Bottom fishing near the top
General Electric's decision to throw a half billion dollars into the Wall Street leverage industry would seem to ring another bell. GE, after all, is one of the last triple-A corporate credits on the American scene, and its decision to go slumming in speculative-grade debt suggests a loss of self-confidence.
A new index of stocks in the Drexel Burnham Lambert orbit, created exclusively for Grant's, debuts in this issue. Each of the 13 component companies is a Drexel investment banking client, an investor in Drexel-underwritten securities, or both.
Credit quality: the long view
Credit is a mechanism that makes it possible for economic units to spend out of phase with their income. -- Edgar R. Fiedler, Measures of Credit Risk and Experience (National Bureau of Economic Research, 1971).
Spending out of phase with one's income (if any) is absolutely de rigueur nowadays...
A report on the boom in financial traffic from the December 22 American Banker:
The value of payments sent over computerized funds transfer networks has soared past the $1 trillion-a-day mark.
The J-curve effect is in full play, and the underlying real trade improvement is even more powerful than the monthly reported surface nominal dollar reductions in the U.S. trade imbalance. Yes, Virginia, there is a trade improvement.
--Gert von der Linde,
Commodity future prices weaken
Tile Commodity Futures Bureau Price Index continues to tinker with a possible downside breakout, the focus point of our warnings last week. The Index was pressured into another probe of its four-month plateau of support fashioned in the 208 area...
In the government bond market, the news is the dearth of news. Since last April, when yields stopped falling, long-dated securities have set up light housekeeping. The decline in volatility has attracted no great attention, but it must, if it keeps on going. Wall Street has invested billions in turmoil.
It may not exactly be the shot heard round the world, but Pennsylvania Power & Light has called some preferred stock for early redemption at a price below the market. GEICO, which owns the issues, has filed suit, the preferred market is roiled and lawyers are preparing to argue the fine issues of contract law.
Euro-crisis recedes (and what was it?)
Just when the term "perpetual floating-rate Euronote" began to seem even halfway intelligible, the crisis in that oddball security dropped from international sight. What happened, what caused it, and why should it matter?
There's no denying the popularity of broadcast, cable and media debt -- Morgan Stanley has sold enough of it to paper a large house -- but what can be denied, sometimes, are the numbers. They don't add up in the manner of one plus one.
The malaise in junk has little to do, this time out, with credit. It's the investment bankers who are under a cloud, not the bonds.
That may change, of course, and we fully expect it will. Believing that credit will one day reclaim its rightful place at the center of finance, Grant's has undertaken a search for the humblest low-rated debt issuers.
No problem: Just wait till next year
"The worst are those pretentious dinner parties that some of my new junk-bond tycoon friends insist on giving..."
"We're doing this stuff too," he added, pointing to the sprawling Morgan Stanley securities-trading room just down the hall. "You ought to see the sort of deals going on in there. Everybody's gonna get carried out when the junk-bond market goes." -- Barton M. Biggs as quoted in The Wall Street Journal, December 5, 1985.
n what may constitute a new indoor record for the corporate high yield market, the Wedtech 14s of 96 slid to a bid price of 28 last week, less than 3-1/2 months out of the gate.
One in the eye for junk finance
Revelations that Ivan Boesky, the arbitrageur, philanthropist and author, has owed his stupendous success not to native brilliance but to a succession of feedbag tips purchased from Dennis Levine, the singing investment banker, mark a great divide. Like an earthquake that topples a few buildings and rattles everyone's cups and saucers, the Boesky affair is likely to change the financial landscape in ways large and small.
General Reinsurance, the company about which Neuberger and Berman has been pounding the table, is running happily against the tide of 1980s finance. Its problem is not where to find the cash, but what to do with the torrent that rolls in the door.
Like newspaper reporters and teenagers, institutional investors tend to move in packs, and nowhere is this collective impulse more apparent than in Japan.
When Clarence Charles Hatry, a successful and, for all anybody suspected, honest English financier, was unmasked as a thief and swindler in September 1929, the market repercussions ranged wide.
Buy now, pay later (and later, and later. . . )
When First Boston Corp. last month offered $3.2 billion's worth of securities backed by auto loans, the market put its foot down and demanded $4 billion. Happy to oblige, First Boston set a record for the biggest underwritten deal in U.S. annals and proved again that the modern investment banker stands ready to "securitize" almost anything.
