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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Junk thoughts Date: 6/3/2011 3:48 PM
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Most of this board is aware but thought it was a well ordered little article.

The advice isn’t to run for the exits — at least not yet.

. . .

But they’re urging investors to be pickier and acknowledge the risks.


<snip>

High-yield bond funds and exchange-traded funds have received about $9 billion in assets so far this year, according to Lipper data. That’s on top of $14 billion in inflows in 2010.

Bank of America Merrill Lynch’s index of high-yield bonds has returned 6% so far this year, following 15% gains in 2010. It rallied 57% in 2009, after a 26% drop in 2008 when the credit crisis entered its worst phase.

http://www.marketwatch.com/story/5-market-signs-to-follow-be...

jack
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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32909 of 35367
Subject: Re: Junk thoughts Date: 6/4/2011 5:20 PM
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Jack,

Thanks for the link. Below is what I consider the key quote in the article and I took the liberty to bold the part which I consider the most relevant.

“Now is the time to be more careful and cautious,” said Lon Erickson, a co-portfolio manager at Thornburg Investment Management. “This is the time you can really get hurt.”

As a confirmed junk bondaholic (addicted to double-digits yields), I can tell you that, what is left now is the really risky stuff (mostly horrendous balance sheets). I can only dream about the values we were buying in 2009 (at double the yield and much better financials).

I tell myself, I gotta stop buying this garbage and I should just wait for the next recession to accumulate more, but those 1% money market rates are causing me to take extraordinary risks.

Oh well... I guess I’m just an obedient American, doing what the FED wants me to do.

Howard

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32910 of 35367
Subject: Re: Junk thoughts Date: 6/4/2011 11:52 PM
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Howard,

I totally agree with what you bolded. I tend to drag it up and down the credit spectrum and across maturity range.

Charlie may be able to find places to put money to work in the bond market but I don't see the reward for the risk. Well, I do believe there is value that can be found in almost every portion of a market cycle. The real answer is I don't see the reward for the work relative to the risk. I don't spend enough time turning over bond rocks to be able to do the quick assessment and wing shoot; it is simply not cost effective shopping for me right now.

Then again I keep the tip of my nose in the game, watch the box scores but for most of the last decade I have not seen enough to drag me deep into the game. Pick and pluck a few, try to keep the rust of the skills. Its hard for me to keep me focused when the 10 year is well below 6%.

Easy and lazy is the road I go. You work too hard. Then again I suspect you like the work.

jack

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32911 of 35367
Subject: Re: Junk thoughts Date: 6/5/2011 2:20 PM
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Its hard for me to keep me focused when the 10 year is well below 6%

This is pret' near the benchmark I use to begin allocating into bonds. When high end IG mid term is less than 6%, then I have little room in the portfolio for bonds. [occassional expection] The junk which offers the yields has enough correlation to equities that I would just as soon look at boring utility stocks or the likes of T, PG etc. Then collect the dividend and have a fair shot at upside in price rather than fix in the inflation adjusted losses. There the risk-reward makes sense to me.

As mid term rates the go up, so does the allocation to bonds.

Putting my money into debt on a company that looks insolvent on the balance sheet and is only floating because of cash flow as the economy potentially downshifts makes me take the eazy and lazy road...

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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32912 of 35367
Subject: Re: Junk thoughts Date: 6/5/2011 11:59 PM
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Jack,

Pick and pluck a few, try to keep the rust of the skills. Its hard for me to keep me focused when the 10 year is well below 6%.

Yeah... That’s basically why I keep looking and buying SOME. The junk market is a small enough niche market, that I’m able to keep up to date on most of the issues. So if a company's earnings show signs of a turnaround or when market conditions change, I’ll be ready accumulate more.

In 2009 I was buying at the rate of 5 transactions per month. In 2010 it was 3 per month. So far in 2011, I’m now down to 1 buy per month. Interest income keeps coming in and bonds are constantly getting called/redeemed, so to some extent, I’m just reinvesting some of my profits and not risking too much of my own money (my excuse for buying into an “over-valued” market).


Easy and lazy is the road I go. You work too hard. Then again I suspect you like the work.

