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Daily Download: Stock Investing News & Analysis for 2-2-10

CB — Tue, 02 Feb 2010 13:39:22 +0000

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing (“CB”), which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions at the following email address: .

General News & Headlines Summary

CB: Remember that below the summaries are a list of interesting links.

News not covered below: (1) Sony Pictures Entertainment announced that its planning to eliminate as much as 6.5% of its work force; (2) Yahoo and The Associated Press reached an agreement that allows the Yahoo News website to continue its use of various Associated Press content; (3) despite declining revenues, the Gannett Company reported profits in the fourth quarter due to cost reductions and a deceleration in ad revenue declines; (4) Boston Scientific agreed to pay the Cordis unit of Johnson & Johnson $1.7 billion to end two patent disputes between the companies regarding coronary stents; (5) Humana reported a 44% rise in fourth-quarter profit from a year earlier as its Medicare Advantage segment offset commercial segment losses; (6) Royal Dutch Shell has outlined plans for a $12 billion, 50:50 biofuel joint venture with Cosan, the worlds largest producer of ethanol from sugar cane; (7) Bank of New York Mellon stated that it would purchase the Global Investment Servicing business of PNC Financial Services for $2.31 billion; (8) Copper’s price increased to $6,810 a ton after dropping to nearly a three-month low at $6,600 a ton on Friday; and (9) Google will launch an online store to sell business software made by third parties in an attempt to compete with Microsoft.

Upcoming Economic Data for the Day (all times EST)

7:45 AM ICSC-Goldman Store Sales

8:55 AM Redbook

10:00 AM Pending Home Sales Index

11:30 AM 4-Week Bill Auction

Initial Public Offerings (”IPOs”) for the Week of February 1- 5, 2010

2/2/10 Film Department Hldgs LLC (“TFDI”) – Motion picture finishing and production company.

2/2/10 FriendFinder Networks (“FFN”) – Internet based social networking company.

2/2/10 Patriot Risk Management (“PMG”) – Insurance management company.

2/2/10 Imperial Capital Group (“ICG”) – Independent, full-service investment bank.

2/2/10 Ironwood BioPharm (“IRWD”) – Pharmaceutical company.

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Carriers Try Software for Data Flood – The Wall Street Journal

Summary: Wireless carriers are trying to use software and other tactics to streamline data traffic until more towers are installed and next-generation networks become available. The increased use of smart phones has been the main source fueling the data explosion. In the last three-years, AT&T, the carrier of the iPhone, has witnessed its data traffic increase roughly 50-fold. Video use accounts for nearly 75% of the data traffic. As a result of the surge in data traffic, in some large metropolitan markets like New York the quality of service is suffering and causing dropped calls and slow speeds. Some methods to reduce the traffic are: (1) to implement a system (created by Bytemobile) that allows a video to download as it is being watched, but with less stalling that usual; (2) another tactic is to match optimal file formats with the correct phone, which can reduce bandwidth needs by as much as 50%; and (3) to implement a system that diverts cellphones off the carrier network to local Wi-Fi when possible. At present, according to Morgan Stanley, approximately 25% of U.S. customers have smart phones, but during peak hours in certain busy markets these networks are operating at or above 80% capacity.

Exxon Grew as Oil Industry Contracted – The New York Times

Summary: During a year when the oil industry in general contracted, Exxon Mobile took the following steps to grow: (1) a $31 billion purchase of XTO Energy; (2) establishing a significant presence in Iraq; (3) bidding $4 billion for a large field off the coast of Ghana; and (4) approving a project based in Papua New Guinea to export gas to China and Japan. In a year where many rivals reduced capital expenditures, Exxon spent a record $27.1 billion on exploration and development. Despite its fourth-quarter profit dropping 23% from a year earlier, Exxon’s fourth quarter results still beat analysts’ expectations. During 2009, the company managed to offset production declines in older fields with production at new projects in Qata. As a result, the company managed to keep its production flat at approximately 2.39 million barrels a day compared to 2008’s production

CB: Such moves, if implemented correctly, should favor the company greatly when demand comes back for oil and gas.