When the editor of Grant's runs out of blue shirts for television appearances (as he did in the week of Ivangate), it should be like picking up money off the sidewalk to sell him short and buy Drexel Burnham. But last week the Grant's Leveraged Stock Index took a beating. All at once, a highly indebted capital structure was exactly what the stock market had no time for.
Bid wanted: Television stations
When SCI holdings, successor to Storer Communications in a leveraged buyout, served notice to investors last year that, barring a successful sale of assets or a restructuring of debt or a rush of prosperity, they might as well kiss their money good-bye, the prospectus language had lost its power to shock.
Central banks "print" dollars
News flash: Acting to support the dollar, central banks have been buying dollars wholesale. They have bought, or "monetized," dollar-denominated securities this year in the round sum of $39 billion.
What made the 1970s the 1970s was inflation, and the place where inflation settled down to make its home was Houston. What Boston is now to financial assets -- Boom Town, USA -- Houston was then to tangible assets. It was an era decked out as a city.
Jumping on desks at Salomon Brothers
A recent story in The Wall Street Journal on the global market in Treasury bonds featured a temperamental trader at the Salomon Brothers office in Tokyo. Bernard Ward, the fellow who caught the Journal's eye, is 27 years old, stands 6'6" tall and weighs 230 pounds. He used to play rugby.
Grant's gives a debt party
William F. Rickenbacker, the noted financial writer and doer, was on hand for the recent Grant's debt and interest-rate conference at the Plaza Hotel in New York. He filed this report...
The Federal Reserve, which can create bank reserves just by writing a "buy" ticket, bought (and thereby turned into money) some $2.7 billion's worth of bills last week.
Regulatory machinery is in motion in the State of New York to restrict junk-bond investments by life insurance companies.
Inflation's "breadth" gains
"Breadth," or the simple ratio of advancing to declining issues, is one of the handiest items in the stock-market tool chest. It is nearly everyone's favorite indicator of the strength of a price movement...
Albert Friedberg, the Toronto-based speculator, has had a change of mind on the markets. For as long as we can remember, Friedberg has been bearish on bonds and stocks. But the other day he told us he'd turned bullish, or at least not bearish. He said he smells a new Bretton Woods accord.
Remember those generously secured Youngstown Sheet & Tube first mortgage bonds, the 9-7/8s of 1991? The ones that changed hands last January at 81 and change to yield 15.1% (Grant's, January 13)?
Linda Bialecki is a head hunter whose specialty is the high-yield bond market. The junk people of whom she can never find enough are the credit analysts who know their business. The rarest of these human hen's teeth are the credit analysts who have actually been through a bear market.
The sight of IBM and General Motors together on the new low list the other day has fired the economic imagination. It has raised once more a question that has vexed and beguiled the bond market for the past two years.
The "Select Capital Preservation Fund" is a mutual fund for investors who have already sown their wild oats. Conceived by a bear, and slated for launch in January, the fund will invest in gold, gold-mining shares and short dated government securities denominated in dollars, Swiss francs, Deutsche marks and yen.
"Dequity," and other post-J. P. Morgan concepts
"Dequity," and other post-J.P. Morgan concepts
An address by the editor of Grant's before the Financial Management Association in New York, October 16.
I wouldn't be anywhere else this morning. In a bull market, we bears do whatever we can to make ends meet, and we do it gratefully.
Suddenly, long-dated British bond rates have pushed to 10.6%. The pound is down, and London bank rates are up.
Disinflation disimproves again
Inflation ghosts have grown bolder lately, haunting the bond market in broad daylight. The dollar is down, gold is up and the latest trade numbers give reason to hope...
World Bank: read the notes
The World Bank is a triple-A-rated institution that trades like a triple-A and has all the right triple-A friends. It is the biggest non-sovereign borrower of medium- and long-term capital in the world.
W, the wonderful fashion fortnightly, compiled a list of the "in" things in New York recently, enumerating (among others) red cabbage salads, off-the-shoulder evening dresses, anything Chanel, mad fashion -- and mad hats, fur trim, greed and utility stocks.
