Search This Blog


Monday, October 27, 2014

The Most Important Fundamental Factor Than Should Affect High Yield Bond Prices Looks Positive

Ultimately the most important risk factor that should be reflected in high yield bond prices compared to investment grade bonds is the risk of default. Effectively high yield bond investors are being paid higher interest because they are taking higher default risk (i.e. not getting paid back).

On that front the recent report from Moody's rating agency is good news for high yield bond investors. As Barrons reports 

High-Yield Default Rate Down To 1.7%, Should Stay Low – Moody’s

Of all the things that make high-yield bonds prone to the occasional market shock, defaults really aren’t one of them for the moment or for the foreseeable future. A Moody’s report out today says the default rate among U.S. companies with speculative-grade ratings fell to a mere 1.7% at the end of the third quarter. That’s near a six-year low and down from 1.9% a quarter earlier, and it’s well below the market’s 4.4% long-term average since 1993. The Federal Reserve’s ultra-low-rate policies since the financial crisis have enabled even the junkiest of junk-rated companies to refinance debt and issue new debt at uncommonly low interest rates...

Sunday, October 26, 2014

This One is A Little Perplexing


Global turbulence triggers flight from EM equities

Global market turbulence has triggered the biggest outflows from emerging market equities in more than a year.
Investors removed $9bn from stocks and shares across Africa, Latin America, eastern Europe and Asia in October, according to figures from the Washington-based Institute of International Finance, which tracks all cross-border investment into developing countries by non-residents.
But here are returns for October
GMF emerging asia  +2.1% (blue)
VWO overall emerging markets  +1.4%(green)
SPY S+P 500 +1.1% (gold)
One month growth of $100,000 total return
This comparison is interesting flows into emerging markets (top) and price movements for VWO (bottom) seems to be evidence of quite a bit of performance chasing buying high and selling low

Thursday, October 23, 2014

WSJ on The Rebound of the High Yield Bond Market

Junk Bonds Rally

Plunge in Yields on Government Debt Fuels Resurgence

Junk bonds have bounced back after their steepest decline in more than a year as investors once again push aside concerns about overheated prices in pursuit of higher-yielding investments.
Portfolio managers are snapping up speculative-grade debt after a selloff that last week took the yield of a major index above 5% for the first time since the “taper tantrum” of mid-2013. Yields rise when prices fall
Have performance chasing individual investors been selling while professional investors have been buying ? The article notes:
Some $19.2 billion has been withdrawn from U.S.-based high-yield bond funds and exchange-traded funds, according to fund tracker Lipper. The record annual outflow was $7.1 billion in 2005.

Wednesday, October 22, 2014

WSJ on Those One Decision Stocks

I promise I didnt read today's paper yesterday before writing yesterday's post.

From the WSJ

Clouds Darken for America’s Blue-Chip Stocks

Coke, IBM, Others Find Once-Reliable Formulas Leave Them Too Big to Change Direction Quickly

The approach was time-tested and hard to beat: Put your money in blue chips, decades-old companies that could be counted on to perform through thick and thin.
But now the market’s stalwarts are showing their age. Steady has become stagnant as companies once considered among the market’s most reliable post poor growth, quarter after woeful quarter.
The list of stumbling stars is remarkable: AT&T Inc., which on Wednesday lowered its revenue forecastCoca-Cola Co. , whichposted flat salesInternational Business Machines Corp. , whichthrew out its profit forecastWal-Mart Stores Inc., whose same-store sales haven’t increased in the U.S. since 2012; General Electric Co. , whose stock price hasn’t topped $30 since the financial crisis.

There are No One Decision Stocks

Occasionally I peruse what goes on at places like Seeking Alpha where individual investors produce homegrown stock analysis and recommenstations.

A craze over there for a long time has been "dividend growth stocks" often household name companies which are seen as guaranteed to produce a growing stream of income often with the extra imprimatur than Warren Buffett owns them. If the price's temporary market movement and besides there's that dividend.. And of course as the name implies the many individuals posting and reading there think it is relatively easy to generate alpha--better than maket returns on a risk adjusted basis. And since there is no systematic way to track the stock picks generated by the many that write on the site there would be no way to test if anyone actually is successful in doing so.

Earnings reports over the last few days show that investing is seldom if ever so simple.

 I am certainly a believer that price can deviate from value...certainly there is no economic rationale for the price fluctuations we have seen in the overall market of the past couple of weeks. And no doubt many stocks have been knocked down in prices that don't reflect value during that selling.I also do not in any way consider myself a stock picker...

But sometimes price does reflect underlying fundamentals (in the long term it does) and sometimes there are changes that can impact the long term prospects for a company.

I am not a stock picker in my approach but the recent news on IBM, McDonalds and Coke seems to point towards some real change in prospects

For IBM the problems seem most daunting . As Andrew Ross Sorkin reports in the NYT dealbook. IBM may gave known how to keep shareholders happy through dividends and buybacks...but it took its eye off the ball in terms of building the business.

