Econ,
It matters because default rates are increasing and likely to reach cycle highs over the next year.
Igy
Econ,
It matters because default rates are increasing and likely to reach cycle highs over the next year.
Igy
The default rate for corporate debt is expected to hit about 2% and that includes junk bonds. It's not much of a concern for highly rated borrowers.
And it still has nothing to do with the original point.
Econ,
You fail to understand that many companies now in default were once "highly rated borrowers."
It is called a business cycle.
Think again your assumptions.
Igy
I made no assumptions. The corporate default rate is expected to reach 2%. Are you suggesting it will be significantly higher?
Take junk bonds out of the calculation and corporate debt becomes a very safe investment.
And this still has nothing to do with the original point.
Econ 101 wrote:
Ghost of Igloi wrote:Econ and topcat,
Good points. The problem with much of the corporate debt issued in the last five years comes covenant light. Default recovery rates have fallen with less protection for investors.
Igy
That's a very small concern given the rate of defaults, especially among highly rated borrowers. But then that has really nothing to do with the original point, so I'm not sure why you brought it up.
Econ,
I brought up the point that new issuance is coming covenant light because that is a change. And that change is driven by the search for yield. So investors are taking more risk for an incremental increase in yield. As I correctly pointed out, many of the companies in default were once "highly rated borrowers" when oil was at $100 a barrel. No different than when AIG, GM, Ford, Lehman, Citigroup, Chrysler, Bear Stearns, Washington Mutual were highly rated borrowers prior to the financial crisis. All bonds have a risk of default, if you choose to discount that risk to little, fine.
Igy
Your original point was that higher rates leads to higher stock prices. When you were corrected on that, you suddenly changed topics to bond defaults. Apples and oranges.
Of course bonds have risk, but highly rated borrowers have a minuscule rate of default. Do you seriously advise your clients that highly rated bonds are too risky? Of course not.
As for covenant light, I have no idea how you linked that to a search for yield. It's protection for the borrower.
"Your original point was that higher rates leads to higher stock prices. When you were corrected on that, you suddenly changed topics to bond defaults. Apples and oranges."
Un-fog your glasses Mr. Econ, here is what I said:
"Some analysts have said that rising cost of capital is a sign of an improving economy. Of course the market has risen on multiple expansion and not earnings, so hard to justify that belief."
Igy
Selective memory...
Ghost of Igloi wrote:
topcat,
One of the excuses to support higher stock prices has been the low cost of capital. Also, the Fed Model, that compares that the dividend yield of stocks to the risk free rate, or the 10 Year Treasury, justifies rising equities. So, the view that higher rates somehow becomes supportive to higher stock prices runs counter to the view that has been held since 2012. It seems convenient to me that once faced with higher rates, those that want to believe that the market moves higher, invent another justification. I certainly hear your view but I don't buy it.
Igy
Say wha? wrote:
Uh, higher rates support higher stock prices? No one believes that.
Ghost of Igloi wrote:
say,
Sure there are. Some analysts have said that rising cost of capital is a sign of an improving economy. Of course the market has risen on multiple expansion and not earnings, so hard to justify that belief.
Igy
Econ 101 wrote:
You are confused. An improving economy is not synonymous with higher stock prices, and vice versa. As the economy improves, rates are often increased to control inflation. But increased rates also makes debt notes more appealing which can result in decreased demand for stocks thus lowering their prices.
From there the conversation quickly changed to one about bond principals decreasing (!) and bond defaults. Go figure.
Econ,
I can do little other than translate the meaning which is clear to me:
"One of the excuses to support higher stock prices has been the low cost of capital. Also, the Fed Model, that compares that the dividend yield of stocks to the risk free rate, or the 10 Year Treasury, justifies rising equities. So, the view that higher rates somehow becomes supportive to higher stock prices runs counter to the view that has been held since 2012. It seems convenient to me that once faced with higher rates, those that want to believe that the market moves higher, invent another justification. I certainly hear your view but I don't buy it."
