Displaying items by tag: debt

(New York)

With the market still facing some volatility after last month’s beating, some investors might be inclined to seek out stocks that may stay relatively safe from big moves. One strategy for doing so could be to look for companies with low debt. Low debt brings greater financial flexibility to companies and generally makes investors much less worried about their ability to meet their obligations. According to Barron’s “Stocks of firms with low debt have outperformed those with higher debt by about one percentage point a year for the past 25 years … Low debt companies are also less volatile than the overall market, on average”.

FINSUM: This seems like a good parameter by which to carve out a safer portion of a portfolio, though as our readers will know, we generally don’t like using historical returns alone as a guide.

(New York)

While the stock market is getting all of the attention, the bond market is experiencing a lot of turbulence as well. The riskiest corners of the debt market, including junk bonds and loans, are on pace for their worst month since the US downgrade in August 2011. High yield’s spread to Treasuries has surged a whopping 110 basis points since the start of the month, and unlike in stocks, there aren’t signs of a rebound. The average yield on the index is 8%.

FINSUM: It is reasonable to be nervous about credit right now given the huge volume of issuance in recent years and the pending threat of a recession and accompanying earnings slowdown.

(New York)

Merrill Lynch’s new compensation plan is not being received well by brokers. Many are angry about certain aspects of the plan and are pushing back. In particular, brokers don’t like that the plan incentivizes them to tell clients to take on more debt during a period when interest rates are rising. Around 15,000 advisors have complained to Merrill Lynch management. Management responded by saying it was a good incentive and was designed so that it didn’t heighten conflicts of interest.

FINSUM: This seems like it will just create misaligned incentives, especially given that it is being put in place when it is very unfavorable to be adding debt.

(Buenos Aires)

A couple of weeks ago investors seemed ready to accept that the brief emerging markets selloff was just a minor Turkey-induced tantrum, but would not blossom into something worse. Well, that view seems to be waning, as the selloff in EMs has spread and is starting to have all the hallmarks of a full crisis. One analyst summarized the situation this way, explaining that this has all the hallmarks of an EM crisis: “a large dose of debt and an associated domestic credit bubble, including misallocation of capital into uneconomic trophy projects or financial speculation. Then add: a weak banking sector, budget deficits, current-account gaps, substantial short-term foreign-currency debt and inadequate forex reserves”.

FINSUM:EMs are facing a lot of headwinds, but the economies in most of them seem healthy, so hopefully the problems will be contained to just the most troubled (e.g. Turkey and Argentina).

(New York)

Pimco, long-time leader in fixed income, has just gone on the record saying there may be some good opportunities in emerging markets. The company’s CIO sees the major turmoil in EMs, but says they offer opportunity. With all the selloffs, Pimco says “There are clearly a lot of challenges in emerging markets. But we see a little bit of value. It’s beginning to look interesting … We don’t see the same complacency in emerging markets as we do in other markets … We are more buyers than sellers”. For instance, Pimco is a major holder of Argentinian debt, and favors the country over Turkey.

FINSUM: With all the currency weakness and selloffs, there are certainly some good opportunities. However, this is an area where we may favor active management, as it takes a lot of work and insight to understand the internal dynamics of EM opportunities.