What Detroit And The Stockton Bankruptcy Mean For Bonds [View article]
What do Detroit, Illinois, Cal, Harrisburg have in common. They are run by the democratic party. By the votes today with promises of more in the future and then borrow the money later in order to keep the promise.
It always amazes me that in a market with over 50,000 borrowers everyone likes to focus on only a handful of names that are in trouble due to poor management. You get poor management in corporate America as well and those companies go bankrupt. No one forces investors to lend to these shaky borrowers and yet they chase after yield. If the market would punish them for the mistakes they make there might be change forced upon them but that doesn't happen. Investors have incredibly short memories or they throw their money into a fund or ETF that is forced to buy the stuff the investor would never buy on their own.
Case in pont is a recent corporate bond issue from Six Flags with a 'B' rating at 5.25%. That rate is lower than senior bank loan debt which makes no sense. The only way that happens is that the funds had so much dumb money dumped into them that they had to put it to work. The corporate CFOs are giddy about being able to borrow money at such a low rate given their shaky business models and weak balances sheets.
I would say don't lend to borrowers who have over extended their pension obligations and are seeing a net decline in population growth.
More Top Managers Batten The Hatches [View article]
Good article Howard. I wonder if either manager had any comments or concerns related to liquidity in the corporate market. A recent WSJ article stated that investment banks had cut their corporate inventories by 78%! That makes me wonder who all these bond investors will sell to? Investors poured a record level of dollars into fixed income funds and ETFs last year after a 30yr bull run in what is essentially a finite return market. Connect the dots and you get an ugly picture.
The 'Great Rotation' And Other Nonsense [View article]
Very Good. Although I am not sure why you own LQD. Do you expect corporate credit risk to fall allowing the corporate bonds to keep pace with the fall in Treasury rates? I assume you saw what the fund did in 2008.
Don't you guys get the point that neither party gives a damn about you or your opinions. Why does neither party simply pass the legislation they want when they control all three positions? Because that is not their objective. They play a game of king of the hill and we are simply collateral damage. When was the last time they passed any meaningful legislation that solved any of the 'real' issues we have? They can find billions if not trillions to fund a stupid and far too lengthy war or bail out hedge funds, I mean banks, but can't find money to provide for education, low income housing, jobs etc.
Watch the upcoming reality show known as the Federal Government with this episode titled 'Debt Ceiling Drama'. They seek TV time just like the Kardashians. Would any of us know their names if they just did their jobs instead managing by crisis and creating the media hype. This buys them free TV face time keeping them relevant in the eyes of their backers. It is a show that may be close to 'jumping the shark'.
The 'Great Rotation' And Other Nonsense [View article]
Macro: I take you are long gold and Treasuries and short stocks and high yield bonds.
I am not sure what your definition of a 'massive bond rally' is but if the 10yr falls all the way to .75% in the next year you make a whole 12% and if the Fed can push it all the way to 0.50% you make a one time whopping 14%. That is not what I would call a massive rally and it is one that will not likely be repeated. If you are calling for a global economic meltdown then there is no reason to be on an investment website. For the massive rally to happen the US economy will have to go into the tank which means so will just about everyone else.
Data is interpreted in different ways. And I am certain the data can be presented in order to make the opposite case. That is what makes markets.
How long do you think investors will be willing to lend money at below the rate of inflation, which many people say is under reported?
Having said that I am always fearful of collapses but I can almost always find some value in the equity and fixed income markets.
The Preferred Stock Marketplace For 2013 [View article]
PGX has very high interest rate risk. It does not make sense to take on 'high interest risk' when interest rates are near all time lows and near absolute lows. The PGX issuer website shows an average maturity of 35 years and a duration of only 3.10 yrs. That duration is very misleading and should rates rise above the average coupon you will get a huge jump in duration and even more volatility in price. Both PGX and PFF have low quality portfolios made up of junior securities with extremely long maturities and short call provisions. You put all the cards in the hands of a low quality borrower.
Senior Bank Loans are much better option in my opinion. They are far higher in the capital structure with good yield and almost 'no' interest rate risk. You can also find fixed income funds paying around 5% with little or no interest rate risk.
Good Luck
these are my opinions only and should not be construed in any way as the opinion of my employer or its employees. And these opinions are not meant to sell you anything. Thanks
Eric: I am not sure if the point of your article was to try and discredit the BLS/CPI figure or to suggest oil prices are going substantially higher. In regards to the CPI figure, that can be debated all day but for investors what matters is how the market is pricing inflation. And yes I agree that the Fed more than likely underestimates inflation as that action helps keep the COLA adjustments lower for all the social programs. So tell us how to take advantage of a higher inflation rate than what is being reported.
WTI is going lower. It is simply supply & demand. With the many finds in the US we will have to have a robust economic recovery for demand to stay up with supply.
The only time we have had any sustained high levels of inflation was in the 1970's and early 80's. It is doubtful that we will have inflation again at that level for that same reason which was too many dollars chasing too few goods. With the global flattening we now have an under utilized global workforce and under utilized manufacturing capacity. So in order to get high troublesome inflation it is going to have to come from another source. With labor making up 70% of most companies cost the factors making up the other 30% factors will need to increase dramatically, housing, energy, health care etc.
