HYBRID VIGOR VOL 2 ISSUE 25: A Rod By Any Other Name

James Carville, the Democratic political mastermind, once said that in his next life he’d like to be the bond market. Only the bond market, he said, has more clout than the politicians he advises. “You can intimidate everybody” as the bond market, he said.

For those not quite in Carville’s circle, but still seeking power in the afterlife, you could do worse than coming back as a rating agency. Just look at what those unsolicited investment- grade ratings, their absence, or the possibility of their absence can do to bonds. (We
talk about this in the Ugly 20 discussion). Call us purists—we still find it rather sad that professional money managers can be dragged around by investment-grade mandates, and sadder still that investors and allocators are sending money to die in the name of safety and job security.

Here at Hillside, we’re trying to help investors find defensible value in the unpopular while avoiding the forced and overbought. We’re taking a stand in favor of the new Restoration Hardware zero-coupon convertible, which had a miserable time finding a home last week because it looks too much like the old Restoration Hardware zero-coupon convertible. There’s a time and place for buying rich stuff because you have good reason to think it will get richer soon, and there’s a time and place for buying good risk/reward paper to take advantage of short-term unfashionability.

In this vein, one of our readers suggests that currently fashionable Alex Rodriguez and his huge contract shows how labels like “investment-grade” can mislead. The reader points out that even though the Yankees are having a pretty good season, there’s a high likelihood they’d be doing better if they were spending A-Rod’s salary on a handful of talented young players—for the money the Yankees are paying him, they should be getting three or four players, each putting up numbers comparable to the former juicer. Similarly, instead

of overpaying for the shield of investment-grade, managers should be using whatever techniques they prefer to find less expensive, more capable paper. It was almost this time last year that RPM’s valuation maxed out. Is something similar being Illuminated now?

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).