FW: Bridgewater Daily Observations - "Here We Go Again?"

Okay, this definitely kind of catches your eye: "have the tone of the first kernels of corn popping in a sizzling pan of oil"

That doesn't exactly sound like a good thing.

John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013


-----Original Message-----
From: Bridgewater Daily Observations [mailto:Bridgewater_Daily_Observations@bwater.com]
Sent: Friday, February 15, 2013 8:01 AM
Subject: Bridgewater Daily Observations - "Here We Go Again?"

Here We Go Again?

The progression of abundant liquidity moving out on the risk curve is increasingly showing up in more aggressive financial activity by corporations, pursued in tight partnership with Wall Street. Sound corporate conditions, including high cash balances, low debt service ratios, high profit margins and a fourth quarter bounce in sales and earnings, are connecting with the increasing availability of inexpensive junk bond and leveraged loan financing to create the rumblings of days past. The output capacity of corporations appears to be sufficient to satiate increased demand, at least for now, limiting the need to allocate this abundant flow of liquidity to capital expenditures. At the same time, the Fed and the financial system are producing more liquidity at a rapid rate on top of the pile that exists, and this money is moving out into the high yield and leveraged loan markets, lowering spreads and credit standards and improving the risk and reward of engaging in transactions that re-engineer the corporate balance sheet. Given this environment, it is notable, but unsurprising, that last week we saw not only the announcement of two large LBO transactions, after a long period of deal inactivity, but additionally the launch of an activist effort to have Apple pay a special dividend. And on Thursday, Berkshire Hathaway and 3G purchased Heinz, in a $23bn deal funded with a substantial amount of debt. These developments, along with a rebirth of the CLO market, have the tone of the first kernels of corn popping in a sizzling pan of oil. Whether they are or not, activity across the world of credit is heating up and when combined with the hundreds of billions in private equity "dry powder," pressure is building for the various players to exploit the abundance of cheap money and perceived global economic stability to their own benefit.