Double Dip Risk Rises After Inventory Blowout – Bloomberg

Summary: On Friday, the Commerce Department reported that U.S. gross domestic product (“GDP”) grew approximately 5.7% in the fourth quarter of 2009 (advance estimate) with changes in inventories accounting for 3.4 percentage points of the total growth (CB: nearly 60% of GDP). According to methodologies used by Alan Blinder, inventories account for less than 1 percentage point of national output, but account for nearly 34% of the historical fluctuations in output. Historically, inventory levels are volatile due to the difficulty in forecasting the future. If sales unexpectedly decrease, then inventory levels will be high and the producer will cut back production. Yet, if sales unexpectedly surge, inventory levels will become depleted and the producer will have to increase production. There have been nine quarters since 1970 where GDP growth was at least 3% and changes in inventories represented 50% or more of the GDP growth. Of those nine quarter, the average GDP growth rate was 6.6%, while the average inventory contribution was 4.4% (CB: nearly 67% of GDP). Yet, the average growth rate of the following quarter was .9%.

CB: It will be interesting to see how the next two revisions for GDP play out. In the third quarter, the GDP growth was initially stated at 3.5% and was subsequently revised down to 2.2%. Unless sales dramatically improve and they haven’t at this point, the inventory build-up witnessed in the fourth quarter might not be used much in the first quarter of 2010, which would weigh against next quarter’s GDP growth. Furthermore, according to John Williams at Shadow Government Statistics, GDP is one of the least reliable government numbers due to the upward-biased changes to its calculation methodologies over the years and the flexibility economists have to massage the numbers especially with the advance estimate. Separately, David Rosenberg of Gluskin Sheff had the following thoughts on the GDP growth number:

Here is another way to assess the data: We saw history in the making — an eye-popping 5.7% GDP growth rate the exact same quarter that the unemployment rate rose 40 basis points, to 10%. It is like Houdini’s rabbit! This has never happened before. Normally, when we see a GDP number like this the unemployment rate declines 20 basis points during the quarter in question. The flip side is that in the past, when the unemployment rate rose as much as it did in the fourth quarter, believe it or not, in those quarters real GDP actually contracted fractionally (at a 0.5% annual rate).

We went all the way back to 1947 and so we can say with 100% confidence that at no time in the past 62 years has a 5.7% GDP advance coincided with such a rise in the jobless rate. It makes no sense.

As we said in our Friday note, the really big deal in the U.S. GDP report was the slowing in real domestic demand, to 1.7% annualized in Q4 from 2.3% in Q3. Consumer spending actually slowed to a 2.0% annual rate from 2.8%. Here we are, eight quarters after the recession began, and real GDP is still 1.8% below the level prevailing at the onset of the downturn back in the fall of 2007. Until now, it has never before, at least back to 1947, taken more than eight quarters to re-attain the prior GDP peak (it usually takes between four and five quarters). These did not make the headlines.

Burkle Targets Barnes & Noble – The Wall Street Journal

Summary: Ron Burkle and his investment company, Yucaipia Cos, sent a letter to Barnes & Noble stating their interest in increasing their current 19% ownership stake in the company to 37%. In the letter, he states that: (1) it is not fair that the Riggio family, the founders, hold 37% of the company, while no other shareholder can own 20% of the company before setting off the poison-pill rights plan; (2) such a poison pill works against the interests of the shareholders not belonging to the Riggio family; (3) the reason for his accumulation of shares is due to the company being undervalued; and (4) he disapproved of Barnes & Noble purchasing Barnes & Noble College Booksellers, a separate entity, and such a purchase indicates that the company is operated for the benefit of certain insiders.

Short View: American Bulls – Financial Times & Data Hit Hopeful Notes for Economy – The Wall Street Journal & Demand for Corporate Loans in U.S. Falls – Financial Times & Global Manufacturing Surges Back – Financial Times

Summary: According to the Institute for Supply Management (“ISM”), the ISM index increased to 58.4 during January from 54.9 in December, for the sixth consecutive month of increase. Furthermore, 13 out of 18 industries experienced growth. The chair of the ISM survey, even stated that the manufacturing sector is now in recovery. Yet, market participants need to be cautious of the following: (1) the rise of this index has been fueled by the restocking of depleted inventories, which appears likely to end soon; and (2) exports decreased during the month as the U.S. dollar strengthened.

