My personal favorite is Thanksgiving. And I’m sure that just like me, you’re more than familiar with the feeling you have after dinner when you’ve eaten way too much turkey and stuffing! You want nothing more than to retire to the couch and relax and couldn’t imagine eating another bite.
Frankly, that’s how junk bond investors are feeling these days. They’ve gorged on so much junk in the past few years that they can’t imagine swallowing any more. Yet Wall Street keeps serving up bigger platters of the stuff.
Take this Financial Times story on the Dell/Silver Lake/EMC (EMC) mega-merger. To help pay for the proposed $63 billion transaction, Dell will need to issue $40 billion or more in debt. Up to $15 billion will be in the form of high-yield, or “junk” bonds. That would be the biggest sale of junk debt ever.
|Are investors too stuffed – on junk bonds – to take on any more?|
Then there’s the Anheuser-Busch InBev/SABMiller tie up. That $106 billion deal will need a whopping $70 billion in debt financing to close. That’s the most of any takeover in history. The current record belongs to Verizon Communications (VZ), which had to sell $49 billion worth of bonds as part of its buyout of its previous wireless phone partner Vodafone (VOD).
There’s just one problem. Investors have been selling junk bonds for months on end, recently pushing yields on BB-rated bonds to more than 6.3%. That’s the highest level in more than three years. Junk bonds lost almost 5% in the third quarter, the worst quarterly performance in four years.
Personally, I believe these are warning signs that investors may be full up on junk — and unable to swallow another bite. We’re already seeing weakness in the IPO market, where companies raise equity financing. If one or more big announced deals fail because companies can’t raise cost-effective debt financing, that would be another troubling sign for the markets. So keep an eye on developments in the junk bond market, as I am.
|“Investors have been selling junk bonds for months on end.”|
Any thoughts on this trend? Is it getting too expensive to raise money in the debt markets? Or will Wall Street bankers manage to find enough investors/patsies to pony up? Do you view these mega-deals as a healthy sign of risk-taking … or an indicator of a market top? Let me know what ideas you have at the Money and Markets website.
My colleague Mark Najarian did a great job filling in while I was out on Friday, and many of you commented on his piece about the lack of an increase in Social Security benefit payouts.
Reader Unique said it’s completely unfair that benefits aren’t being increased: “It is the same thing every year. Congress does not want seniors, disabled, veterans and the poor to have an increase in Social Security benefits. There are those in Congress making $174,000 a year that complain they are not making enough money.
“The only thing that has gone down is gasoline cost. Tell me how far do people that are retired, disabled, or poor go if they even have a car? We all have worked all our lives and did not work for the government and need to have our yearly increase.”
Reader F.R. also weighed in on that, saying: “This is so unfair. Social Security is our money because we paid into it. Welfare recipients do not have to contribute anything and there is never any shortage of funds for them to receive their unearned benefits. The government has been stealing money from Social Security to fund other projects and Obamacare.
“Congress has just had another increase in their salaries and we have no increase in our Social Security? They have pensions and the cream of the crop in benefits too, at taxpayers’ expense. When are they going to wake up?”
And Reader Ted F. added: “The lack of a COLA in Social Security is just more of Obama’s war on the middle class. The index used to determine the Social Security COLA does not even come close to reflecting the costs seniors face.
“Gas prices are down, but that affects the vast majority of seniors very little. People driving to work is another story. Food prices and the cost of prescription drugs are up, which has a bigger impact on seniors than working people. The system is flawed and there are attempts to use an even more flawed system. The system needs to look at senior costs not the general population.”
Meanwhile, Reader Myron R. warned that the system can’t maintain itself given its current structure: “The only way Social Security will remain viable is if they expand and diversify the investment options. Manage it like all other long term investment/retirement plans. We as owners of Social Security should have some input into where the money can be invested. Guess politicians can’t think that way or that far into the future.”
Reader Jacob also picked up on the sustainability theme, saying: “Social Security was a system designed to support people retiring at 65 when the average life expectancy was 67. So let’s move away from the pointless rhetoric of whether Republicans cut too much or Democrats spend too much. The truth is that given the dramatic life expectancy change in the ensuing decades, the math doesn’t work, period.
“So you have two choices: Either raise the employment tax dramatically, or means test the system. Personally I don’t want to be paying more in employment taxes so that Warren Buffet or Bill Gates can collect Social Security. So I would prefer to limit who is eligible to those who really need that safety net.”
Thanks for sharing your thoughts on this incredibly important topic. If I didn’t cover your comments here, or you have any more you’d like to add, then head over to the Money and Markets website and weigh in using this link.
Shares of Weight Watchers (WTW) soared today after media mogul Oprah Winfrey bought a 10% stake in the company and joined the board of directors. She will try to turn around the weight-loss and healthy-living company, whose shares have slumped dramatically in the past few years.
I’m skeptical of the economic data that comes out of China, and I’m far from alone on that score. But if you take the figures at face value, GDP grew 6.9% in the third quarter. That was the weakest growth since the Great Recession year of 2009, but slightly above forecasts of 6.8%. Industrial output and fixed asset investment missed forecasts, while retail sales and services sector growth slightly topped them.
I recently wrote about the wave of mega-mergers, and some of the financing challenges facing companies that want to combine. But the Wall Street Journal covered another problem in a story today: Government antitrust scrutiny.
All these deals have resulted in only a handful of companies competing in several industries, from television to beer to household appliances to air travel. One widely used gauge of market concentration shows more than a third of U.S. industries meet the “highly concentrated” standard, up from around 25% in the mid-1990s.
Are too few companies dominating too many industries? Is that suppressing competition, resulting in us paying too much for goods and services? What do you think about the Chinese data? Believable or not? Hit up the website and let me hear about it.
Until next time,