junk bonds

Is Preferred Stock a Good Bond-Like Investment?

Some people like preferred stock, which is similar to a bond and has higher yields. My reaction is that any bond-like thing with high yields is like a junk bond and could seriously damage a portfolio during a recession. An ETF of preferred stocks has about half of its assets in the banking industry. This is extremely risky because banks are levered about 12 to 1 and thus have a ratio of 92% debt and 8% equity. If a small amount of the bank’s loans fail then the stockholders and later the preferred shareholders will suffer the loss. In the great banking crash of 2008 some bank preferred stock received support from the government but generally it has been government

2016-06-20T16:08:18-07:00 June 20th, 2016|mayflowercapital blog|Comments Off on Is Preferred Stock a Good Bond-Like Investment?

More Cracks In The Junk Credit Market

Today the president of a P2P online lender and two other employees mysteriously and suddenly resigned. It was alleged that loans that the company sold to investors had something improper. The company had to buy back those loans and sell them to some other investor. I have been writing for a long time that P2P and BDC lenders are too risky. These lenders claim that there is a new era of online lending that enables them to find creditworthy borrowers that banks can’t find but that is a ridiculous theory. Banks can do anything that these online lenders do, if the underwriting is sound. These lenders simply recruit shaky “B” paper borrowers and play dumb when they “underwrite” the loan

2017-01-10T23:33:01-08:00 May 9th, 2016|mayflowercapital blog|Comments Off on More Cracks In The Junk Credit Market

How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

Puerto Rico will default on a large bond payment due May 2. How will the markets react? The hedge fund industry owns a very large portion of Puerto Rico’s bonds, doesn’t want a default, and is hoping that somehow the commonwealth can simply borrow more to have the cash to make scheduled payments. That is irrational since there is no way the island can afford its existing debts. Congress is working on passing a bill that would allow the commonwealth to use the bankruptcy courts to cut the debt balance. This is the humane thing to do and is the island’s only hope. Voluntary negotiations with creditors to ask for a cut in debt balances won’t work since some creditors

2016-04-22T14:39:43-07:00 April 22nd, 2016|mayflowercapital blog|Comments Off on How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

When Will The Recession Occur?

The average economic recovery lasted 66 months over the past 50 years. Recoveries were of shorter duration before that, however, I prefer to use the most recent 50 years because it is more relevant. The current recovery is 82 months old. The recoveries in the past 50 years that lasted longer were 1991, which lasted 119 months, and 1982, which lasted 91 months. Both of those were due to rare, exceptionally favorable circumstances including the Reagan tax cuts, the end of the Cold War and the huge opening of low cost EM labor markets in the former communist areas. The good times in 1982-2000 correlated with significantly lower debt to GDP loads than today’s debts. Some people claim that the

2016-04-11T12:18:11-07:00 April 11th, 2016|mayflowercapital blog|Comments Off on When Will The Recession Occur?

Rising Risk of Big Muni Bond Default

As the economy moves closer to the top of the credit cycle and a subsequent stock crash and recession bond investors should be aware to avoid being fooled by hidden risks in bonds. Traditionally Muni bonds were low risk and had a track record, except for a few tiny cities, of not defaulting. But Puerto Rico is deeply in debt. News stories have said the territory may seek a 46% haircut plus several years of no interest (which would really be more like a 55% haircut. There are many news stories about Chicago public schools having more debt than they can afford. It was a shock when Lehman failed and creditors were paid a small amount. When Argentina defaulted in

2017-01-10T23:33:03-08:00 February 2nd, 2016|mayflowercapital blog|Comments Off on Rising Risk of Big Muni Bond Default

Junk Credit Markets Have Already Crashed: Recession Coming

Junk bonds and similar subprime financing devices like BDC and P2P lending are what will fail and soon cause a recession. About a year ago the news media ran articles saying not to worry because the interest coverage ratio was roughly a fifth better than at the top of 1989 junk bond bubble. But interest rates were much higher then, so that implies if rates were (hypothetically) the same in both eras then about a year ago junk bonds would have reached a peak similar to the 1989 top. The news reports of a year ago need to be revised to reflect the serious deterioration in debt service ratios for energy companies and how that affects other allied industries like

2017-01-10T23:33:05-08:00 December 22nd, 2015|mayflowercapital blog|Comments Off on Junk Credit Markets Have Already Crashed: Recession Coming

Today’s Bond Market Turbulence

Today junk bonds declined 0.87% in price and the 20 year Treasury ETF TLT declined 1.3% in price. Usually if junk bonds decline then Treasuries go up, so this was rare situation. Probably investment grade rates rose out of fear of the Federal Reserve’s likely rate increase to be announced on December 16, 2015. Junk bonds had already declined a lot last week after Third Ave. Focused Credit Fund mutual fund announced a freeze of redemptions.  I expect that the Fed may still go ahead with the rate increase just so they can claim they were prudent in fighting inflation. But eventually the rising amount of evidence of a growing global economic weakness will probably result in the rate increase

2017-01-10T23:33:10-08:00 December 14th, 2015|mayflowercapital blog|Comments Off on Today’s Bond Market Turbulence

Lessons From The Junk Bond Crash

    Recently junk bonds and other low quality credit instruments like bank loan participations have plummeted in price as defaults rise. Typically a rise in junk bond defaults is the canary in a coal mine that a recession is coming, which in turn means stocks will crash 50%.    A mystery exits where workers who suffered from underemployment and excess debt were able to continue consuming goods at the same as before the 2008 crash. Corporations have increased profits by cutting wages and work hours and yet they managed to keep their sales from falling. So how do workers manage to buy back the things they make if they have less income? The answer is of course borrowed money. Perhaps

2017-01-10T23:33:10-08:00 December 11th, 2015|mayflowercapital blog|Comments Off on Lessons From The Junk Bond Crash

Bond Fund Risk

Today the Third Avenue Focused Credit Fund stopped letting investors redeem shares so they can do an orderly liquidation. See the Wall Street Journal article. Investors in bond funds should remember that junk bonds can become illiquid and thus a massive redemption request would result in the sale of its bonds at a fire sale price thus making things worse for the mutual fund shareholders. Investors in investment grade bonds should remember that occasionally small portions of the portfolio can become junk and drop in value. Unlike a bank account a bond portfolio can lose value because of a credit quality downgrade.    During the Lehman bankruptcy some “A” grade bond funds dropped a few percent in value. Lehman was

2017-01-10T23:33:10-08:00 December 10th, 2015|mayflowercapital blog|Comments Off on Bond Fund Risk

Oil Plunge Creating Recession in Credit Markets

   There is a massive flight to quality in the junk bond market with CCC rated bonds now yielding 16.6%. This is an amazing spread of the 10 year Treasury which yields about 2.24%. The spread between the two is over 14% instead of the usual 4% to 6% spread. Rates these high are called shut off rates where the capital markets have simply shut off the supply of funds to these borrowers. When this happens then the news spreads to the all of the lending industry and the fear becomes contagious causing B paper borrowers to be unable to get needed funds thus triggering possible defaults.

2017-01-10T23:33:10-08:00 December 8th, 2015|mayflowercapital blog|Comments Off on Oil Plunge Creating Recession in Credit Markets