In prehistoric times, the governors of the New York Stock Exchange defined gambling as the practice of betting on stock prices without the shares themselves changing hands.
If it's all right with Congress and the President and Craig Hall, the Texas real-estate syndicator, the Federal Savings and Loan Insurance Corp. will soon raise $3 billion in life-saving capital. The $3 billion will help to secure an additional $15 billion, which is supposed to guarantee the solvency of FSLIC in the coming hard times.
The Fed rules ( or does it?)
This banker said that from the early 1970s on, there were virtually no borrowers with AAA or AA ratings. Most corporate lending was to A and lower-rated borrowers and among the better borrowers in this group, loans were mainly bridge-type financings....
Thomas J. Tisch, who is not to be confused with his father, Laurence A., the acting chairman of CBS (of whom he is the spitting image), nor with his uncle, Preston R., the new Postmaster General, nor with his brother, James S., the shipping magnate, has some tips for bank-stock investors...
Money surges, quit so what?
A bond market that can coolly absorb a $4.3 billion money-supply number on top of the news of the resignation of a pro-Volcker member of the Federal Reserve Board is not a market to panic over a news analysis on page A-24 of Thursday morning's NY Times. Nonetheless, the story deserves more attention than it apparently received.
The conviction that the affairs of the United States government are in a state of sub-triple-A disorder has been an original but admittedly unprofitable investment idea.
"The old kazazza," according to Bertie Briscoe, who trained the featherweight Sandy Saddler, is the place to hit a person, if you have the time to be exacting about it. The same advice might be profitably applied to the financial arena: The region of maximum vulnerability is the best destination for a punch.
The CPI futures contract on the Coffee, Sugar & Cocoa Exchange used to be as dead as inflation. Now that inflation fears have revived, it is deader.
Tracks of the crowd (or what they're really buying)
In other economic news, the Treasury Dept. said U.S. savings bond sales soared to a 40-year high in August...
The Federal Reserve Bank of New York, not reaching for a mass audience, has titled its new, 379-page study of the banking business, Recent Trends in Commercial Bank Profitability.
Some $49 million's worth of People Express convertible preferred was still up in the air on Thursday.
Back in December, Stephen Marris of the Institute for International Economics in Washington published a study titled, Deficits and the Dollar: The World Economy at Risk. He may be wrong -- it is to be hoped that he is...
At the Federal Reserve press conference Thursday, the spokesman noted a rise in the Treasury's deposit balances at the Federal Reserve banks...
Some timely questions and answers: What is reflation?
It is a successful policy of monetary debasement and fiscal stimulus. It is the ancient political cure for tired booms, heavy debts and restless voters.
The U.S. government is reflating, right? Trying, not necessarily succeeding.
By dint of winning a week's vacation to La Paz, Bolivia, Michael Klotz, a Chicago financier, owns some of the finest inflation-forecasting credentials in North America.
CLC of America is a bankrupt barge company. It is a bankrupt barge company with a base of operations in the agricultural and industrial Midwest. The price of its stock has recently doubled: to 2.
Houston -- A filing last week with the Securities and Exchange Commission may well revolutionize the structure of publicly held mortgage banking companies.
Texaco is a junk-grade debt issuer (it's hard to get used to the fact), but the frying pan into which it has recently hopped is a legal, not a purely financial, one.
To put the issue of bank capital in clear and sober perspective, the accompanying table compares...
Now that even the 5-1/2% passbook rate has become respectable again, a Florida savings and loan has offered 6%-plus on a new certificate of deposit.
Lower rates, no more credit
Although a piker by the zero percent standards of American Motors, the Federal Reserve Board cut the discount rate last month to 5-1/2%, the fourth such gesture this year. We use the word gesture advisedly...
William H. Tehan, the successful inflation investor turned successful deflation investor, called in from a Vermont tennis tournament last week to satisfy the curiosity of his many fans. Ever since the stock market topped out and gold began to rally, people have been asking after him and his portfolio.
Barring a pre-election gift to the Democratic party by Paul A. Volcker, a third year of "free reserves" will begin this fall.
Frontiers of financial design
The first Putable Extendable Variable Coupon Renewable Notes were recently offered by Citicorp through Goldman Sachs & Co.
•
Credit cycles: the manic phase
In Christmas week 1955, the American Statistical Association and the American Finance Association convened in New York to consider the disquieting state of credit.