Translation: Igy doesn't believe higher rates support higher stock prices, but others do.
"Sure there are. Some analysts have said that rising cost of capital is a sign of an improving economy. Of course the market has risen on multiple expansion and not earnings, so hard to justify that belief."
Translation: There are analysts that believe higher interest rates are supportive of higher stock prices. Igy did not say it was his view.
In regards to my "covenant light" comment, it was a comment, take it the way you want.
Igy
Figy, you are too much! I give you credit for your trolling, but I'm amazed that you actually get responses. I mean first you pout words into Flagpole's mouth, then you have two different posters correct your obvious misstatements about bonds. Don't these people read the thread and know you're not the real deal? Hey, have fun with it. It can't last forever.
Sliggy,
I'll pout this one just for you:
https://mobile.twitter.com/edclissold/status/768196792475324416
Igy
You'll pout? Classic!
[quote]Sally V wrote:
you actually get responses. I mean first you pout......
You said it Sliggy....
Oh snap! It's a K5 quote screw up. It's true! Figy is K5!!!!!
U.S. stock futures dropped on Thursday, with investors staying cautious as the closely watched summit of central bankers in Jackson Hole got ready to kick off.
Federal Reserve Chairwoman Janet Yellen isn't speaking at the meeting until Friday, but financial markets have been lackluster all week in anticipation of what she might say about the path of interest rates.
On Thursday, futures for the Dow Jones Industrial Average dropped 42 points, or 0.2%, to 18,430, while those for the S&P 500 index fell 4.65 points, or 0.2%, to 2,170.25. Futures for the Nasdaq-100 index lost 12.50 points, or 0.3%, to 4,773.50,
The indicated losses come after a downbeat trading day on Wednesday, when the S&P 500 and the Dow average finished at their lowest levels since early August. The selloff came as health care shares dived following outrage over a price hike for Mylan Inc.'s (MYL) EpiPens, which are widely used to treat anaphylactic shock.
Shares of Mylan were set to rebound a little on Thursday, rising 0.4% in thin premarket trade.
But the main event on Thursday is the first day of the economic symposium hosted by the Kansas City Fed in Jackson Hole, Wyo. Central bank boss Yellen will speak on Friday at 10.a.m. Eastern Time, and markets are likely to remain becalmed until then, analysts said.
"Markets are incredibly quiet this August (in sharp contrast to last year), so investors are latching on to anything they can, which gives this meeting a lot more attention than it probably deserves," said Neil Wilson, markets analyst at ETX Capital in a note.
"The big question on the table is whether the Fed is ready to raise rates in September... We can probably expect Yellen to signal the Fed's confidence about the U.S. economy and this could drive up expectations it will pull the trigger in September, potentially pushing up [the dollar] and hitting gold in the short-term," he added.
Rudy Havenstein has been dead for decades. You are again citing a fake Twitter account
Klondike5 wrote:
Down to 14,850 from a peak of 15,700 I believe.
Maybe 5%
What's the bottom?
I am betting sub 13,000
Hello Gents!
It's me, former denizen of these parts.
I may come back - the talk has become more normal and the trolls seem to have faded.
And I think the real Igy is here at least sometimes.
It's our third anniversary! Happy Anniversary, troops!
Here are some stats:
Since the Founder made his first post, here is how the markets have done, incl dividends:
Dow: +7.78% per year (+25.11% total)
Vanguard Total Stock Market Index ( a better measure): +9.76% per year (+32.1% total)
So if you have been in, invested in cheap beta, you've made good money, in line with the historical averages. Or even better, since inflation has been so very low.
And amazingly, the torrid pace of posting hasn't let up.
It's been 3 years, or 1,094 days. Through it all, we've averaged 12.7 posts per day. 13,919 posts.
I hope to come back soon - I've been flooded by many things (and hanging out on the politics thread), but cheers mates - enjoy the end of summer, good investing and good running.
Yours,
Agip