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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: James F. Hopkins who wrote (28331)	9/18/1998 2:17:00 PM
From: Mike McFarland	Respond to of 94695

Nice post Jim, I think I'm going to have to re-bookmark the ol' Kahuna thread once again. Just in the last couple days I've become really skittish--maybe it's just the prospect of seeing the president squirm on video next week, maybe because of the post Greenspan let down yesterday, but whatever, it made me take gains and raise some cash for trading today. Made a little of the Sept bounce. Anyway, enough rambling: I've a question for the thread. I heard on teevee that S&P earnings estimates are now -0.2% for the third quarter. I know this is a real newbie question, but that is the estimate for earnings growth right? --MM

To: James F. Hopkins who wrote (28331)	9/18/1998 3:02:00 PM
From: Oeconomicus	Read Replies (1) \| Respond to of 94695

Jim, I must take issue with your argument about lower rates and the calling of debt. Corporate debt that is callable is not that common, especially in the junk arena (and any that is would be price on a yield to call basis, not to maturity, so a rise in rates would not result in much appreciation in prices). Investors in junk debt do not want to take the higher risks only to give up the upside of an improvement in either credit of the borrower or of generally lower interest rates. Prepayment provisions generally only allow prepayments based on discounting the remaining P&I payments back to the present using comparable term treasury rates, either flat or with a very small spread. With this kind of "make whole" provision, the current environment of falling treasury rates, but rising or flat junk rates actually makes it more costly to prepay junk debt. Also, cuts in rates do not necessarily "make more capital available". The widening of spreads over treasuries is an indication of a lack of appetite for risky (relative to treasuries) debt abound bond investors and banks. This would indicate either a lack of liquidity or a tightening of credit standards (or both) and is an indicator of economic slowdown or recession. Regards, Bob PS: Convertible corporate debt is frequently callable, but that is simply a means of forcing conversion to stop the interest accruals and reduce balance sheet leverage when the conversion value exceeds the call price.