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"The fundamentals haven't changed, but the prices certainly have," says fund manager Mark Egan,...

"The fundamentals haven't changed, but the prices certainly have," says fund manager Mark Egan, explaining why he recently sold Bank of America (BAC) bonds yielding 3% that he had picked up last year when they were yielding 8%. He notes the great balance sheets of the financials mean good times for bondholders, but not so much for the owners of the common stock.
 
Comments (6)
  • Would not the capital gasin exxceed at least a few year's interest?
    22 Oct 2012, 02:15 PM Reply Like
  • So 8% yield is bad, now 3% is good - all from a same entity. What kind of dumb logic is that?

     

    And a great balance sheet is NOT good for common stock? Do you know all the reason the BAC stock came down so low is mostly due to investor's worry about B/S, esp more capital raising? Now the B/S is bullet-proof, and you said it's bad for investors. Is this guy insane or totally stupid?
    22 Oct 2012, 03:02 PM Reply Like
  • Buyer and seller makes the difference. The banks has more cash on the balance sheet and less LT debt. Makes the bonds less risky but the stock price is down from the teens just a few months ago. Better to buy the bonds rather than the stock?
    22 Oct 2012, 03:11 PM Reply Like
  • You need to work on your reading comprehension skills. The fund manager sold the bonds he bought at 8% at 3% b/c the risks now outweighed the rewards. Generally speaking a higher yield is more risky (not alwasy true, but a good general rule).

     

    As for the second point, a strong balance sheet is good for everyone but disproportionately favors the bondholder. Common holders benefit more in times of expansion not consolidation. Hence why BAC shares have been stagnating and/or falling for awhile. Future profits look grim, hence current price action. Bondholders get paid either way.
    22 Oct 2012, 04:40 PM Reply Like
  • A few months ago?
    Last time BAC saw teens was April 2011.
    But at least it's moving in the right direction.
    22 Oct 2012, 07:02 PM Reply Like
  • "He notes the great balance sheets of the financials mean good times for bondholders, but not so much for the owners of the common stock."

     

    I must have missed something as it seems to me the opposite is true. The bonds look less attractive at lower yields, whereas the balance sheets can generate cash that can be returned to shareholders even if management can't make great returns on equity.
    22 Oct 2012, 10:55 PM Reply Like
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