That leaves us with a severely declining dollar as the other way to get high inflation. Although we have our problems I don't see our currency taking a dive against the other major currencies.
Koy: the tracking error on TBT is so wide that the only ones I can see making money are the market maker and the futures traders.
The fixed income market and the myriad of instruments and derivatives associated with it is rarely understood by the novice investor. The learning curve is simply too steep.
You can start with reading "Bond Markets, Analysis, and Strategies" (7th Edition) by Frank J. Fabozzi
My suggestion would be to not try and 'speculate' in the bond market but instead make good loans to good borrowers at what you feel is an acceptable rate. That is essentially what the bond market is.
I think the bank loan market offers investors a fair risk/return ratio currently.
The 'Great Rotation' And Other Nonsense [View article]
You are correct. It may not happen immediately but if investors that went into bonds in order to avoid seeing losses on their statements of 15%-25% begin to see those levels they will panic out. there will a hoard of overweight fixed income investors trying to squeeze through a very small door.
The 'Great Rotation' And Other Nonsense [View article]
Omar, you are completely wrong. All US bond markets ultimately trade off the treasury market so you can not differentiate the two except in maybe a very short period of time. In the 93-94 bear market show me how corporate bonds or high bonds offered positive returns when the Treasury bond went from 6%-8%. Corporate bonds were yielding a good bit more and still got hit. What do you think will happen to 3-4% corporate bonds?
Another thing you are probably not aware of is the fact that the investment banks have shrunk their corporate bond inventories by 78%. This means there is very little liquidity in a market that has had 100's billions poured into it in the past 2 years and that is at the top of a 30yr finite bull market. It will not end well and the door to get out is not near big enough. To steal a line from a top banking analyst "When interest rates do rise, what you are going to see is a lot of fat people trying to squeeze through a really small door".
The 'Great Rotation' And Other Nonsense [View article]
No it just makes the authors points losing points. Who buys into a market after a 30yr bull run with no real upside. Bond returns are finite in that once you get to zero there is nothing left to earn. At least with stocks if you had a 30yr bull market you could make the case for further growth. You can't make the case for rates falling another 7 points because that would take them below zero. The best you can hope for is to not earn your 2%-3%.
The 'Great Rotation' And Other Nonsense [View article]
Here is a simple question. Who will continue to loan billions/trillions at rates of 1%-4% for investment grade and 5%+ for junk? Six Flags just issued bonds at 5.25% with a B rating after having gone bankrupt in 08. Makes little sense. The best high yield bond investors can hope for is to lose less. There is little liquidity in a market with a return that will for most part mean earning the coupon at best. And that coupon is at generational lows.
Investors in the 93-94 bond bear market got bailed out by the fact that rates were at 6%-8% with some room to fall. Where will that fall come from now with rates at 1%-4%? The bond market is priced for perfection with little chance of experiencing anything but low sideways returns or negative returns.
Karl: Thanks for the article. I find it interesting the Neil basically says he is ok with losing money in his bond investments as long as it is for the right reason, whatever that might be.
The issue of liquidity is a major concern of mine. The liquidity in the corporate and muni market has been greatly diminished since 2007. According to a recent WSJ article the investment banks have cut their holdings in corporate bonds on their trading desk by a whopping 78%. Who will buy the high priced corporate bonds such as Targets with prices of $130-$140-$150 when any heavy selling comes? No one in my opinion unless they offer a bid that is 4- 5 points below the last trade. The muni market is not much better. In the second week of Dec. I could not get a bid on AAA rated munis. Why? Because the prices were falling and dealers did not want to take on any more inventory and this was just a slight pickup in selling. If we get any heavy selling I can see the markets getting locked up for periods of time. If this happens what happens to all those so called 'liquid' ETFs that own illiquid securities that aren't trading. In that case what is the true NAV. Without confidence in the NAV I can envision investors panicking out and ETFs trading at big discounts much like closed-end funds.
What Detroit And The Stockton Bankruptcy Mean For Bonds [View article]
It always amazes me that in a market with over 50,000 borrowers everyone likes to focus on only a handful of names that are in trouble due to poor management. You get poor management in corporate America as well and those companies go bankrupt. No one forces investors to lend to these shaky borrowers and yet they chase after yield. If the market would punish them for the mistakes they make there might be change forced upon them but that doesn't happen. Investors have incredibly short memories or they throw their money into a fund or ETF that is forced to buy the stuff the investor would never buy on their own.
Case in pont is a recent corporate bond issue from Six Flags with a 'B' rating at 5.25%. That rate is lower than senior bank loan debt which makes no sense. The only way that happens is that the funds had so much dumb money dumped into them that they had to put it to work. The corporate CFOs are giddy about being able to borrow money at such a low rate given their shaky business models and weak balances sheets.
I would say don't lend to borrowers who have over extended their pension obligations and are seeing a net decline in population growth.
