Run Awayyy!!!

[NW-Bound]

So, if it's never been worse and I"m doing well right now, can I take comfort in the thought that it can only get better?

I have often had the same thought, but then I keep worrying that my financial state might revert to the mean, meaning to that of typical people out there.

Just this morning, read a Web article on the depressing state of the Spanish economy, the high jobless rate, and just plain misery all around.

PS. Off-topic here, but a recent BBC article discussed how the Spanish problem was not caused by its government, unlike the Greek fiasco. It was the Spanish private sector that caused the real estate implosion, while the Spanish public debt was in fact better than those of other European countries. Reading that, I wonder how the US survived the subprime and real-estate meltdown so well. Or is it simply a delayed problem because the Chinese kept letting us borrow money?

 

[Chuckanut]

So, if it's never been worse and I"m doing well right now, can I take comfort in the thought that it can only get better?

You took that quote out of context - a big NO NO, IMHO. I suggest you read the entire blog, or at least the entire quote.

 

[marko]

You took that quote out of context - a big NO NO, IMHO. I suggest you read the entire blog, or at least the entire quote.

I just wanted to highlight the point of my comment, not an attempt to take something out of context.

I read the blog. My buddy attended the conference. Chill. It's all good.

 

[brewer12345]

I just wanted to highlight the point of my comment, not an attempt to take something out of context.

I read the blog. My buddy attended the conference. Chill. It's all good.

Well, consider yourself warned.

 

[Nords]

Actually, I was making a wider point. When we start seeing this kind of crap being issued, it means that terms and conditions on less egregious forms of jusnk have gotten very loose. If you continue to see this kind of garbage being issued, you know what is coming (junk market implosion). It is also a clear sign to start exiting junk funds. I can see changes in terms and conditions in individual bonds. You really cannot see it in funds. Caveat emptor, big time, from this point forward on junk. It will blow up, it is just a matter of time now.

So how does one short the junk market as a whole?

Or should we just Google the keyword phrases "junk bonds"+"John Paulson"?

 

[brewer12345]

So how does one short the junk market as a whole?

Or should we just Google the keyword phrases "junk bonds"+"John Paulson"?

Like everything else, junk is tough to short. You can short an ETF, but it might be a long, expensive wait. I generally find it wiser to hop out amd wait with some cash on the sidelines to buy the babies that inevitably get tossed out with the bathwater.

 

[marko]

Well, consider yourself warned.

Oh, my, yes! I didn't know about that rule. I had seen others do that and assumed (you know what happens when you 'assume'!) it was the thing to do.

From now on, I'll make sure to post the entire original quotation even if it's a couple dozen paragraphs and just let the next reader figure out what particular comment within that quote I was refering to.

 

[Gumby]

I think Brewer was speaking of being warned about a pending bond market implosion, not about any rules for posting quotes. From the point of view of the moderators, we prefer that you not post entire articles, but rather post only the relevant portions that you are commenting on.

 

[marko]

I think Brewer was speaking of being warned about a pending bond market implosion, not about any rules for posting quotes. From the point of view of the moderators, we prefer that you not post entire articles, but rather post only the relevant portions that you are commenting on.

Thanks. One of the challenges of email/written word.

I was just being snarky on the posting quotes part. Apologies.

 

[Lsbcal]

Bernstein wrote an article on junk bonds in 2001: Credit Risk

There is a nice chart of Junk-Treasury spreads there.

 

[Donzo]

I have a fair amount in VG high yield fund - got in about 4 years ago. What do you suggest as an alternative to junk bonds??

 

[veremchuka]

I have no specific knowledge, but that does make sense to me. Junk is still paying a good yield (>6%) - where can you get that? Bonds and CDs are very low, stocks have had a big run up, getting people to think about re-balancing.

So that can lead to a bubble of people piling into junk. And bubbles burst.

I guess a good indication might be how much money is flowing into the big junk funds? IIRC, Vanguard closed their junk fund to new investors a few years back?

-ERD50

Vanguard closed their junk bond fund around May 2012 IIRC. The SEC yield as of 10/5 is just 4.64% (BASED ON HOLDINGS' YIELD TO MATURITY FOR LAST 30 DAYS.)

Like some here I'm unclear what this means to the Vg HYCBF? I bought it when the nav was in the mid $4 range so I have a long way to go before it drops to my purchase point and if the nav is dropping wouldn't the yield increase? The yield when I bought it was in the 12% range!

 

[MichaelB]

So how does one short the junk market as a whole?

Don't junk bonds have a high correlation with equities? Perhaps some out of the money S&P puts would be a good hedge.

 

[haha]

So, if it's never been worse and I"m doing well right now, can I take comfort in the thought that it can only get better?

No. As it "gets better", it also gets worse for current owners.

