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August 29th, 2012

Don’t Get Your Hopes Up For Jackson Hole
* Turning Point for Housing?
* Consumer Confidence Not So Confident
* Bond Investments – Top 3 Non-Cyclical Corporate Issuers
* Nokia Bonds Have Run Up, Look to Exit

Don’t Get Your Hopes Up For Jackson Hole

Posted: 29 Aug 2012 03:00 AM PDT

By TJ Kim

August 29, 2012

The Federal Reserve’s annual symposium at Jackson Hole is only a few days away. Despite some investors’ expectation on new stimulus that might be hinted at the meeting, the situation now seems more likely that Chairman Ben Bernanke may not signal or announce any definitive plan. Especially with some signs of a rebound in the economy and thus reducing the urgency of another round of Quantitative Easing, the Fed may take more time to reassess the economy before drawing up any stimulus package.

While it is hard to figure out what will be announced at the symposium, it will be helpful to understand what the focus of discussion was at last month’s FOMC meeting.

The underlying theme at the meeting was “mixed signs in the economy.” While the GDP is indeed growing, there are no vibrant industrial and commercial activities at the moment. Consumer Sentiment has improved with some indications from the recent rebound in the housing sector. On the contrary, due to the tight credit rules for loans, the private sector is not well positioned to fund investment and consumption while savings at the banks are piling up. So it is ambiguous where the growth is heading. Economics Research team from Credit Suisse wrote in their recent report,

“…may not show enough improvement to satisfy the “many” FOMC members who on August 1 “judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

“After a $1.3bn slip in the latest week, commercial & industrial loans are growing 13.4% yoy, their slowest pace since late May. At $1.5tr, the level of C&I loans is some 9% below its 2008 peak, when firms frozen out of primary markets tapped contingent credit lines. Real estate lending has been considerably more sluggish. Real estate loans held by banks dropped $14.7bn (+0.7% yoy) to their lowest level since late January. The weakness was concentrated in residential loans (-$12.5bn). Consumer loans fell $0.7bn (+2.2% yoy).”

<http://www.bondsquawk.com/wp-content/uploads/2012/08/Money-Supplys.png>

<http://www.bondsquawk.com/wp-content/uploads/2012/08/Total-Bank-Loan.png>

In terms of the Federal Reserve Balance Sheet, the Fed has reduced its balance sheet, having sold off most of the assets that it bought to provide liquidity to corporations during the financial crisis. This hopefully means that companies have become more financial sound since the crisis.

“The Fed has been selling off assets from its three Maiden Lane portfolios, which it acquired during emergency operations in 2008 related to Bear Stearns and AIG. At year-end 2008, Maiden Lane assets totaled $73.9bn; on August 22 the total was $3.5bn. On August 23 the New York Fed announced the sale of the remaining securities in Maiden Lane III. This follows the wind-down of Maiden Lane II in February 2012 and the January 2011 termination of the New York Fed’s extension of credit to AIG. The total net profit to taxpayers from the Fed’s assistance to AIG and AIG-related facilities was $17.7bn.”

<http://www.bondsquawk.com/wp-content/uploads/2012/08/Asset-Holding.png>

The most recent Beige Book which contains the Fed’s conversation with businesses, noted the following,

“…overall economic activity continued to expand at a modest to moderate pace.” This was a slight downgrade from the “moderate pace” language in the June 6 report.

Over the past few weeks, the tone of the domestic economic data has brightened somewhat, perhaps enough to upgrade the characterization of US growth back to “moderate.”

The next Beige Book will be release on August 29th, and it will be an important reference during the FOMC’s meeting next month.

With two objectives, price stability and revival in employment, the Fed will decide whether there is a need for an additional large asset purchase program. As mentioned in the meeting, the key point is to keep the monetary policy rules simple and to find the best measure that would keep the long-term interest rate tame while stimulating commercial and industrial activities to boost employment once again. As of now, however, we need to wait and see if the recent rebounds in housing and automotive will remain steady, possibly providing confidence in other sectors as well.

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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

 

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Turning Point for Housing?

