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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.
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...
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.
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.
"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.
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.
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.
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.
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.
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.
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 "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 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.
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.
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...
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 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.
In other economic news, the Treasury Dept. said U.S. savings bond sales soared to a 40-year high in August...
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.
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.
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....
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...
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....
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.
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.
"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."
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.
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?
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).
"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.
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.
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.
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.
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.