The stock market will like the Federal National Mortgage Association, the giant federally chartered mortgage company whose shares have climbed a wall of worry of our very own construction...
Found: a bull on business
If Gert von der Linde, chief economise at Donaldson, Lufkin & Jenrette, declared that the grass was blue and the sky was green, a prudent man might steal a glance out the window before betting against him.
"Perfect savings account"
"Since Treasuries are dollars which pay interest, if a dollar flight occurs, Treasuries will decline in price."
August Arace, the author of that sentence, is a professional handicapper of the inflation/deflation contest.
A Cook's tour of the numbers:
-- Adjusted Federal Reserve credit: expanding at the customary rates of growth, about 8-1/2% year-over-year.
-- Adjusted monetary base (defined as bank reserves and currency): up by about 8% year-over-year, also on trend.
-- Borrowings from the Fed: customarily low....
The uptick in the latest CPI follows hard on a report by the National Association of Purchasing Management that industrial materials prices showed some unaccustomed bounce last month.
The LTV bankruptcy focused the attention of the junk-bond market last week as no other event in recent memory has been able to do.
Fred Alger, the money manager, was recently surprised to receive the resignation of his chauffeur.
Texas Air Corp., the airline holding company that has leveraged itself to the wild blue yonder, issued six million shares of 6-1/4% cumulative convertible junior preferred at $25 each the other day. Nobody seemed to have minded the prospectus.
One day in 1947, the front page of the old Washington Daily News carried a story about a child prodigy. "Well, Can YOU Read the Backs of Dominoes?" the headline inquired, and a photo showed a tyke in bow tie and bib overalls holding a large wooden domino up in the air with his left hand...
The Federal Reserve's balance sheet is not nearly as delphic as the testimony of its chairman. While Paul A. Volcker testified ambiguously last week, the Fed shrunk its assets decisively.
Concerning Thursday's discount-rate cut, to 6% from 6-1/2%:
1. It was exactly what the market expected and half of what it wanted.
2. It was unaccompanied by reductions in Japan or Germany.
3. It was a monetary gesture.
Seven World Trade Center, the largest speculative office tower erected in New York and the future corporate headquarters of the largest speculative bond house erected on earth, was topped off last Tuesday.
The accompanying graph is no irresistible advertisement for the German bond market. Yields on 10-year German governments peaked as long ago as 1973, or eight years before Treasury yields topped out.
Well might Drexel Burnham buy its own skyscraper. In the April-June quarter, according to Salomon Brothers, junk-bond issuance topped $14 billion, a number that represented 31% of overall corporate bond issuance.
Single-A industrial bonds are cheap. They're cheap in comparison with governments, and they're cheap in comparison with double-A industrials.
Some chapter and verse...
Last year saw weakness in a broad range of vital financial signs of industrial corporations. It was a strange sight for the third year of a business expansion.
Conflicting advice from all over
John Mendelson, the Dean Witter market analyst who helped to give the stock market the heebie-jeebies last week, also turned bearish on the bond market.
What the Japanese won't touch
Lisa Wolfson, a First Boston vice president who deals in the exotica of risk-controlled arbitrage, has just returned to Manhattan from a series of business trips...
Over a welcome-home lunch, she was able to confirm that the Japanese hardly eat lunch at all. In Tokyo, she said, they go out for 15 minutes to slurp noodles standing up. Investment decisions are always savored, however....
Bank Valuation, the San Francisco-based consulting firm that calls 'em as it sees 'em, is out with new ratings of the country's 50-largest banks (not the holding companies but the banks themselves).
Albert O. Friedberg's pick for best trade for the rest of 1986: Buy Deutschmarks, sell pounds sterling....
For the first eight months of fiscal 1986, which began last Oct. 1, government receipts totaled $494.56 billion, compared with $474.66 billion the year before.
So where's the Arctic fund?
Latest in a procession of single country and regional closed-end funds are The Scandanavian Fund Inc...
The first day out of the gate, the brand-new Macy 16-1/2s of 2006 -- the junior subordinated debentures that pay no interest in cash until 1993 -- spurted five points. Almost nobody paid attention; not a word of it got into the papers. It was as if a $1.5 billion debt transaction has become chopped liver.
