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  • Debt Frontiers – Amazon and Australia

    Posted by Carl from Chicago on November 27th, 2012 (All posts by )

    Amazon, the giant online retailer, recently issued debt at absurdly low rates. Per this Bloomberg article:

    Amazon, which had no bonds outstanding, sold $750 million of 0.65 percent three-year notes that yield 38 basis points more than similar-maturity Treasuries, $1 billion of 1.2 percent five-year debt with a 63 basis-point spread and $1.25 billion of 2.5 percent securities maturing in 10 years that yield 93 basis points more than benchmarks

    Let’s look at those yields again. Amazon is able to issue 10 year bonds with a yield of 2.5%. That is an amazingly low rate for a company that barely makes a profit, albeit one with a giant market cap.

    Nowadays you don’t even have to have a REASON to issue debt. Amazon issued this debt partially to pay for their new corporate campus and partially for “general corporate activities”.

    When corporations can issue debt at these sorts of low, low rates you really need to think about the rate of return that you are expecting for your portfolio. These sorts of low rates either point to a “bubble” in corporate debt (it doesn’t look like a bubble to the less sophisticated because they associate high prices for stocks or real estate with a bubble, but in terms of bonds, a low interest rate on a longer term maturity means that you essentially got a lot without paying much to investors in return) or just a long term re-setting of expectations among bond investors, a capitulation of sorts.

    On the other side of the world, Australia is having a wild ride. The Australian Dollar is coveted because it is a “commodity economy” and is independent of the typical reserve currencies such as the US dollar, the Euro, and the Yen. Australia also offers higher (relatively) yields on their government debt. When I was in Australia many years ago the Australian Dollar was 60 cents on the US dollar; the Australian dollar is now stronger than the woeful US dollar (or US peso). As a result of these strengths, 63% of Australian debt is now held by foreigners (per the article). Recently some government officials are calling for a more formal registry into who is buying their bonds; the government is attempting to reduce the value of the Australian dollar because it is hurting tourism, exports and their international competitiveness and reduced interest rates significantly as a result. But all is to no avail as the value of the Australian dollar stays high, buoyed in part by the robust demand by foreigners for Australian denominated assets such as government debt.

    It is a strange world where a company that doesn’t have much of an actual profit can raise debt at rates not much higher than the US government and a country like Australia has giant demand for their currency and government debt due in part to its diversification from the typical currency basket components.

    Cross posted at Trust Funds for Kids

     

    9 Responses to “Debt Frontiers – Amazon and Australia”

    1. Bill Brandt Says:

      I must have been in Oz the same time as you Carl – fun times – one of the reasons I stayed 2 months wandering around

      Something’s screwy when my interest on money market and bank is so low they don’t even send me a 1099

    2. Mike K Says:

      Australia seems to be on a long term virtuous cycle with low defense costs, good commodity prices and a small population. A few years ago, Japan was trying to set up retirement communities for their elderly in northwest Australia. I don’t know how that turned out. I doubt Japan can afford it anymore.

    3. Jason in LA Says:

      On the corporate side, there has been increased implied volatility in the high yield (junk) sector.

      Financial bubbles can take awhile to burst. We saw this in the late 1990’s with internet stock mania and mid-2000’s with housing. Everybody knew they were bubbles, yet nobody wanted to be the first to run for the exits.

      http://blogs.wsj.com/marketbeat/2012/11/20/vix-still-sleepy-but-volatility-in-high-yield-bonds-going-bonkers/?mod=yahoo_hs

    4. Bill Waddell Says:

      I think you are over-estimating the Australian economy. The 30% premium tax on the big mining companies couples with the slow-down in Chinese manufacturing is driving the mining industry down fast. In the meantime they have pre-spent the minimng tax income on a blizzard of welfare type programs. Australia is in trouble and everything is trending the wrong way there.Julia Gillard (their P.M.) is cut from the same cloth as Obama. I would charge them a stiffer interest rate than Amazon too, since Amazon is increasingly more likely to repay the loan.

    5. Mike K Says:

      Well, when Rudd became PM in 2007, he had campaigned on an environmentalist platform like Obama. After he took office, even the Conservative PM Howard had lost his seat, and Rudd had a mandate, the wise men told him what his policies would do to electricity prices. Rudd then reversed course and adopted a sensible program on energy.

      Obama doesn’t listen to “wise men” or anyone else except his crazy base. Maybe Australia has gotten rich enough to lose its common sense. Certainly it has a rich history of union craziness. I remember when the “Egg Board” would arrest people whose hens laid too many eggs.

    6. Bill Brandt Says:

      Mike – something interesting I remember from an Australian during my travels there years ago – there union problems occurred when English union activists emigrated

    7. Mike K Says:

      Wretchard has some appropriate comments.

      Some nations, he writes (like China) are building plants to liquefy coal. They’re doing something. But Australia on the other hand, like a mad person, is imposing a “Carbon Tax” — its buying indulgences for Gaia. It’s spinning prayer wheels in the winds. That’s what it’s doing. Nothing but praying before the temple of political correctness.

      I have this theory that Obama has noticed that he can sell packaging without anything in it. We are handed boxes called “Pivot to the Pacific”, “Ending the War on Terror Where it Began”, “Free Healthcare”, “Free Education”, “Government Cheese” and “World Peace”. And there’s nothing in them. We just put them on the shelf and congratulate ourselves on being so prepared.

      It sounds like Rudd’s successor has reverted to the left wing craziness.

      On the other hand, maybe there is more than we see. Chevron is drilling offshore wells in Western Australia.

    8. Carl from Chicago Says:

      Australia is benefiting because it provides diversification to international investors. Due to the relatively small size of their market if even a fraction of large investors like national funds, pensions, etc… want to have a “sliver” of their assets in Australian dollars that means that their domestic market will be irrationally propped up. There aren’t a lot of places that you can go quickly and cleanly with convertible currencies and the rule of law.

      Australia doesn’t seem to be competitive in much of anything besides mineral extraction nowadays. Tourism and agriculture / ranching are big businesses but they get crippled by the rising dollar. Little would be manufactured in Australia for myriad reasons from unions to currencies to vast shipping costs to get to many markets.

      As far as Amazon, they should just issue debt all day long with very far out maturities (30 years?) if the market is going to give it to them at 3% or so. Why not? Their cost of capital must be far higher than that. It would take a long time for debt to be significant relative to their equity level.

    9. Bob Says:

      “As far as Amazon, they should just issue debt all day long with very far out maturities (30 years?) if the market is going to give it to them at 3% or so. Why not? Their cost of capital must be far higher than that. It would take a long time for debt to be significant relative to their equity level.”

      They could make some acquisitions with that cash like maybe buying a fish processing company.

      “On the corporate side, there has been increased implied volatility in the high yield (junk) sector.”

      Thanks, the article doesn’t clarify exactly what is popping, implied or realized volatility. I Haven’t studied volatility dynamics with regards to fundamental values for credit products but my guess is the spike in vol after a run up over the past few years isn’t a reassuring sign. This is next, or at least somewhere, on my to do list.

      Though, I wouldn’t say that everyone knows it is a bubble when bubbles occurs. It depends on one’s beliefs, how they are formed and new information processed.