Being an oldster, I have this misty-eyed nostalgic feeling about rating agencies. But what the heck is an ‘E’?
“First, because of the illiquid market, ANY firm (Goldman, Wells Fargo, Capital One, GE, etc), will be wiped out if they’re forced to mark-to-market their books. Spreads on non-Treasuries are insane.” Ask yourself why is it illiquid? These Einsteins thought that debt can grow faster than the income used to service it. The market was very sick, the current symptoms are detoxification. Some junkies will start a new life, some will die. “Second, your assertion that unless the government buy at par will wipe out the equity is mathematically wrong. The equity is assuming the value of the books is worth 17 cents on written down book (i.e much lower than par). In other words, any bailout above 17 cents will net a gain for the company.” Wow. 17 cents? Please do tell how you’re coming up with that number. Sorry to be rude, but you’re way off.
Are you serious? Unless you been sleeping in a cave, you would know that the market is in total disarray not because of fundamentals but simply from a lack of risk appetite and total disarray. Right now, the majority of people, including good FICO score holders, cannot get a mortgage. There was article on Bloomberg yesterday regarding BOA restricting credit lines of McDonald Franchisees, despite no financial problems. HELOC line are being slashed, etc, etc. The credit market is at a standstill… this has nothing to do with Einsteins’ endeavors. The 17 cents is easy to derive. If you’re taking the CFA or have already passed, this shouldnt be too hard to figure out. Heck, you could just pull some sellside research and get the number. Even common sense would tell you that its a low number… did you think WAMU was trading at par? LOL
“Unless you been sleeping in a cave, you would know that the market is in total disarray not because of fundamentals but simply from a lack of risk appetite and total disarray.” I’ve been out of this so called cave since May 2006. And fundamentals have everything to do with the current market action. De-leveraging is the product of our over-leveraged inflated economy gone bust. “The 17 cents is easy to derive. If you’re taking the CFA or have already passed, this shouldnt be too hard to figure out.” Apparently I hold the CFA charter and can’t figure out how you’re concluding that their long-term assets are marked-down 17 cents on the dollar. Please save me the suspense and do tell. "The credit market is at a standstill… this has nothing to do with Einsteins’ endeavors. " So why is the credit market at a standstill?
I am tired of this back and forth argument. If you TRULY believe that the credit market is driven by Fundamentals and the market is “correctly” pricing a doubling of LIBOR rate, then I would suggest you sell your house and short the living crap out of the stock market. Because there is no way the economy can function with the credit market in its current state. There are countless firms who simply cannot survive with LIBOR at this level, especially when the debt resets in the near term. I, on the other hand, will be looking at Triple A Corporate debt yielding double digits; I will be looking at CDS that implies unrealistic default rate of 15%-20% for bellwether firms like IBM. I smell huge irrational pricing of credit securities with no fundamental basis whatsoever … you seem to differ.
swtxlady Wrote: ------------------------------------------------------- > I am tired of this back and forth argument. I dunno. I have seen a bunch of assertions you made but not much of an argument. You might be right, but in my book cfa_gremlin +1.
^JDV does actually keep a book just for the purpose of scoring debates on AF, which will be used to tally up on Financial Judgement Day (week next thursday I’ve heard). You have been warned
swtxlady, I am not trying to question you, but I am curious what you are seeing… You said: “I, on the other hand, will be looking at Triple A Corporate debt yielding double digits; I will be looking at CDS that implies unrealistic default rate of 15%-20% for bellwether firms like IBM. I smell huge irrational pricing of credit securities with no fundamental basis whatsoever … you seem to differ.” Can you give me a Aaa corporate name you see in the double digits (offered side of some reasonable sized issue)? If you see it, I want to look at it too (and I will buy it), but I havent seen any. With IBM CDS 49/54 as of this morning, I have that showing implied 5yr cumulative default rate (using a flat curve, so kind of unrealistic) of less than 4%. It would have to widen by about 250 bp to to get to 20% by my calcs. Im not all that involved in CDS, so someone else could tell me I am full of it, however.
