phillips49

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.

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.