Friday, June 08, 2007

One surge and the covers get ripped

Often when there’s a surge in Wall Street, a few bullish asses get covered (and that of bears, get ripped). But when you get some sound bytes from illustrious investors like Wilbur Ross, the billionaire financier, you blog – I do it because I can save it for future and see if their calls go right. And if they do, well, I would learn a thing or two on how great minds work.

Here’s what he said to CNBC’s money honey, Maria Bartiromo - the private equity frenzy is saddling many companies with high levels of debt, and he added that the ultimate holders of the debt are often unaware of what they are getting into.

“The problem is that the people who make the initial credit decisions don’t end up owning the paper,” he said. “They flog it off to the outside world — who generally don’t know what’s in the portfolio.” Ross further explains that the excessive buyouts have sucked floating stock out of the market and it is this lack of supply that pushes stock prices up than earnings expectations.

Richard Bernstein, chief investment strategist at Merrill Lynch, sees a different potential scenario at work.

In a note published recently, he writes that interest rates and stock prices (or, more specficially, price-to-earnings ratios) usually go in different directions. But they both have been rising lately — a situation that historically doesn’t bode well for leveraged buyouts. Higher interest rates would make it more expensive to fund a leveraged takeover, and higher P/E ratios mean that the deals are pricier to begin with.

“Investors right now can’t imagine how the L.B.O. boom would end,” Mr. Bernstein writes. “Rising rates and rising equity valuations could do the trick.”
Read the full story here and here.

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