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It is very difficult to make money in
choppy non-trending markets. When politics is unstable, this makes it even
worse. With high-grade bonds returning less-than-true inflation, investors
and bond traders get busy with Junk Bonds as a last resort.
“In finance, a high-yield bond
(non-investment-grade bond, speculative-grade bond, or junk bond) is a bond
that is rated below investment grade. These bonds have a higher
risk of default or other adverse credit events, but typically pay
higher yields than better quality bonds in order to make them attractive to
investors.” -Wikipedia
It is our contention that the global
bond markets are overloaded with all kinds of bonds, whether they are of
investment-grade, corporates, central bank bonds, infrastructure and
municipal bonds or whatever.
We think it is very clear the Federal
Reserve is on overload in the amount of paper they have offered, they are
currently offering at auction, or plan to offer in the future. In a recent
report we said the Federal Reserve is now at a point where they are having
difficulty selling nearly 60% of the regularly offered auction paper.
The net result is a turning point in
yield rates. Investors will demand higher
interest rates for additional risk.
Europe is in a credit mess. Investors
from Europe are buying Bernanke’s paper as a safe haven out of fear,
and demand for security. This has calmed down and mitigated some risk for US
paper for the intermediate term of a few months. However, the risks are
rising again as the international credit markets are all intertwined. The
forecast for bonds is: run away!
Should we get a nasty credit event in a
major market, which is surely coming, it is not beyond our imagination to see
a rolling crash in the primary bond markets with too many investors running
for the exits all at once. If so, this becomes that grand moment in time when
we could see a cascade of bond defaults, crashing in an unstoppable waterfall
of valueless debts.
Risk is beyond comprehension of most
investors and traders.
“The holder of any debt is subject
to interest rate risk and credit risk, inflationary risk, currency risk,
duration risk, convexity risk, repayment of principal risk, streaming income
risk, liquidity risk, default risk, maturity risk, reinvestment risk, market
risk, political risk, and taxation adjustment risk. Interest rate risk
refers to the risk of the market value of a bond changing in value due to
changes in the structure or level of interest rates or credit spreads or risk
premiums.
The credit risk of a high-yield bond
refers to the probability and probable loss upon a credit event (i.e., the
obligor defaults on scheduled payments or files for bankruptcy, or the bond
is restructured), or a credit quality change is issued by a rating agency
including Fitch, Moody's, or Standard & Poors.”
–Wikipedia
Have you noticed all the credit rating
agencies downgrades for central bank paper like Greece, Spain and France?
Even the USA got a credit-debt downgrade!
Some of our top analyst friends are
saying this is inevitable and that it’s not a question of if it
happens, but when it happens. If you are trying to exit risky paper or maybe
even high grade paper, and these markets hit the dumpster, it’s too
late and you won’t get out without major losses, in our opinion. The
simple reason is: there will be not be enough buyers taking the other side of
this trade.
Bubble Magnitude of Junk Bonds Issued is
Legendary
Wikipedia went on to
report…“Global issue of high-yield bonds more than doubled in
2003 to nearly $146 billion in securities issued from less than $63 billion
in 2002, although this is still less than the record of $150 billion in 1998.
(The) issue is disproportionately centered in the United States, although
issuers in Europe, Asia and South Africa have recently turned to high-yield
debt in connection with refinancings and
acquisitions. In 2006, European companies issued over €31 billion of
high-yield bonds. 2010 was a record year for European Junk Bond issuance,
with as much as €50bn expected.
“In the US, high yield bond
issuance after the financial market meltdown of 2008-09, produced $317
billion in offerings through the first 11 months of 2012, besting the
then-record $287 billion seen in 2010.”
Housing Related Bonds and Credit Ready
to Smash
In June of 2005 we reported in Trader
Tracks Newsletter that the housing markets would crash based
upon two key events: (1) As commodity futures traders, we watched as the
lumber futures took a dive on that date. (2) Next, we observed new housing
prices in hot markets rise over 100% from 2003 to 2006. This was encouraged
by Mr. Greespan’s easy, low interest rates
permitting too many unqualified buyers to purchase homes way beyond their
ability to pay.
That was seven years ago and housing
remains a severely damaged market sector. At its very foundation, the credit
and bond markets are wrecked. Worse yet, the housing related bonds are soon
to be joined by commercial real estate paper in the trash, as the leases in office
buildings and the retail sector continue to fail and unwind.
Recent action in residential and
commercial real estate gave some green shoots encouragement. However, if you
look closely, you can see two major USA department store chains failing
badly. We have reported on this for over 3-4 years and now it is getting
worse.
The hottest, biggest, extensive retail
market in the world, Hong Kong, China has reported luxury rents at $15,000 a
square foot. We find this preposterous and so do the tenants as they are
leaving as fast as leases expire with no renewals. The retail chickens are
coming home to roost. You cannot push on a “charge more” string
forever.
Municipal Bonds for Community Finance
are Breaking Down
In 2010, Meredith Whitney (a top credit
analyst) reported that 100 USA communities would soon default on their bonds.
She was unfairly and harshly criticized. We view her work as among the best
in this field. Mrs. Whitney was just a little early. In the investment
business it is much better to be early than late. If you are a tiny bit too
late you can lose a bundle in a flash. Please note the counties, cities and
towns in California, the Midwest and Alabama for failure examples.
This is just the tip of the iceberg as a
torrent of failures is coming. The interest on these municipal bonds comes
from real estate and business taxes. With so many failures in this sector the
bond interest due from taxes is simply not available to pay the bills.
“In the first 11 months of 2012
companies sold a whooping $324 billion in junk
bonds, according to Dealogic. That
means with one month to go in 2012 the speculative junk bond bubble is more
than DOUBLE the size of anything we saw right before the 2007-2008
crash!” –Mike Larson, Money & Markets 12-7-12
There are several ETFs and related
indexes for investing in bonds of all kinds. There are also two
signal-indicator indexes measuring volatility and market attitudes towards
investing in bonds. At this point from a technical analysis standpoint,
the red warning lights are flashing on all of them. We are planning an essay
in Trader Tracks Newsletter to elaborate on this problem/opportunity.
The story will offer trading ideas and suggestions to protect investors and
enhance trades for gains.
Even if you were holding a large package
of junk bond investments and had offsetting trades with put option spreads or
positions, we have to wonder who can cover in the event of a major market meltdown? In our view, the damages would be overwhelming and
the insurance credits (puts) could not be paid nor covered. The cash demands
could simply overpower the ability to pay.
We already learned from the explosion of
derivatives used for real estate and other credit markets what happens on
those so-called insurance policy trades! Big banks were hit so hard they
became insolvent and were propped up using TARP funds, which were paid by US
taxpayers.
Big banks or writers of these
derivatives simply cannot cover going into default. The banks have buried
them in back rooms off-balance sheets to get them
out of the way of more similar trading. This is like keeping two sets of
books and we say it’s fraudulent. This is not news and has been written
about extensively by top analysts who report on our industries, the economy
and markets.
Hard Assets are Best Investment - Not
Fiat Paper
It is obvious to us that hard assets are
the answer. It all starts with physical gold and silver.
Somebody please tell us when the global
bond markets crash for good and we’ll tell you when this can all get
better and we can start over again, maybe with a partially backed fiat gold
currency.
Roger Wiegand
www.webeatthestreet.com
Contact Claudio Bassi, at Trader Track’s New York City publishing
offices for a trial subscription. Call
718-457-1426 Monday through Friday, 9:30am to 5pm or,
e-mail cbassi@miningstocks.com
Recommendations made in “Trader Tracks”
are exclusively those of Roger Wiegand and the
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