Leave it to me to get stuck with an extended cold in one of the warmest winters I can remember. A stuffy nose. A bout of congestion. A lack of energy. A persistent cough. I’ve been dealing with all of those symptoms for the past week or so.
Market Roundup
The good news? I think I’ve finally kicked this thing. The bad news? Despite today’s bounce, the market remains sick, sick, sick!
You’ve read about many of the symptoms here in Money and Markets — narrowness in market leadership, multiple sectors and indices underperforming the averages, emerging-market currency, bond and stock meltdowns, lackluster growth in many advanced economies, credit market turmoil.
But on Friday, those chronic, lingering problems got acute in a hurry when the Third Avenue Focused Credit Fund imploded. And the real risk is that things only get worse from here.
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| A sick market has a lot of people worried. |
Why? Because excessively low interest rates, and repeated rounds of global QE by central banks, helped inflate a huge bubble in junk bonds. Too many investors who were too desperate for income bought too many mutual funds, ETFs and individual high-yield bonds.
Total junk debt outstanding soared from just $940 billion in 2008 to more than $1.8 trillion this year, fueled by record-high issuance over the past half-decade. Junk bond mutual funds attracted record net cash flows of $55.6 billion in 2013, on top of $34.3 billion in 2012 and $21.6 billion in 2011, according to the Investment Company Institute.
Now, a huge amount of the money that dog-piled into these higher-risk investments in a desperate search for yield is draining right back out. Bank of America (BAC) estimated that investors yanked $3.8 billion from junk bond funds last week alone.
The iBoxx High Yield Corporate Bond ETF (HYG) traded a whopping $4.3 billion worth of shares on Friday, the most since inception in 2007. This Bloomberg story has even more fascinating statistics about the carnage in HYG — including the fact it had its third-worst day of outflows on record ($560 million).
Bottom line: I don’t think the sick stock market is going to get any help from junk bonds. Instead, I think it could get even sicker in the weeks and months ahead.
| “The sick stock market isn’t going to get any help from junk bonds.” |
So don’t forget my recommended strategies: Raise cash. Buy inverse ETFs to hedge your downside risk. And for your more aggressive funds, turn this into one heck of a profit opportunity (more details a bit further down). Many financial stocks are particularly exposed to weakness in credit, including private equity firms, fund management companies, Wall Street-focused banks, and large foreign financial institutions.
Now let me hear your thoughts. Is $3.8 billion in outflows just a taste of what’s to come? Or are junk bond investors selling at the wrong time? Are stocks going to be hostage to junk bonds for the foreseeable future? Or is this trend played out? Any particular stocks or sectors you want to avoid or buy here, given what’s happening in the markets? Post your comments online.
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Many of you took the opportunity late last week and over the weekend to discuss the junk bond market turmoil, and what it means for stocks down the road.
Reader Donald L. said: “Third Avenue had a good reputation and this comes as a bit of a surprise. But it offers a good lesson for all. Some junk bond funds and ETFs will fall, but will also recover later as they don’t have quite this level of eclectic junk.
“The whole idea of a fund is to provide some sort of cushion against everything but total failure. The reckless use of leverage and exotics violates this principle. One would hope, but I doubt, that a painful lesson has been learned.”
Reader Chuck B. added “I agree with Mike that it is a shocking development, but it isn’t totally unexpected. If not that fund, it would have been another one. Others are likely to pop up.
“What worries me is the effect it could have on even higher grade bonds, and, after a bit, on the stock markets. So many companies – even quality companies – have gone into the debt market to finance expansion and capital expenditures, and these could be in danger of having their debt downgraded. Would investors want to own companies that have had debt downgraded? Even sound companies could see their stock move lower out of caution.”
Reader Billy was even more emphatic about the dangers ahead, saying: “There are innumerable canaries in the financial coal mine and the high-yield junk bond market is NO exception. It ranks as one of the largest canaries in the world’s financial markets. Katy bar the door … the bear market is about to really roar!”
When it comes to investing in higher-yield investments in general, Reader Jack M. had this to say about one category of them: “I’m experiencing pain on some energy pipeline stocks. Just when I thought it was low, it went lower. Seeing the dividend go up made me feel better. As long as I have confidence the investment will survive, the yield will cover the losses. In income investments, I like to think long term. Am I crazy?”
In response, Reader Jim said: “I have three of them myself. It’s been very painful. I ask myself if all of a sudden, an important element of our infrastructure is trash. I don’t think so. I think it’s mostly related to credit market problems discussed here.
“KMI, for instance, is the prime dry gas mover, which has a bright future. Rich Kinder is one of the best at what he does. If and when we start exporting gas, it should do a great business. I agree, a long-term strategy is the right one. I’m sticking!”
