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October 6, 2008 By Nick Atkeson & Andrew Houghton, Editors of Big Money Options |
Houghton and Atkeson
Andrew Houghton and Nick Atkeson work together to identify options trading opportunities on the institutional level and, now, for OptionsZone.com readers. They are the editors of Big Money Options, an options trading service that provides one to two new opportunities each week based on their findings.
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Bottom line, bailout or not, world markets are in a crisis of credit. Debt issues are inflating equities pricing, and we must make sure we understand the credit markets fully before investing further in stocks and equity options.
It's been asked why the taxpayer is bailing out Wall Street when it's really homeowners who need assistance. Basically, "Who cares if a bunch of investment banks and other complex financial institutions mired in complex transactions fail? Let them fail. Let's take our medicine and get on with life."
Well, if only it were that simple. Let's look at how this crisis is affecting companies that are about as far from Wall Street as you can get. Can they survive the stock market today?
A Dangerous Game of "Chicken"
Recently, poultry producer Pilgrim's Pride (PPC) saw its stock drop to the lowest price in the company's history. What was behind the stock's collapse?
It turns out that "the company does not expect to be in compliance with its fixed-charge coverage ratio covenant for the fiscal year ending September 27."
Basically, Pilgrim's Pride was at risk of going out of business because it was unable to fund its short-term working capital requirements. What this meant for Pilgrim's Pride in practical terms is:
- No short-term lending = no chicken feed
- No chicken feed = no chickens
- No chickens = no chicken jobs and higher prices for remaining chickens at the store
- No jobs and higher food prices = harder to pay the mortgage on the overpriced house that is underwater.
Normally, during credit booms, lenders would waive the debt covenants and/or lower the short-term capital requirements. Given the stock market today, it is an opportunity for the lenders to get their money back, which puts companies like Pilgrim's Pride in grave danger.
To understand the extent of the crisis…Continue reading…
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