British companies are being charged higher premiums by the government for insuring their medium and long-term business contracts with Saudi Arabia.
Blue skies, right sunshine
The divergence between the headlines ("Mexico 'unable' to pay debt on current terms" -- Financial Times) and the financial markets continues wide.
People can talk themselves blue in the face about the business and economic fundamentals, but what the financial markets seem increasingly concerned with are the markets themselves. There is a circularity about a ripening speculative trend...
Bank clearings in New York are boiling. They were up by some 54% in April, year to year, and were higher by some 41% in the four-month period from January to April. At last report, they were running at a weekly rate of $2 trillion, whatever $2 trillion means.
With so many trillion-dollar numbers in the air, it's easy to lose sight of a mere billion, but we think you ought to know about a trio of billion-dollar junk offerings, either actual or contemplated.
Without fanfare, the dollar has achieved remarkable stability against the price of gold in the past year.
Seeking help (as usual) from the professional timing fraternity, we made the rounds Thursday to find out where the bond market was going next and when. For the very short run, the thinking was mostly bullish.
The tax bill may or may not prove to be what the economic doctor ordered, but it continues to menace tax-advantaged investments.
The Italian stock market, the very model of new-era capitalism on the up side, has lately been giving the world a refresher course in crashing.
What's new in the monetary data is the weakened state of bank credit. As more and more companies troop to the bond and stock and commercial paper markets, fewer and fewer line up to borrow at banks.
Only a month ago, the Federal Open Market Committee felt constrained to warn the bond market against an excess of optimism. Only a week ago, the Federal Reserve Bank of New York felt obliged to find out about the damage attending the short squeeze in the 9-1/4s of 2016.
But nothing stays the same for long in the bond market.
Needless to say, the marketplace is no debating society, and rhetorical points are not dollars. Mindful that dollars and cents are the only genuine chips in corporate finance, we have devised a new debt barometer. It's the Grant's Leveraged Stock Index.
"As a bank supervisor, I see an omen -- tremors in the banking system," the Comptroller of the Currency, Robert L. Clarke told a possibly slack-jawed gathering of the Boston Economic Club the other day. "The tremors tell me that things are not as steady and stable as they used to be."
What the Comptroller of the Currency didn't mention in Boston (see above) was that there are fewer investment-grade companies to lend to.
It is hard to imagine anyone more bullish than Bill Tehan -- or more bearish. It is hard to conceive of anyone more successful than he has been at calling the big financial turn -- or more unsuited to life at the average brokerage house. All in all, it is hard to think of anyone on Wall Street just like him.
Watch commodities -- and Milan
No sooner did the Bank of Italy cut its discount rate by another full percentage point, to 12%, than the Milan bourse caved in.
The Dennis Levine-size jump in the money supply last Thursday gave rise to speculation that not even that much money was enough -- that not even $6.1 billion of M-1 and $29.6 billion of M-2 could suffice to keep Wall Street in the style to which it has lately become accustomed.
Tax reform has been no friend to leveraged real estate. No sooner did the Packwood scheme see the light of day than the shares of Integrated Resources, the real-estate syndicator cum financial-services company, crashed.
On Wall Street, as in nature, bears don't win popularity contests. Blamed for the Crash, they made excellent political game for the Hoover and Roosevelt administrations in the early 1930s.
In 1900, the Dow Jones Industrials were on their way to 70, and high-grade corporates fetched 3.31%. If, in that year, you put $100 into the stock market and $100 into the bond market, if you kept that money invested and if you reinvested the dividends and the interest income, what would you be today?
The federal budget deficit outlook for fiscal 1986 has deteriorated over the first six months of the year.
Walter F. Mondale, last seen running for President in 1984, has resurfaced as a director of a new closed-end investment company.
In the past few months, some respected voices in the financial markets have been raised on the side of caution.... In any event, we've drawn up a short list of what these heavyweight people and institutions have been saying or doing...
The correct institutional attitude toward the Federal National Mortgage Association nowadays is bullish. Earnings are up and interest-rate sensitivity is down.
This is a story about the early and artful call of some high-yield notes. It is a story about the psychology of the bond market (complacent), the recent frame of mind of some fixed-income investors (mad) and the latest wrinkle in investor protection (ironic). It is about the hazards of investing in a blind pool (considerable).
