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Value Dilution Shows No Sign of Stopping


Corporate, high-yield spreads indicate recovery is still a long way off.

As I'm sure you've noticed, there have been a plethora of secondary equity offerings over the last 2 months. This issuance has been most prominently seen in the REIT space, and has just now started to broaden out into other sectors (e.g. steel, solar and *cough, cough* banking). The reason for this is simple. It's cheaper to dilute your common than to roll or issue new debt - especially when you own commercial property that's painfully underwater and virtually un-refinancable, even at the most usurious of rates. I'll have more on that later...

Back in December, I was speaking with an analyst at a large fund, and I made an off-the-cuff comment that "Pretty soon, the word "dilution" is going to be used by more than just chemists."

Well, ladies and gentlemen, the corporate chemists are busy diluting, and until the (non-government influenced) credit markets loosen up substantially from here, you can expect to see this trend continue. Corporate and high-yield spreads have definitely come in, but are still very wide, versus what are seen in "distressed but recovering" economic conditions.

Yesterday, the Federal Reserve chose not to announce any additional bond manipulation purchases than are already on the docket. This is either analogous to a wild-haired mad scientist leaning over his beakers and rubbing his hands together while concocting his next wicked brew, or a sign that the Fed may in fact have realized that in the end, they're not bigger than the market, and trying to be can have severe repercussions.

I'll let you decide for yourself.
No positions in stocks mentioned.
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