Lastly, Reader Lois said: “Do your subscribers a favor and recommend how to benefit from junk bond failures through such vehicles as Inverse ETFs, etc.”
I appreciate all the comments. I have been watching the junk bond market for many, many years and I know that ultimately, what happens there always spills over into stocks. It’s been clear over the past year that the junk bond weakness didn’t bode well for equities.
It’s also why I have advocated several strategies for coping (raising cash, using inverse ETFs to hedge stock risk, targeting vulnerable companies with put options for your speculative funds, etc.) here in Money and Markets.
(Editor’s note: In answer to Lois’ question, Mike has given multiple recommendations over the past several months in his Interest Rate Speculator service designed to help subscribers profit from junk bond-driven turmoil. Several positions have delivered double-digit or even triple-digit profits.)
If you have other questions or comments on these topics, make sure you add them below.
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Newell Rubbermaid (NWL) is buying Jarden Corp. (JAH) for $13.2 billion, uniting two makers of consumer products. The combined firm will sell everything from Cephalon kitchen products to Aerobed mattresses to Graco strollers.
The CEO of the mutual fund firm Third Avenue Management, David Barse, has been let go. He ran the firm since 1991, but was fired after the Third Avenue Focused Credit Fund was locked for withdrawals. The move rocked the high-yield debt market last week.
Speaking of casualties from falling junk bond prices, Stone Lion Capital Partners L.P. said investors couldn’t withdraw money they had invested in its credit-focused hedge funds. The firm manages around $400 million in those funds. The real irony here? Stone Lion was founded in 2008 … by two veterans of failed brokerage Bear Stearns & Co.
Will the Federal Reserve hike interest rates on Wednesday, only to turn around and cut them back to zero later on? The Wall Street Journal explored that possibility in a story today.
Recent experience in other countries suggests that’s a possibility, as does the threat of yet another asset bubble bursting. We’re already seeing junk bonds implode, and the story discusses whether commercial real estate could be next.
So what do you think about these firms preventing investors from getting their money back? How about the Fed – what are you expecting officials to do this week? Any other topics I haven’t covered here that you’d like to weigh in on? Then use the website as your outlet.
Until next time,
Mike Larson
P.S. Don’t miss out! Supercycle Trader — the wealth-building service that led members to 13 winners in 14 completed trades last month — is about to release a NEW bundle of recommendations.
Click this link to activate your membership today!
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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when people are fearful, be greedy. when people are greedy, be fearful. lots of fear out there right now. my guess is all this negativity means we’re still stuck in the “bear trap,” which is usually the last good buying opportunity before the market resumes its up trend.
i’m still buying the s&p. if i’m wrong, i can always sell. it’s only money, i can always make more.
Sometimes it’s a good idea to keep clear of platitudes.
…and sometimes platitudes are golden.
I don’t see any fear out there right now. A small increase in vix is hardly time to panic. My guage of fear is when the normal news media, not cnbc, starts talking about this stuff.
the rate hike is not going to be enough to affect the economy. so, you’re right, there’s no real fear out there, or i’d buy even more.
$1,000 gold: keep dreaming that a rate hike won’t affect the Dow or that there’s no fear out there. Jim Rickards, former CIA financial director and author of the book “The End of the Dollar”, has been predicting a worse crash than ’08 for years. He’s also been right about the economy for the last 20 years and no one, on Wall St or the Federal government, has listened to his savvy advice. Speaking of fear, last week the IMF head, Christine Legarde, agreed to accept the yuan as a world reserve currency, just as predicted by Rickard.
if i’m wrong, i’ll sell.
I heard 3 financial gurus, who were guests on Fox Business channel today, predict a Fed rat hike would cause a 1,000 point drop in the Dow.
that would be a good buying opportunity after i sell.
Self appointed no doubt. I have been reading all this Supercycle stuff sent to me with a grain of salt. Gold just moved DOWN $12 and change yet I read on here about a gold breakout by Tuesday go figure. I also read about the fancy information for sale on the Supercycle trader at a very fancy price. Glad I am to old and to smart to buy into that stuff. Only time will tell not Oracles.
the vix is a farce. it doesn’t measure fear. nothing can really measure fear. contrary to what they tell us about being a measure of the furtures’ contracts, it ends up simply being the inverse of whatever stocks do. nothing can actually measure fear. the deeper stocks drop, the higher the vix goes. i don’t need to the vix to tell me that scares the hell out of us.
there is a lot of negativity out there right now, not really fear. negativity is a good sign for the markets. we all know that. it’s when everyone is positive we get our guards up.
