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Money Report


BofA and GE: Selling FDIC-Insured Bonds

General Electric (GE) and Bank of America (BAC) just unveiled plans to sell a total of more than $16 billion in Federal Deposit Insurance Corp.-insured bonds under the U.S. government's Temporary Liquidity Guarantee Program. The bonds yield one percentage point more than an equivalent Treasury. "A lot of investors looking for high-quality paper are considering them," says Matt Tucker, head of fixed-income investment strategy at Barclays Capital (BCS). (The iShares Barclays Agency Bond exchange-traded fund includes one FDIC-insured bond, issued by Bank of America, among its 19 holdings.) But Thomas Atteberry, co-manager of First Pacific Advisors' New Income Fund (FPNIX), says not to confuse insured debt with ultrasafe U.S. government debt. Insurance is an iffy proposition, he says—just ask buyers of Fannie Mae (FNM) and Freddie Mac (FRE) preferred shares who assumed the government would have their backs. He's been buying 2003 and 2004 pools of mortgage-backed debt packaged by Fannie and Freddie. Underwriting standards were still strong then, he says.

Beware the Reverse Stock Split

Almost 10%, or 47 companies, in the Standard & Poor's (MHP) 500-stock index are trading under 5, and three under 1. That's why more companies are expected to do reverse stock splits—cosmetic maneuvers that make a stock appear more valuable by decreasing the number of shares outstanding. Time Warner Cable (TWC) is slated to complete one by Mar. 12 as part of its separation from Time Warner (TWX), which should wrap up its own reverse split soon after. Both involve exchanging three shares for one, which will then trade at a higher price.

Is a reverse split a signal to dump a stock? A 2008 study of 1,600 companies that did reverse splits found that the typical stock underperforms the broad market by 50% on a risk-adjusted basis during the three-year period after the action. "Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future," says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University's Goizueta Business School in Atlanta.

The Merck-Schering-Plough Deal

What moves the market these days? Apparently not a pickup in M&A. On Mar. 9 pharmaceutical giant Merck (MRK) announced the $41 billion takeover of Schering-Plough (SGP). And while news of a big deal often spurs a rally, Merck's bid failed to improve the market's mood, and the S&P 500 slipped 1%. MF Global Re-search's Nick Kalivas says that shows how preoccupied investors are with the health of the financial system. As if to buttress his point, the S&P 500 rose 6.4% on Mar. 10 on news that Citigroup (C) had an operating profit in January and February, its first since 2007.


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