Ha

 

[brewer12345]

Vanguard closed their junk bond fund around May 2012 IIRC. The SEC yield as of 10/5 is just 4.64% (BASED ON HOLDINGS' YIELD TO MATURITY FOR LAST 30 DAYS.)

Like some here I'm unclear what this means to the Vg HYCBF? I bought it when the nav was in the mid $4 range so I have a long way to go before it drops to my purchase point and if the nav is dropping wouldn't the yield increase? The yield when I bought it was in the 12% range!

What it means for VG high yield and all high yield funds is that they will either have to accept lower yields, buy dangerously poorly underwritten bonds, or both. It will take time, but as existing bonds get called they will get replaced with crap unless the market recovers its senses.

Personally, I am bailing and either holding cash or redeploying the money to other asset classes.

 

[FinanceDude]

What it means for VG high yield and all high yield funds is that they will either have to accept lower yields, buy dangerously poorly underwritten bonds, or both. It will take time, but as existing bonds get called they will get replaced with crap unless the market recovers its senses.

Personally, I am bailing and either holding cash or redeploying the money to other asset classes.

Wonder what Bill Gross is doing these days?

 

[brewer12345]

Wonder what Bill Gross is doing these days?

Talking his book and shamelessly whoring for more AUM, as always.

 

[JPatrick]

I have a fair amount in VG high yield fund - got in about 4 years ago. What do you suggest as an alternative to junk bonds??

Keep your Vanguard. This fund and one like SPHIX keep their CCC stock levels quite low, which of course reduces yield, but at the same time increases safety.
I would not bail on these two unless I saw quality and duration change dramatically.
However, if stocks take a tumble, these will follow. If I had a crystal ball (I don't, too damn cold here) stocks are what I would watch.

 

[Lsbcal]

Wonder what Bill Gross is doing these days?

Performance of PTTRX is 12.7% for last 12 months. Also good long term preformance: http://performance.morningstar.com/fund/performance-return.action?t=PTTRX®ion=USA&culture=en-US

 

[Donzo]

Keep your Vanguard. This fund and one like SPHIX keep their CCC stock levels quite low, which of course reduces yield, but at the same time increases safety.
I would not bail on these two unless I saw quality and duration change dramatically.
However, if stocks take a tumble, these will follow. If I had a crystal ball (I don't, too damn cold here) stocks are what I would watch.

thanks for the reply. I have been watching the yield go down - guess it has to if they are going to keep it on firmer ground. The yield is still better than most places.....
I have lowered my exposure to stocks in the last few weeks - building up some dry powder for the next drop.

 

[brewer12345]

I hate to say it, but the author of this piece is spot on:

Distressed Debt Investing: An Open Letter to CFOs Across America

"Dear CFO -

I hope this letter finds you well. My name is Hunter and I started and currently run a collection of sites focused on credit - specifically distressed and speculative credit. Our readers come from across the world and include every major U.S investment bank and many hedge funds, law firms, and asset managers in the country. I've spent the majority of my career working in leverage finance as an investor allocating and providing capital to sub-investment grade issuers and companies in bankruptcy.

You might be wondering why I am writing to you today. As an active participant in both the primary and secondary credit markets, I spend a significant amount of time gauging the risk appetite of investors that provide financing in the U.S. bond and bank debt markets, up and down the risk and ratings spectrum. Simply put: You are doing your investors and your company a disservice if you are not tapping the credit markets as soon as possible. If you are not planning a new bond or bank debt offering, call your relationship manager at your preferred investment bank of choice and put the wheels in motion. Whether it be refinancing your capital structure, financing an acquisition, dividend, or share repurchase, or simply stuffing the war chest for a rainy day, I behoove you to issue into this market."

 

[haha]

Haha, I love it. Hey guys, get down here fast before this wealthy and stupid drunk goes home.

How far we have come in 3 short years. Muchas gracias, Señor Ben!

Ha

 

[brewer12345]

Haha, I love it. Hey guys, get down here fast before this wealthy and stupid drunk goes home.

How far we have come in 3 short years. Muchas gracias, Señor Ben!

Ha

I keep seeing CCC-rated PIK bonds being issued to fund shareholder dividends. The rate at which this crap is accumulating in high yield bond portfolios is accelerating.

 

[haha]

I keep seeing CCC-rated PIK bonds being issued to fund shareholder dividends. The rate at which this crap is accumulating in high yield bond portfolios is accelerating.

Is this dividends in industrial corporations?

Ha

 

[brewer12345]

Is this dividends in industrial corporations?

Ha

You name it. Most seem to be controlled by LBO shops, who are generally very savvy about exploiting stupidity on the part of lenders. The most recent deal is an issue from Jaguar Holding Co., which is the LBO of something caled Pharmaceutical Product Development Inc. Not exactly a utility-type business to my way of thinking.