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blood on the street

  • Category :
  • the market
  • August 12th, 2007

    When there is blood on the street, buy property. It kinda more easier said then done. Perhaps if you look at it from its intrinsic value, it might have make it easier. I am talking about the recent credit market and the flight for quality drying up anything that’s not issued by the government, depressing the equity market at the same time. Yes, it is true that the sub prime fallout makes obtaining capital more expensive. For those who need to do that in a short period of time, it will depress its earning.

    But if you look at corporate earnings for Fortune 500 for the last couple of years, many have enough earning reserved that they don’t have to tap the capital market anytime soon. Companies like GE is not going to run out of money to meet it commercial paper and bond obligations. However, company stocks are being penalized disproportionally to the increased risk.

    Since no one wants a stinky fruit, it is obviously true that financial companies are going to earn less in fees from leveraged M&A activities and the debt packaging, but that doesn’t mean that company a diverse company like Bear are 2 credit grade less likely to meet its bond obligation. The fact that Bear has to offer 245 basis point spread for its recent issues is a case in point that there is blood on the street.

    But if you are sitting on the most senior tranche or the top 2 investment grade obligations, the intrinsic value of the cash flow hasn’t change since the sub prime crisis start. Does it mean American corporations are 2 times more likely to default? Maybe a little, but not to the extend that it has gone down now.

    Unfortunately the credit market doesn’t lean itself towards people with little money like me.  Even with corporate bond ETFs like the LQD@102.66, the move is at most 10% that unless I buy it on leverage or go for the near 5% yield, it’s not as sexy as China play like BHP or LFC.

    Entry Filed under: the market

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