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Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Re: Will the Bailout Plan Work?||Date: 10/5/2008 10:46 AM|
|Author: WendyBG||Number: 257722 of 455728|
I'd like to add....I think your weekly roundup of pundits is excellent, unequalled by anyone else.
A different approach, which complements yours, is taken by Doug Noland at www.prudentbear.com. Mr. Noland is unequalled at collecting raw data. His Credit Bubble Bulletin has been predicting this crash for at least the last 4 years (the time I have been reading him).
An obscure statement in this week's Credit Bubble Bulletin is easy to overlook, but may be the first rumblings of the next crisis.
October 2 – Dow Jones (Shara Tibken): “Sixty-one U.S. companies defaulted on their debt in the first three quarters of 2008, nearly quadruple the number last year. More than half were since late May, according to… S&P. Nine U.S. companies defaulted in September, including Lehman Brothers… and Washington Mutual… Through the first five months of 2008, the year-to-date total was 28, which was already more than the 16 seen all of last year and the 22 from 2006. The U.S. speculative-grade default rate climbed to 2.68% in September from 2.5% in August…” [end quote]
Many corporate mergers in the past 3 years were financed by debt that contains "toxic waste" features, such as "covenant lite" and/or "PIK-toggle." These enable companies to take on too much debt and/or to interrupt interest payments without going into bankruptcy.
With a deepening recession, many more companies will default on debt payments. As we all know, the danger of debt (vs. raising capital using equity) is that debt payments cannot be cut like dividends, to conserve cash -- except the toxic ones.
The problem of defaulted interest payments still hasn't shown up on the radar screen. The government bank bailout generally covers mortgages and other consumer debt CDOs, but not corporate debt.
I predict accelerating defaults in interest payments, even if the PIK-toggle clauses avoid formal bond default (which is why I didn't buy any of those bonds). I believe that the CDS market would treat interest interruptions as a "credit event." That's why I'm worried about a CDS cascade, which the bailout doesn't address.
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