Dollars and Jens
Wednesday, June 27, 2007
Sub-Prime Credit Contraction?
U.S. Foodservice has postponed the financing backing its $7.1 billion buyout by Clayton, Dubilier & Rice and Kohlberg Kravis & Roberts due to weak market conditions, people familiar with the deal told Reuters, the latest sign that the buyout business could be slowing.

The decision to postpone the bond offering comes after bank loan and high-yield bond investors forced U.S. Foodservice to change the terms of the financing a number of times due to the large amount of debt being assumed by the company.
I don't know anything about this deal beyond what's in the article, and it's possible that the terms were simply unrealistic. But while sub-prime mortgages collapsed back in February, high-risk commercial debt and stock only went through a small, temporary pull-back.

I'm not sure whether this is an indicator of changes in the risk premium, but it at least seems worth noting.

Tuesday, June 26, 2007
Computer-Assisted Investing
I don't mean the traditional programmed trading you're thinking of. Here's an entertaining little piece about the use of artificial intelligence to extract useful information from news stories. Many of the systems mentioned look fairly simple; there seems to be plenty of room to build.

As a bonus, the article showcases what is quite possibly the worst definition of "algorithm" I've ever seen.

Sunday, June 24, 2007
social norms
Imagine that you have kids in a daycare and you need to pick up kids before 4 pm... Parents tend to come later and later, and the teacher wants to improve on that, so she gives a fine to parents that come more than 10 minutes late. The fine was about $2 in Israel for coming late. Before that, the social norm was to be on time, but when we made it some sort of market transaction, it became OK to be late. People think, "OK, if I'm late, it costs $2. I'm not violating social norms by being late." The effect of the fine was to make more parents come late. Before it was, ... [g]ood people don't come late. Now, suddenly if you pay $2, then it's fine to be late. You put a price on the social norm and the social norm is much weaker than it was before.

Friday, June 22, 2007
interest rates IV
The bond market as a stabilizer, tightening and loosening financial conditions as necessary.

Wednesday, June 13, 2007
interest rates III, and financial journalism
U.S. 10-year Treasuries surged the most since February after yields at a five-year high convinced speculators that rising borrowing costs will curb the economy and inflation.
You might think traders would have thought of that yesterday, when they were pushing those borrowing costs up.

I do think the bond market is one of the economy's great stabilizers, tightening credit in the face of strength and inflation and vice versa.
One gauge of momentum shows Treasuries were poised to rise after the worst start to a month in three years. The 14-day relative strength index for the 10-year note futures was 19 today, the 10th straight day under 25. Readings below 30 indicate the note's price may rise, while readings above 70 indicate it may fall.
Readings below 30 indicate it may rise. Or it may not. If you were counting "may" as "will", you would have lost money for ten straight days before today. It's nice that they stepped back and made their statement meaningless.

The RSI is an indicator of momentum. It seems to be most often used as suggested here, with extreme values presaging a reversion to the mean, but in some contexts it's used by momentum followers to mean the exact opposite.

Tuesday, June 12, 2007
interest rates II
Another bad day for bonds.
Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt.
Up about 14 basis points, which is pretty solidly into "yikes" territory. A reopening of the 10-year issue didn't go as well as was hoped.


Description:          4 1/2 % NOTE C-2017
Term: 9-Year 11-Month
High Yield: 5.230 %
Price: 94.399130
Allotted at High: 64.49 %
Accrued Interest: $ 3.79076 per $1,000
Total Tendered**: 20,436,166
Total Accepted**: 8,000,068
Issue Date: 06/15/2007
Dated Date: 05/15/2007
Original Issue Date: 05/15/2007
Maturity Date: 05/15/2017
CUSIP: 912828GS3

**In thousands

Why do I think you care? Hard to say.

New Century
I'm confused, and thought I'd share my confusion.
New Century Financial Corp. has warned that its effort to liquidate assets could be stymied if General Electric Capital Corp. is allowed to proceed with plans to seize computers and other equipment it leased to the bankrupt housing lender.
I'd assume New Century has DIP financing, and if they don't, I can't imagine they'd have trouble getting it, if I understand their preferred stock situation correctly. A lease is an executory contract, falling under section 365 of the bankruptcy code, and should be assumed or rejected; if they reject the lease, they need to return the equipment promptly, and if they assume it, they should be making regular payments (and, in fact, I think they have to make up any pre-petition payments they missed), and it should be worth borrowing from the DIP financing to do that.
GE Capital, arguing that New Century owes it $8.7 million on leased equipment and can't stay current on payments, has asked a judge to lift the protection normally granted to companies in Chapter 11. That would enable the firm, a unit of General Electric Co. , to repossess the equipment, which includes computer servers, and chairs.
This is a multi-billion dollar company; $8.7 million, again, is surely worth borrowing from a post-petition lender, and wouldn't threaten wiping out the preferred stock.
The committee of unsecured creditors in the bankruptcy case also has opposed GE Capital's bid to seize the computers, saying it marks the third time the company has tried to force New Century to pay more "substantially more" in cash than the value of the equipment. Previous attempts were rejected by U.S. Bankruptcy Judge Kevin Carey, the committee said.
Now this really confuses me. Why are they trying to get more than the value of the equipment? Is this a lease or a sale? (If the equipment was sold, with the debt secured by the equipment, GE's in a much less favorable situation.) Or did New Century just sign a real bummer of a lease?

If this is really a lease, New Century should borrow the money needed to cure the default, and should continue its liquidation in a responsible manner. If GE is a secured creditor, it can insist on some protections of the value of its collateral, but it largely needs to sit back and wait. If anyone who sees this knows what's actually going on here, I'd love to hear more detail.

Sunday, June 10, 2007
interest rates
Oh, hey, I opened a blogger window. I wonder what I was going to type.

Oh, I think it had to do with interest rates. If you've not noticed, they're up like 50 basis points in the past month. The highest weekly close on the ten-year yield in the last five years, according to data from the federal reserve website, was 5.22% in early 2006. We ended this past week around 5.17%.

The yield curve was inverted for a long time, persistently worrying some people. It has now righted itself. Projections from, among other sources, the White House, have been raised to near-normal economic growth for the next year or two.

The bit of rain I wish to on this parade is the issue of the federal budget deficit. I've refused for a while to get too worked up about it in the near-to-intermediate term because, as a percentage of GDP, it's not actually that high right now, it's not projected to be that high in the near future, and interest rates were around 4.5%. If the size of the economy is growing, in nominal terms, above 5%, borrowing money now and collecting taxes later makes sense if interest rates are much below 5%. The margin of error on these things was always a check on this as an argument for deficits that were too big — as, in fact, was intertia — but as interest rates climb, potentially (to cite a number floated by Bill Gross a few days ago) toward 6.5%, the idea that Congress should be within some plausible tweaks of budgetary balance becomes more compelling.

Tuesday, June 05, 2007
A brief history of Swedish political economy since 1870.

þMark Thoma

Powered by Blogger