Moreover, China, India, South Korea, and Taiwan have all reported strong industrial activity for January.

According to the Federal Reserve, despite U.S. banks reducing the hurdles for large companies to borrow money, loan demand for both businesses and households continued to decline. The Fed’s survey of loan-officers showed that for the first time since 2007, the percentage of banks that reduced their lending standards was greater than those that tightened their standards. Economists believe that businesses worry about taking additional risks at this time of uncertainty, and thus are not seeking loans.

CB: The following are comments respondents wrote on the ISM survey:

“Commodity prices are moving up again.” (Printing & Related Support Activities)

“We now believe that we will not have a good upturn until the 3rd quarter of 2010.” (Primary Metals)

“Overall activity is significantly higher than we typically see this time of year.” (Machinery)

“Orders from automotive very strong.” (Electrical Equipment, Appliances & Components)

“Lead times continue to be a problem for electronic components.” (Computer & Electronic Products)

Despite the good manufacturing news, the article above does express some caveats worth considering. All the articles attributed the rebound in stocks today to the excellent manufacturing data. While this is true, it should be noted these gains were made on reduced volume and does not say too much regarding the market’s sentiment towards the fundamentals. CB would have been more impressed by the day’s rise if it had occurred on volume similar to that experienced on Friday. On face value, the recent news has been good and one would expect more buying power than what is currently being witnessed. For instance, the Dow Jones Industrial Average ’s(“DJIA”) volume for Monday was: (1) 37.4% less than Friday’s; (2) 15.6% less than its 12-day exponential moving average (“EMA”); and (3) 15.8% less than its 200-day EMA. Furthermore, the Nasdaq Composite Index reported volume on Monday that was approximately 42% less than Friday’s.

Moody’s Warns on Deluge of Debt – The Wall Street Journal

Summary: According to a report released by Moody’s Investors Service, 995 of the 1,300 companies Moody’s has listed with a junk rating, on non-investment grade, have over $800 billion of debt coming due between 2010 and 2014. Yet, nearly $700 billion of the $800 billion will come due during 2012 through 2014. Kevin Cassidy of Moody’s believes that the current maturities can be handled, while the later maturities may cause some problems if the future economic situation has not improved significantly from the current one.

CB: Given the recent strength and demand in the high-yield, or junk, bond market, the current maturities should be easily handled by the market as long as: (1) yields on Treasurys remain low; (2) investors continue to find comfort with taking additional risk to their portfolio; (3) no large default sovereign or corporate occurs; and (4) the general default rate plays out the way many expect it to with decreased defaults. As long as the junk bonds continue to yield well with few defaults, investors may not fully understand the risk they are undertaking. Junk bonds had a great year in 2009 regarding both returns and the $145 billion that were issued to the market. The market in CB’s mind has risk of dropping significantly if there are investors in junk bonds that usually would not be investing in them. All it takes is a hiccup in confidence before the less familiar people run or pricing reevaluates risk. Nevertheless, a corporation may be able to take care of these future debt maturities by refinancing in the current high demand market. Such actions, if done on a large enough scale combined with the right amount of economic recovery, may forestall or eschew some defaults. In fact, companies that could be potential short candidates or companies to avoid on the long side would be those unable to obtain such refinancing at this time. For those interested in reading more: (1) in the Daily DL for 1-19-10, there is an article that provides details on junk-bond returns in 2009 as well as the record amount of recent junk bond offerings; (2) Leon Cooperman briefly discusses his strategy for holding nearly 25% of his assets under management in high-yield debt; (3) in the Daily DL for 1-11-10, there is a brief discussion regarding: (a) the reduced expected-default rates for high-yield debt during 2010, with Moody’s expected default rate at 4.3%; and (b) the reasons for the increased demand in high-yield debt; and (4) in the Daily DL for 12-21-09, there is more analysis on the high-yield market as a whole.

