• October 23, 2019

ELAM: Stocks creep higher, nat gas jumps, the legend of Boone - Odessa American: Business

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ELAM: Stocks creep higher, nat gas jumps, the legend of Boone

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Posted: Sunday, September 15, 2019 5:00 am

T. Boone Pickens passed from this life at age 91 this past week. He is being heralded in the press as a corporate raider. Really?

Dennis Elam

Thursday Sept 12, 2019 after market close

T. Boone Pickens is being heralded as a corporate raider. Except he never raided anything but the stock market. Despite this label, he never succeeded in taking over even a single company. He announced in the 1960s that it was easier to find oil on Wall Street than to drill for it. But that was easier said than done.

Instead it was the creation of a single handed control of the junk bond market that allowed Pickens, along with Wagner and Brown of Midland, to attempt their take overs. Michael Milken was a bond trader at Drexel Burnham Lambert. Junk bonds are those rated below investment grade Baa. It was thought all junk bonds were dangers (C rated bonds have a 50% default rate). But Milken noticed firms controlled by one individual issuing such bonds. If the bonds defaulted, the owner went bust. As a result those bonds sold by solid entrepreneurs rarely defaulted.

And so Mike began touting junk bonds. Junk bond mutual funds began sprouting. Corporate raiding despite the sexy title, was rare.

The reason was that most corporations had directors at banks and insurance companies. And for that reason, banks and insurance companies would not loan a raider the money to, well, raid. Until Miliken discovered he was literally the market maker in junk bonds.

Milken would announce the issue of a junk bond.

The real purpose was to raise money for a hostile take-over. The raiders would use the bond money to buy stock in the target firm. Once a large enough stake was owned, the raiders announced a proxy fight for the right to vote shares to oust existing management. Typically a high price was announced as a target for the stock to attain. Management of the target company was always more worried about their own jobs than whether the stock price went up. So management would seek a ‘white knight’ to take over the firm, and save their job. The white knight would then be in a bidding ward for shares. So Pickens and company could watch the stock price soar (recall they bought shares early at a low price). Who cared if they never took over a company? Once the white knight bid high enough and had enough shares, the raiders could sell out for millions.. But was Pickens raider, uh uh, just a green mailer.

Stock prices have reached another marginal high on the promise of a trade deal. Look for a short-term top this next week. Oil prices are mired in the mid 50s. Natural gas caught lots of hedge funds short as it rallied over $2.50 amid certainty that absolutely could not happen. That is what happens when negative think tries to outfox social mood towards prices.

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