After 6 yrs of run-up, don’t you mean BULL TRAP, $1000?
that’s possible, chuck. i’ve got one finger on the sell button. anything below the august 24 dip and i’ll head for the sidelines.
Who’s on first? Jim
What’s on second.
who’s on first? what’s on second? where is were?
i’m a nut. can’t you tell. i love to write absolute garbage
i can tell you’re a troll, $1000 gold. now, can you tell me something? where is were?
Hi Mike
The sooner that the Fed gets out of the markets, the better. Yes there will be some causalities, but the markets will begin to become more free again. Bring on a modest rate hike as a sign of confidence and show some directional guidance.
Sorry Howard, but the Fed will never be “out of the markets”. That’s not what they are about.
The idea of the Fed raising interest rates just so they can turn around and lower them a bit later is a real LOL thought. At least it may hold off, for a little while, the idea of the banks charging interest to hold your money until you spend it. I fear that is coming sooner or later, as it already has in some countries. You might try pulling most of your cash from the banks and hiding it under your mattress, so to speak, but the government hasn’t printed enough bucks for that, and I hear withdrawing substantial cash is highly discouraged by banks. It makes it hard for DHS, or BATF to track it, and they will think you are trafficking drugs, guns, or something.
We are heading to be Greece very soon. A run on the banks will cause them to close without notice and they will take at least 1/2 of your money then re-open and set a daily limit to withdraw. You may get only 40 to 50 cents on the dollar.
What do you have to say about the gold to oil ratio?
Having trouble printing out new format (lose at least 2 printed lines going from page to page. Have sent e-mail asking for help. So far, NO Reply. How can I cancel my subscription to Money & Markets newsletter?
Wunderbar
Keep the humidity up in your house and you will prevent and also cure colds.
We are in this Titanic . . . the waters are so COLD no one near to come and save us … but Jesus Christ .. so prepare accordingly we are slowly going DOWN . . el que tenga ojos que vea el que tenga oidos que escuche . .
Feliz Navidad to all of you
Stuffy nose trick.
Breathe normally, then take one deep breath utilizing both the belly and the upper chest to completely fill your lungs. Pinch your nose shut right where the cartilage meets the flesh. Blow ALL the air out of your lungs. Hold your breath until you can’t stand it. Let go of nose breathe normally for 30 seconds. Repeat above 5x in a row. Nose is unstuffed! From Ayruvedic medicine.
Oil is seeping up and about to spring a leak. Good times for Saudi to be threatening productivity and crying market shares issue. Financials are like a festering buger slowly getting bigger, the more you pick at it the bigger it seems to get until it eventually comes flying out of there with all its snots and everything.
Com-mon guys why would you want to use inverse funds or put options -these are very high risk operations left to professional traders. I know I tried them with little success. Try this. You must use the following caveats 1.REALYZE. -you buy bonds to hold to maturity (no trading) you don’t care what the price goes to you just want $1000 at maturity plus coupon per bond and 2. You must be
positive as much as possible that the issuing company can survive to pay at maturity 3. buy bonds maturing in 5-7 yrs and callable only at par(1000)
Ex. xyz corp bond AA rated issued at 1000,coupon of 5% a year. Price is now at $500 so is discounted. Bond is now rated BB-and must be sold by many bond funds(at a loss.) The bond now pays you 10% per year based upon your cost(500) and at maturity say in 2020 you also collect $500 per bond as cap. appreciation because it must be
bought back at $ 1000 or the co. is in default and goes into bankruptcy (not wanted) You want them to be able to pay you back.
Good plan. Even in bankruptcy, you’ll get SOMETHING. if the company has any assets, because bondholders have first priority. (After the gubmint, anyway)
We are repeating the same things that caused the 2008 market drop. Only this time it will be much worse because we didn’t do the right things to correct the mistakes made in the 5 yrs leading up to 2008. We are kidding ourselves this won’t happen again. And it is predicted by Jim Rickards it will be much worse than ’08. The Fed printed $4 trillion in monopoly money to buy it’s own Treasuries the last 4 years. Oil is now under $40 a barrel, oil companies are laying off people because Obama won’t give the ok to sell oil to the rest of the world who would buy millions of gallons a day and bring back the folks they laid off. Oil was $1.79/gal in 2008 and no one cried the blues like the oil guys are now. And now radical Islamic terrorism, from ISIS, has begun in the US. The Fed still wants to raise interest rates and it was predicted today that if it does, the market will react with a 1,000 point drop. Why are they all so stupid????
