10 replies to this topic

[Gary Smith]

Here's something I have covered on another forum. As a disclaimer, since whenever I post here it gets twisted to pieces, I am not any raging bull on stocks having (at this moment anyway) only 5% in equities. The remainder is 82% in junk bonds funds - both open end and closed end - and 13% cash. If I had my druthers, stocks would take out their November lows. Please check out the chart below. It's a comparison between junk bonds and the S&P. PHT and EAD are closed-end junk bond funds and the other two, VAGIX and LBHBX are open-end junk bond funds.

As best as I can recall since 1991, over the very short run, this is one of the biggest positive divergences I have seen between stocks and junk bonds. The last time it was like this (in the open-end at least) was January to early March 2003. We know what happened after that. I am not saying it will happen again because the economic landscape is much more dire this time around. Plus, while history may repeat in the market, it's never quite like expected. The strength in junk bonds is a bit counterintuitive in light of a predicted spike to historic highs in corporate defaults in 2009.

Warren Buffett has purchased $850,000,000 in junk bonds the past few weeks. There has been more deal volume in junk bonds the past month than in the previous six months. Investment grade bonds are also seeing a thaw as witnessed by the eager reception of Cisco's recent $4 billion offering among others.

I don't make any predictions and for all I know this recent rally in junk bonds will prove ephemeral. Or maybe there is some decoupling occurring between stocks and junk bonds like we haven't seen in the past. I am sure bulls and bears alike will interpret the recent divergence within the confines of their particular bias.



http://finance.yahoo...ource=undefined

[ogm]

I think junk bonds will be clobbered too by the end of the year and the divergence will be resolved. Defaults are only going to go up from here. And refinancing junk bonds will be harder and harder, so equity issuance will be more prevalent. Thats why equity prices may be leading this. Just guessing.

Edited by ogm, 11 February 2009 - 02:25 PM.

[10Shekel]

Gary,

Interesting observation & thanks for the post. I've been extremely bearish since the fall of 2008 however I don't doubt that we are overdue a major bear market rally at some point & I think it could be a rather sharp one. Would you be willing to post if you see one of your momentum patterns triggered in the equity markets?

Something you might find interesting:

http://www.cnbc.com/...30048868&play=1

Pimco's McCulley: Treasury Plan Short on Details - today on Squawk (the value proposition) - at some point if the Fed "backstops" these SIVs and an entity like Pimco is put in charge of it (because quite frankly they can do it better than anyone else) & get some value/pricing set then start trading these assets (SIV for cheap financing) - could this be a catalyst for a rally soon to come?

[ds]

Gary, You chose some of the best performing cefs and oefs (fortunately I have also been an owner of a few of your choices, although the premium is getting a bit rich), but in general most High Yields have not touched their 9 month ma whereas in '03 they had busted through by this point in the rally. Also on daily and weekly charts many High Yield funds have not formed higher highs. Your post is timely, right in here is gonna be the crucible for High Yields. I think they had more of a panic capitulation bottom in November than stocks, and we're not going all the way back there again.

[maineman]

Gary, Thanks for posting. I meant to tell you that after last Thursday's drop and pop and some whipsaw for me I remembered you had writtern something about that, so I dug out your book and reread it on Saturday. Just what I needed to help me step back and calm down a bit from the daytrading and hear some words or wisdom and reassurance. Sure enough you described just how to handle those "unexpected" reversals. Just wanted to say thanks. mm

[Lee48]

I eyeball my basket of junk daily and have been impressed that they have hardly even blinked during the recent market gyrations. Which is a good sign for a general market rally soon.
Also a little surprised that a quality fund like HYG has stalled out at the 74 area while some others contine on up.
http://stockcharts.c...PHT,FAX,tip|C|H

I think they will soon level out at or near the top of their range. Then most of the money will be made in vehicles like SSO when this bear market rally gets cranked up...imho

[pdx5]

Thanks Gary for another informative post. Personally I visualize the general level of current stock prices as the 4th life time buying opportunity for a holding period of 3 to 5 years. On the near term basis, we could easily see new lows on SPX. However the LT upside potential is 4:1 over LT down side potential from these levels. The risk reward ratio for longer term traders looks encouraging.

[Lee48]

After looking at this junk again, it still doesn't look half bad for a buy and hold type move until this stuff turns down again on bankruptcy news maybe later this yr. But they should be a leading indicator. You can sit back and collect near a 16.67% div every month in a stk like PHT or PHK while it creeps on up, and while the general market jerks up and down with it's scary action of trying to find a bottom confounding bulls and bears. PHT 9.90 and PHK 9.38 are nowhere near their highs in the 16 area. HYG 12.26% yld. Gary is looking pretty smart with an 82% investment in junk. Of course I don't know how far he rode this stuff down, or even when he bought back in....

[Gary Smith]

>>>>>Gary is looking pretty smart with an 82% investment in junk. Of course I don't know how far he rode this stuff down, or even when he bought back in....<<<<<


http://messages.fina...F...0&frt=1#583

Lee, not smart, never smart, just always lucky. Above is the link to when I begin legging into junk bonds this time around. That's my handle on the Yahoo boards and usually post on the VWEHX board although it's not a fund I trade because of its short term redemption fees. Be very wary of PHK and PHT as they are trading at historic premiums to their NAV. I rolled out of many of my original closed end junk bond funds when their premiums got out of whack with their NAVs and moved into ones which were trading at discounts or miniscule premiums to NAV. Also be wary of the three exchange traded junk funds - HYG, JNK, and PGB. Late in December they also went to historic premiums to their NAV (they have since come in a bit) and rolled out of them increasing my exposure to the open end junk funds which always trade at NAV. Trading junk bonds can be a bit more complicated than just going for the yield. I never ride anything down and always pull the plug if prices turn against me.

[Lee48]

Come on Gary, you have to be sumwhat smart to survive in this business.
Thanks for your reply on when you bought in and the Nav valuations as I sometimes ignore them. Always a good idea to keep them in mind..
I see where you bought in, pretty good, but not when you dumped them.

Junk went way below the S&P but is now outperforming. And probably will for a while longer till the depression idea vrs recession idea sets in again.
http://finance.yahoo.com/echarts?s=SPY