Tags: hussman | bond | market | greed

Hussman: Bond Market Greed Dangerous

Friday, 20 Aug 2010 10:08 AM

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Money manager John Hussman warns investors against becoming greedy in the corporate bond market.

"Increased risk perceptions could hit corporate bonds very hard even in a softening economic environment," Hussman writes in a note to investors.

"While corporate cash levels may very well reduce liquidity risk for companies that would otherwise need to raise funds in a tight credit market, investors should not ignore that the overall debt burden of U.S. corporations is higher than it has ever been."

Hussman notes that, for companies with low earnings cyclicality, cash provides a clearly better margin of safety than for companies that are prone to earnings losses during periods of economic weakness.

“Just as dividends have to be evaluated in relation to the earnings available to cover those dividends, and the stability of those earnings, investors wishing to hold corporate bonds for additional
‘pickup’ in yield should pay close attention to earnings stability, cash reserves, and overall debt burdens,” he says.

“We would emphatically avoid the debt of financials and cyclicals that are prone to massive ‘extraordinary’ losses that can quickly wipe out available liquidity.”

Weaker-than-forecast reports on New York manufacturing and Japan’s economy are adding to concern the global recovery is slowing.

“People are wary because of weak economic numbers,” Peter Jankovskis, co-chief investment officer at Oakbrook Investments, told Bloomberg Business Week.

“Japan’s figures got investors concerned. Over here, corporate earnings have been strong. However, we’ll have a fair amount of economic data this week and investors will be waiting to see what those numbers will show.”

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