Why will the debt stock Meltdown While the turmoil in debt markets will continue, despite the passage of the rescue package, Wall Street analysts are now busy making the case for equities. There are unique opportunities to buy there now is a refrain classic television and print media. Really? The simple ignorance or willful blindness to the old?
What these so-called experts would have you believe, there is a fundamental break between debt and equity. But anyone who runs a business knows that, at their roots, both instruments from pilots same value in the shortest terms, under a business model built logically, the impact of the implementation of assessment themselves which are allocated to equity must constitute the basis for pricing the debt.
What happened to the concept of weighted average cost of capital, essentially incorporating equity, debt and hybrid? Well, for now, the concept itself has been abandoned, may be easily and for very obvious reasons.
Firstly, those who control the market have managed to largely under-pricing of debt and equity on price since the late 1980s. Secondly, there is a widespread reluctance to recognize that the prices of listed shares, which are conditioned by options, shorts, eventually one day of trading and leverage, beyond the credibility of business models, are not an adequate reflection of inherent risks.
Finally, corporate balance sheets prepared under existing regulatory regimes are unable to reveal whether compliance with debt service and dividend capacity is actually generated by the basic components of a business model or by residual surpluses debenture or share issuances.
Risk assessment, moreover, is severely limited, a qualitative manner, the inability to understand the global economy on the one hand and the dynamics that the fate of poor countries to another. For example, the economic reality of the developing world (where fascism and despotism are on the rise) is that real family incomes are declining and growth numbers are artificially fueled by credit and public expenditure, the prism the tiger economy "is now becoming an illusion.
For example, given the significant use of offshore jurisdictions of convenience in the two previous decades, the full facts relating to international asset and fund transfer mechanisms are simply not on the table. For example, Western analysts lack the perspective necessary to grasp the real impact on the international matrix of soaring underground wealth, driven by tax evasion and systemic criminal activity in the Third World.
Which brings us to the crucial question of the day: If risk premiums on debt has increased 35-50% in recent weeks, which are directed action?
In the same context, it is important to distinguish between market capitalization and verifiable corporate value. For too long, the spin masters have collectively succeeded in ensuring that the gap between perception and reality is skewed heavily in favor of the former. But this time, the ground has shifted, in more ways than one.
Fortunately, small investors will realize that professional players on Wall Street are already arbitrage margins between debt and equity prices, insisting on significant dilution when granting bailouts.
While lawmakers in Washington are worried about what will happen next, hedge funds and managers of knowledge capital are already engaged in asset revaluation in the aggregate, the transactions concluded on Goldman Sachs and General Electric by Warren Buffet are useful examples in this regard.
Regarding the impact of the rescue package is concerned,.
Posted on May 28, 2010.