Posted: 29 Aug 2012 01:00 AM PDT

By TJ Kim

August 29, 2012

Since the housing market plummeted in 2008 – 09, the FOMC has kept the Federal Fund Rate nearly zero in an effort to stimulate consumption and investment. The low borrowing costs among banks eventually resulted in the record-low mortgage rates. After almost three years, we finally are seeing some improvements, perhaps a tipping point for the housing market into a bullish state.

This Tuesday, Standard and Poor’s released the Case-Shiller Home Price Index for the month of June. The data came out positively with the National Composite up 1.22% and the 20-City Composite up 0.50% on an annual basis. All the composites of the index surpassed their respective consensus by at least .4%.

<http://www.bondsquawk.com/wp-content/uploads/2012/08/HPI.png>

The positive reading in the S&P Case-Shiller HPI was in line with other home price series such as CoreLogic, and FHFA, confirming the upward trend in the industry. The economists from Deutsche Bank wrote in their Global Markets Research,

“Thus, the developments in the June C-S data provide important corroboration that house prices are finally turning higher.”

Moreover, this year’s rising trend in home prices may sprout significant improvements in Consumer Spending and Investment, both of which play a key role in the GDP growth.

“This is already having a significant impact on households’ balance sheets, and in turn it will provide support to consumption trends over the medium-term.”

While the recovery in the housing sector strengthens consumer confidence in spending and investing, other macroeconomic factors still cast doubt on the overall progress in the economy. The Unemployment Rate is still far away from dropping below the 8% level, and the fiscal stimulus program by the Fed has not been so effective in encouraging spending and investing activities.

Hopefully, the recent advances in housing and automotive would resonate through other sectors and ultimately the GDP in the long run. Although the light of optimism from the recent release of Home Price Indices provides some reliefs to homeowners and others related to the industry, it did not upturn the 10-Yr U.S. Treasury Yield heading downward at 1.63%.

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Disclaimer
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Consumer Confidence Not So Confident

Posted: 28 Aug 2012 11:00 PM PDT

By TJ Kim

August 29, 2012

Yesterday, the S&P Case & Schiller HPI provided confirmation to a stable growth in the housing sector, planting hopes for rebounding confidence in Consumer Spending. However, the Consumer Confidence came out on a little bit different note.

The Conference Board released the Consumer Confidence Index. It came out at 60.6, 5.4 lower than the consensus. The drop was mainly from the consumer’s pessimistic outlook in the Expectations Index, while the Present Situation Index was little changed.

<http://www.bondsquawk.com/wp-content/uploads/2012/08/CC.png>

In a close look at the data, there were downward movements in consumers’ anticipation of a better labor market. Mr. Gapen from Barclays Capital noted in Instant Insights,

“Perceptions of a labor market recovery dropped off somewhat, as 15.4% of respondents expected more jobs (previous: 17.6%), reversing the increase seen between the June and July surveys. This caused a modest weakening in the labor differential (the percentage of respondents who thought jobs were plentiful minus the percentage that thought they were hard to get) to -33.7 from -33.2 in July.”

Moreover, the index also showed that consumers are concerned about stagnant business conditions that might get tipped over to contraction, as reflected in data. The Conference Board wrote in their press release on the Consumer Confidence,

“Consumers’ optimism about the short-term outlook deteriorated in August. The percentage of consumers expecting business conditions to improve over the next six months declined to 16.5 percent from 19.0 percent, while those anticipating business conditions will worsen increased to 17.7 percent from 15.1 percent.”

Regardless of all the recent optimism from housing and automotive, there needs to be firmer signs that the labor market will soon overcome the 8% barrier. Only then, consumers will start regaining confidence in the job market and eventually their prospective income.

 

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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

 

 

 

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Bond Investments – Top 3 Non-Cyclical Corporate Issuers

Posted: 28 Aug 2012 09:00 PM PDT

By Rom Badilla, CFA

August 29, 2012

Speculation on the Federal Reserve’s next move is running rampant as we move closer to Chairman Ben Bernanke’s speech at Jackson Hole and the FOMC meeting in mid-September. While it remains to be seen as to what will happen exactly, the Federal Reserve if they act that is, is closer to adding stimulus to the economy rather than removing it assuming that signs of weakened growth persist. This may mean even lower yields which in turn should continue to bode well for bonds from both a potential price gain and carry perspective. If bad times for the market are ahead, shifting toward non-cyclical and consumer staple-focused companies may be prudent since a downturn will have less of an effect on their businesses. Sports fans will know that playing defense can win you some football games.

