Should You Own Junk Bonds?

At "A Dash" we think the time is right for high-yield bonds.  We hold profitable positions in these securities in personal and client accounts.  The yields offer an attractive alternative to most of the common shares, and have less chance of default or dilution.  Naturally, we are very attentive to comments on prospects for these securities.

Our attention focused on this item from Zero Hedge:

…everyone is ignoring that 20% of these names will be bankrupt by year end,
unless Obama and TTT nationalize everything, in which case look for the
first 5 year plenary session some time in December, complete with
parades by the 91st and 341 Missile Wings showing off their Minuteman
III arsenals (reduced to single warhead delivery to comply with START
I).

Unlike most readers, we click through to the source, which reads as follows:

“Champagne might be a little premature,” Gregory Peters,
head of credit strategy at Morgan Stanley in New York, said
yesterday in a Bloomberg Television interview. “You’re still
facing the biggest distressed default cycle that we’ve ever
seen.”

Moody’s is forecasting the default rate among high-yield
companies globally to soar to 14.8 percent by year-end from 8.3
percent in April as companies that financed a record amount of
high-yield, high-risk debt leading up to the credit crisis
struggle to refinance.

Our Take

A key skill for investors is to verify the accuracy of sources and their evidence.  We highlighted this problem, and noted the difficulty when readers uncritically accept the summaries provided by popular sources.  The summary from this author is not accurate when one looks at the source material.

The other key point in this case is the intermingling of a political viewpoint with investment advice.  There is plenty to analyze about the Obama Administration.  We work on this daily at our sister site, ElectionStocks.com, where we link policy proposals and decisions to stocks.  Our approach is strictly analytical.  We note successes and failures, and did the same for various candidates and the Bush Administration.  Our approach is not partisan — strictly oriented to investment success.

Those who start with the conclusion — an attack on government policy — and then look for evidence, may be in for a long four years of bad investment decisions.

Long  PGF

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9 comments

  • janet May 8, 2009  

    Why would anyone listen to a source called ZERO HEDGE anyway??

  • Steve May 8, 2009  

    Any concern about rising long term T-bond rates? Would rising T-bond rates affect the prices on junk bonds negatively?

  • Greg Feirman May 8, 2009  

    Refuting one argument against junk bonds doesn’t make the case for them either, Professor. What’s your case that these things are undervalued, especially after the run they’ve had?
    I’m a seller……

  • Jeff Miller May 8, 2009  

    Steve – Rising T-bond rates might be negative if one held bonds of the same maturities. The other factor is the wide spread because of the perceived risk. These are double-digit yields, so there is room for treasuries to move higher.
    Good question, and thanks.
    Jeff

  • Russ Wood May 8, 2009  

    Prof,
    I am interested in a claim you’ve made now in at least 3 of your posts. The claim can be summarized as follows: you follow links in a blog post but hardly anyone else does.
    How can you possibly know this? I assume you can track some basic stats on your own blog. Do you consider those stats reliable for the habits of your own readers? Do you also assume those trends hold for most readers on most blogs?
    Just to be clear, I am not being argumentative, I am genuinely curious about your claim and how you arrived at that conclusion. If you have explained this elsewhere and I missed it, I apologize.
    Thanks as always,
    Russ

  • Jeff Miller May 8, 2009  

    Greg — I understand your point. I have written a bit about the lack of any acceptable value metric right now. PGF was trading in the twenties before the Lehman downfall and as low as 5.27 a couple of months ago.
    I find it a more conservative way of getting exposure to financial stocks, partly because I do not expect massive defaults in the group. That was the point of this article.
    Goldman Sachs is my only other financial long at the moment.
    If you don’t like the equity market right now, and do not like financials, then you are right. This is certainly not your play.
    Thanks.
    Jeff

  • Neil May 9, 2009  

    Hi
    I agree with your comment on the danger of mixing political opinion with investment analysis. Political affiliation is largely conditioned either by your upbringing or some emotional attachment to the political organization/their ideas. On the other hand investment analysis requires a constant striving for objectivity.
    The two things make uneasy bedfellows!

  • Jeff Miller May 13, 2009  

    Hi Russ,
    You have raised a very good question. I tried to explain this in one of the articles.
    My blog rankings are not among the top group and never will be. I do not do what it would take to get there. So I have no stat obsession. I do get occasional reports and I know what they show. They show the number of readers who click through to a source. Even when I strongly recommend reading the article or seeing the supporting charts, most people do not. They spend a couple of minutes on an article that it took me an hour or more to write, and they do not check my sources.
    Perhaps that is testimony to reader confidence in my representations, but I think not. If you look at overall blog ratings, the “reach” measured as those who click to other sources, is very low compared to the page views.
    So I do have evidence, but it is not as strong as I would like.
    Another test is to read the comments from these posts. Go go one of my examples and see for yourself. It is basically boo-yah nation.
    Thanks for a great question — one that I cannot answer with complete authority.
    Jeff

  • Russ Wood May 13, 2009  

    Thanks for a thoughtful response Jeff.
    For what it’s worth, I read your site for your analysis because it is outside the mainstream (unique) and thus valuable. I rarely follow the links. I may be kidding myself, but I justify this because I am usually familiar with the cited story via other readings (the same links seem to show up on many blog linkfests). Still, your caution on the difference between blogger analysis and news is valid.
    Boo-yah.