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Five Things You Need to Know: The Odd Decouple, Hu Are You?, Little Orphan Analyst, The Czar, Marketing!


What you need to know (and what it means).


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. The Odd Decouple

In 1999 two bonds - one a neat freak (cash poor, but well dressed), the other a slob (you try keeping a neat place with emerging market infrastructure) - moved in together to save money on interest rates. Turns out they found that they're having the same problems they've always had - a vulnerability to high interest rates and economic slowdowns - despite relatively easy access to cash.

  • For the first time since 1999, emerging-market bonds are decoupling from U.S. junk bonds.
  • Since 1999, according to Bloomberg, emerging-market bonds have held a .93 correlation to U.S. bonds rated below investment grade.
  • U.S. junk bonds have returned 3.3 percent so far this year, according to Merrill's index of 1,850 securities with a market value of about $613 billion.
  • Emerging-market debt is up 1.8 percent, using Merrill's Global Emerging Market Sovereigns index, which has 194 securities with a market value of $215 billion.
  • Why the decoupling? For one thing, emerging-markets are leveraged to rising commodity prices and export of raw materials.
  • But wait, let's take a step back. Was there ever supposed to be such a coupling in the first place? Emerging-market bonds and U.S. junk bonds are fundamentally different asset classes with distinct risks... at least they used to be. What changed?
  • Could it be too much liquidity chasing too few opportunities? Competition in fixed income raising prices on bonds while depressing yields?
  • Now, there is the beginning of a global retraction in liquidity. Emerging-markets, those that are most leveraged to liquidity and investor risk-seeking behavior, are always first to feel the effects of liquidity reduction.
  • This decoupling puts a positive relative shine on U.S. high-yield for now, but if there is a fundamental transition occurring from risk-seeking behavior to risk aversion, the U.S. high-yield market won't be far behind.

2. Here's a Pointy Stick in Your Eye, Mr. Hu

Japanese Premier Junchiro Koizumi will be visiting the U.S. in late June. Unlike China President Hu Jintao, Mr. Koizumi will get the White House red carpet treatment.

  • In details announced yesterday, Mr. Koizumi will visit Washington D.C. on June 29.
  • Because Mr. Koizumi is a premier, he is not eligible for an official "State Visit."
  • However, the Bush administration will sponsor a ceremonial dinner for the outgoing Japanese premier and the President may even accompany Mr. Koizumi, a longtime Elvis fan (really, is there any other kind?), on a visit to Graceland.
  • By contrast, China Premier Hu Jinato's U.S. visit two months ago was simply an "official visit," although Beijing petitioned the White House for months to elevate the status to "state visit."
  • A "state visit" is the highest form of diplomatic contact between two states.
  • Although we civilians consider a visit to be a visit, a state visit differs from an "official visit" in terms of honor, prestige and diplomatic contact.
  • To put it in context, if we invite a friend to our home for cocktails, dinner and perhaps a game of Twister, that is like a civilian state visit. "Left hand, blue, Mr. Koizumi. Would you like another Whiskey Sour?"
  • If we let a cousin come by but hide the liquor and order Chinese delivery, that's more like an official visit.

3. Little Orphan Analyst

According to Karen Richardson of the Wall Street Journal this morning, there are more technology analysts on Wall Street today than there were in the late 1990s.

  • Citing a Bear Stearns report by chief investment strategist Francois Trahan, Richardson reports that even though there are fewer analysts employed by Wall Street overall than in the late 90s, there are more covering technology stocks now than then.
  • "The average number of analysts per tech stock in the S&P 500 nearly doubled to 23.53 by the end of April from 12.36 in January 1996 and was still 22% higher than the 2000-2001 average of 19.25 analysts per tech stock, according to Mr. Trahan's report," the Wall Street Journal said.
  • Trahan's report for Bear Stearns looks at "Orphan Stocks," those stocks that are largely ignored by Wall Street analysts.
  • Today technology, along with telecommunications and health care are the most overrepresented sectors covered by Wall Street Trahan says.
  • The least represented sectors are Energy, Utilities and, believe it or not, Financials.
  • Why the magnified focus on tech, which has lost about 2 trillion in value since 2000?
  • Richardson points out the grim (for investors) truth: "Since the end of 2000, 112 high-tech companies have made IPOs of new stocks, according to data and research firm Thomson Financial, compared with 49 energy/power companies over the same period." That translates into more investment banking fees.
  • Meanwhile, since 2000, how has technology performed versus those stodgy and boring energy and utility sectors? The Amex Utilities Select SPDR (XLU) has eked out a 10.2% gain. The Amex Energy SPDR (XLE) is up a solid 96%. The Amex Technology Select SPDR (XLK) is down 62%.

4. What did you expect? He's a CZAR!

BusinessWeek in its latest issue reports that President Bush has "bestowed" broad authority on Intelligence Czar John Negroponte to excuse publicly traded companies from SEC reporting requirements in the name of national security.

  • Every President since Jimmy Carter has had the authority to exempt companies working on certain top-secret defense projects from portions of the 1934 Securities Exchange Act, BusinessWeek says.
  • But officials tell the magazine that this is the first time that authority has been delegated to someone outside the oval office.
  • Intelligence Czar John Negroponte oversees both the CIA and NSA in his role as the administration's top intelligence official.
  • This is the U.S. so we're accustomed to the continuing merger between government and business.
  • Why, wasn't the Vice President only a few years ago running a small company called Halliburton (HAL)?
  • No big deal. Vice presidents have to come from somewhere. Except that Vice President Cheney reportedly continues to hold 50,000 shares of HAL.
  • And what is a "czar" exactly? Turns out the word means "emperor." So there you go.

5. It's How You Say It!

Yesterday new Fed governor Randall Kroszner in a speech to a seminar for journalists on revamping economic statistics said Congress should pass legislation enabling government statistical agencies to access business tax records to get a better sense of the dynamic process of new business formation.

  • Why, of course! That makes sense. Business formation sure is dynamic. We need to get a better sense of it.
  • But even while we were thinking that, a little used synapse in our brains released a chemical neurotransmitter and reminded us of something we heard recently. Something familiar.
  • On May 1, ABC news reported that stock regulators and the IRS are exploring the idea of requiring companies to publicly release more tax information.
  • On the one hand, corporate watchdogs believe there is a bit of a "gap" between what companies report to the SEC and the IRS.
  • Hmmm, but those pesky privacy people worry about any move away from the historic
    privacy of tax returns, even for corporations. Privacy! Again with the privacy! Those people are relentless.
  • Privacy aside, (because let's face it, who cares?), what a difference a couple of weeks make. We call it MARKETING!
  • Old approach: "Government hungry for tax receipts looks to toss aside tax privacy."
  • New approach: "Government wants to get a better sense of the dynamic process of new business formation!"
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