Will Corporate Bondholders Be Left Holding The Bag Again?
The latest Federal Reserve flow-of-funds data show that nonfinancial corporations "retired" a record $587 billion of equity at an annual rate in Q1:2006 (see chart below). Nothing wrong with that in of itself. If corporations have nothing productive to do with their profits then they should return these profits to their shareholders via share buybacks or dividend payments. But there appears to be the beginning of an ominously familiar trend taking place - corporations increasing their credit market borrowing to finance stock buybacks. Also plotted in the chart below is the ratio of nonfinancial corporate borrowing as a percent of capital outlays. After hitting a cyclical low of 0.6% in Q4:2003, this ratio has moved up to new cyclical high of 49.4% in Q1:2006. Although shy of the last cyclical high of 61.7% (Q1:1999), bondholders ought to begin wondering if they are not being sacrificed once again to boost earnings per share for stockholders.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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