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Weekend Links: Focus On High Yield Bonds

Published 08/10/2014, 01:08 AM
Updated 07/09/2023, 06:31 AM

We haven’t done a Linkfest in a while. Tadas Viskanta’s “Abnormal Returns” is the gold standard amongst the blog distributor’s, but our goal is not to compete with or even try and emulate Tadas’s regular product.

Instead the goal is to simply re-distribute the best of what we see come across our horizon in terms of blogs, tweets, etc., every once in a while, and maybe readers will benefit. We try and add a new source of good content every few months, someone or some source that we thought had good intelligent market commentary, that was somewhat actionable, and worthwhile.

* The best article I read all week, and in fact probably in the last month, by one of Barry Ritholtz’s employees. I actually talked about in a meeting with a new prospect on Friday, August 8th, 2014. From 1995 through 2000, the S&P 500 rose – on average – 25% per year. During the next 10 years, the S&P 500′s cumulative return, from March, 2000 through March, 2009, was a cumulative -1.38%;

* So much focus on high yield bonds of late. Christina Padgett of Moody’s distributed Moody’s regular North American leveraged Finance Update. I missed the conference call in late July. Moody’s Analytics on their August 7th, 2014 note said that high grade (investment grade) spreads could widen “somewhat” from their recent 109 bp lows, while high yield’s (below investment grade) recent 418 bp’s could widen to 425 by year-end 2014. What struck me was that, that widening doesn’t seem very worrisome. Although after the last decade of stock and high yield returns, everyone is a worry wart these days, Moody’s also noted that the US high yield default rate in June ’14 was 1.9%, which COULD or might average 2.5% 1h ’15. My thought was that if the HYG is yielding 5.79% as of Friday, August 8th’s close, and the high yield default rate is just 1.9%, expected to rise to 2.5%, that leaves 3.5% of excess spread on just the HYG, on just the expectation of defaults increasing ?

Maybe the selling in high yield is now overdone. At 6.5% or 7% on the HYG, we’d certainly give the asset class a hard look. I’m tempted even now…

That is what I think so many miss individual investors miss on the high yield analysis: while selling the record low spread-to-Treasuries for the asset class is somewhat prudent, the fact that defaults stay very low as the Fed continues ZIRP (zero interest rate policy) means the excess or record low spreads, may not be that worrisome. A lot of high yield debt is being refinanced at these record low rates, which takes pressure off the balance sheet and helps ease default risk.

The HYG hasn’t traded below its 200-week moving average since late 2011, or when we had the last recession scare, until this week. This week the low on the HYG was $91.32, while the 200-week moving average is $91.42.

Does anyone think a recession is imminent ?

I actually like municipal high yield better than taxable. Absolute muni high yields are higher than taxable, just by a few bp’s, but that is saying something. John Miller, Nuveen’s muni high yield manager has done a great job this year.

* Jeff Miller’s A Dash of Insight is always a must read. The new release is not out yet this weekend. Here is last week’s blog update.

* Barry Ritholtz on the “Structural Bull Market”. Barry cites Jeff Saut, a pretty good market forecaster. I happen to be in this camp, as I noted here using Blackrock data 6 weeks ago.

* Ryan Detrick on yesterday’s oversold bounce. Detrick is seriously one of the best short-term and statistical concierge’s I know. We sold a little into Friday’s pop on the 5 am Vladimir Putin comment about easing the tensions with Ukraine. Why is Vlad suddenly credible ?

* Paul Hickey’s Bespoke is a another very credible research house. Subscriptions costs are reasonable too. The weekly Bespoke Report letter published every Friday afternoon, between 30 – 40 pages in length, is one of the best weekly market summaries I’ve ever read. Bespoke noted this week, the largest weekly drop in newsletter bullish sentiment since February, ’14, which from 55.6% down to 50.5% in the last week. What has been interesting about this survey over the last few years is that while newsletter writers are bullish, the average investor has remained tilted bearishly as measured by the AAII data. AAII bearish sentiment jumped this week to 38.23% – the highest bearish sentiment in a nearly a year.

That – in my opinion – is the hallmark of this bull market, off the March, 2009 low: average investors are still cowed, and intimidated. I graduated from college in 1982, and only knew a bull market until 2000, and then in 2008, I really knew a bear market. With last week’s 4% drop, fear gauges spiked and bearishness ramped. We haven’t seen a 20% correction since mid-2011.

* Per Bespoke, as of Thursday night, just 23% of the S&P 500 were trading above their 50-day moving averages. Fear and risk come on in a hurry.

* Norm Conley of JAG Capital out of St. Louis on the continued attractiveness of Technology. Russell 1000 Tech continues to outpace the Russell 1,000 Growth index. Here is another post from Norm on the forward operating EPS of the 10 SP 500 sectors. Norm uses this to make the case for Tech, but I think Basic Materials looks pretty good too.

* The drubbing Industrial stocks have taken after q2 ’14 earnings releases is puzzling. There has to be opportunity there. More to come on the Industrial sector this week.

We are going to cut it off here late on Saturday afternoon. There are a lot of blogs and such out there, competing for your eyeballs. Thanks for taking a minute to read ours.

We had a decent bounce in the S&P 500 later this week. One of our worst positions this year has been the TBF or the unlevered or Inverse Treasury. Gary Morrow, one of our favorite technicians notes the double-top in the IEF  Friday, August 8th, on “This Week on Wall Street”, a blog to which he contributes run by Doug McKay. I’m hesitant to get long duration here, since the TLT also traded down to the late May ’14 yield of 2.38% – 2.3 this week and could not trade through. The late selloff in Treasuries Friday afternoon with the SP 500 ramp, was probably more position squaring.

I feel like this equity market correction isn’t over, but another sharp leg down in the S&P 500, and we’d be buying for a year-end rally.

A lot of retail reports this week, including Macy’s (NYSE:M), Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS) and Wal-Mart (NYSE:WMT) – tough sector all year long. Cisco Systems Inc (NASDAQ:CSCO) too. (Long WMT with about a 2% position, and long a small position in CSCO.)

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