phillips49

Investment Grade Corporate Bond ETF Breaks Down

I don't think I would make to much of this. LQD is about where it was in 2007 when the market was much higher. It sold off during the great liquidation. It has now recovered it's basic value and sells just for the dividend. The great liquidation provided a great opportunity to buy this ETF at discount. That was a one time good deal.

Speculative-Grade Winning Streak Continues

Why I bought "junk" and still own it.

It boils down to risk/reward.

All investing is speculative. Last year proved it very painfully. The market suddenly collasped from under all asset classes with the credit market freezeup, giant liquidation sale and rapid leveragaging of the investment markets. Money moved into "safe" investments. Treasuries became over bought and yields dropped to zero as investors just tried to keep what they had. At that point even treasuries became a risk ,since they would have to eventually unwind as well as fear faded.
The current yield on"safe" 5 year bonds is 2.49%. I use 5 year since that is the maturity of the junk I own. Junk pays 800 basis points more. The yield has held up remarkably well through the financial crisis. The default rate fears have not materialized. So cash money is paid every month. "cash", real money in the till! And it comes monthly, not quarterly or semi-annually.
As financial markets stablized and some confidence returned and the underlying value "NAV" has also increased by 25% showing some confidence in the unlaying assets.
I suspect that with the tightening of lending standards, companies can ill afford to default on bonds. Who will buy a bond from a company that has a history of default. Who will lend a company money with a poor credit record. Bond holders also have quite a significant say, even in bankruptcy. To wit the role of GM bondholders.

Inflation is not a short term concern.

The stock market is a little ahead of itself at the moment anticipating the end of the recession. Earnings have been achieved by cost cutting to which there is a limit. Growth has not been demonstrated, just hoped for. So in my view it would be a bad time to jump in..downside risk. Treasuries at this point also have more downside risk that upside potential.
Junk may still have some upside potential left. I use September 1 2008 as a benchmark for fair price on these assets. So if the market goes down, I still get 10-13% cash every month. If the market goes up I get the cash and the increase in NAV as well.

Everything is all about debt at the moment, so why not invest in it? You don't have to worry about P/E, new product lines, competition or the cost of goods. Debt is owed money. Pay it back!

I suspect that since bonds performed better than stocks in the last decade, that the baby boomers are now moving into fixed income as they approach retirement.

Of course there is always cash, but then again no pain, no gain.

Why I'm Lowering My Bond Exposure

You'll never go broke taking profit, but I'll hold a while longer myself. The ETF throws off 10% cash every month that I've used to invest in stocks. The dividend held steady during the financial crisis. The NAV has risen some 24% since the first of the year, which indicates that investors have some confidence in the underlying bonds. HYG currently sells at 1% premium to NAV which is not over priced. The equites market is over bought at this point and I don't see a good place to park the cash. I'm thinking that stocks are more of a risk at this time than HYG.

Stocks / Bonds Intermarket Considerations

Old Trader,

As I understand the author, rising below grade bond prices as related to investment grade bond prices, indicate improving economic conditions. Comparing the price divergence of LQD to JNK since the 1st of March, shows rising below investment grade bond prices.
Not being bearish, to me doesn't necessarily mean bullish either. To me it means bearish is increasingly risky. Cautiously optimistic would be more appropriate.

Stocks / Bonds Intermarket Considerations

Thanks,

Good article. The last 30 days do show the divergence you speak of between investment grade and below investment grade bond prices (using JNK and LQD as proxies) and is also coincident with upward movement of stock prices. This would indicate improving economic conditions. Bearish is wrong place to be.

Don

Defining a Depression

Thoughtful article, but it seems to me that comparing Credit Market Debt to GDP is a very narrow parameter to evaluate our current condition. Considered by itself, it would be a little scary, especially since there is an implied comparison to the 20's and 30's.

But, comparing debt to GDP is really more like measuring debt to cash flow. OK, so we owe 3.56 times our current income. Is that really bad? If an individual makes $50K per year and has total debt including mortage, cars, loans and credit cards of $178K, is that really bad? Well, it really depends on the maturity of the debt. If it was all due today, it would be a big problem. But if it is spread out over 20 years, it might not be.

