While market technicals scream "buy," the fundamentals are poor.
Several sophisticated analysts have noted that the commercial paper market, the link between Wall St. and Main St., must return to normal before things can improve. That has not happened and results in the ever-increasing spread of junk bonds over Treasuries. That spread just reached an unimaginable 1700 basis points.
Many bonds are priced to reflect the 70 cents on the dollar that they usually get in bankruptcy court.
Many stocks trade under $1 which is their critical value for antiacipating bankruptcy. Today's WSJ makes a good case for improvement early next year. "Ignore the Stock Market Until February"
http://sec.online.wsj.com/article/SB122714126820842751.html
7 comments:
If an equity were priced to bankruptcy it would be $0. Right?! Sigh.
I should have said that many bonds are priced to reflect what they get in bankruptcy court: $0.70/$1
Stocks are considered in danger of bankruptcy when they trade under $1 which many are doing now.
Deborah,
Is there a graph, or web site, you can refer us to showing the spread between Corporate Debt and Treasury yields? I'd like to see the trend and monitor to see if/when the gap narrows and gets closer to normal. Thanks, Dave
"Stocks are considered in danger of bankruptcy when they trade under $1 which many are doing now."
Wouldn't a 1:10 reverse split be an inexpensive way to escape this classification?
HA!!! I'm so glad they are taking my advice.
[Associated Press: "Fannie Mae may execute reverse stock split"
Associated Press, 11.26.08, 04:05 PM EST]
Dear Dave,
I use the Merrill Lynch High Yield Constrained Index at http://online.wsj.com/mdc/public/page/2_3022-bondbnchmrk.html
from which I subtract the ten-year treasury note on the Fed's website:
http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
Excellent question!
Deb
Dear Kumbu,
You called it right! Here's the news release on Dec. 2:
Freddie Mac plans to meet NYSE listing rules -
Mortgage finance company Freddie Mac said Tuesday it has told the New York Stock Exchange it plans meet listing requirements by May 18, possibly through a reverse stock split, to prevent itself from being delisted.
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