Mike, I used to get colds and/or flu at least once or twice each year, sometimes more. First thing I did was stop the flu shots. Next was build immunity – 1000 mg of Green Tea extract/day helped, vitamins also plus 2000 units extra of D3.The last 15 years of my working life (60s and 70s) I was a driving instructor. The teens were sometimes sick, sneezing and coughing in a closed car – right next to me. The last eight or ten years, after starting my regime, I was sick once for two days, and only once for a day, since retiring, 9 years ago. Now 87. It may not work for everyone, but it seems to for me. Humid mid Atlantic climate, hot summers, raw winters. I still mow my own lawn and shovel my own snow.
anybody who’s 87 and still mows his lawn and still shovels his snow is doing something right. we could all learn a thing or two from you.
Way to go Chuck.!!!! (<:
Mule
I started taking 5000 units of D3 ten years ago and have had only one cold and no flu in that time. That stuff works. Merry Christmas Chuck. The Other Jim
Our Markets cannot help be sick especially in a country that operates like a couple that are married in a State where community property laws are in effect. What I mean by this is that one of the two that are married has a spending problem and the one that does not ends up responsible for the debts of the one that has the problem. Until we reel in our government and the central banking system that loves to manufacturer debt via credit our markets cannot and will not truly be sound money and growth generating entities. The further we go, the deeper we get into this scenario the more volatility and less value we will see in our markets.
It seems that the basic argument is whether or not debt matters. We are about to find out who’s right. Jim
our debt is manageable. we basically have a $100,000 monthly mortgage payment with a $100,000 monthly income. this would bankrupt you or me, but its manageable for uncle sam.
Higher interest rate means the monthly payment will rise, while maybe putting people out of work, therefore reducing income. Broke yet??
According to David Stockman, former congressman and Reagan’s budget director, the median market price/earnings and price/sales levels are both higher than they were before either of the last two market crashes. This would indicate the markets are very overbought and vulnerable.
Mike,
I should not keep reading your stuff,
I think I caught your cold.
soon Yahoo shares will tank as they are losing market share to yahoo, amazon and google and facebook!
What is I’m verse fund? I heard so many times but what. to buy to protect the stock. So many of your advisors talk about keep cash but when is the fire sale start?
I want to buy the I’m verse stock but don’t know.
Joanna
INVERSE, Joanna. It sells the stock short, therefore goes up, when the stock goes down. Some are geared to rise 2 or 3 times the decline Risky, but can pay off big. Not for most people. Requires study and close watch to prevent big losses when it goes against you, since it can go down 2 or 3 times as fast as the stock goes up.
Joanna,
I agree with Chuck. I use TQQQ and TZA for my inverse short term trades… You need software that will give you 1 minute and 5 minute harts of candlesticks…. I use the QQQ and IWM for my charts Then I use trend lines to make my decisions… Takes some study, but it is not rocket science… Good trading!… :)
For Jim, and others with KMI, I just read an analyst report complimenting Kinder on reducing their dividends and putting the money into CAPEX. This will reduce the need for debt, which should soon become more expensive, thus save the company money. He thinks dividends could move up to $1.30 to $1.60 by 2017, and says hold.
Chuck,
When I grow older, I want to be just like you! Well, perhaps a different political opinion, but physically and mentally, just like you….. I would suggest another vitamin to your regimen and that is a 1,000 of Vitamin C each day….. My first MOS in Special Forces was as a Medic….. Years later I spend a bunch of time as a Paramedic and was constantly around really sick people, like you were….. An old ER Doc suggested the above vitamin and I have not had a case of pneumonia since that time….I have a burn in my right lung thanks to a cyanide exposure during my military tour.. Incidentally, I also still cut my own lawns and snow blow, mountain bike and pursue a gym routine three mornings a week… We take care of our bodies an they take care of us, aye?… :)
Thanx, Eagle. I do take about 2000 of C/day – just didn’t mention, + a number of other things for various reasons. My multi is heavy on vitamins and minerals, too. Can’t do as much as I used to, but just wrestled a 50lb bag of ice melt home to get ready for the season.
Chuck,
My total is a Multi Vitamin for Seniors, 1,000 mg of Vitamin C, 2000 of D-3 and some fiber capsules….. The 1 hour gym time makes a big difference also (30 min. resistance training and 30 min cardiovascular on a bike in the Cardio theater)… In my opinion, the worst thing we can do is take to the Strato Lounger 100% when we retire… Like putting a snub nose to your head… What the heck sense does it make to work our butts off all of our lives for a retirement, then not take it for as long as possible, aye? You’d be surprised how many prior service guys there are in my gym between 0900 and noon… Good psychotherapy on my opinion!… :)
sounds logical, chuck. i think oil is near a bottom. $20/bbl oil is possible, but unlikely. somewhere in the $30 range oughta do it.
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