Insect bites, bruises, sore feet, tiredness, happy sons… I am back from backpacking.

Whenever a financial product is plentiful, it is usually time to avoid it.? Tonight’s poster child for such nuttiness is junk bonds.? If you are a speculator, you can own junk bonds, and the stocks of the companies that are issuing them, because the market is hot for now, but be ready to sell; have your stop orders ready.? Fundamental investors would need to be more careful.? Though default rates may be declining, there is no guarantee that that will continue to be so; given troubles at the banks, cautious stance is warranted.

If looking at individual issues, those aiming for organic growth are better candidates than those that are doing mergers, paying special dividends, or just levering up.? So be wary, and realize that conditions could change rapidly.? Stick to sounder credits, including investment grade issues.? There is more juice to be squeezed in the long end of investment grade, then in shorter junk issues.

My second point for the evening is avoid the equities of scale acquirers.? In general, acquirers of large entities overpay, and execution after the acquisition is tough because it is tough to integrate:

• Management teams — different views are often incompatible, and the victor looks down on the company acquired.
• Cultures — same thing.? Cultures encompass the ways that a broad body of people implement the views of management.? Incompatible cultures are tough to merge; usually that of the acquirer must die, much like ancient war that destroyed losing cultures.
• Systems — rarely compatible.? It takes a lot of effort to make all of the critical computer systems speak the same language.
• Marketing — different philosophies lead to a need for the best to remain, and the worst to die.
• Finances — easy, except that differing practices must be integrated.? Accounting is often more liberal coming out of an acquisition, because of the need to make the acquisition look good.

The best acquisitions are small, incremental, and facilitate the organic growth of the acquirer.? They add new products that can be sold through existing infrastructure.? They add new markets to sell existing products to.

In an environment like this, focus on organic growth, and perhaps those companies likely to be acquired.? Organic growth because it shows where there is real and perhaps repeatable growth in the economy; targets because if capital is cheap, there may be future companies bought out by fools who serve themselves and not their shareholders.

All for now.? Back on Monday.