here's our thinking: If IBM is a great indicator of when interest rates are at
a low, and interest rates are going to start to increase, it means a couple of things.
- Refinance the
house or car now if you are thinking of it and have not yet done so. In
fact, any borrowing that you are contemplating should be done sooner rather
than later as rates are likely to go up.
- If you have
long-term bond holdings, you need to be sure that you don't care about the
quotation value of the bonds as that is very likely to decline. If the
dividend income from those holdings keeps you happy, you are fine.
However, if you may need the principal, then it might be a good time to
sell debt, just like IBM is doing.
IBM's thinking in taking advantage of cheap rates is reflected in a statement from Direct TV. Just days ago, DirecTV, the
largest U.S. satellite-television provider, sold $3 billion of debt in a
three-part offering to capitalize on record low borrowing costs to refinance
bank loans and buy back shares. The CEO wants to use the company's free cash
and debt for share repurchases. "We look forward to tapping into what is
currently a relatively strong debt market," the company's CFO said. DirecTV
repurchased more than $1.7 billion of stock in the second quarter and has
authorized an additional $2 billion for its stock buyback program. The stock
has gained 18.2% this year and is a buy candidate in our managed accounts.
IBM stock yields about 2%. As an
investor, if you think the company is solid enough to lend money to and the
common stock yields twice as much as the loan, then why not buy the stock? Of
course, one of the possibilities for the loan proceeds for the company is that
they can earn 1% by repurchasing their stock that yields 2%. That's a good spot
for them to be in. IBM has repurchased about 3.8% of its outstanding shares
over the last year. IBM
has said only that it will use proceeds for general corporate purposes.
debt issuance in general seems to indicate investor confidence that the economy
will be good enough for the companies issuing debt to be able to repay those
loans. Some 77% of companies in the Standard & Poor's 500 Index that have
reported second-quarter earnings beat analysts' estimates and manufacturing growth
in the U.S. and Britain slowed less than expected in July, increasing
confidence in the economic recovery.
million dollar question for the stock market is this: Where will the money go
if IBM is correct, interest rates go up and institutions and people start
selling bonds? Our best guess is some will go into the
stock market and some into cash. The demand for bonds shows confidence in the
future. The ability for large companies to be able to sell bonds and the
willingness to use these proceeds to buy back stock also shows confidence. So
while the market is certainly in the midst of typical summer doldrums, the
aforementioned points to renewed strength down the road. We don't expect
current market weakness to spiral down as it did two years ago. It is hard to
say where the near term market bottom is, but we expect the market to firm up
and rally by the end of the year.
call if you'd like to talk; we are here for you (310-459-9196). Thank
you for your continuing confidence. If you are a former subscriber or
client, feel free to call as well.
Thanks for your continued support and trust. And remember, invest for the
future-it will be here before you know it.
Fried Asset Management, Inc.
*Audit available on request. Returns include
dividends and interest and are net of fees. Past returns do not
guarantee future performance.