Actually after a while it’s NOT too much work, and yes I do enjoy it. Easy and lazy is all that is needed if one keeps on track and stays the course.

Howard

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32913 of 35367
Subject: Re: Junk thoughts Date: 6/6/2011 12:15 PM
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howardgt,

You wrote, I tell myself, I gotta stop buying this garbage and I should just wait for the next recession to accumulate more...

I'm not sure a recession is always highly correlated to junk bond yields. Do you have any data on this? True, a recession may provoke a sell-off of some junk holdings as institutions try to limit their default risk, but 2008 / 2009 was a special case.

The last recession was caused by a freeze in credit markets driving up yields in a way not seen in generations. The subsequent inability to borrow (at any reasonable rate) probably caused the ensuing recession.

In most recessions, you can expect the Fed to actually try to push yields down. I don't know what the historical data says here, but I'd imagine junk bonds would just respond by allowing the spreads to widen and actual yields wouldn't rise all that much.

Of course today the Fed hasn't much room to push yield down further, so I suppose a recession tomorrow is likely to have the result you're hoping for...

- Joel

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32914 of 35367
Subject: Re: Junk thoughts Date: 6/6/2011 12:23 PM
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Easy and lazy is all that is needed if one keeps on track and stays the course.

Thought that deserved repeating. The statement tends to be true for seasoned investors across all asset classes that they are both comfortable with and have spent enough time with to have more wisdom than enthusiasm.

jack

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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32915 of 35367
Subject: Re: Junk thoughts Date: 6/6/2011 5:30 PM
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Joel,

I'm not sure a recession is always highly correlated to junk bond yields. Do you have any data on this?

I never really researched or read any studies supporting this... I was just going by personal experience from many (too many) years of investing. So it’s good that you asked for links and data to backup my statement.

I compared data for Vanguard’s High Yield fund (VWEHX) because it goes back the farthest (1989) that I was able to find. If you have something that goes back farther, it would be interesting to see how it correlates.

Recessions since 1989:

http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...

July 1990 – Mar 1991
Mar 2001 – Nov 2001
Dec 2007 – Jun 2009


Vanguard High-Yield Fund (VWEHX) Secular trend bottoms since 1989

http://finance.yahoo.com/q/bc?s=VWEHX&t=my&l=on&...

Nov 1990 (6.1) Jan 1991 (6.1) down from Jul 1989 (8.2)
Sep 2001 (6.1) Oct 2002 (5.5) down from Feb 1998 (8.2)
Oct 2008 (4.2) Dec 2008 (3.9) down from May 2007 (6.3)


Above I list the double bottoms as reversal points. Price bottoms seem to correlate close enough to recession bottoms (or recoveries) for my investing. As Mark Twain is quoted as saying, "history does not repeat, but it does rhyme".

A recession bottom is probably a good time to begin buying most financial assets, but junk bonds allows me to “lock-in” a significant income stream for a set period. That is really why I’m buying this asset class.

I’m sure you are correct that junk bonds are “just reacting to the Fed pushing yields down”, but this is all part of the classical business cycle: 1) inverted yield curve, then 2) recession and high default rates, followed by 3) easy money by the fed and finally 4) all markets rally.

I’m just connecting the dots.

Howard

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32916 of 35367
Subject: Re: Junk thoughts Date: 6/6/2011 6:05 PM
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howardgt,

You wrote, Vanguard High-Yield Fund (VWEHX) Secular trend bottoms since 1989

http://finance.yahoo.com/q/bc?s=VWEHX&t=my&l=on&......

Nov 1990 (6.1) Jan 1991 (6.1) down from Jul 1989 (8.2)
Sep 2001 (6.1) Oct 2002 (5.5) down from Feb 1998 (8.2)
Oct 2008 (4.2) Dec 2008 (3.9) down from May 2007 (6.3)


What are the numbers in parenthesis? Yield numbers? Current yield? Or total return for a period? The link you provide only shows the chart for the fund's NAV, which is pretty meaningless for such an analysis.

Vanguard's site shows the distribution yield by month, but only for the past 18 months. Of course again distribution yields don't necessarily tell you anything useful if they include returns of capital...