The company’s revenue hasn’t grown in years. Indeed, IBM’s revenue is about the same as it was in 2008.
But all along, IBM has been buying up its own shares as if they were a hot item. Since 2000, IBM spent some $108 billion on its own shares, according to its most recent annual report. It also paid out $30 billion in dividends. To help finance this share-buying spree, IBM loaded up on debt.
While the company spent $138 billion on its shares and dividend payments, it spent just $59 billion on its own business through capital expenditures and $32 billion on acquisitions. (To be fair, Ms. Rometty has been following a goal set by her predecessor, Samuel J. Palmisano, to return $20 a share to stockholders by 2015. Ms. Rometty abandoned it only on Monday.)
All of which is to say that IBM has arguably been spending its money on the wrong things: shareholders, rather than building its own business.
Mr Buffett as Sorkin notes has been a big fan of IBM because of its stock buybacks and dividend growth investors have their eyes on the dividend. But as Buffett in his latest letter to investors  has noted (quoted by Sorkin)
“In the end, the success of our IBM investment will be determined primarily by its future earnings.”
The question for Ms. Rometty is whether she can figure out how to turn around IBM — not just its numbers, but also the company itself.
Both McDondalds (MCD) and Coke (KO) seem to be facing trends in consumer tastes away from their core products. More disturbing to long term investors is that the CEOs of both companies seem to be surprised by the developments and arent too clear on what they will be doing to turn things around.
Here's a great graphic from the WSJ illustrating the dilemma for both

Here is the WSJ on MCD  and here on KO I wont review the ugly details here.

One sign that is not very positive for KO is the CEOs statement that a cost cutting program will be implemented to improve profitability. Given the size of the companies revenues there would have to be massive cuts in expenses to have much impact on earnings. In my experience citing cost cutting to generate a major improvement in earnings is a sign that management doesnt have any real ideas on how to grow the company.

In any case these three examples point out that stock picking is never as simple as it looks, there are no one decisions stocks....and most investors are likely better off with a diversified portfolio of passive ETFs and/or index funds.

Tuesday, October 21, 2014

High Yield Bonds Individual Investors Selling and Professional Investors Buying Again ?

Two recent reports in the FT note the large swings in high yield bond markets, particularly in the high yield bond ETFs which offer an easy way for retail investors and traders to invest in the high yield market. The result is often high volatility and large moves in the prices of these bonds. Recent weeks have shown a large selloff, as occurred in August (graph below is of HYG the largest high yield bond ETF). At that time the selloff driven by retail investors and short term traders pushed prices down to levels that many professional portfolio managers saw as attractive. Many are expressing similar views in reaction to the recent selloff.

Ft Reports:(Oct 17) Junk bonds caught in flight from risk

A sell-off in US stocks this week hit the junk bond markets as investors shunned the riskier securities amid fears about the outlook for the global economy.....
Markets have stabilised after mutual funds and ETFs investing in junk bonds experienced record outflows.

Renewed selling this week has highlighted some of the potential pitfalls faced by holders of the securities – which are sold by companies with fragile balance sheets and a higher probability of default – in a risk-averse environment.
Investors withdrew a further $549m from high-yield funds and ETFs in the week ended October 15. That brings this year’s total outflows to $5.5bn.
However, the junk bond market still has many supporters. Mark Haefele, global chief investment officer at UBS Wealth Management, said the sell-off boosted the attractiveness on the debt.
With spreads on the bonds versus comparable US Treasuries at about 500bp and default rates still expected to remain low, total return on junk bonds could rebound and reach the 5-6 per cent mark in the coming six months, he said.
High-yield market analyst Marty Fridson estimated that, after being extremely overvalued for most of the year, the high-yield market had swung to “moderately undervalued”.
And this month Pimco said fundamentals remained compelling – given its view “for a lower-growth global economy and subdued interest rates over the foreseeable future – an outlook we call the New Neutral – the case for high-yield bonds is a compelling one, both as a tactical and strategic allocation”.

The FT also reported (Oct 20) that fickle retail investors as well as short term traders can produce large swings in the high yield market as they trade in and out of high yield bond ETFs

Embedded Investors turn to junk ETFs amid sell-off

Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings....

Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.
Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.
The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated....

The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.
The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.

More on HEDJ Currency Hedged Europe ETF

 I wrote recently about the strategy of investing in Europe through a currency hedged ETF ticker HEDJ

At ETF,COM an analysis makes the following points:’s important not to become mired in euro pessimism. The important issue for tactical ETF asset allocators is to understand the risks and the opportunities. Heightened central bank activity always creates both. From that perspective, consider a more hopeful investment outlook:
  • The eurozone is not an economic island. Contrary to sagging wages in the West, Asian incomes have been on a tear over the last decade. The OECD forecasts that 80 percent of the growth in middle class spending globally through 2030 will be driven by Asia. European consumer companies are ideally positioned to benefit from this trend, ...
  • Valuations matter. The Eurozone has been accused of “turning Japanese.” While it’s true that the new, dismal normal of the eurozone is sluggish growth and more frequent recessionary relapse, the probability of eurozone stock markets following the Japanese experience is extremely low. Why? Simply because valuation is the best predictor of longer-term returns. During Japan’s epic decline, equity valuations started from lofty levels, and debt was concentrated in the corporate sector. Those conditions are not present in the eurozone today....
  • Currency depreciation has gloriously arrived. ...With major policy divergence between the Fed and the ECB, a new era of currency depreciation is upon us (see Hahn’s April 2014 piece on, “Position Now For a Weaker Euro”). Looking toward next year, the benefits of a weaker euro and, potentially less austerity, will feed through into the data and show up as improved profits.