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Shaun Lee's  Instablog

Shaun Lee
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Hi, I started as an analyst at Great Court Capital in 2007, doing M&A and distress advisory. More recently, I worked as an equity analyst covering global oil & gas, metals & mining and industrial companies. I've just been laid off. Hoping to stay in the investment research side of... More
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  • The Age of Deleveraging Part 1
    Gary Shilling is an economist with a spectacular 40 year track record of predicting macro-events. He called the fall of inflation in the early 80s, the US housing bubble and the subsequent financial crisis. The book focuses on explaining the deleveraging phenomenon and its impact on investing strategies.

    Over the past 60 years (since 1952), every single sector of the economy has levered up. The financial services sector went from cumulative sector debt of under 20% to in excess of 120%. The story is similar for non-financial corporations (abet not as extreme).
    It's repeated across households to state & municipal governments and the Federal government.

    The increase in leverage among households is mirrored by the decrease in savings. The savings rate of the American consumer fell from 12% in early 1980s to 1% in Jan 2008. Not surprising the decline in savings rate coincided with the beginning of the bull market in stocks in Aug 1982.

    Shilling predicts an era of slow growth ahead. Driven by 2 key trends - increase in the savings rate and business cost cutting. He estimates that a 1% rise in savings rate will knock off 1% of real GDP growth. Businesses have been cost cutting by not hiring more employees and increasing employee productivity. These two trends suffer from the fallacy of composition. If everyone saves, who will buy stuff and generate demand? Overall the economy suffers. Similarly for business cost cutting.

    The above 9 causes will take some time to work through the system, leading to slow growth ahead.
    Jan 03 5:24 AM | Link | Comment!
  • France Telecom Debt Alert

    Just an update on France Telecom (FTE). I just read this article from Bloomberg on FTE's CDS spiking (date 25 Nov 2011). FTE's CDS apparently spiked to 182 basis points (bps), reflecting the market's fear of FTE's possibilty of default. The good news is that despite the spike FTE's CDS spread was still less than the French government's bond CDS, which hit an all time high of 249bps.

    I just checked the CDS on FTE's 10 year bond today on Bloomberg. It's back down to 152bps.

    However, when I compared the total CDS spread curve for FTE with 1 month back. Things aren't that great. The short end of the curve has hiked from 60+ bps to 80+bps. That translates into higher short term funding costs for FTE.

    None of this is desperately dire for FTE but it does reflect the CDS market's concern about FTE's debt load. The good thing is that FTE only has 8.15% (Euro 2.7B) of its debt coming up for re-financing in 2012. So the increase in interest expense should be tolerable.

    All in all, my opinion is that there is the CDS spike should not be cause for concern. 

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 14 2:35 PM | Link | Comment!
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