Do Bond Moves (Good) Outweigh Home Sales (Awful)?
Vince Farrell, managing director at Scotsman Capital and a CNBC contributor, made some interesting observations today about LIBOR and the credit markets. See his comments below.
For the Friday before New Year's, there is a lot going on.
The TED spread is down to 1.13%, or 113 basis points.
Remember, this is the difference between the LIBOR rate and the three-month U.S. Treasury bill rate, and is a measure of "fear" in the market place. The higher the number, the more fearful -- and the more money flowing to the safety of Treasurys, thus lowering the interest rate. A higher LIBOR indicates an unwillingness on banks part to lend.
This was 2.2%, or 220 basis points, a short while ago, so the improvement has been significant. Still not back to its 10-year average of 0.48%, or 48 basis points, but a lot better than it was.
This might be an indication of better flow in the bond and money markets, and that could be why a bunch of investment banks are taking this moment to try and clear the decks of a lot of inventoried Leveraged Buyout (LBO) debt.
The report is they are trying to sell $160 billion of bonds, and $70 billion of loans (think of a bond as a long-term loan, or a loan as a short-term bond) at discounts of 10% and 5%, respectively. If sucessful, the indicated loss would be $19.5 billion, but they could have hedged to soften the blow.
It's encouraging to see the attempt, since the implication is that there is a market for this stuff. I would doubt they would be successful at such tiny discounts. LBO deals done a few years ago were averaging prices that were around 7.5x cash flow, but the more recent deals were more towards 11x cash flow. The latter deals look very rich, and consequently, carry higher risks of flawed business strategies, [sensitivity to] economic downturns, etc.
Still, there is a price for everything, and, hopefully, all this will get done and credit can start to flow more easily in the marketplace.
New home sales -- at an annual rate of 647,000 -- were just awful. This is a 12-year low, but it doesn't look like the bottom yet. The silver lining is that we are approaching historic low levels. The sooner we get there, the better, so the backlogged inventory of homes for sale can be worked down.
I was accused of being an old grouch the other day. Grouchy? Yes, at least on occasion, but I still want to have snowball fights, so how old can I really be? Or is that more a question of (im)maturity? Whatever. Back on Monday and I'll wish you all a happy New Year then.
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