Financial professionals use market messages like the one previously discussed to time their own borrowing and lending practices. Some big companies have become quite astute in making a decision about when to borrow money. No company has proved more adept than IBM.
We now listen to yet another market message that can help you make better, more profitable moves in the financial world. And when a company this big sends a message, you'd better listen!When Big Blue Borrows . . .
The goal of this exercise is to borrow money like a professional on Wall Street. Whether your goal is to save yourself money on a mortgage or refinance an existing loan, the markets can tell you when to act and when to act "quickly!
For most Americans the largest single purchase they will ever make is a home. It is the largest single monthly expense and, usually, the biggest debt ever incurred in one's lifetime. Yet, most people allow emotions and a host of other factors to influence the timing of a most important purchase. And while that is completely understandable, given the nature of the home buying experience, there are messages from the market that, at the very least, will help you get the least-expensive mortgage available.
The key is to act like a pro, coolly and rationally. Big corporations borrow money all the time. They borrow money to finance acquisitions, to pay down older, high-cost debt, or to help maintain cash flow as they wait for money to come in the door.
The corporate treasury department directs the borrowing activities for many companies. So the treasurer serves a very important function, acting as a key player in any company's financial future. It is often the treasurer who decideswhen to borrow money in the bond market. It is critical that he or she be extremely sensitive to coming changes in interest rates, so the company can borrow cheaply and use the proceeds profitably.
Nowhere in corporate America has the corporate treasurer been better at borrowing money than at International Business Machines, IBM.
IBM's borrowing habits are important to observe. Professionals pay very close attention to IBM. "Big Blue, as it is known on Wall Street, can provide some very important clues about the direction of interest rates, particularly when interest rates are at the lows of a given cycle.
The world's biggest computer company has been more astute at borrowing money than many institutions that borrow and lend money for a living.
Indeed, many of the biggest corporations in the world have become quite adept at borrowing money on the cheap, locking in low rates of interest and using the proceeds to invest more profitably at higher rates of return. In 1999, hundreds of U.S. corporations borrowed money to lock in the cheapest interest rates available in over 20 years. In the first half of the year alone, over 4,000 companies borrowed $531 billion, the biggest corporate borrowing binge in several decades.
But why did these corporations go into hock in late 1998 and early 1999?
Let's take a look at recent market history.
In October of 1998 bond market interest rates plunged to just over 4.7 percent, the lowest yield on the Treasury's 30-year bond since the government began issuing those "long bonds" in 1977. The drop in rates was the by-product of a rout in the world financial markets touched off by an economic crisis in Russia and the collapse of a major EastCoast hedge fund (investment fund) known as Long-Term Capital Management.
The financial crisis of that summer and autumn made all sorts of investments unattractive to well-heeled professionals. Their sudden aversion to risk in emerging markets, currencies, commodities, or even U.S. blue chip stocks sent them scurrying for cover into the world's safest investments, U.S. Treasury bills and bonds.
That rush into bonds sent interest rates plummeting in the United States to levels described a few paragraphs previous. The drop in rates, in turn, prompted a record number of Americans to refinance their homes, apply for new mortgages, buy cars, and finance all sorts of other activities with borrowed money. Corporations also took advantage of the precipitous drop in rates, borrowing money at a fast and furious pace.
The question, however, is how to determine when interest rates have seen their lows and are about to turn upward. That's where a study of professional borrowing is most profitable. Mimicking the pros allows individuals to lock in low rates just like corporate treasurers do.
The financial pages of the nation's major newspapers, the "Wall Street Journal," and, of course, CNBC frequently discuss the borrowing habits of major corporations. They do so because corporate activity in the bond market has important implications for the direction of interest rates. The more heavy the corporate bond calendar, the greater the degree of corporate bond issuance, and the greater the chance that rates are going up, rather than down.
There is strength in numbers. When corporate treasurers see interest rates at multiyear or multidecade lows, they jump at the chance to borrow money, knowingfull well that low interest rates are tantamount to a gift from God. Anyone with half a lifetime of experience borrowing money knows that interest rates can fluctuate wildly, as they did in the 1970s and 1980s. Bond market interest rates peaked in 1980 at 14 percent as inflation soared, oil prices skyrocketed, and gold vaulted to over $800 an ounce.