Following are some recent remarks of government policymakers on the subjects of inflation and the dollar...
All for debt, and debt for all
. . . both lower price-to-book values and declining inflation indicate that the U.S. economy may be underleveraged.
" . . . a well-capitalized enterprise can afford to experiment because it can afford to be wrong." -- Columbia Savings & Loan Association 1985 annual report.
Does anything lead interest rates, or do interest rates lead the world?
About the worst thing you can say against the Amalgamated Bank of New York is that you can't own its stock. The Amalgamated Clothing & Textile Workers Union, which founded the bank in 1923, controls every share.
In the airline industry, debt flies first class, business class, coach or standby, depending on the carrier. A surprise standby entrant: the 17-1/2% secured equipment trust certificates of Eastern Airlines...
Many junk-bond players would stop short at investing in a dirt pile. But Evans R. Dick III, who has invested in a pair of gold-bearing dirt piles near Helena, Mont., will have nothing to do with junk bonds.
Drexel Burnham Lambert Inc. intends to lease the entire World Trade Center Seven tower and consolidate its offices, which are currently scattered in four downtown buildings, Crain's New York Business has learned. . . .
The accompanying graph illustrates the point that the world prefers governments to corporates.
Good-bye, euphoria; Hello, hysteria
Gert von der Linde, the economist at Donaldson, Lufkin & Jenrette who was an early and stalwart bull on the bond market, now has some bearish things to say. But he prefaces them with some moderately bullish things.
And then the dollar rallied
The Federal Reserve remains a reluctant bystander to the bullish goings-on in the credit markets.
George S. Moore, the former Citibank chairman who addressed the luncheon session of the Grant's conference on his half century in banking, paused to field an investment question after his speech.
All but the leakiest vessels have been lifted by the incoming tide of this bond-market rally, but parts of the fixed-income fleet are riding higher in the water than others. Riding highest of all are Treasuries. Nothing has come even close to them.
The futures contract in domestic certificates of deposit is almost extinct. After a long decline, the contract vanished suddenly from the commodity page of The Wall Street Journal the other morning.
For the past few months, the price of an acre of prime Iowa farmland hasn't fallen. That may seem a modest kind of bull market, but in Iowa it's like the rain that follows a drought.
"I will not belabor the state of Iowa's agricultural economy except to predict that the bottom will be reached this year, and prices will start to stabilize and the recovery will be slow and gradual. . . . We reasonably cannot predict a return to a respectable level of profitability prior to 1987."
-- Kenneth M. Myers, chairman of the board and chief executive officer, First Interstate of Iowa, in remarks delivered at the bank's annual meeting, April 17.
Integrated Resources Inc., the real-estate syndication-cum-financial services company, is a case study in the following financial subjects: real estate, liquidity, illiquidity, contingent liabilities, leverage, deflation, inflation, debt and bull markets.
Is the Fed pouring it on, driving the bond and stock markets higher? No, it is not. The news about monetary policy is how little changed it really is.
Last Monday, a man not a million miles from here looked into the Financial News Network camera and tried to sound as if he knew what he was talking about...
If inflation is dead, then the new inflation futures contract is buried. Hardly anybody trades it. Milton Friedman has praised it, but the financial press ignores it.
Whatever it may or may not mean for the world at large, mortgage foreclosure postings set a 23-year record in Dallas (not Houston) last week, and spreads between junk bonds and Treasury bonds yawned wider than ever.
The bad-debt collection business is hale and hearty -- so much so that we are chagrined. If there was ever a tailor-made Grant's investment concept, it is the bad-debt collection concept. But, glancing at the accompanying graphs, we notice that we are not the first to catch on to it.
TOKYO -- Land prices near Tokyo's Stock Exchange showed the largest increases in a year which saw the price of a square foot of land in the Japanese capital soar by more than 50%.
A footnote to the Federal Reserve balance sheet disclosed that foreign central banks and other such shadowy international institutions accumulated $4.8 billion in marketable government securities last week, bringing their collective Treasury holdings to $140 billion. Both the weekly accumulation and the grand total constituted records.
Sir:
Charles Allmon, wizard stock picker, thinks the market is too high. White House insiders think Beryl Sprinkel and his monetary doctrines are amusing. The Fed is goosing the money supply.
