Readings: Long & cold winter, Tata Motors, Iron ore production
Barrons: Forecast: A Long, Cold Winter
One thing at work right now is what I call the cattle prod — essentially the Fed poking people to take risk. They are taxing cash by having negative real returns on cash. At the same time, yields on investment-grade and junk bonds are incredibly alluring. You can pick up 15 percentage points over cash buying junk bonds. Or you can pick up 8.5 percentage points on investment-grade paper. At some point, the cattle prod will get people moving, as it did in March of ‘03 when the market turned.
If you want to get long socialism, one of the next segments of the market that will be given a guarantee will be municipal bonds. That’s because state and local governments are a huge share of total [gross domestic product] and employment, and we can’t afford to have them down for the count.
Mint: Tata Motors’ funding worries get worse
The $3 billion (nearly Rs15,000 crore) bridge loan it had taken to finance the acquisition of Jaguar-Land Rover (JLR) is due for repayment in less than seven months’ time, and the rights issue has helped the company raise less than 30% of its requirement.
Worse still, JLR would need a large, steady flow of capital to fund its research and development, which IIFL estimates at about $1 billion every year. Meanwhile, all this is happening at a time when the company’s domestic operations and cash flows are going through a severe downturn.
Indian companies have left their foreign currency denominated debt (including convertibles) unhedged for some years now, on the assumption that the rupee will always appreciate against the dollar. The sharp depreciation of the rupee this year has come as a rude awakening.
How many others are in the same boat?
- Frontline Thoughts: Some Things That Just Should Not Be
“Leveraged loans had a particularly rough month with the average senior secured loan losing over 20 points in value and now trading in the mid 60s. The sell-off was largely driven by forced liquidations as hedge funds face substantial redemptions in the run-in to New Year. This is how crazy the loan market is: The worst ever default rate for senior secured loans is about 8%. If you assume a 35% annual default rate and a 50% recovery rate, your IRR to maturity is now in excess of 22%, using no leverage whatsoever. Either this is the investment opportunity of the century, or equity markets have seriously underestimated the economic downturn, and things are likely to get a whole lot worse for equity investors.”
You can buy January 09 crude futures at a stunning 34.5% lower than January 2010. That means if you could find a place to store that oil, you could lock in a guaranteed 34% profit, less the cost of storage. Sounds like easy money. This is just something that shouldn’t be. But what this tells us is that storage for oil is very tight. Oil producers are leasing very large ships to store excess oil, as they cannot find places to store it on land. Storing oil on ships is expensive, so that cost of storage gets figured into the price of oil a year out.
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