Last night, Larry asked me which was a bigger threat to stocks, a US/Iran conflict — or rising bond yields.
The correct answer was, of course, rising yields.
I described it as a triple threat — but it may be even more than that; it could be a quadruple or quintuple or even sextuple threat!
1) Valuation: Models such as the so-called Fed model that have been declaring equities undervalued rely on comparing the earnings yield with the 10 Year yield. As the yield spikes, what was "undervalued" by this measure suddenly is much less so.
2) The M&A / LBO Put: One of the firm bids supporting this market has been the manic pace at which public companies have been taken private of by Private Equity (soon to be public themselves). Some have argued this was based on cheap stock prices, but we shall soon find out that it was based in fact on cheap money. As that gores away, so too will the LBO Put.
3) Competition: If you could get a guaranteed 5.5% or 6% on your money — risk free — would you? The answer depends on your personal situation, but for many institutions and wealthy investors, the answer is absolutely.
4) Profits: If it costs more to borrow or finance, that bites into profits. Indeed, this has been one of the primary complaints about the Fed model, it double counts low rates this way, and can makes apparently cheap looking companies more expensive-looking in fast order as rates rise.
5) Share buybacks: Much of the share buybacks we have seen have been financed with cheap borrowed money. This is another leg of the bullish stool that is about to leave town on the same stagecoach as low rates. (cue music, sunset)
6) Consumer spending: WIth MEW sliding, we have seen an increase in consumer credit driven spending. Watch that crimp if rates stay near 5.25%. Indeed, we could see a move towards 5.5% by Summer’s end once people realize Bernanke is serious about a rate hike by year’s end.
We have PPI and CPI out later this week, so this may all be moot by the weekend.
But with inflation over 3.4% in China, I somehow doubt that . . .
Oh, Yeah — Inflation
Maretbeat, June 12, 2007, 4:35 pm
Chinese Inflation Fuels Few Worries So Far
By ANDREW BATSON
WSJ, June 13, 2007; Page A2
While waiting for last night’s Soprano’s to start, I decided to pop in a DVD I had lying around: Steely Dan – The Making of Aja.
Since someone else is sure to bring it up in comments, let’s deal with the finale: Creator/writer/director David Chase made his bones adding a level of reality — Cinéma vérité — to his plotting and characters. He never liked neat endings, always leaves a level of ambiguity and uncertainty.
And while I didn’t love last night’s episode — it was just another episode, and not any way at all a special "finale" — I recognize what Chase attempted: He ended the show on a note of tension, uncertainty, and ambiguity. You know, just like real life. Hey, no one knows what will happen in the future, or what fate awaits us. He ended the show the same way . . .
Not that I really liked it — it was disappointingly slow, and except for Phil "Flat-Head" Leotardo, not a whole lot happened.
Where was I? Oh, yes.
Turns out its part of a series of DVDs titled "Classic Albums" series that aired originally on VH1. So, while waiting for the last episode to begin, I popped in this DVD I’ve had lying around.
– are just so damn good, it makes you wonder how the rest of their programming can be so goddamned awful. It was that much better than what you would expect from typical VH1 stuff.
If you are any type of Dan fan, you must go order this right now.
In fact, I was so impressed with the quality of the interviews, clips, and sound quality — I can’t recall the last time I did this — that, even as the DVD credits were rolling, I ordered four more DVDs (all $10 or less) from the same series.
I’ll update how these are at a latter date, but based on the Steely Dan DVD, and the high caliber of reviews at Amazon.com, I expect these all to be similarly excellent . . .