More Links of Note

An Analysis of Berkshire Hathaway – T2 Partners LLC

Credit Suisse: Buy the Dips – the Bear isn’t Here Yet – PragCap

The Best Approach to 2010: The Opposite of 2009? – PragCap

Reported Earnings versus “Owner Earnings” – Hussman Funds

How to Reform our Financial System – Volcker

The U.S. has a Currency Problem – Paul Kedrosky

Risks Lurk for ETF Investors – The Wall Street Journal

Cloudy Future for Fannie and Freddie – The New York Times

Chain Bridge Investing (“we” or “CBI”) states at the outset that the opinions, judgments and derivation of thinking in this writing are solely Chain Bridge Investing’s. It is imperative that any judgment or valuation you take from information dispersed by CBI be examined within the context of your portfolio investment and overall objectives. To that end we urge you to contact your investment advisor or portfolio manager to insure that the information or suggestions proposed by CBI conforms to your needs and financial strategy.

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Daily Download: Financial and Stock Investing News for 1-19-10

CB — Tue, 19 Jan 2010 17:57:13 +0000

Upcoming Economic Data for the Day (all times EST)

9:00 AM Treasury International Capital

10:00 AM State Street Investor Confidence Index

11:30 AM 3-Month Bill Auction

11:30 AM 6-Month Bill Auction

1:00 PM Housing Market Index

Initial Public Offerings (”IPOs”) for the Week of January 19- 22, 2010

1/21/10 China Hydroelectric (“CHC”) – Hydroelectric power generator.

1/21/10 Andatee China Marien Fuel Services (“AMFC”) – Fuel oil for cargo & fishing vessels.

1/21/10 Cellu Tissue Holdings (“CLU”) – Tissue paper products.

1/21/10 Symetra Fin (“SYA”) – Annuities and retirement plans.

1/21/10 Terreno Realty (“TRNO”) – Real estate investment trust.

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Dimon Sticks by His Cautious Outlook – Financial Times

Summary: Despite J.P. Morgan’s fourth-quarter profits of $3.3 billion, which exceeded analysts’ expectations, Jamie Dimon, the chief executive of J.P. Morgan, indicated that the bank is still not in the clear and rough times lay ahead. Dimon claims that the bank’s profit over the last twelve months has been boosted by several factors that may not occur again in the future. The primary factor boosting J.P. Morgan’s profitability has been its operations in fixed income trading, which are now beginning to weaken as competition increases and trading volumes decrease. Fourth-quarter revenues from fixed income trading were roughly half of the third-quarter revenues. Meanwhile the bank continues to struggle with both its retail bank and credit card division. At present, the company has total reserves to cover loan losses at a reported $32 billion. Company management expects that retail banking could continue to lose roughly $2.5 billion a quarter for the next several quarters. Furthermore, despite credit card charge-offs dropping to 8.6% in the fourth quarter, management believes that with continued high rates of unemployment and the diminishing holiday effect the charge-off rate could reach 11% again, while the credit card portfolio that J.P. Morgan inherited from Washington Mutual is expecting a charge-off rate near 24%.

Yield Junkies Return to Bond Market – The Wall Street Journal

Summary: According to Thomson Reuters, companies issued a record $11.7 billion in high-yield debt last week, surpassing the previous record of $11.4 billion set in November 2006. The continued strong demand for high-yield debt follows a the 2009 year where the Bank of America Merrill Lynch index for high-yield corporate debt returned 57.5% after experiencing a 31.5% decrease in 2008. At present the current average spread between the yields on high-yield debt and U.S. Treasury bonds is near 600 basis points, where as in December 2008 it was near 2,200 basis points. The common thought in the market is that investors are being driven to invest in high yield bonds due to the ultra-low interest rates being maintained on less risky debt. Investors are taking on more risk than they would normally in order to obtain a material return. Meanwhile, corporations are issuing these high yield bonds in order to: (1) repay current balance sheet liabilities and extend maturities into the future; and (2) pay current investors a dividend on their holdings.