Good Luck
More Top Managers Batten The Hatches [View article]
Thanks and Good Luck
Fixed Income: Fewer Places To Hide [View article]
Is Now The Time To Buy Municipal Bonds? [View article]
Recently I have read The Strategic Bond Investor by Anthony Crescenzi.
Enjoy and good luck.
The 'Great Rotation' And Other Nonsense [View article]
I always like to hear an opposing view, so thanks
Good Luck
Bernanke's Kryptonite [View article]
Watch the upcoming reality show known as the Federal Government with this episode titled 'Debt Ceiling Drama'. They seek TV time just like the Kardashians. Would any of us know their names if they just did their jobs instead managing by crisis and creating the media hype. This buys them free TV face time keeping them relevant in the eyes of their backers. It is a show that may be close to 'jumping the shark'.
Good Luck to everyone.
The 'Great Rotation' And Other Nonsense [View article]
I am not sure what your definition of a 'massive bond rally' is but if the 10yr falls all the way to .75% in the next year you make a whole 12% and if the Fed can push it all the way to 0.50% you make a one time whopping 14%. That is not what I would call a massive rally and it is one that will not likely be repeated. If you are calling for a global economic meltdown then there is no reason to be on an investment website. For the massive rally to happen the US economy will have to go into the tank which means so will just about everyone else.
Data is interpreted in different ways. And I am certain the data can be presented in order to make the opposite case. That is what makes markets.
How long do you think investors will be willing to lend money at below the rate of inflation, which many people say is under reported?
Having said that I am always fearful of collapses but I can almost always find some value in the equity and fixed income markets.
Good Luck
The Preferred Stock Marketplace For 2013 [View article]
Senior Bank Loans are much better option in my opinion. They are far higher in the capital structure with good yield and almost 'no' interest rate risk. You can also find fixed income funds paying around 5% with little or no interest rate risk.
Good Luck
these are my opinions only and should not be construed in any way as the opinion of my employer or its employees. And these opinions are not meant to sell you anything. Thanks
Bernanke's Kryptonite [View article]
WTI is going lower. It is simply supply & demand. With the many finds in the US we will have to have a robust economic recovery for demand to stay up with supply.
The only time we have had any sustained high levels of inflation was in the 1970's and early 80's. It is doubtful that we will have inflation again at that level for that same reason which was too many dollars chasing too few goods. With the global flattening we now have an under utilized global workforce and under utilized manufacturing capacity. So in order to get high troublesome inflation it is going to have to come from another source. With labor making up 70% of most companies cost the factors making up the other 30% factors will need to increase dramatically, housing, energy, health care etc.
That leaves us with a severely declining dollar as the other way to get high inflation. Although we have our problems I don't see our currency taking a dive against the other major currencies.
Good Luck
The Bubble In Bonds [View article]
The fixed income market and the myriad of instruments and derivatives associated with it is rarely understood by the novice investor. The learning curve is simply too steep.
You can start with reading "Bond Markets, Analysis, and Strategies" (7th Edition) by Frank J. Fabozzi
My suggestion would be to not try and 'speculate' in the bond market but instead make good loans to good borrowers at what you feel is an acceptable rate. That is essentially what the bond market is.
I think the bank loan market offers investors a fair risk/return ratio currently.
Good Luck
The 'Great Rotation' And Other Nonsense [View article]
Good Luck
The 'Great Rotation' And Other Nonsense [View article]
Another thing you are probably not aware of is the fact that the investment banks have shrunk their corporate bond inventories by 78%. This means there is very little liquidity in a market that has had 100's billions poured into it in the past 2 years and that is at the top of a 30yr finite bull market. It will not end well and the door to get out is not near big enough. To steal a line from a top banking analyst "When interest rates do rise, what you are going to see is a lot of fat people trying to squeeze through a really small door".
Good Luck
The 'Great Rotation' And Other Nonsense [View article]
Good Luck
The 'Great Rotation' And Other Nonsense [View article]
Investors in the 93-94 bond bear market got bailed out by the fact that rates were at 6%-8% with some room to fall. Where will that fall come from now with rates at 1%-4%? The bond market is priced for perfection with little chance of experiencing anything but low sideways returns or negative returns.
Good Luck.
The Bubble In Bonds [View article]
The issue of liquidity is a major concern of mine. The liquidity in the corporate and muni market has been greatly diminished since 2007. According to a recent WSJ article the investment banks have cut their holdings in corporate bonds on their trading desk by a whopping 78%. Who will buy the high priced corporate bonds such as Targets with prices of $130-$140-$150 when any heavy selling comes? No one in my opinion unless they offer a bid that is 4- 5 points below the last trade. The muni market is not much better. In the second week of Dec. I could not get a bid on AAA rated munis. Why? Because the prices were falling and dealers did not want to take on any more inventory and this was just a slight pickup in selling. If we get any heavy selling I can see the markets getting locked up for periods of time. If this happens what happens to all those so called 'liquid' ETFs that own illiquid securities that aren't trading. In that case what is the true NAV. Without confidence in the NAV I can envision investors panicking out and ETFs trading at big discounts much like closed-end funds.
Good Luck