Coverage Universe - Weekly Price Change Jan 19-29, 2018
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Markets have been fretting about rising interest rates since the first bailout following the recovery from the Global Financial Crisis. The time period immediately after the Global Financial Crisis was when the first issue of rate reset preferred shares started. From then till now almost all new issues of preferred shares have been structured with a rate reset feature.
The outlook for rising interest rates escalated in 2013 when then US central bank chief Ben Bernanke attempted and failed to reduce monetary accommodation, causing the Taper Tantrum. This was followed by newly appointed Fed vice chair Stanley Fischer introducing a policy of 4 interest rates hikes in 12 months and very likely more. Fast forward to 2018, US central bank interest rates have been increased 5 times in one quarter point increments, apparently with 4 more to follow. It has been a rough ride for income focused investments; the regular income definitely helps to ease the stress.
Even investment scion Warren Buffet loves to beat up on bonds, yet the $702B of assets in Berskshire Hathaway(BRK.A, B) are partly financed with $102B debt . Strip out the policy liabilities associated with the insurance segment and the debt equity ratio is about 30%. There is enough cash in Berkshire to pay off the debt, yet it is awaiting an attractive acquisition opportunity. The acquisition will likely include some cheap debt on the acquired companies' books. Success for equity valuations depends on a foundation of inexpensive debt capital allowing the common shareholders to benefit from the leverage this gives to earnings. Take away the cheap debt with rising interest rates and it is not only bond valuations that suffer.
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