Even More Room at the Inn – The New York Times

Summary: In 2010, nearly 100 new hotels are being prepared to open in major cities across the U.S.. According to Smith Travel Research, New York will lead the other cities with 46 hotels opening, while Houston is second and plans to open 30 hotels. Many of the hotels opening this year have been in the works for the last two to four years, thus explaining, in part, why they are opening during hard economic times. According to one executive, in the hotel industry, once construction begins, the best economic path is usually to finish the project. A finished project can at least bring in some revenue and can begin the payback period. In cities that have a significant number of new hotels opening, like New York where capacity is projected to increase 12% in 2010, the customer is expected to benefit as the additional capacity and low occupancy rates force more price competition amongst the hotels. Yet, the current buyers market may not last long since there is not much additional capacity planned for 2011 to 2013, which means there will be upward pressure on future room rates.

Souring Mortgages, Weak Market Put Loan Agency on a Tightrope – The Wall Street Journal

Summary: The Federal Housing Administration (“FHA”), which currently insures nearly 50% of all new home loans, is planning on announcing revisions sometime in the next week or two that will tighten the agency’s easy money standards. The revisions could include any of the following: (1) increasing the minimum down payment; (2) creating a minimum credit score; (3) raising mortgage insurance premiums; and (4) limiting the amount of money sellers can add back for closing costs. Yet, such revisions, if strong enough, could significantly reduce housing demand and the current recovery. Some of the FHA’s current problems are a result of it not having the proper risk-management tools and processes in the past to evaluate lenders. Despite the new chairman’s efforts to establish more risk monitoring, there are currently 30 FHA-approved lenders with more than 1,000 loan originations, and more than 12% of these loans are in default within two years of being issue, which is double the national average. The agency is still struggling with many defaults, which are declining at a slower rate than expected. Presently, the FHA’s reserve fund may run out of money if housing prices were to suffer another down turn. Yet, increasing the FHA’s criteria for insuring loans may create a self fulfilling prophecy by lowering demand and causing prices to drop, thus leading to increased pressure on the FHA’s reserve fund.

More Links of Note

Guru Outlook: Felix Zulauf & The Secular Bear Market – PragCap

Why Contrarian Investors Have an Edge – Bill Fleckenstein

December Sovereign Gold Reserve Holding Update – ZeroHedge

2010 Investment Strategies: Six Areas to Buy, 11 Areas to Sell – The Big Picture

The Risky Rich – Nouriel Roubini

Why Stock Markets are Still Undervalued – Telegraph

The “Other” Imbalance and the Financial Crisis – Alphaville

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Daily Download: Financial and Stock Investing News for 12-21-09

CB — Mon, 21 Dec 2009 13:32:21 +0000

General News & Headlines Summary

News items not covered below are as follows: (1) Airvana will be taken private in the first quarter of 2010 by a group of investors for nearly $530 million; (2) Telstra, a large Australian telecommunications company, indicated that its first-half revenue would be lower than the prior year’s and it also cut its full year guidance primarily due to increased competition along with increases in the quantity of wireless homes; (3) Bucyrus International, a mining-equipment manufacturer, stated that it is paying $1.3 billion, in cash, for the mining division of Terex Corp. and expects the deal to be accretive to earnings withing the first year; (4) Royal Dutch Shell is planning to sell 10 Nigerian onshore oil assets, which are valued between $4 billion to $5 billion and have proven oil reserves of nearly 100 million barrels; (5) Spyker Cars has made a revised bid, with previous obstacles removed, to purchase Saab; and (6) the London Stock Exchange will purchase a 60% stake in the Turquoise trading platform in a deal that is intended to lead to significant cost savings.

No Upcoming Economic Data for the Day (all times EST)

11:30 AM 3 – Month Bill Auction

11:30 AM 6 – Month Bill Auction

Initial Public Offerings (”IPOs”) for the Week of December 21- 25, 2009

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Business Chiefs Hit at Climate Agreement – Financial Times

Summary: Many energy business leaders believe that the climate deal at Copenhagen does not provide enough certainty and indicate that much more is needed from the agreement. While the deal states that there is a general global commitment to constrain the rise of global temperatures, it does not detail the measures necessary to achieve this commitment especially regarding the required caps on emissions. At present, the support from business leaders is critical due to the fact that businesses will account for nearly 90% of the annual $500 billion investment to fight global warming. More details of the agreement and will be decided over the next several months. Furthermore, the conference’s failure to determine a time line for the global treaty could lead to weakened confidence in the carbon markets.