The idea that the 1980s are a simple replay of the 1920s (but without Babe Ruth) has never sat well around here. It is too pat and too popular. If the past were really so obliging as to repeat itself literally, then historians would have all the money.
A turn in monetary affairs is evident but not, for the bond market's money, alarming.
...Here is an investment paradox.
In the spring of 1984, when Treasury yields were pushing 14%, it seemed that everybody hated bonds, even governments. Now that Treasury yields are under 8%, it seems that everybody loves bonds, all of them.
From time to time we've quoted the views of a professional bond investor who's gotten it right since the bottom of the market in the spring of 1984. The other day, this man, who has been known in these pages as "really bullish" (he hates a fuss), turned bearish.
Land values in Iowa, in real terms, are lower now than at any time since the mid-1960s.
Hardly a bear in the world is safe. Shrugging off the cascading oil price, the British pound rallied to $1.50 last Thursday...
The latest banking week brought news of a $5.7 billion bulge in the money supply but of no visible change in the Federal Reserve's open market policy.
The spectacular, titanic, amazing, volcanic bond-market rally has left an urgent investment question in its wake: To reach for yield, or not?
The government-to-junk yield spread has never been wider, bond-market rally or no. The graph shows that investors last month preferred government bonds to "high-yield" corporates, hands down.
Paradox of the season: Despite falling interest rates, worldwide bull markets and a three-year-old business expansion, the rating services keep busily downgrading corporate bonds.
By inching back toward the $68-a-share buyout price, the common stock of R.H. Macy & Co. reminds you (as if you didn't know it) that the credit markets are in a trusting mood.
The old Beatrice was a $12 billion consumer products company with more equity than debt. The new, post-LBO Beatrice will be a different proposition, a company with hardly any equity at all.
First there was John W. Kluge, who sold $1.3 billion's worth of debt securities with the gay disclaimer that the investor might never see his money again.
Then there was K. Rupert Murdoch, the Australian-born media magnate, who assumed the Kluge debt in order to buy a portion of the Kluge assets.
Now comes Murdoch again.
Paul Montgomery, the technician at Legg Mason Wood Walker, Newport News, Va., called the top last January 6. He thought it was the top, but it wasn't, and he switched gears and jumped back in the market. Now he is bearish all over again, as he wired his clients last week...
The club of forecasters who got bullish early and who stayed bullish on bonds is as exclusive as the Union. It includes, among other people, Edward Yardeni, chief economist at Prudential Bache Securities...
Fannie Mae, the $100 billion mortgage company, gains when interest rates fall but loses when its assets deteriorate.
[T]hese are strange and -- for investors -- hospitable times...
The congressional testimony by Paul A. Volcker last week was out of tune with the times. In a day of bull markets, tax cuts and growth-minded economic policies, the chairman sounded the cautionary note of inflation.
"By the end of this month, I'll owe $2 billion, more than some smaller Third World countries, and I'm pretty proud of that. Today, it's not how much you earn, but how much you owe."
-- Ted Turner, quoted in The Wall Street Journal, February 11.
Public Service New Hampshire, the outcast utility that last year improved itself (Grant's, January 13), sold $225 million's worth of third mortgage bonds last week through a syndicate headed by Merrill Lynch.
Some of the bears we've been quoting are less bearish now -- are nursing their wounds and giving this apparently relentless bull market its due.
Amsted Industries, the Chicago-based manufacturer of construction products, industrial items and railcar parts, replied to a hostile tender offer last year with a management buyout scheme.
In return for the anxiety of owning low-grade debt, a junk investor has failed to earn what a government investor has earned.
The recent stock offering by the New Milford Savings Bank, New Milford, Conn., is one for the thrift industry record books.
The accompanying lines of type, reproduced from The Wall Street Journal, document the unbelievable: On separate trading days recently, issues of Petro-Lewis and Crystal Oil gave up 14-1/2 and 15 points, respectively, on the American Stock Exchange.
"Volcker Says Dollar Has Fallen Far Enough."' Traders rushed in to do his bidding.
We think we know contrary opinion when we see it, and we've just seen it. The source is a new report, "Distant Thunder: The Start of a New Commodity Price Rise," published by Smith Barney.
