I can not get the thought out of my head that corp buy backs using cheap money, but increasing the corp debt level can be good in the long term. Is the corp willing to pay more as time goes by to finance buy backs and service debt, as the cost still looks like relatively cheap money. Of course it is good for short term stk price and bonuses that are tied to stk price, but that debt is still debt. I have this thought that the folks who benefit from short term stk price bonus, have this idea, that any future problem is best left to somebody else who takes the reins of power in a corp, once they have moved along with their huge bonuses in the bank. Debt eventually needs to be serviced . When the so called low cost free money has to be serviced by paying int and princ. the debt, as of now, is generally paid with cash flow or rolled into new debt, or paid by a combination of both.. The cost of new debt could go up as investors demand more for the risk.
Lets take a look at what could happen?????? Corp bonds are traded daily and some bond trader will spot a corp that is in danger of having taken on too much debt Then the bond market will want more for the increased risk of that corp bond.. This method of wanting more will be reflected in the price of the corp bond going down in value as the investor will want to buy the bond for less vs. the par value at maturity to offset the increased risk. The bond trader acts as the middlemen for the price the buyer and seller agree to trade the bond. and takes a commission when large sums of money are required.. The corp world in general [as these events usually happen as one] might find the cost of debt goes up as the investor wants more for the increased risk. What actually happens is the corp receives less cash for the sale of a bond, thus increasing the cost of rolling into new debt. More bonds with the same par value at maturity must be sold to receive the same amount of cash required to pay off old debt. I do not know if the cost of corp funds has changed very much so far. But I fear, investors may ask for more as they buy the debt and assume the increased risk of lending money to a corp with a huge debt load. I would think this increased debt load, will be reflected by investors who have priced in lower bond values. The lower bond values will then be priced into equity value at some time, perhaps now or later.. Thus my bearish out look for equities.
I do not think equities can be fairly priced by looking at recent bull runs and profits when future debt servicing is not a part of the equation
Does any off this make any sense. Have I explained my thoughts clearly???
I am sure there is a counter argument to this thinking.
If so then we would all profit if somebody could make the counter arguement