The Market Ticker
Commentary on The Capital Markets- Category [Bonds]

It appears so -- there are reports that his "departure" to move to Janus was not exactly "voluntary."

Who knows.  What is clear, however, is that Gross, to a large degree, made his "name" by being involved in what is arguably the largest and biggest hammer-swinging company in government securities.

In other words it wasn't so much Bill as it was (and is) the firm's leverage over government actions.

It's not hard to win on a bet when you can hammer on the dealer, effectively allowing you to cheat (albeit legally.)  Nonetheless there were allegations that perhaps some game-playing with valuations took place anyway.

Janus is seeing a big spike in (Company) stock price in the pre-market, which I think it is a mistake.

This move also comes into an environment where the game-playing that has been run since 2009 is now having negative impacts on earnings power, and along with that geopolitical issues are constraining attempted extensions of the 'Bezzle.

You can't get away from arithmetic.  You can lie about forward expectations by simply ignoring what the math tells you for a while, but eventually the ability to machine earnings with borrowed money spent on buybacks (which, I will remind everyone, simply increase the leverage in the system) comes to an end.

There are two ways a generally-declining rate environment that has allowed the leverage expansion to continue may end -- and only two.  As I have repeatedly discussed if you have a 10% interest rate and borrow $1 million, you need $100,000 to pay the interest coupon every year.  If the rate falls to 2% you can either pay $20,000 for that coupon or you can borrow another $4m and pay the same $100,000.  

Doing the latter sounds smart but it is in fact terminally stupid, because when that environment changes there are only two possible ways it can change -- either rates flat-line in which case you have to stop increasing leverage (in which case your EPS expansion, which was responsible for the stock price gains, goes to zero -- now what happens to your stock price?) or, much worse, rates actually rise and when the rollover requirement comes you can't make the coupon at the new demanded rate and are forced to liquidate things to cover some of the principal -- and not a small amount either.  Consider that a rise of just 2% from 2 -> 4% is in fact a doubling and thus requires you pay down $2.5 million of principal immediately, which happens to be 25 times your annual budgeted interest payment!  

In that case your EPS doesn't go to zero, it reflects a monstrous leveraged loss instead!

I know, I know you'll say -- that won't happen because it hasn't yet.  Uh huh.  I "get it" that the personal and institutional "memory" has been effectively cleaned of when it has happened in the past, simply because for the last 30 years we've lived in a generally-declining rate environment.

But none of that changes the inevitable -- when something cannot continue forever it will stop.


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