Keith Collister, Contributor

The well-known radio programme Breakfast Club on Friday morning held a discussion on "why investors should be wary of Jamaican bonds", an obvious reference to a Gleaner headline in Wednesday Business.

Bear Stearns' Dr. Carl Ross clarified his position on Jamaican bonds, saying that he was not suggesting that investors should reduce their holdings.

He argued that Jamaican bonds were a hold that one should own for the relatively high interest rate, or what international investors call the "carry". While he currently expected no improvement in Jamaica's fundamentals, particularly because it was an election year, he also did not expect them to deteriorate. He cited as causes for concern our continued large fiscal deficit and our disappointing level of growth, which at a mere 2.0 per cent is well below its peers.

Dr. Ross noted that despite Bear Stearns' underperformance recom-mendation on Jamaican bonds, they had actually performed slightly better in the recent international bond-market correction, brought on by the rise in benchmark United States. 10-year Treasury yields by half a point from approximately 4.75 per cent to 5.25 per cent.

The prices of our longer-terms bonds maturing in 2039 and 2036, had only fallen between two and two and a half points over the period. (The correction started around the same time as the Air Jamaica bond was issued approximately two weeks ago).

Over the same period, the bonds of our regional peers such as Peru and Brazil had fallen between four and six points.

Jamaica lags behind its peers - most of whom are seeing at least 5.0 per cent growth, falling fiscal deficits, current account surpluses, and lower levels of debt - in every majorarea.

Dr. Ross believes, however, that while Jamaica is not a good short-term buy for capital appreciation - short term being the next one to two years - Jamaica's prospects should be better long term.

HEDGE FUND

The Financial Times noted on Thursday that international investors remained gripped by lenders' attempts to sell more than US$1 billion of U.S. sub-prime mortgage assets seized as collateral from two Bear Stearns hedge funds.

On Friday, it was announced that Bear Stearns is to provide $3.2 billion in loans to bail out one of its money-losing hedge funds, the biggest rescue since that of Long Term Capital Management in 1998.

The rescue appears to have been prompted by the need to avoid driving credit markets lower, leading to a broader repricing of risky debt securities generally.

The hedge funds were predominantly invested in collateralised debt obligations (CDOs), which package portfolios of debt (in this case sub-prime mortgages) into high-yielding securities. These securities are rarely traded and difficult to value, and therefore lack transparency.

A repricing of risk in the credit markets is overdue, and Jamaica, as a recent beneficiary of the huge world-risk appetite, needs to pay close attention to any change in international credit conditions.

William O'Donnell, a strategist at Union Bank of Switzerland, said investor enthusiasm for CDOs could come back to haunt them.

"Lending-fuelled risk seeking is in many ways a Ponzi [pyramid] scheme in that is great for investors until it's not, and when it's not, the unwinds are breathtaking with their alacrity," he says.

This may be something for our local investors to bear in mind with respect to their local investments.

SUPREME VENTURES

On Wednesday this week, Supreme Ventures Limited (SVL) hit a 52-week high - and coincidentally, the price at which its private placement was offered by NCB Capital markets - of $3.70 per share.

This followed a strong earnings report by SVL last week, in which the company's net profit increased by over 100 per cent, to $229 million, for its six months ending April 30.

Earlier this week, Mark Croskery of Stocks and Securities, advised that investors should be cautious, citing a similar trend earlier this year when the stock rallied from $1.60 to a high of $2.36. I agree.

Supreme's recent better profit performance this year is already in the market, and while I expect this better performance will continue - Supreme is actually one of my few growth stocks this year - the company still looks very expensive based on fundamental valuation.

Barring the announcement of an overseas deal to buy the company, I would expect the price to drop back once the single buyer who is pushing up the price is satisfied one should probably hear what SVL has to say in the JMMB conference call this week before taking a final position on the company.

keithcollister@cwjamaica.com