One potential data source seems to be: http://finance.yahoo.com/q/pm?s=VWEHX+Performance

That link provides total return for the fund by quarter back to 1979. But that doesn't provide me data at the monthly granularity you seem to be quoting.

In any case, it would probably be best if we had some kind of junk bond index we could reference over that period. Such indices probably didn't exist in 1989, so comparisons are going to be difficult unless you try to blend the returns of more than one fund.

- Joel

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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32917 of 35367
Subject: Re: Junk thoughts Date: 6/6/2011 7:06 PM
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What are the numbers in parenthesis?

Sorry for the confusion. The numbers in parens are NAV prices . (6.1) is $6.10.

Why do you say a chart of NAV prices is meaningless? I consider buying at or near the cycle low as “a good time to buy”. Good enough for me!

From the link to the Yahoo chart, you can also get distributions (all the way back to 1989). Go to historical prices and click the “dividends only” button:

http://finance.yahoo.com/q/hp?s=VWEHX&a=06&b=10&...

But I didn’t use distributions (or yield) because this was a simple comparison. Also this fund is a conservative junk bond fund and consequently they hold very little C or lower rated bonds.

The point I was trying to make in this thread is that at the bottom of a recession most of the companies that are going to default have already done so, and the survivors have access to easier credit going forward. The bond fund NAV price trend shows that bond prices have begun to rise again and credit conditions are improving.

Personally I do NOT buy bond funds anymore. I just use them as an indicator of market conditions. I find a diversified individual bond portfolio greatly outperforms funds. Probably because funds are forced to sell low (when panicked shareholders are cashing out near bottoms) and buy high (when the public flocks to junk at the top)


Howard

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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33035 of 35367
Subject: Re: Junk thoughts Date: 7/7/2011 5:37 PM
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Charlie may be able to find places to put money to work in the bond market, but I don't see the reward for the risk. Well, I do believe there is value that can be found in almost every portion of a market cycle. The real answer is I don't see the reward for the work relative to the risk. I don't spend enough time turning over bond rocks to be able to do the quick assessment and wing shoot; it is simply not cost effective shopping for me right now.

Jack,

You attribute to me more work than I actually do, as well as more implied risk. I put in some time daily looking for things to buy, but nothing excessive. The payoff is that I can pull better risk-adjusted money out of the bond market than the average investor, because I'm buying at the discounts that come to those who shop frequently.

In 2009, with a great deal of trepidation, I spent $66k to buy $99k face of agencies and corporates, or 66 positions in all, with an average YTM of 11.5% and an average credit-rating of invest-grade. In 2010, I spent $100k to buy $132k face of agencies, corporates, and munis, or 74 positions in all, with an average YTM of 8.9%% and an average credit-rating of invest-grade. In 2011, I’ve spent $123k to buy $198k face of corporates and munis, or 47 positions in all, for an average YTM of 9.9% and an average credit-rating of invest-grade. What the rest of the year might offer buyers remains to be seen. But things don’t look good now that interest-rates are on the rise.

Meanwhile, the fishing sucks majorly, with high water from New York to California and everywhere in-between. Torrential flooding has restructured stream beds and made wading unsafe and fishing a wasted effort. So I’m biding my time until I head out to Yellowstone at the end of the month. Bonds or fish, the same metrics apply. If you don't have a line in the water, you're not going to catch fish. But there are times, like now, when it's better to be on the sidelines, prepping gear for when conditions favor success.

Charlie

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Author: LONGREITS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33036 of 35367
Subject: Re: Junk thoughts Date: 7/7/2011 6:04 PM
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Thanks, Charlie. By the way, have you read The Most Important Thing, a book which came out by Howard Marks, founder of high yield and distressed debt shop Oaktree? If not, I think it was written just for you. I think you'd appreciate it:

http://www.amazon.com/Most-Important-Thing-Thoughtful-Publis...

And, of course, I could be wrong.

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Author: voiceinthedin Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33043 of 35367
Subject: Re: Junk thoughts Date: 7/8/2011 1:35 AM
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Charlie,

thanks......enjoyed that post......interesting.....

Dave

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