Individuals who borrowed money then paid dearly for the privilege. The prime lending rate, the rate that banks charged commercial customers, exploded to 20 percent! Rates have come down steadily as inflation declined to levels not seen since the 1960s.
You can see why it's important to borrow money cheaply. It can become quite dear in a relatively short space of time. IBM is quite successful at doing just that. Anytime IBM borrows money for 10 years or longer, by selling bonds, it has historically done so at the almost precise moment that interest rates are at their low point in that particular cycle. Consider the chart. In only one instance in the last 25 years has IBM failed to catch the exact low in rates when it issued 10-, 20-, 30-, or even 100-year bonds. That is a track record not to be trifled with!
If you had followed IBM's treasurer into the market and borrowed when he had, the cost savings on your mortgage could have been significant. Every time interest rates go up a half point, the cost of a $100,000 mortgage goes up by $33 per month or $396 per year. (That would increase the cost of a 30-year loan by $11,180--a 12 percent increase in the cost of the home. On a national basis, for every one point increase in mortgage rates, Americans pay an additional $250 billion in interest.)
But it's not just mortgage rates that areinfluenced by the cost of money. As we've said earlier, car loans, credit card rates, stock prices, and the economy are greatly influenced by interest rates. Knowing when rates are going to turn can be quite helpful in planning your immediate financial future.
That's why it pays to follow Big Blue.
NOTE: There is a fascinating footnote to the hectic pace of borrowing undertaken by U.S. corporations in the first half of 1999. Many companies borrowed heavily in the first and second quarters to avoid potential financial problems that may have been associated with the turn of the century. So-called Y2K concerns prompted some of the nation's largest firms, Ford, Wal-Mart, and others, to essentially line up all their financing for the remainder of the year in the event a financial panic ensued as a consequence of the turnover to the year 2000.
That was a message that individuals should have heard, as well. It pays to have one's financial house in order before, not during or afte
Can the financial markets really foretell the future?
According to CNBC's veteran market watcher, Ron Insana, they can and do. Every day the world's markets are speaking -- shouting, really -- boldly predicting the future. In fact, they are reflecting information not yet revealed to the general public: events as dramatic as the outcome of a war, as tragic as a nuclear accident in some distant part of the globe, or as mundane but vitally important as the future direction of interest rates.
In order to understand what the markets are saying, you have to know how to listen to and interpret the messages they are sending. This is the first book to show readers how to understand the signals put out by the markets, and how to use that information to advantage in their lives.
Since ancient times, writes Insana, investors and merchants have met to buy and sell goods -- and to exchange information and gossip. This information is reflected in the prices charged for those goods, whether it is news of war in a far-flung region that will cut off the gold supply or a crop failure that will make wheat scarce.
Now skip to the present day, where the proxies for goods and services -- tradable securities -- act in exactly the same fashion. From the price of oil to foreign-currency fluctuations, from the price of a stock to the interest rate offered on a bond, the financial markets provide clues to events great and small. For example, Insana documents how
- the stock market sent a shudder down Wall Street several moments before President John F. Kennedy was killed in Dallas
- the crude oil market warned the world that a war was coming between Iraq, Kuwait, and the United States -- and then predicted a quick victory
- the wheat market told the West about the seriousness of the Chernobyl nuclear accident days before official word of the meltdown
- a tiny currency known as the Thai baht warned the global markets that the Asian economic crisis was imminent and potentially devastating.
In the world of finance, Insana reveals how
- the yield curve gives a one-year advance warning of an impending recession
- a little-known futures contract predicts with great precision what the Federal Reserve will do to interest rates weeks before the Fed makes its decision
At a more personal level, Insana shows how individuals who heed the warnings of the markets will make better personal decisions regarding
- investments
- mortgages and loans
- real estate purchases
- career choices
- and much more
Whether you are an investor, a market buff, or are simply interested in making better financial decisions, the markets are speaking to you in a very relevant and personal way. Let Ron Insana be your guide and interpreter to understanding the message of the markets.
Ron Insana is familiar to millions of viewers as the popular business journalist and anchor in CNBC. His show, Street Signs, is seen in 70 million American households and in 71 countries. Insana makes frequent guest appearances on NBC Nightly News, the Today Show, and Imus in the Morning.