Oil Demand Recovery to be Sluggish – Financial Times

Summary: The five leading oil trading firms, which trade nearly 15% of the world’s oil output, are: (1) Vitol; (2) Glencore; (3) Trafigura; (4) Gunvor; and (5) Mercuria. Early this week, the Organization of the Petroleum Exporting Countries (“OPEC”) will analyze the views of these top trading firms regarding oil demand for 2010, as OPEC discusses production policy. At present, Vitol along with Glencore and Gunvor foresee oil prices remaining within the $70 to $80 a barrel range during the first half of 2010 primarily due to the lack of fundamental support for the current prices. According to Mercuria, the demand for oil in both China and India will remain strong, while demand growth in developed nations will likely remain week. Despite the International Energy Agency’s (“IEA”) prediction that oil demand in 2010 will increase by 1.5 million barrels a day, most of these top traders tend to believe it will increase nearly 1 million barrels a day, while OPEC is currently forecasting an increase of .8 million barrels a day in 2010.

China Tightens Land Rules – The Wall Street Journal

Summary: China, in an attempt to reduce the recent price increases in its property market, has introduced the following new rules regarding property purchases: (1) a minimum 50% down payment will be required for land purchased from the government; (2) land purchases from the government must be repaid within a year of the sale agreement, but for certain projects a year extension may be granted; and (3) developers will not be allowed to purchase new land if they have not paid for their existing land in a timely manner. At the end of November, China’s urban property prices had increased 5.7% from a year earlier.

CB: These rules are significant since the government has ownership over all of the land in China. Land purchases are technically long-term leases. Going back a couple of years, China had implemented measures to contain already rising property prices. For instance, a property sold within five years of purchase is subject to a 5% tax in order to discourage flipping. Furthermore, even two years ago lenders required a 30% down payment for mortgages, much higher than those being conducted during the real estate boom in the U.S.. Moreover, to control foreign buying, a source of rising property prices, a non-Chinese citizen would have to live in China for a year before being allowed to buy a home. Yet, there have been many noted ways around some of these older provisions.

Ethanol Recovery Faces Oversupply Repeat – The Wall Street Journal

Summary: At present, ethanol margins have been increasing, while the prices of natural gas and corn have remained relatively low. Meanwhile, according to Renewable Fuels Association, the installed capacity of corn ethanol is nearly 13.1 billion gallons a year with approximately 1.2 billion gallons of idle capacity. With the improved ethanol margins companies like Valero Energy, Archer Daniels Midland, and Pacific Ethanol want to bring online new and temporarily idled capacity. These above mentioned companies are expected to bring online nearly 940 million gallons of capacity in 2010 along with another 1.4 billion gallons of capacity expected from industry-wide expansion projects. This large amount of supply may be enough to create an ethanol glut and send ethanol margins falling, thus leading to more potential business failures in the ethanol industry.

CB: If this scenario plays out, then it may be to the benefit of the largest and most efficient producers to take the short-term losses and run the less efficient competitors into the ground, while maintaining enough cash and debt capacity to purchase the competitors’ assets at a later time. This industry recently went through a boom-bust cycle, and most participants probably do not want to experience another instance of bust so soon, especially shareholders. Furthermore, the article focused primarily on the supply side, but some of these ethanol companies will be in for some pain if corn and natural gas prices begin to rise. An occurrence of rising corn prices does not seem to be remote.

Sales of Dollar Junk Bonds Hit Record – Financial Times

Summary: According to Dealogic, for the year-to-date period, global issuance for high-yield bonds has reached the level of $144 billion, surpassing the previous high of $143 billion for 2006. Furthermore, returns on high-yield bonds for the year are at 56%, a record level, exceeding the previous record of 39% set in 1991. As of the end of November, the default rate for high-yield bonds was at 12.7%, or 250 defaults. While Moody’s originally estimated that the default rate would peak at 16.4%, it has revised its projections and believes the default rate has peaked and will drop to nearly 4% next year.