Below are details of three investment grade corporate issuers, featuring bonds maturing in the intermediate and long end of the maturity spectrum. The purpose of showing both is to allow investors the opportunity to tailor their bond investments in accordance with their investment objectives.

Information and market quotes on the bond investments are provided by Trade Monster’s Bond Trading Center <https://www.trademonster.com/Products/Bonds.jsp?PC=iTB> (unless noted otherwise). Furthermore as a gauge of the overall credit worthiness of the company, we provide some simple credit metrics of each company, Long Term Debt to Total Assets Ratio and the Interest Expense Ratio.

The Long Term Debt to Total Assets ratio measures a company’s leverage by determining the percent of assets have been financed by debt. A higher percentage indicates more leverage and more risk.

There are two components that make up the next ratio. Earnings Before Interest, Taxes, Depreciation, and Amortization aka EBITDA is one measure of profitability while Interest Expense is the cost of debt. Combined, this ratio aka Interest Coverage Ratio measures a company’s ability to service their debt. In other words, it shows how easily a company can pay interest expense given their profitability. A higher Interest Coverage Ratio implies better credit health since it is making enough money to stay current with their debt interest obligations. Conversely, a red flag is raised when this ratio approaches 1.5 or lower since its ability to pay the interest on their debt is questionable.

Without further ado, here are the issuers:

The Kroger Group (Equity Ticker: KR) has many bonds issued on the back-end of the yield curve. This supermarket chain employs over 300,000 people across the country and is the largest grocery store chain in the U.S.

According to Bloomberg, the Kroger Group has a Long Term Debt to Total Assets ratio of 34.8%. In addition, the Interest Coverage ratio for the past year stands at 6.7x.

Here, two senior secured notes are featured. The first one sports a 3.4% fixed coupon that pays semi-annually and matures in April 15, 2022 (CUSIP# 501044CQ2). This bond features a make whole call and is currently being offered at a dollar price of $104.01 which equates to a yield to maturity of 2.92%. For those looking for liquidity, this bond which has a deal size of $500 million and was issued in April of this year can be sold at a yield of 3.03%.

As for a longer maturity bond that offers a little more yield, there is a bond that has a 5.4% fixed coupon that pays semi-annually and matures in July 15, 2040 (CUSIP# 501044CN9). As with the shorter term option, this bond has a make whole call and has a yield to maturity of 4.79% and is offered at a dollar price of $109.35. The long dated bond was issued in 2010 at a deal size of $300 million and can be currently sold at a yield of 5.00%.

Both bonds are rated investment grade by both rating agencies. Standard & Poor’s rates both bonds BBB while Moody’s has both of these senior notes at Baa2.

The Altria Group (Equity Ticker: MO) is one of the largest tobacco corporations. The Virginia based company employs over 10,000 individuals with a reach than spans worldwide.

The Altria Group has a Long Term Debt to Total Assets ratio of 35.4% while the Interest Coverage ratio for the past 12 months is 5.9x according to data provided by Bloomberg.

For those looking to add some yield to their bond investments without compromising quality, there are options available. Currently, tobacco bonds are trading in line with the overall corporate bond market from a yield perspective but offer a little more than other lower yielding consumer staples.

The first Altria Group bond pays a 2.85% coupon, semi-annually and pays final principal at the maturity date of August 9, 2022 (CUSIP# 02209SAN3). These senior notes are currently being offered at a dollar price of $99.24 which translates to a yield of 2.94%. In addition, this recently issued bond is massive and should be fairly liquid due to its deal size of $1.9 billion. Bonds can be sold with little concession relative to the offered side. These bonds can be sold currently at a yield of 2.98% in the secondary market.

