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Bernard Thomas

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  • New Alarm On Shadow Loans [View article]
    The reason why we should care is that retail investors are buying "senior bank loans" which are senior obligations of shaky companies and not issued by banks using questionable lending standards and weak covenants. Many investors thing they are buying high-quality investments and are unaware that the loans can be rated B, CCC or not rated at all.
    Oct 15 03:38 PM | Likes Like |Link to Comment
  • Bank Loan ETFs Offer 4% Yields, Protection From Rising Rates [View article]
    Senior bank loans are not as "fool-proof" as wholesalers portend (pretend). They are senior claims on risky credits. They might be safer than CCC-rated bonds, but they are in now way a conservative or moderate risk investment. As more and more loans are cov-lite, the corporate borrower is able to "behave badly" with little recourse from borrowers.

    The "interest-protection" aspect is unneeded insurance at this time. Why? Bank loans usually float off of Libor, usually three-month Libor. Except in times of crisis, three month Libor move with Fed Funds rates. What investors are probably looking at is three more years with no coupon increase. When coupons do rise, they will do so gradually and modestly. If rates rise more rapidly, businesses might find that they are unable to pay the higher interest rate and/or they can no longer obtain affordable financing as attractive returns are now available in higher-quality investments. This would be especially true if the yield curve steepened. At that point, risky corporate borrowers find find it beneficial to restructure its debt while giving investors less than 100 cents on the dollar. Investors should not assume that they will receive rising income streams or even 100 cents on the dollar at maturity. Bank loans are speculative investments, period.
    Feb 28 09:20 AM | Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    I like 5 to ten year bank bonds. Spreads are wider enough that there should be some more spraad compression as rates rise compression, which should offset some of the rate rise.
    Aug 25 08:07 PM | Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Correct!!! This is how play HY. Use common sense, don't extend out too far and stay in HY, not junk. There is a difference.
    Aug 6 10:53 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Back to 2008. Yeah that is a long time. 2009 to now has been the golden age for HY! Remember the junk bond scandals of the late 80s / early 90s when companies defaulted left and right. Please, have a little deeper perspective. I have been in the bond market for more than two decades.

    Why don't we just use default rate data for mortages during the housing bubble (when they were at all-time lows) and use that as the norm too. Hence BUBBLE!
    Aug 6 10:52 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Hmm, for a company to call a pfd, it usually needs to save at least .75 on the coupon (cost of financing) to cover costs of coming to market and realizing a meaningful savings. Do you really think that preferreds which have been issued in the current low-rate environment will ever be able to be called?

    This is why I say my grandchildren will be trading some of these 50-year or perpetual preferreds. Preferreds are negatively convexed and call features are designed always benefit the issuer. It gives them the right to call when they can refinance at lower rates, but they can leave them out there when rates rise and enjoy realtively cheap financing.

    10-year BBB and A-rated bonds give you better returns when duration and seniority are considered. Preferreds are long-term securities which are called when beneficial for the issuer, as as been the case for the past 30 years.

    How will the investor feel holding a 5.75% pfd valued at $19 when new preferreds are being issued at 8.00% and 10-year corporatre seniro debt is being issued at 6.50%?
    Aug 6 10:47 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    The situation is this. There is much money in HY that would not be there if rates were normal and attractive yields could be had in investment grade bonds. There is also money in HY from equities. When the economy and rates "normalize, capital shoudl return to their traditional homes. Many curent BBB-rated invetsors wil move to A. Some BB investors will move to BBB, B to BB and CCC to B. Itis at the very bottom of the scale where the pain will be concentrated.

    HY bonds do behave more like stocks, but they are financing sources for corporate issuers with weak credits. They are subject to inetrest rates. If the 10-year Treasury is at 4.00% and A-rated indutrials are at 5.00%, BBB-rated at 5.50%, BB ratd at 6.00%, B-rated at 8.50% then CCC might be at 10.00% or more. Some companies may be un willing to refinance at 10.00% and could defualt or restructure debt at less than par.

    HY has done well because of low rates. There could be an equal and opposite reaction when the rate situation reverses. HY fund wholesalers and marketers (most of whom do not understand HY bonds and are simply regurgitating what they have been told) are painting a scenario that HY bonds do well when the economy is bad and even better when it is good. If that was the case, they would not be very risky, would they.

    HY isusers especially low B, CCC and lower, are very sensitive to financing costs. Many would have already defualted if not for the current rate environment. Wholesalers love HY. Traders are concerned that this is the golden age and it will come to an end within five years. If you are playing with HY, stay five-years (maybe three-years) and less.

    If you would like, I can send you a free trial sucbcription to my service "Bond Squad." We don't ask for credit card info for free trials, it is truly free and with no obligation whatsoever.
    Aug 6 10:42 AM | 2 Likes Like |Link to Comment
  • Right Said Fed: Why Bernanke Was Right [View article]
    Higher rates might force elected officials to act, but if they did not the results could be catastrophic for the economy. Put yourself in Bernanke's shoes. He has the economy barely breathing on its own. He has fiscal headwinds from a dysfunctional budget deficit coming next year (not to mention slower global growth. He has a Congress which can't agree on the color of the sky, never mind fiscal policy. Hew will keep policy accommodative, but not necessarily unchaged, until the boys and girls on Capitol Hill can work together on a solution.
    Mar 29 08:21 AM | 1 Like Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    muoio; ever hear of comparative advnatage?

    Tariffs and protectionism are counter productive in the long run. We cannot become economic Luddites. Speaking if Luddites, reversing the trend of increased automation and efficiency will not work either.

    Why will no one admit that for 20 years we lived an unsustainable lifestyle in the U.S. and we need wages and asset prices to reset to be globally competitive?
    Sep 5 08:53 AM | 2 Likes Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    Strat, not all companies can take advantage of all breaks. Lower the tax rate and eliminate loopholes and everyone benefits. Same goes for personal income tax. Flat tax is best.
    Sep 5 08:45 AM | 2 Likes Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    Dialectual, I am not paid for these articles.
    Sep 5 08:43 AM | Likes Like |Link to Comment
  • Laddering Bond Portfolios: The Alternative to Bursting Bubbles [View article]
    Problem with bond funds is that they don't necessarily work for income investors. Bonds are bought and sold leading to unintended consequences for income-oriented investors.

    ETFs permit equity-like speculation in the fixed income markets. Not good for income-oriented investors.
    Jan 24 09:31 PM | Likes Like |Link to Comment
  • Another Perfect Storm Brewing for Markets and the Economy [View article]
    The entire market recovery, since 2009, has been dollar related, either directly or indirectly (optimism for increased exports).
    Oct 16 08:06 PM | 2 Likes Like |Link to Comment
  • The Mortgage Debacle Explained [View instapost]
    Cash flow will not decline to default levels, at least ot among the large banks. That is pure hype. Large banks will use their huge cash positions (not simply liquidity, but actual cash) to get through this. Revenues will be down. They will never return to the thrilling days of the early 2000s, but they will be profitable, albeit less so and more conservative in their business models. Regional banks could go belly-up. Housing will be impaired until prices decline significantly further. U.S. growth will average around 2.0% for the next decade and unemp;oyment may not drop below 7% (maybe 8%) in that time.
    Oct 16 08:37 AM | Likes Like |Link to Comment
  • Rally Is Not Structurally Based [View article]
    Overseas jobs can come back if our cost of manufacturing is permitted to fall to where we have a comparative advantage. Of course that would result in deflation and further drops in housing prices. Prices of homes went up too far too fast and should be allowed to correct. We have literally been living on borrowed time.
    Sep 4 10:48 AM | Likes Like |Link to Comment
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