Can it possibly get any better?
Our Index of Monetary Pressure (page 10) is making all-time lows, suggesting that the supply of lendable funds is more than sufficient to meet the demand.
As the stock market blazed its way to new highs last week, bank stocks gave ground worldwide.
A popular President, bull markets, falling interest rates, easy money and dormant inflation are the happy financial circumstances of 1986.
The technicians who so presciently called the early January trading top are looking back over their shoulders. They say that the market is within a hair's breadth of making them bullish again.
A recent sale of junk debt by the San Antonio Savings Association has caused no long lines of customers to form outside brokerage offices. For one thing, the issue was small -- $25 million's worth -- and the thrift is mutually owned. And for another...
January performance numbers are in, and they don't favor the high-yield debt markets.
Speculative oil bonds are being annihilated. Over the past several weeks, issues of Crystal Oil, Global Marine, Damson Oil and Petro-Lewis Corp. have lost one, two or three points a session.
Prices will fluctuate, and technicians will plot the fluctuations. . . The very latest word is that the trend of the long-dated Treasury market is weakening.
The launching last week of ML Media Partners for the purpose of investing a quarter billion dollars or so in TV and radio stations, the identities of which the managing partners don't happen to know at the moment, is a news story of possible historic interest.
Joe Jolson, the thrift analyst at Montgomery Securities, San Francisco, put out a "sell" recommendation on the Federal National Mortgage Association the other day.
The money supply climbed by $2.7 billion in the latest banking week, free reserves continued to prevail and adjusted Fed credit continued to grow ...
A complication may be developing in the proposed leveraged buyout of the Outlet Company subsidiary of the Rockefeller Group Inc. because of proposed changes in the tax laws, according to Wall Street sources.
-- The New York Times, January 21.
Not to put too fine a point on it, but where are interest rates headed? Where is the bond market going, and when will it get there? If the oil market is so weak, why is gold so strong? If inflation is coming back, why have the commodity indices taken a header? You could drown in the crosscurrents.
As it did a year ago in these pages, the accompanying graph provokes thought.
An inflationist and a pair of deflationists were asked to explain the gold rally. Their answers...
One exotic international bank stock was strong last week. That was the Bank for International Settlements, the Swiss-based central bankers' bank that also happens to be an investment (Grant's, July 1).
Our Index of Monetary Pressure made a record low the other day, pointing to the virtual absence of money-market congestion . . .
The Australian dollar is off its December lows, and Prudential-Bache Securities can't keep up with the demand for its own First Australia Fund prospectuses.
News that the Freddie Mac will soon begin to buy second mortgages hand-over-fist and resell them to Wall Street as securities has been met with aplomb.
The following appeared in The Denver Post on January 15, i.e., before the oil-price break:
Foreclosures in all six metro counties have reached record numbers...
The Clearing House Interbank Payments System is the electronic superhighway of dollar traffic, and it has no posted speed limit.
As noted elsewhere in this issue, monetary policy continues open throttle.
It was a wonderful week to be alive and jumping out of a window. It was a testing time for nerve and money and an occasion for hard thought.
Our favorite institutional bond bull (up 29% in 1985) was bullish and unbowed when we checked in with him last Thursday.
Was it wholly a fluke that Robert Prechter, the Elliot Wave expert, went short of bonds last Tuesday, the day the market peaked?
Fannie Mae: the Texas angle
Fannie Mae may not be the perfect interest-rate proxy (Grant's, December 30), but it was the next best thing last Tuesday. The bond market climbed, and the shares of the Federal National Mortgage Association did handsprings.
At last week's tally, most closed-end bond funds were priced at premiums (in some cases substantial ones) to net asset value...
Watching the bonds go down last week, a bear could feel a certain measure of delayed gratification. But there was also a nagging question...
At current and still lofty Treasury-bond prices, what is the risk in the market? A Cleveland friend and his computer have applied themselves to that problem...
R.D. Smith & Co.: après junk
Public Service of New Hampshire (PSNH) wasn't everyone's candidate for the utility most likely to succeed in 1985, but R.D. Smith & Co. happened to believe in it.
To glance at our Grant's Bank Audit Index (page 11) is to see the aplomb with which investors met the stock-market plunge last week.
