Weekend Reading

There are many good articles this weekend. Here are a few:
“The Quiet Coup” by Simon Johnson
“Now the Long Run Looks Riskier, Too” by Mark Hulbert
“It Pays to Understand the Mind-Set” by Robert Shiller
“America’s liberals lay into Obama” by Edward Luce
“Stocks Through a Wide-Angle Lens” by Lawrence C. Strauss
Money quote from the last article:

Now, while corporate-credit markets remain firmer than they were at their 2008 worst levels, debt values have backed up a bit without the close attention of equity markets. Bank-issued debt, in particular, has eroded in value without gaining much attention.
As a result, once again (nominally) high-grade corporate bonds are looking rather attractive by several measures.
J.P. Morgan Chase credit analyst Eric Beinstein last week noted that the high-grade bond benchmark is pricing in “a default rate of about 45%” over the next 10 years — and 10 years is the average life of the bonds in the index. He says this means a hypothetical investor could buy the components of the index, funding the purchase at the London Interbank Offered Rate, watch 45% of the bonds go bust, then recover only 20% of face value, and still break even for the decade.
The worst 10-year default rate for high-grade debt since 1980, he says, was 5%, implying the market is building in truly cataclysmic credit losses, in part because liquidity in this market remains so scarce.
This is an extended way of illustrating that — outside the ultra-high-quality slice of the market — corporate debt now should reward prudent risk-taking.

Posted by on March 29th, 2009 at 3:12 pm


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