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Five Things You Need to Know: Junk Back In the Trunk, Borrow & Spend, $3, Fight the Power, Walk of Shame


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. Putting Junk Back In the Trunk

Today the Wall Street Journal says some corporate bondholders are beginning to complain about the US companies using debt to buy back their own stock and raise dividends.

  • According to the article, US corporations have issued $84 bln of new bonds in the first half of the year, up 7.2% year-on-year, while issuance of "riskier" junk bonds was up a whopping 25% to $47 bln.
  • Moreover, bank lending, especially to companies looking to finance acquisitions and special dividends, has soared, the article says.
  • Now, some bondholders are complaining about companies using this debt to help fund stock buybacks and dividends because it uses up cash without creating new growth opportunities. (Hmmm, that sounds familiar: corporations using up (or simply hoarding) cash and not creating new growth).
  • "We lend money and look for companies to pay it back when they generate cash. But instead of investing the proceeds in assets, they are sending them straight out of the company to shareholders," a bond portfolio manager told the WSJ.
  • What is most interesting is not that this practice of issuing to repurchase shares or pay for special dividends is happening. It's actually been happening for 10 years or more. What is interesting is that now... and only now... a groundswell of risk aversion among corporate bondholders is causing them to sit up and take notice.

2. Note to Japanese Consumers: Don't Delay, Buy Today

While the Bank of Japan begins meeting Thursday to determine the fate of that country's ultra-loose monetary policy, the New York Times today takes a look at the Japanese consumer, believed by many economists to hold the keys (read: consumption) to Japan's expansion out of more than a decade of deflation.

  • Consumptions continues to be something of a problem in Japan, according to the Times.
  • In the first quarter corporate spending rose 3.1 percent from the previous quarter and exports rose 2.7 percent, but private consumption was up just 0.5 percent, according to government data.
  • Yusuke Yamamoto, a 29-year-old banker living in a Tokyo suburb explained the transition many Japanese consumers are facing after years of deflation: "Before, when you bought, you lost," Mr. Yamamoto said. "Now, when you don't buy, you lose."
  • Meanwhile, Bank of Japan data shows the last 14 years of low interest rates have cost households 304 trillion yen, or nearly $2.7 trillion, in lost interest income, the Times said.
  • The article notes that savers such as Mr. Yamamoto, 29, has much of his money in a savings account that yields nearly zero percent interest... and has ever since he can remember.
  • "Older people have experienced things like rising salaries and interest rates," he told the newspaper. "But I never have. Somewhere in the back of my mind, I still doubt it will happen.''
  • As deeply ingrained as Mr. Yamamoto's experience with deflation, think about the situation here in the U.S. where the opposite is just as deeply ingrained. Indeed, it is nearly impossible for many of us to imagine a situation where we would save more than we consume, not to mention the economic implications of that attitude.
  • Ah yes, the unimaginable; where speculation without risk management goes to die.

3. $3

Gasoline costs are now at their highest in more than 10 months as the average U.S. price at the pump nears $3 a gallon, according to the US Energy Department.

  • The nationwide average price for a gallon of regular gasoline was $2.973, up nearly 4 cents from a week earlier and the highest since Sept. 5, when the price hit a record $3.069 following Hurricane Katrina, the USA Today reported.
  • According to Merrill's David Rosenberg, every penny increase at the pump drains the equivalent of $1.3 bln from household cash flow.
  • Factors fueling the increase in gasoline prices include changeover in gasoline mixture additives from MTBE to ethanol, normal seasonal demand, and the onset of what is forecast to be a busy hurricane season.
  • Methyl tert-butyl ether (MTBE) has been used in U.S. gasoline since 1979 but recent legislation has emphasized substituting ethanol for MTBE as a fuel additive due to environmental concerns.
  • Despite high prices, gasoline demand is up from a year ago, according to government data.
  • Meanwhile, with June retail sales due out for Friday, watch for those pennies at the pump to impact June data. Expectations are for a 0.4% increase versus 0.5% prior.
  • Now, because of its obnoxious size, you might think a Hummer H3 is among the SUVs with the worst gas mileage, but it actually checks in at an average of 16/MPG in the city, 19/MPG on the highway.
  • Turns out the SUV with the worst gas mileage is actually a 2006 Dodge Durango, which checks in at 9/MPG in the city and 11/MPG on the highway, according to US Department of Energy data.


4. Fight the Power

The Paris-based International Energy Agency says China is building way too many power plants and wasting energy, according to the Associated Press.

  • Yesterday the IEA, an arm of the Organization for Economic Cooperation and Development, released a report that calls for sweeping change in China's state-dominated power industry, the AP reported.
  • China's economic boom has made the country the number two power consumer behind the U.S.
  • The Chinese government plans to build dozens of power plants in coming years to meeting surging demand, and according to the IEA is adding energy generating capacity every year that is equal to the total in France or Canada.
  • The IEA report calls for China to create a competitive energy market with prices reflecting the true costs of energy rather than government imposed price ceilings designed to keep prices from affecting consumption.
  • As noted in Five Things, last month China raised electricity prices to households and businesses for the first time in more than a year to help power companies pass on the higher cost of coal.

5. I Love the Way You Walk

According to the UK times Online, a computer system can spot those who are guilty by the way they walk.

  • For more than ten years, scientists have been working on a computer system that can analyze the movements of criminals and compare them with those of a suspect.
  • Swedish police successfully used it three years ago to identify a robber involved in a bank raid in which a customer was killed.
  • In Britain scientists are working on "automatic gait recognition", which will allow police and courts to compare images captured on CCTV with the walk of a suspect.
  • Work is also being done on the techniques in China, Australia, Japan and the United States, where scientists have been experimenting with radar guns, similar to those used by police to track speeding cars, the article says.
  • This can mean only one thing: the end of the line for notorious underworld crime figures Nicky "The Limp" Mangano, "Peg Leg" Paulie Walker, Anthony "Super Strut" Jackson and Patrick "Walk Everywhere" McDonohue.
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