Another way of looking at our current financial condition might be to look at our debt to equity ratio. We would look at debt to equity ratios to examine the financial condition of a company that we where considering buying stock in.

In 2005, the per capita wealth of the the US was $513,000 against a population of 296 million making our equity worth $151 trillion. That yields a debt to equity ratio of 0.3. Not to shabby

You could also look at debt as "the price" and GDP as "earnings" which would yield a P/E of 3.5, again not to shabby.

That we have had a succession of bubbles is undeniable. The bubbles are now deflating. What happens during the bubble building and deflating process? If one bought at the beginning of the bubble and held until the bubble deflated, there would be zero gain. If one bought at the beginning of the bubble and sold at the top, one would have a gain. If one bought at the top of the bubble and sold at the end, one would have a loss. So it appears to me that bubbles do not create or destroy wealth, they simply transfer wealth.

Oil Bubble Continues Its Burst

Seems to me that it doesn't take much to cause price changes one way or the other when supply and demand are roughly in balance.

If the sole criteria for declaring and bubble is price decline, then every asset class was in a bubble. I don't seem to recall any prescient bubble callers on all asset classes. The last time I looked gold was off 27%, platinum 57%, copper off 50%, stocks off 40%.

I think supply/demand arguements are still valid for all asset classes.

It is my hope that the USA will use the relief on oil and gas prices to develop and implement plans to liberate us from foreign sources of energy. A world power can not remain a world power as long as it is dependant on foreign countries for it's energy. This is a national security issue that must be resolved before we export all of our remaining wealth. As it stands now, if we make someone out there mad, we're walking to work, if work is still open.

Things Aren't as Bad as They Seem - Barron's

I think rational people have pretty much ruled out the '29 end of the world scenario. It should be pretty clear by now that the governments of the world are willing do whatever it takes to prevent that. That means realistically we are dealing with a recession. We have had recessions before and we will have them again. We have always recovered. History proves that.

I agree that the gas price drop will be a boon for the consumer. It comes at just the right time of the year for the retailers. The holidays...the time of the year they go into the black.

The stock market behavior appears to be more liquidation driven than value or economy driven. That may be due to a confluence of factors such as hedge fund redemption selling, margin call forced liquidation selling, financials raising cash by selling equities, baby boomers that don't have the time to do it again and the fear mongers benefitting from short selling The current P/E of the S&P is around 13.5 against a 30 year average of 18. To me that says that the sell off was most certainly not value or economy driven but driven by the need to raise cash. The last time the P/E was at this level was 1988. The market returned to more traditional value 2 years later.

I don't think it is polyanna to be optimistic about the future. History is on my side.

I shopping for some stocks. They're still on sale this week.

How Long Will the Bear Market Last?

Continuing......value can both intrinsic and relative. P/E expresses an intrinsic value. The current trailing P/E of the S&P is 13.5 using SPY as a proxie. This value is low relative to the 30 year average P/E of 18. This would suggest that the current market is under valued relative to the last 30 years. The real GDP of the US has grown on predictable slope for over 50 years. Since the governments of the world seem to want to continue that pattern and appear willing and eager to do whatever it takes to support it, it is reasonable to assume that pattern will continue. The current wave of fear mongering is benefiting those that propagate it at the expense of others, just as other self promoting movements before them promoted real estate, tech, energy, and equities into bubbles.

How Long Will the Bear Market Last?

Falling in love with your thesis will get you murdered in the market. The author's thesis is expressed at the end of his article and the rest of the article is arranged to support the thesis.

"Foreign Banks will dump treasuries and buy gold"

Not very likely unless they want to hamstring themselves and their own ability to print paper and cut themselves out of 20% of the gobal economy situated in the good old USA. Gold is a commodity whose value is based on supply and demand unless it's price is standardized and fixed (i.e. gold standard). For the average guy, there isn't much you can really do with gold..... you can't eat it or buy a car with it. The only value it has is what someone else is willing to pay for it in legal tender. After the gold bulls have talked others into buying the stuff and driving up the price, they'll exit leaving others holding the bag. It's happened in every other sector. The last and final bubble to burst will be gold. History says it will.

