http://www.nytimes.com/2012/11/02/opinion/the-junk-is-back-i...Bonds with "optional interest payments?" A new middle ground between traditional bonds and preferred stock.
Amazing the NYT editorial board is now the expert on junk bonds. More important to watch is hi yield funds had withdrawals last week for first time in a long time. Whether its"Sandy" related only time will tell.
You guys just DON'T GET IT! You take enough junk bonds from enough different industries, locations and maturities and combine them into a fund. When you put them together it diversifies the junk risk away. Junk becomes as good as GOLD, AAA Rated! Moodys/SP/Fitch AAA ratings can't be far away!Wall Street proved out this business model with sub-prime mortgages. It worked out . . . . wait a minute. . . great for Wall Street and a disaster for anyone holding the paper. . .But Ben and the Fed want my widows and orphans to invest in "risk assets." I am 100% confident, Ben will take care of us this time around.Ben promised us that a nationwide downturn in residential real-estate was "highly unlikely." I am sure he will give us that same promise with these junk bonds.What could go wrong? I am all IN!Thanks,Yodaorange(In case you are not a regular around these places, this post is tongue in cheek. I strongly think some of the junk bond holders will end in tears. Not a recommended investment at the current low interest rates.)
Wall Street proved out this business model with sub-prime mortgages Well. Don't blame wall street. They do this for thie living. Wall street business carries both behavioral and mathematical issues. Behavioral,- They are just immoral, plain and simple. They don't care about their customers, clients,or even their own firms, no one, but their own bonuses. This is systemic. The only solution for this is, holding them to standards that we hold ordinary individuals. Even in CA you have 3 strike law to put folks who are deemed dangerous to socienty away. But there is no real regulation to punish banks when they routinely violate laws. We just collect fine and tell them see ya later.- There are rougue individuals.- Failure of risk controls. Why is this behavioral? The investment banks work on complex products and use leverage. So risk is inherent in this model. But we see the routine, huge losses. So how come these losses are not deducted early and contained? Because there is a systemic failure of risk controls driven by CEO's bonuses.Mathematics- The heavy reliance on standard deviations. When you build complex products like derivatives, which are built on top of multiple products, where a single violation of standard deviation can result in losses multiplying very quickly. The problem is, the traders take 10 yr or 30 year volatily model and often apply them for the next week, month, or year. This is very risky and when you built a product, which is complex, build on top of many such 30 year assumptions and then use leverage, when you go wrong you go wrong big way.It doesn't matter they are correct, successful in 99% of times, the one time they have losses are huge. But from a traders point of view, it is one trade, one quarter or one years bonus at the most. Even in further worst cases, they leave this job and join across the street.This itself would not be a problem but many folks who don't have the skilss to understand, who should not be touching these kind of toxic stuff are buying them. Wall street is knowingly selling this stuff to them. That is immoral. You are putting your middle school kids with NFL Pro's. They will get crushed. They should not be playing that field.But we all are playing without even knowing it. Every time you have a money market account you think it is safe, but the kind of exotic instruments they invest is so risky. That's why I don't have anything on money market. I just leave it on my checking. I would rather earn nothing than for the few pennies risk all my capital.
Its getting to where there is but one FUNDAMENTAL - YIELD!Over and over I hear the desirability of an investment described in a single dimensional manner, the yield of a bond, preferred, or stock.I going for turnarounds (something I am used to investing in) and growth which is a new concept to me.
The really interesting aspect to frothy pricing in the junk bond market (for me and perhaps many of us) is what happens to REIT pfds when the junk bond market beging to unravel. Undoubtedly there will be pressure on REIT pfd prices. But how much? It seems to me that REIT pfds fit somewhere in the spectrum between investment grade bonds and junk bonds. There is no maturity date, of course, and REIT pfd holders are not creditors. And there are no covenants in REIT pfd corporate charter documents that prevent a REIT from loading up with debt that's senior to the pfd holders. But, on the other hand, REITs' cash flows are probably a lot more stable than the cash flows of junk bond issuers, and they are, in most cases, less levered. Furthermore, after interest payments, pfd holders have seniority with respect to the vast majority of the REIT's cash flow.My guess - and it is only a guess - is that if the "average" junk bond suffers a 200 bps increase in yield, the "average" REIT pfd will see a yield increase of perhaps 75 bps. Those who have access to such data (Yoda, perhaps?) might go back into history and see how REIT pfds have acted when junk bond yields have spiked. That said, history doesn't repeat itself (but, as Mark Twain famously said, "it rhymes"), and much will depend upon WHY junk bond yields spike. Ralph
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