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alstry (35.87)

Maximos Alstrymous....The Defender of the Fools

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April 29, 2010 – Comments (2)

Most Fools can't distinguish between capitization by debt and equity capitalization.

One you have to pay back with interest....one you don't.  And debt is senior to equity....so when the debt defaults, the equity gets wiped out completey.

Bonds, senior or subordinated, convertible bonds or preferreds, can be considered debt capitalization for the purposes of this analysis.

Stock is equity.

To put it in a more familiar example....the mortgage, first or second, is debt....and any value above it would be the homeowner's equity.  If the value does not exceed  the debt, there is no equity.....and when any of the debt defaults, generally the equity gets wiped out....completely.

When a homeowner keeps borrowing against his house....generally the equity is deminished as the homeowner spends down the money(and for the purposes of this example let's assume it is not for improving the house in  an economically beneficial way).

What is amazing is in the last two and one half years....Wall Street public companies have borrowed more money than ever has history.....infecting our public corporations with more debt than ever before.  Generally, when such conditions occur, the equity is diminished...especially if that money is being used to pay high executive salaries and not increase sales.

Let's look at Best Buy or Harley Davidson as examples....a few years ago, the companies had very little debt and lots of cash.  But due to one or more of the following: stock buy backs, silly acquisitions, high executive salaries, and losing lotsa money....both companies have accumulated collectively billions in debt while at the same time seen sales evaporate or remain essentially stagnant even though their biggest competitor may have gone out of business.

Under such circumstances, just like the homeowner would lose equity when he or she borrowed massively against the house and frittered the money away....the equity value of both companies should have also decreased as mananagement's levered up the businesses.  But noooooo, the equity values of both companies have risen substantially over the past year despite the massive leverage.

The irony of all ironies is that your investment/retirement/and pension funds were forced to buy that debt because of modern portfolio theory regardless of the fundementals.....and the bankers had no problem selling it because they made tens of millions in commissions.  Not only that, just to really get you potentially where it hurts....they are buying the equity as well

The above are just two examples of the trillions of dollars of money that have been BORROWED by our public corporations in the last couple years......NEVER before have our public companies been capitalized with soooo much debt in such a short period of time.

But not only are our companies being infected with soooo much debt, so is government...to the tune of trillions of dollars PER YEAR now.  Never in American history has government borrowed so much money simply to pay high government salaries while tens of millions of Americans lost their livlihoods and/or homes due to their inability to get credit.

The joke of all jokes upon the Fools is most of you are buying this debt and don't even know it.  It is what your mutual fund, pension fund, and investment fund managers are sucking up as Wall Street knocks on the door selling it with buyers enthusiastic to spend your money.

We are now simply borrowing money to service existing debt....this is the classic circumstance of a ponzi scheme.  The only reason America and Fools have a higher standard of living than the rest of the world is we still have access  to credit...vs. other places that do not have similar access and their people go hungry and starve.  We really don't product that much any more relative to our current standard of livinig absent borrowing and spending.

Wall Street and Washington are now borrowing OVER $3 trillion dollars per year from us simply to maintain high executive salaries, a great lifestyle for politicians, and the illusion of a functioning economy.....and we are the primary ones funding this scheme with our savings.

Alstrymous feels like a Greek Guy walking into a synagogue telling its members who are Madoff's clients that Madoff was a Ponzi Scheme BEFORE the news broke out telling the truth.  You think the message would have been popular despite the truth.  In this case, Madoff is Wall Street and Wall Street owns government.....and now you.

As long as you continue to bury your collective Foolish heads in the sand and permit this fraud to persist....the concept of money in America no longer holds the same role as it did a generation ago and we and our children will face the consequences.  Money has simply morphed into the evidence of a credit arrangement and not value for services performed.....but many are still not aware of this subtle legal distinction...yet.

At some point...the Fools will realize that their entire net worth is not much more than a collection of toxic debt and equity investments....and it became that way because you sat like Foolish sheep and let Wall Street sell you on an unprecedented amount of debt in the past couple years....

And when the truth comes out and Wall Street cuts all off of credit....the entire house of cards will collapse.....and to add insult to injury....the Fools will learn that they bailed out the exact parties who infected them with the toxic debt in the first place.

Welcome to the Digital Age...where few will ever use credit again.

 

2 Comments – Post Your Own

#1) On April 29, 2010 at 1:56 PM, PDTBiotech (90.39) wrote:

Holy $#@*%*@$*!!!!!!!!!11111!!!1!!

Wait, too much debt has wrecked our economy?  Right, and we're standing by while it's happening.  OK.   So same as always then.

 

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#2) On April 29, 2010 at 2:09 PM, alstry (35.87) wrote:

Bingo PDT....

As we all collectively sit back and let Wall Street force feed our retirement/investment.and money market accounts with toxic debt instrument....many will want to shoot themselves in the head when the find out that they bailed out those that poisoned them.

But it's OK...banking reform will set the stage for the Digital Age.........why do you think Alstrymous is so excited.

Evil triumphs when the good do nothing.

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