As for how long the bear market will last....nobody knows.....it will last until investors begin to feel a little bit more confident and feel like taking a little bit more risk. Nothing is risk free. Not even stuffing your mattress with dollars. Rational people have pretty much ruled out the depression doomsday scenario. That leaves a recession. We've had them before and we'll have them again. We've been through this before and proven that we will come out the other side.

Is Gold A Sucker's Bet?

The real estate bubble burst, the financial market bubble burst, the credit market bubble burst, the energy bubble burst, the commodity bubble burst, the stock market bubble burst. Money moved from asset class to asset class along the way.
The next and final bubble to burst will be gold. History says it will. Gold is neat but you can't do anything with it except cash it in for money to do something else with. When people start to head for the cash register, the price will plummet as viciously as the stock market . It always has. It always will. The slower ones will be left holding the losses and the gold bug rhetoric. I'd rather take my chances with inflation.

Using History to Plan Near-Term Investing

Conspiracy of Fear

I woke up this morning feeling fine. It’s a bright sunny fall day. My car was still in the driveway. The gas station was pumping gas at $2.79 per gallon. Traffic was normal. Best Buy was busy with the usual Friday payday trade. My job was still there. My bank ATM still worked. That is the reality of the day.

The newspaper headlines read WORST EVER WEEK FOR THE DOW. My paper assets are now worth 20% less than they were a week ago. Jeepers, what is going on here?

So I have to ask, what was the reality of the week?

For starters, for every dollar I lost, someone made a dollar someplace. You can bet on that. The dollars didn’t just burn up or evaporate. The dollars are still there. For every sale, there was a buy. That means that wealth just changed hands. Someone picked my pockets. Someone got richer as I got poorer.

Well, who would want to do that? Well, probably the same ones that cheered on the bull market in equities, housing, real estate, energy, gold and investing for the long term. Now, in light of the financial crisis in banking, the cheerleaders are propagating waves of fear overwhelming the average little guy. Stories of the crash of 29 lead the way. Sell your stuff at a loss, hoard cash. Don’t take a chance.

The reality of it is, they have exhausted feeding upon each other and are now feeding upon us. And it’s working. They are picking our pockets again. And we are helping them. Just as in 29, some are getting rich at the expense of others. Someone is buying up your fire sale assets. And we are saying thank goodness I got out with something.

The reality is that if there were no sellers, prices would skyrocket because there would only be buyers. The reality is that business fundamentals don’t dictate the fire sale. The P/E ratio of SPY is 13.5, well below the historic S&P average. The 30 year average P/E is around 18. The 20 year around 22.

The reality is, this ain’t 1929. The reality is that the nation will survive the market, as it always has. The reality is the money will be in different pockets when it comes out the other side and we will have helped them.

The Cramer Crash?

Perhaps Cramer is getting to much credit here. After all, Europe and Asia were down big time overnight and S&P futures were down 270 points before the market open. Personally, without the help of Cramer, I set up stop loss orders over the weekend. It doesn't make much difference whether is is hedge fund selling, lack of confidence, bad news, scary headlines or just plain fear. The impact to ones holdings is all the same. Understanding it, doesn't make the reality of any better. Enough is enough. Personally, I think what happened was the music stopped and a lot of folks heard a wee small voice say.....going down!

The Credit Hostage Crisis

Please don't take this as defending the fat cats on Wall Street, but it seems to me that there is plenty of blame to go around here.

If the root cause of the problem, is the housing market collaspe and mortage defaut, well then who did that?...it wasn't Wall Street.....it was us!

Yes, the FED kept rates too low too long and money was easy, yes Wall Street invented CDS's and CDO's, yes accounting regulations require mark to market, not mark to model, yes the FED kept rates to high to long and were igorant of the impact on derivitives, but we (the taxpayer) borrowed the money...nobody made us take it....nobody made us bid up homes prices beyond reasonable value, noboby forced us to get in over our head...we fell for it...we created the housing bubble, we are the ones defaulting, we the people are the problem.

At the end of the day, we were no better than the banks or Wall Street.

Oil Price Speculation Truth Begins to Leak into Mainstream Media

Absent credible facts and data, this article is SPECULATION.