I am restricted in giving investment advice on a public forum, so I am not going to list names that I am involved in (I hope you understand). But I can point you in the right direction… 1. Credit Default Swaps. List of names (not involved in) that has spiked in the last 30 days: - Constellation (237 despite Berkshire’s backing. In a more stable market, it would at a minimum trade at half that level). - Coventry (250, no impact from financial markets) - Chesapeake (312, hedged until 2010) - Sears (490, despite asset coverage and comfortable debt service capacity) - Metlife (365, insurance are insulated from mtom issue that plagued AIG [company-specific]) - Prudential (350, ditto) All these companies were trading at 50-100 as recent as last month. 2. Look at IG corporate yield in Europe.
Aside from CEG, which clearly has an event driven feel to it, I don’t think I would characterize any of those as Aaa bellweather names. I own some of them, so am with you that they are names worth owning/looking at, but I don’t agree with you that they were 50-100 last month. I have CHK outside of 200 in mid summer, SHLD north of 450 in the same time, MET 125, SHLD 450, PRU 150. Might want to double check my levels, I just did a quick scan. I still don’t think there is a Aaa corp name trading in double digits, but that is just me. I don’t know squat about European names, but the ML Euro Corp index yields 6.87%, less than the US Corp master @ 7.48% (as of yest).
I think we’re splitting hairs when it comes to definition… All the names I listed are not triple A, I never said they were. In fact, as you probably know, there aren’t that many AAA Fitch CDS actively trading for obvious reasons. I think I mentioned IBM off hand as a bellwether (example), and they’re A+. CEG (w/transaction), PRU, MET definitely meet that criteria. The other companies I mentioned simply doesn’t have financial exposure and that’s the reason why they’re included. Sears, Chesapeake, and Coventry are big, well-capitalized companies. I doubt people expect any meaningful default rate for the names I listed. Like I said, these are names that I am not involved in… doesn’t mean i dont think they’re mis-priced… It’s hard for me to imagine a great company like Metlife trading at 365 CDS. It’s insane. Maybe you have a different view. I am not invested in it simply because i just see much better opportunities elsewhere in the CDS space. You’re right… i made an error when it came to quoting 50-100 last month (especially CHK,SHLD). In all honesty, I haven’t look at them in a while until this morning and didnt bother to check their charts. CEG, MET, PRU were trading 50-100 in ~May, when I first took a glance. I figure they would stay at those levels if not decline in July/August, that clearly wasn’t the case. Regardless of my carelessness, the appropriate price level is below 100 for all these names, I would love to hear arguments to the contrary. With Europe IG bonds, I am not going to comment on specific securities… they’re out there and I just leave it at that.
I’m buying more of WM at this level, now at $1.68. Purchased some at the low $2s earlier last week. Taking another 25% position. I will put the last 50% when I see a clearer short-term trend
adalfu Wrote: ------------------------------------------------------- > I’m buying more of WM at this level, now at $1.68. > Purchased some at the low $2s earlier last week. > > Taking another 25% position. I will put the last > 50% when I see a clearer short-term trend short and long term trend is to 0
These guys are going to zero and fast. If I were long I would be unwinding my position in a hurry. I don’t even think these guys will last through the end of this month.
I don’t follow many of these either, especially the finance names (ill respectfully take the 5th on those), but off hand had a couple thoughts. What are yours? Good discussion! Insurance - Hear you on mtm issues on aig, and if that is indeed tru on MET and PRU, then I can’t argue in the least. SHLD – a third rate retailer who’s largest shareholder would not be afraid in the least to lever it up. And, at 1.8x it has plenty of room to do so. Weak mix, weakening/no margins. But, agreed, I don’t think a weak balance sheet is a problem right now. Need to turn it around though. Inconsistent cash flows, typically neg FCF and low leverage now leaves me thinking that to fund buybacks it’s going to lever, so it could be in the future. CHK – I am a fan of this one, but don’t think its going to get back to 100. Yeah, hedged, totally agreed, and I like that a lot. But on two occasions in last, what? 6 months? They have pulled back production, re-upped, reduced capex, upped, now, do they finance in debt or equity? They seem to indicate equity (and recent history would agree), but Ive lost a little bit of faith in their consistency and ability to plan. Ability to fund next yrs capex pretty much depended on Haynesville transactions (okay, probably a pretty good bet), but any shortfall and they are going to have to look at debt. I don’t know anything about healthcare, I’ll have to take a look at CVH.
More on WM… Most of the bonds are trading in the teens and twenties. If these guys are expecting to get hosed, the preferred and common shares below these guys are worth nothing!