Misery Loves Company – Ruler Waffling

October 22, 2009 at 2:00 am Leave a comment

Ruler

Besides using a ruler for measuring small distances and rapping disobedient knuckles, the wooden instrument can also be used for extrapolating trends. This ruler is a very convenient tool when rigorous analysis is a second choice.

Misery loves company, so the often maligned pool of inaccurate Wall Street equity analysts are happy to share the limelight with their trend leaning junk bond analyst cousins. As default rate expectations have bounced around like a jack rabbit post the Lehman Brothers bankruptcy, these bond forecasters have been caught flat-footed.

Reuters highlighted the backpedaling of Standard & Poor’s recent forecast changes:

“S&P said it now expects defaults to decline to 6.9 percent a year from now from a September rate of 10.8 percent. On Oct 2, it had said it expected defaults to escalate to 13.9 percent by August 2010.”

 

For a lazy analyst, extrapolation is a good fall-back strategy. Sticking your neck out by looking out further into the future or grasping the concept of reversion to the mean can be difficult and politically risky from a job retention perspective. It’s much easier to constantly hug current trends because it then becomes virtually impossible to be wrong.

Just as the rating agencies contributed to the subprime and auction rate securities (ARS) debacles by rubber stamping their AAA approvals last year through the financial crisis, so too have we witnessed the failure of bond analysts to properly analyze junk bond default rates.

Hopefully the narrowing of credit spreads is a leading indicator for economic improvement, but regardless the number and amount of high yield deals hitting the market is flowing heavily. The Wall Street Journal recently reported billions of junk bond deals being priced this week and next, including the $500 million Crown Castle International’s 10-year deal; $200 million Mohegan Tribal Gaming’s eight-year bonds; $325 million in Headwaters Inc.’s five-year notes; and over $2.4 billion of bonds from four other borrowers, including Boise Paper Holdings, Reynolds Group, Murray Energy Corp. and Universal City Development.

As larger companies are freely tapping the capital markets for capital, it’s becoming more and more evident that small businesses are having tougher and tougher times accessing credit, thanks in large part to banks hunkering down and reducing lending. Reference the flattening commercial bank credit curve chart provided by the Federal Reserve System:

Commercial Credit 

As we watch the credit flow drama unfold in these uncertain economic times, don’t panic if you wondering what will happen next. Just reach into the desk drawer and pull out the favorite tool of Wall Street equity and junk bond analysts…the righteous ruler.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management and its client accounts do have direct positions in HYG shares at the time this article was originally posted. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Fixed Income (Bonds). Tags: , , , , , , , .

The Not So Good, Bad, and Ugly Now You See It, Now You Don’t: TARP

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Receive Investing Caffeine blog posts by email.

Join 1,558 other followers

Meet Wade Slome, CFA, CFP®

More on Sidoxia Services

Recognition

Top Financial Advisor Blogs And Bloggers – Rankings From Nerd’s Eye View | Kitces.com

Wade on Twitter…

Share this blog

Bookmark and Share

Subscribe to Blog RSS

Monthly Archives


%d bloggers like this: