Even though short-term interest rates are now increasing, investors are telling Yellen & Co., the pace of hikes is still way too slow. The reach for yield remains a dominant theme in fixed income markets. Here the WSJ reports that the demand for leveraged loans is on fire. Investors are desperate for decent income and riskier companies are taking full advantage. The upshot is that the world of leveraged loans appears to be going slightly mad. Loan sales are running ahead of the pace of the past three years, fueled by a rush of money into the sector. Retail investors have piled … [Read more...]
Should You Dump Your Junk Bonds Now?
Despite higher yields, junk bonds today don't look to be worth the risk. If loss rates are factored in, the rosy picture of higher yields begins to look less appealing. MarketWatch reports: The real junk yield The truth is that it’s much riskier than it seems from doing this simple yield, or yield-spread, analysis. That’s because the annual loss rate for junk bonds over the past 35 years has been around 2.5%. You can arrive at the loss rate by adjusting defaults for recoveries. Default rates for junk average about 4.2% annually, according to research from Standard & Poor’s. And … [Read more...]
A Failed Fed Tightening
For the third time in the span of about twenty years, the Fed is in denial over an asset bubble its policies have helped foster. Bubble conditions are most obvious in the FANG segment of the stock market, but a value-based investor could point to many more areas of the market where values appear stretched. Yes, the Fed is now tightening policy, but the pace of tightening is about four years late and at a pace that the market finds laughable. Here, the Wall Street Journal presents the facts of a failed Fed tightening. Broad financial conditions are as accommodative now as they were in early … [Read more...]
Net Worth to Income Exceeds Prior Bubble Highs
Here is a chart that should make the Fed uncomfortable. You are looking at the net worth of American households as a percentage of their disposable income. The three lines in the chart are the mean, and plus and minus one standard deviation. What should stand out immediately is how for five decades the ratio moved in a relatively narrow range than then soared and crashed, and then soared again and crashed. Now the ratio has soared again and it has exceeded prior highs. Part of the driver here is that growth in household liabilities has slowed from its historic path, but the biggest … [Read more...]
Bill Gross Sounds Scared of This Market: Should You be Too?
Janus Global Unconstrained Bond Fund manager and market guru, Bill Gross, sounds scared of today's stock market. At the Bloomberg Invest New York summit on Wednesday, Gross said "If there’s a common factor it’s the expansion of credit. And the credit that’s being generated by central banks. Money is being pumped out into the system and money that is yielding less than nothing seeks a haven not only in bonds that are under-yielding but in stocks that are overpriced." … [Read more...]
Portfolio Strategy: Is This What is Driving the Asset Bubble?
Here’ s an interesting chart from Bespoke Investments that may go a long way toward explaining the exuberance among some sectors of the stock market today (think FAANG type stocks). This shows the share of Millennials who say they are taking more or much more risk with their investment assets now compared to last year. The Millennials are of course too young to have any battle scars from the dotcom bust. They may not appreciate the damage that can be done in the investment markets when valuations reach pie-in-the sky levels. If the history of markets is any guide, it looks like … [Read more...]
Asset Allocation Advice from Jack Bogle
Here Jack Bogle offers insight on asset allocation which can help you become a more successful investor Diversification is the cornerstone of a prudent investment program, but when you diversify, most often something in your portfolio is performing poorly when other assets you own are performing well. Many investors instinctively want to get rid of the under-performing assets and buy more of the assets that are going up. That would of course defeat the purpose of diversification. As Jack notes here, he is invested about 50% in stocks and 50% in bonds and half the time he worries why he has … [Read more...]
Don’t Invest like a Herd Animal
Investing in the consensus isn't always the right course of action. Beware when the financial press and the majority of analysts agree on something. It can be a sign that the opposite is true. This idea was fleshed out nicely in 2008 by Stephen McClellan in Full of Bull: Do What Wall Street Does, Not What It Says, To Make Money in the Market. Now you can see evidence of the phenomenon of herd investing again in the case of Europe. The Financial Times reports that Europe's strong performance is a big surprise among investors and economists. Chris Giles and Claire Jones write: The consensus … [Read more...]
Muni Bonds at Risk
Illinois is on the brink of having its credit rating cut to junk status. On June 1, S&P Global downgraded the state's credit to one notch above junk. The ratings agency also said it may downgrade further this summer if the state's legislators and governor can't agree on a budget soon. Eric Platt writes for the Financial Times: The state’s general obligation bonds, debt often considered sacrosanct by investors, are now rated triple-B minus by S&P, its lowest investment grade. S&P’s smaller rival Moody’s downgraded Illinois on Thursday, too, to Baa3, also a single level above … [Read more...]
Boutique Value Manager Closes Flagship Fund
Longleaf Partners has long been a boutique value manager we have followed at Young Research. They are one of the good guys in the mutual fund industry. Longleaf uses long-term value oriented approach and eschews the benchmark hugging and overdiversification that handicap most mutual fund managers. So what does it say about the market when a highly respected boutique value manager that only buys about 15-25 companies in its portfolio closed not because its fund has grown too large, but because there are a lack of opportunities? You can read between the lines. Here is more from … [Read more...]
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