Run Awayyy!!!

[brewer12345]

The junk bond market has just completely jumped the shark. New issue: CCC-rated bonds that are pay-in-kind (means the issuer can at its option pay coupons with more crappy bonds instead of cash) and with the proceeds paid out to shareholders. Investors really are idiots.

TEXT-S&P assigns Petco Holdings 'B' rating | Reuters

 

[LOL!]

I thought the Greek government had a patent on these kinds of things.

 

[foxfirev5]

I hope Vanguard high yield fund won't hold these. However everyone should realize the risks. It's not called junk for nothing.

 

[ERD50]

I hope Vanguard high yield fund won't hold these. However everyone should realize the risks. It's not called junk for nothing.

Yes, I'm curious what this means to the Fidelity and Vanguard 'junk' funds.

-ERD50

 

[NW-Bound]

I just looked up to see that Petco is a private company now. So, the bond proceeds go straight to the private owners as dividends, and not even to invest in the company. Nice!

 

[jebmke]

I had a sales guy in Brazil who wanted to wanted approval to sell a job to an iron ore company that proposed to pay us in iron ore pellets. I told him that if he was willing to take his salary and commission in iron ore, I might think about it. He never called me back.

 

[2017ish]

PIKs are back! Given that they did so well when issued by Drexel in the '80s, who could be surprised. Drexel Burnham Lambert - Wikipedia, the free encyclopedia

 

[HFWR]

http://us.ishares.com/product_info/fund/overview/HYG.htm

I hold HYG, which appears to hold mostly B-something or the other grade...

 

[audreyh1]

Who is buying this stuff??!?!

 

[Tyro]

Yes, I'm curious what this means to the Fidelity and Vanguard 'junk' funds.

Aren't the prospectuses (I looked it up to be sure it isn't prospecti) clear on that?

 

[brewer12345]

Who is buying this stuff??!?!

I don't know of any billionaires who live in a group home, so I assume it is junk bond funds that are stuffed to the gills with cash from yield-chasing investors.

 

[Gumby]

History repeats itself. First as tragedy, second as farce.

-- Karl Marx

 

[ERD50]

re: Fidelity and Vanguard junk funds...

Aren't the prospectuses (I looked it up to be sure it isn't prospecti) clear on that?

Specific to this petco bond offering, yes. I was assuming (maybe incorrectly) that brewer was making a more general point about the junk market.

-ERD50

 

[brewer12345]

Specific to this petco bond offering, yes. I was assuming (maybe incorrectly) that brewer was making a more general point about the junk market.

-ERD50

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.

 

[NW-Bound]

Junk or not, I think it is peculiar that a private company would sell bonds for its private owners to pocket as dividends.

I am not knowledgeable to tell if this is common practice, but is it not like people spending money that they take out of their home as a 2nd mortgage? Isn't that what the private owners of this company do, by pledging their company as collateral for the bonds? What if they walk away, like home owners did?

Do investors get to see the book and cash flow of this company? I guess they do, but I don't. The bond is for $550M. Is this company worth $550M? By the way, they paid $1.8B to take it private in 2006.

 

[ERD50]

... Caveat emptor, big time, from this point forward on junk. It will blow up, it is just a matter of time now.

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

 

[brewer12345]

Junk or not, I think it is peculiar that a private company would sell bonds for its private owners to pocket as dividends.

I am not knowledgeable to tell if this is common practice, but is it not like people spending money that they take out of their home as a 2nd mortgage? Isn't that what the private owners of this company do, by pledging their company as collateral for the bonds? What if they walk away, like home owners did?

Do investors get to see the book and cash flow of this company? I guess they do, but I don't. The bond is for $550M. Is this company worth $550M? By the way, they paid $1.8B to take it private in 2006.

You are getting the idea.

When this company was taken private, the bulk of the purchase price was almost certainly raised via borrowing money.

 

[brewer12345]

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

Funds flows have been significant into junk. Junk is a relatively small part of the bond market, so it does not take that much new money to make things frothy.

 

[clifp]

Possible bond investments
US government bonds short term negative real interest rate
US government bond long term. interest and inflation rate risk, very slim but not 0 credit risk.
US TIPs short negative real rate, tiny positive long term rate.
US Corporate Investment grade short term 0 after tax yield, 2% long term real yield.
US High Yield run away
US Muni negative real rates short term interest/inflation rate long term.

I know very little about global bonds are there any opportunities overseas?
Cause for anything other long Muni and Long corporate bonds I think investing in US bonds is a heads, I lose a little (status quo) or tails a I lose a lot inflation.

 

[Chuckanut]

The junk bond market has just completely jumped the shark. New issue: CCC-rated bonds that are pay-in-kind (means the issuer can at its option pay coupons with more crappy bonds instead of cash) and with the proceeds paid out to shareholders. Investors really are idiots.

This is a joke, right?

 

[marko]

I"ve owned TR Price's High Yield Fund (PRHYX) in some form or another for almost a decade with no issues.

Stable price over 20 years (low in 08 of $4; but generally between $6 and $7).
Stable yield over 20 years (generally 6%-8%).

You need to know that the price more closely follows a stock price vs inversely and also understand the risk, but I can't say that I lose sleep over this fund.

Junk is junk but a well managed junk fund is a nice thing in times when there is no yield to be found. They closed this fund a few months ago to new investors. Glad I was already there.

 

[haha]

Stable price over 20 years (low in 08 of $4; but generally between $6 and $7).

You are very undemanding in your definition of stable. Congrats, you must not be a curmudgeon.

Ha

 

[marko]

You are very undemanding in your definition of stable. Congrats, you must not be a curmudgeon.

Ha

Well, I did buy a big chunk more at $4 so I have a lot of leeway.

As noted, junk bond FUND pricing acts more like a stock and follows stock/Dow/market prices and not inversely.

A monthly dividend annualized to 6-8% pays the bills.

 

[Chuckanut]

I just pulled this from Dr. Pfau's blog on John Bogle: Retirement Researcher Blog: John Bogle Speaks on Retirement Income at the Retirement Income Symposium in Boston

"People may need more income, but bad news: the market doesn’t care whether you need more income or not. Efforts to get greater income creates greater risk. The average family should take care and also avoid junk bonds and other riskier but higher yielding investments.
The combined yield on a stock and bond portfolio has never been worse! But that’s the reality today. It would not be a Bogle move to try and pull more out of the market than it’s willing to provide at a reasonable level of risk."

 

[marko]

I just pulled this from Dr. Pfau's blog on John Bogle: Retirement Researcher Blog: John Bogle Speaks on Retirement Income at the Retirement Income Symposium in Boston


The combined yield on a stock and bond portfolio has never been worse!

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?