CB: When filling in the details about this rally in high-yield bonds, or junk bonds, it does not bode well from a risk perspective for the markets. First, as of November, triple C rated bonds, which are considered deep into the junk rating, accounted for a fifth of all high-yield issuance. Second, the newer issues of high-yield bonds are starting to resort to the following frowned-upon bond practices witnessed before the financial crisis: (1) payment-in-kind notes, which can be repaid with more debt; (2) covenant light notes, which have very few restrictions or operating constraints relative to the risk level; and (3) dividend recaps, which allow companies to access additional debt in order to pay dividends to owners. Third, due to the banks are denying loans to companies that they consider risky, these companies with bad credit risk are going to the high-yield bond market to receive additional financing. As a result of the recent high returns in the high-yield market and fewer than expected defaults, companies are not facing as much scrutiny when they issue their debt and investors are more than willing to invest given the recent returns.

These are dangerous details regarding the high-yield bond market. The fact that the market is already returning to the practices used immediately prior to the crisis, indicates that the markets have not learned their lessons. Companies still have over-leveraged balance sheets. Credit through the bond markets remains easy to obtain. If companies are being turned away from banks, then it implies there is a significant risk that the companies are, or will be unable, to make payments on the debt they are seeking. Furthermore, the economy is still fragile and any slight hiccup could send these over-leveraged companies into operational and financial trouble. If anything, this current run in the high-yield bond market exposes the human tendency to focus on returns and avoid analyzing risk factors, or downside. Also, it shows that people do not remember lessons of the past cycle, regardless of the pain experienced. The more triple C bonds that are issued, the higher that default rate will move.

CB would like to see a break down of the sectors issuing these high-yield bonds. Some sectors are in no shape for additional business investing, and therefore cannot profitably utilize the funds they are being provided in the high-yield market. If CB were looking for shorts, it would follow the high-yield debt and look for those sectors confronting slack and overcapacity issues. Its only a matter of time before the over-leveraged companies begin to experience significant problems. They possibly already have experienced problems, thus explaining the need to issue high-yield debt.

In the end, investors have not learned the most recent lessons. This rally into high-yield bonds is not built on firm foundations. Investors do not appear to be heeding risk. Perhaps, the bailouts eased the fall and failed to imprint the previous cycle’s lessons in investors’ minds. CB is reminded of England in the Middle Ages. When determining the legal boundaries of a person’s property for a contract, the officials would bring some children with them to witness the boundaries of the land. After wards, the children were beaten. As a result, in most cases, those children never forgot where the boundaries were for the rest of their lives. Apparently, the recent level of pain was not enough for investors.

Citadel Broadcasting Files for Bankruptcy – The New York Times & Citadel Files for Bankruptcy Amid Harsh Radio Climate – The Wall Street Journal

Summary: As the radio industry continues to suffer from increased competition from the Internet and declining ad revenue, which is expected to decline 19% this year according to BIA/Kelsey, Citadel Broadcasting, the third-largest ratio broadcaster in the nation, filed a prearranged Chapter 11 with the support of the lenders who hold over 60% of the debt value, but for judge approval the plan requires two-thirds of lenders support along with the majority support of the individual creditors. At present, the company reports owning $1.4 billion in assets, which includes 224 stations in the U.S., and having $2.4 billion in debt obligations. According to Citadel’s bankruptcy plan, the lenders owed nearly $2 billion by the company would receive 90% equity ownership in the reorganized company in exchange for a significant portion of the debt. Consequently, Citadel’s debt load would be reduced to approximately $762.5 million. Furthermore, current equity stakes will be terminated under the bankruptcy reorganization.

More Links of Note

Deposit Insurance Fund, Unofficially – Rolfe Winkler

And the Best Performing Fund of the Decade is.. – Mike Foster

Small Speculators Haven’t been this Bearish Since the March Bottom – PragCap

China Asset Bubbles Will Burst on Inflation, Xie Says – Bloomberg

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