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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (15445)	11/10/2004 8:48:14 PM
From: SeaViewer	Respond to of 116555

They think their massive US$ holdings will pay their retirements. They will get a lot of worthless paper. They put their heads in the sand. And what else could they expect.

To: Crimson Ghost who wrote (15445)	11/11/2004 3:28:43 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Feeding Frenzy Snip from Brian Reynolds post on Minyanville We keep searching for new ways to describe the intensity of the buying interest towards corporate bonds. We have not seen action like this since the bubble days. Yesterday, we wrote how strong issuance had been during the first two days of the auctions. We found this to be stunning, because companies usually stand aside during Treasury auctions and let the government borrow what it needs. Companies also normally stand aside on Fed days because of the volatility associated with it. Yesterday was both a Fed and an auction day, yet companies brought a sizable $5 billion in new bonds to market. In just the first 3 days of this week, we’ve seen over $20 billion in new corporate bonds despite the auctions and Fed meeting. To put that into perspective, we wrote extensively about how September’s $70 billion in issuance was a 7th highest monthly total in 4 years. We’ve done more than ¼ of that in three days! What’s even more astounding is that this issuance hasn't pushed spreads wider. Instead, they’ve ground a little tighter this week, after tightening 50 basis points in the last few weeks and 90 basis points since August. We highlighted about three weeks ago that corporate bond portfolio managers were acting as if they has not been taking enough risk, and were acting to correct that. Now, we can say this has turned into a feeding frenzy. We’ve noted how many companies are using borrowed money to buy back stock. Normally, a company will borrow the money (with a stated purpose of something like general corporate purposes, then announce a buyback once the funds are in hand and the bondholders are unable to do anything about it. Now, bondholders are acting as if they just don’t care, feeling that balance sheets have improved enough in recent years to withstand buybacks. We’ve actually seen some companies announce buybacks, and then borrow the money, with bond investors lining up to provide funding. That’s how confident they are that they can access the bond market. We even saw one company have to pull its bond deal yesterday because of a technicality in their offering document, but they said it would not impact their buyback because they could just borrow the money elsewhere. What this means is that, if stock prices do not rise to reflect the high valuation that corporate bond investors are placing on earnings, then companies will do more and more buybacks in an attempt to get stock prices up. We warned at the start of earnings season to be careful of firms announcing soft outlooks and buybacks at the same time, and that thought has paid off. But, earnings season has wound down, and we are still seeing 3-5 buyback announcements per day. So, while stocks may be in a short-term battle for the S&P 1160 area, and may thus pull back for a short time, we think this feeding frenzy, if it continues, increases the chances of a further surge in stock prices. ============================================================== Mish comments: Brian Reynolds' model is that as long as the appetite for corporate bonds is strong, the stock market is likely to keep making new highs. Spreads between junk and treasuries are now down to 150 bps. Non-junk corporate vs. treasury spreads are much lower. Complacency in corpoarte and junk is staggering, at a time when there is universal hatred of treasuries. Quite amazing to me. It is what it is however. A few companies like microsoft have put out big dividends to get rid of excess cash but most dividends are token. Many companies are going into debt after a two year stock rally to buy back their own stock, after huge rallies, with rising interest rates to boot. This too is amazing. Amazing, but it is what it is. Mish