Kenny Landgraf

Kenny Landgraf
Contributor since: 2007
Company: Kenjol Capital Management
Good article Fred. I will read article 1 and 2. Funny how the fund companies keep trying to debunk the seasonality story (JP Morgan and Oppenheimer). Of course they can never tell their clients to sell their funds. Just stay on the train...even if it goes off the don't want to miss the 10 big up days, etc.
And yes, to your question of shorting from a tactical perspective. You can short with SJB - ProShares Short High Yield. Gosh, I wish this ETF had been available in 2008. :) If, if, if
You just need to watch both the long side (JNK, HYG, PHB, HYS - new) and short side (SJB).
Also, I watch the high yield closed-end funds during the day to get a bearing of the attitude of high yield investors for the day. Examples include PHK, PHH, HIS to name a few. They tend to lead the direction of the open end mutual funds by a day. The mutual funds have a lag due to their pricing mechanism.
BruceCM, it depends what type of investor you are. Short-term or Long-term. Short-term they rolled over as there was much institutional dumping as reported in the WSJ. See WSJ, June 27, 2011 - Anatomy of a Meltdown.
An investor doesn't always know what is going on beneath the churning (selling) of a market. In this case, there were some large hedge funds (MKP Capital Management) that started dumping their subprime mortgage bonds at the same time the government was trying to sell subprime mortgage bonds back to AIG. On March 30 as reported, the Fed rejected AIG's bid and decided to action off the the portfolio piecemeal. This put a lot of pressure on the credit markets including high yield.
From the massive dumping on the day noted, it appears that some very large "leveraged" players decided to exit the high yield market with the market weakness and end of QE2.
I always say that high yield is a leading indicator of investor confidence and I believe it leads the equity market direction. Investing on yield alone with have you looking at plus 40% losses in 2008 and into 2009 as high yield got crushed. You can't just invest in this on yield alone, especially since the spread between high yield and 10-year treasuries are at levels that warrant caution with the potential for 10-year to move up.
We got out in early June and just re-entered with the firming of the high yield market (well, like Peter Tchir stated above - looks like we are on the same page). See JNK and HYG. If I can pick up 2% by sitting on the sidelines for a few weeks, I will do that all day long. Basically, we were able to reenter the HY market where is was minus of few months (March). That's the "alpha" when you get the trade right...and you pick up more shares than you sold.
I have a high yield signal that I've been using since 2002 and it out-performs any "buy-hold-hope" high yield index. I would happy to share my actual results if interested.
My belief is that high yield is the sweet spot of the credit market this year with higher yields and the fact that you will be paid to wait. Also, defaults are below historical average of 4%. You just get goofy market action when the leveraged hedge funds unwind their "cool-aid" and trounce the little guys trying to do the right thing.
Peter Tchir - great comments.
How do you track CMBX?
Keep watching. I think we are at a good re-entry point on the junk / high yield sector. The Fed will do / say nothing other than they will continue to hold rates down for a considerable period of time (2012).
Tchir - Excellent comments. Your analysis is very good of the fixed income markets.
That's the war between faith and facts. Faith says the economist are right and you are right and earnings will be worse. Facts says let's see what they are. Both make sense but the market tends to anticipate the bad news before the bad news shows up. Thanks for your sharing your thoughts.
Good article. Yes, if someone saved up to $7m, then 8% is probably okay. But for the average investor out there with a million or less, 8% is a recipe for disaster. I watched it happen with one client. It works great while the market is climbing. It is "smashing" when you go through a market like 2007 - 2009.
Better to under promise and over deliver. Go for the 12% over an adult investment horizon (although aggressive by today's standards). But a better rule of thumb is more in the lines of 4% - 6% withdrawal rate. As I always say. Pick the fruit, don't saw off branches to your investment orchard. If you had a year with good harvest, you can take a little more. If you had a bad year (like 2008), stick with 5%. :)
You are correct about missing the move. This is why so many advisors and retail investors missed the move of 2009 from the low of March. Primarily, we trade on price movement (bars are bars - OHLC) or what some might call trend following. We tend to come at it backwards. The price movement is the sum of all theories and "votes". Our firm and investment follow price movement. After the movement, we look for the reason. The purpose for the article was to explain why we got the movement over the last six weeks since the start of September. We were told September is the worst month historically. If you waited for all the fundamentals "feel right", you missed the move. I'm happy to share we got part of the move. We also got most of the move in 2009 and started reentering the market within one week from the bottom in March 2009. Fundamentals would not have told you to push in. Price movement would have. :)
Thanks for your kind words. God Bless.
We now have a replay of the tech bubble ten years later only in the bond market. This year almost $500B has come out of money markets through Aug 2010. Almost half of this has gone into Taxable and Tax-exempt bond funds (mutual funds). The Taxable Bond and Tax-exempt "gold rush" are showing the same "what's working" fund flow as equity / tech funds were showing in 1999 and 2000. 1999 you had $176B in equity funds. 2000 you had $260B. Taxable bond funds for those two period combined had negative outflows. Flows into equity mutual funds have not been positive since 2006 at a meager $11B - an amount Pimco Total Return probably gets in one month?!
BetTheHouse - You are very smart and understand the other "invisible hands" moving in the markets on a day to day basis. They have scared all the 90's investors into the paltry bond market. I like to call them "The Whales" and when "The Whales" move, it doesn't matter what your fundamental view or position is, it cannot stand up to the movement of the "The Whales". The SEC as detailed by the Madoff and Stanford ponzi fiasco's, naked short selling in 2008, or the 2010 Flash Crash reflect they don't fully comprehend what is going on by some in the markets. If you saw the 60 Minutes piece, then for many, it is just about price movement and nothing else. So what is the retail investor to do? Understand the new rules of the game and the environment we are in - it is now the same as the 80's and 90's.
You are correct. The flows back in are all institutional. The retail investor is still frozen and is just starting to thaw. Those having bank CD's mature also have a rude awakening when they go to reinvest.
ryanclarke - Good points on bond market being right. Time will tell who is the crazy one. Both could be right. Ten years ago tech stock investors thought they were smarter. No after a decade, I wonder if bond investors think they are smarter.
The "watch" for bond investors will be a rise in interest rates. Just a 1% move up in interest rates will crush 30-year treasury 17%, 10-year treasury 8.6%, Municipals 8%, Corporates 6.7%, and Emerging Debt 6.7% (Source: JPMorgan - 9/30/2010).
Mikesss - Your comment is correct when compares to U.S. S&P 500 - the dividend yield is lower than the 10-year treasury. But, if you look outside the U.S., you have Australia at 4.1%, France at 3.5%, UK at 3.5%, Switzerland 2.9%, ACWI 2.5%, Canada 2.4% and Japan at 2.0%.
So this get you closer to parity on getting paid even from both equity and debt. One must always ask what the potential risks are? There are many, but for the bond investor at record low yields, there is not much more room to fall down the yield curve. Instead, a move up in yields will be a wake up call to all just piling into bond mutual funds. I don't expect the Fed to start moving on rates until the end of 2011 or 2012.
Thanks. Yes, nice addition to SA the app store.
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