Survive, survive…
I’m traveling, so no significant post this evening. I would merely point you to the interview with Anna Schwartz suggesting that the Fed is fighting the last war, and is not fighting the solvency crisis, as they consider it a liquidity crisis.
As for me, with the total level of debt in the economy relative to GDP being so high, bear markets in credit should persist until that ratio is significantly reduced. I am not a bull here on credit. Focus on companies that can survive without external financing for three years.
I have made changes to my portfolio that reflect this. More on that in the next few days.
October 21st, 20086:50 am at
how do you feel about longer term treasury yields, given the debt we have, the measures taken to stem this crisis, and the massive treasury issuance needed to fund it?
10YR at 3.86% as I write
October 21st, 20088:19 am at
Not sure if you are (or Ms Scwharz) is saying that the Fed is fighting liquitidy problems rather than insolvency problems, but I have heard this argument frequently. The problem with this is that in Bernanke’s school (i.e., the Doug Diamond and Joseph Stiglitz school on financial crises) is that there is no real distinction between illiquidity and insolvency in the short run. For instance, intervening as a lender of last resort is a short-term/immediate measure by the Fed. As such, there isn’t sufficient time on behalf of monetary policymakers to adequately determine insolvency, because such a determination requires more than what we see in the event of illiquidity. So, while the theoretical distinction between insolvency and illiquidity (e.g., liquidity is insufficient readily available cash to cover debt service while insolvency is the inability to cover debt at all) is a long-run consideration, Bernanke & Co are treating this as a liquidity crisis until solvency can be adequately determined. Again, not sure if this is what you were saying, but the comment got me thinking about this.
October 22nd, 200812:13 pm at
Urbandigs – don’t like Treasuries here, unless they are TIPS
Mark – that reminds me of my post Liquidity and Solvency: Nonidentical Twins, Never Far from Each Other – The two are very closely related, and companies with weak balance sheets typically face both problems in a credit bear market.
October 23rd, 20087:10 pm at
“Focus on companies that can survive without external financing for three years.”
A micro cap I mentioned on my site today seems like it would fit this criterion: KSW. It’s a $29 million market cap HVAC contractor that has about $18 million in cash and no long-term debt, versus cumulative operating expenses over the last four quarters of about $4.3 million. The company also has a backlog of business about 1.7x its ttm revenue.