Out the curve in order to add more yield, Altria also issued another senior note earlier this month. This bond which has a deal size of $900 million pays a semi-annual coupon of 4.25% until maturity which is set for August 9, 2042 (CUSIP# 02209SAM5). According to Trade Monster, these bonds are yielding 4.40% to a buyer which equates to a dollar price of $97.47. In addition, these bonds can be sold at a yield of 4.50% given today’s markets.

Both bonds are non-callable and are rated BBB by Standard & Poor’s and Baa1 by Moody’s which falls under the investment grade spectrum.

For our final spotlight, we move toward beverages. Earlier we talked about how defense can win football games. Though with beer in hand while watching their favorite team, everyone wins!

Molson Coors-Brewing Company (Equity Ticker: TAP) produces and sells beer across the entire Northern Hemisphere through a variety of brands such as Coors Light, Molson, and Keystone. The company is headquartered in both Denver, Colorado and Montreal, Quebec employs over 9,000 people and is one of the largest brewers by volume.

The beverage company has a Long Term Debt to Total Assets ratio of 15.4% while the Interest Coverage ratio over the past year stands at 5.4x according to Bloomberg.

Molson Coors features a bond that pays a fixed semi-annual coupon of 3.5% and matures in May 1, 2022 (CUSIP#60871RAC4). The senior notes have a make whole call and can be bought at a dollar price of $105.77 for a yield of 2.81%. These bonds were issued in April 2012 and have a deal size of $500 million. Having said this, the deal is large enough where liquidity is ample in the market place. These bonds can be sold at a yield of 2.90%.

By extending out the maturity, the yield increases for the buyer to 4.19%. This translate to a dollar price of $113.72 for the 5.0% Coupon bond that matures in May 1, 2042 (CUSIP# 60871RAD2). The senior notes have a make whole call feature and sports a deal size of $1.1 billion. Given this large deal size and presence in the market place, sellers can find liquidity in the market place and execute at a yield of 4.31%.

Both bonds are rated by Standard & Poor’s and Moody’s which have them at BBB- and Baa2, respectively.

All of the aforementioned bonds were highlighted with dollar prices in mind. These bonds were chosen for its closest proximity to par which led to a concession in the overall yield. So if you are less sensitive to dollar prices and can pay well above par, better value can be found in terms of the yield to maturity.

Furthermore, keep in mind that corporate bonds trade over-the-counter. So, prices and yields can vary depending on the broker you use. The best suggestion to use is a broker that offers the most visibility and price transparency for the corporate bond market.

Finally and as always, every bond investor should perform their own due diligence when making their investment decisions.

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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

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Nokia Bonds Have Run Up, Look to Exit

Posted: 28 Aug 2012 06:00 AM PDT

Michael Terry – Seeking Alpha <http://seekingalpha.com/author/michael-terry>

August 28, 2012

As many readers know, I have written a couple of articles on Nokia’s (NOK <http://seekingalpha.com/symbol/nok> ) bonds as they have been an overlooked way to position the troubled telecom. Just to recap some of my opinions:

June 6, 2012 <http://seekingalpha.com/article/640961-nokia-bonds-holding-firm> : “If you really like the company and think everyone has gotten it wrong — buy the bonds and let the coupon pay for longer dated call options, or hedge with bonds and puts.”

June 28, 2012 <http://seekingalpha.com/article/688951-nokia-what-the-bonds-are-telling-shareholders-update-2> : “Ultimately, I continue to believe that investors who want exposure to Nokia might consider the bonds and possibly a call option.”

July 20, 2012 <http://seekingalpha.com/article/735861-nokia-is-fundamentally-weak-but-cash-supports-bonds> : “The company continues to be focused on managing for cash and NSN has continued to add value to cash and to overall results, both of which are a positive and should help support bond prices. I continue to believe that the best way to position this company is through the 2019 debt (unfortunately, I don’t have pricing for the EUR issues), as the yield is 10% and there is significant upside should the company get through their transition sooner than later.”

If we look at a graph of the NOK 5.375% 2019 (CUSIP: 654902AB1), we see the following price action (Source: FINRA Trace):

Read the Full Article <http://seekingalpha.com/article/832321-nokia-bonds-have-run-up-look-to-exit>

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