Category Archives: Credit

MSFT buyback yet another low interest rate story

Company buys 8.7% of market cap (post announcement pop) and makes dividend yield close to 2.7%. Why not? It can always borrow at 75 over ten yr like last time (2.45% at today’s close) and write off interest costs. Capital restructuring. 


Brexit – consequences for investors

BREXIT and the consequences for global investors

The markets (and pollsters) got the BREXIT all wrong last week and Britain did indeed decide to unshackle itself from increased Federalization – and an external Federalization at that. The magnitude of the exit vote surprised even the exit-vote camp, and global markets sharply turned south as investors were seen paring risk and ploughing into safe havens (Treasuries and the like). This was an expected reaction because markets had to pause and catch their breath from the unexpected turnout and assess the outcomes from a future independent UK. (In the days since, a good part of the risk-taking has resumed from the initial knee-jerk reaction)

While some reports may characterize the exit vote as being “anti-trade”, I feel it is more to do with dislike for Federalization and increased bureaucracy, especially that imposed from outside UK’s borders. Immigration was a contention, say others but that too dovetails into the Federalization argument since the Immigration decision was taken by the EU for all member countries. With that as a backdrop, the timing is two years for the UK to formally exit from the EU. A possible new UK Government is expected now that Cameron is stepping down. Along with that is the question of what exit agreements the EU and UK hammer out. It is possible that punitive actions may be taken by the EU to discourage other member nations with exit ambitions. Or it could be that the trade imbalance with Germany (positive for Germany) may dictate a softer, comradely stand.

In any case, we are talking political and trade uncertainty here and uncertainty stretched out in time – a combination that is unpalatable to markets. That should spell increased volatility in risk assets and a general favor towards risk-free assets, however rich they may be. Expect the dust to slowly settle as investors get comfortable with the tone from EU and the new UK Government and they assess the longer term winners and losers (sectors). But aside from this, what can further deepen the damage could be anti-establishment forces increasing in other EU countries as they take UK’s exit vote as a comfort tonic to rev up their anti-EU engines. The keyword therefore is volatility.

PIPPA MALMGREN: China thinks the US will default via inflation – Business Insider–jk8lZLGA

Can fed raise rates with flat 2s 10s?

The story is of low global growth and even lower inflation. With that backdrop, there should be an ever-present long-duration buyer to anchor in returns and therefore forcing its effects on shorter duration paper (thus explaining the current flattening in 2-10s). 

Today’s wsj also talks of real inflation being closer to zero because of inconsistencies in CPI that don’t take into account changing consumer baskets and quality of improvement. 

Thus the fed can’t raise until inflation “normalizes” to the 2% level. Even if it does buck the trend, the legions of bidders are quickly going to bring the effective rate of interest back to low levels. If global growth stories are intertwined as also the market for financial instruments, how can the fed operate from a domestic vacuum?

Why Ackman is right and wrong about index funds

Ackman rightly says that index funds will “keiretsu” corporate America by showering attention (passive as well) on a mostly-stagnant pool of assets, thus propelling their value over time (and unfairly over the rest of the herd). But if mean-reversion holds true, those index funds will create a minefield for themselves and self-destruct; because as value creation dies (falling victim to stupid money continuing to chase a limited set of assets), distorted valuations between the “chased” and “not chased” will herald the natural death of index plays and the rise of “active” plays that focus on value. Perhaps Ackman is saying he can’t wait for that event to happen?


“too big to fail”. Now a buyside mantle?

fast forward to the end and gross makes a compelling point


REVERSE INQUIRY – THE NEW MANTRA – CASH ON SIDELINES CANNOT WAIT bond-underwriters-have-arrived-in-search-of-alpha