Investments

2008 was a bad year for stocks and credit alike.  The Credit Crunch and global financial crisis meant worsening and at some levels disaster credit flow conditions for companies and governments alike and as remarked by Wall Street Journal :

The relationship between U.S. stock and credit markets is ending 2008 in fittingly dysfunctional fashion.

For much of the year, the two markets have been out of sync, with credit often worsening even as stocks rallied. Now, credit seems to be improving, but the stock market isn’t.

Junk bonds, that are also defined as high yield bonds (click herefor a full definition of Junk Bonds from Wikipedia) has now in some investors’ minds traded down to tempting levels as well and whilst the risk remains high in terms of defaults some are now pointing to these junk bonds as a prospective investment opportunity.

This post looks into the pros and cons and Junk Bond investments and where they are possibly headed here on the threshold of 2009.

Toby Shute from Fool.com has this to say about Junk Bonds as a viable investment right now :

Whether you opt for an exchange-traded fund or a closed-end fund, both provide a convenient way to pick up a diversified basket o’ distress. Corporate defaults are definitely headed higher, but the firms that survive ought to generate returns that are fabulous enough to outweigh the zeroes. That’s all the more true if you buy during another dramatic sell-off akin to what we saw in early October and late November.

Shute goes on to also recommend individual securities if one is more hook on companies’ debts :

If you’re bearish on the broader economy, or your inner stock picker urges you to hone in on individual securities, there is another easy way to dip a toe into this part of the market. There’s a fair amount of debt out there that’s listed on a stock exchange and traded just like stock. The usual denomination for these notes is $25, so you’ll see them trading around that price in normal times — remember those?

General Motors (NYSE: GM) has exchange-traded debt priced at around $3, or a dozen pennies on the dollar. But that discount isn’t altogether unreasonable, and it’s not really the kind of opportunity I’m thinking about.

More interesting to me are cash cows like Comcast (NYSE: CMCSA)and CBS (NYSE: CBS). Comcast, the largest cable company in the country, has a note (ticker: CCS) trading below 80% of par. Viacom (NYSE: VIA)spinoff CBS has two issues (tickers: CPV and RBV) trading around $0.50 on the dollar. That is pretty astonishing for an investment-grade credit.

I know both companies are likely in for a rough 2009, but visions of default do not dance before my eyes.

Stephen Taub of CFO.com analyses what he sees as a deterioating credit quality among U.S. speculative-grade issuers in recent months and goes to list the dire credit news of 2008 :

Total downgrades for the year reached 518 as of Dec. 17, the most since 2001. What’s more, the 311 downgrades in the second half of 2008 make the highest second-half total ever, already eclipsing the total of 308 in 2001. “We expect downgrades to continue at this pace in the first half of 2009,” S&P predicted in a new report.

The percentage of issuers with negative bias — those designated as “CreditWatch negative” or with a negative outlook — has climbed to 37.5 percent, nearly a six-year high.

Mark Gongloff of WSJis somewhat mystified that the stock market has not recovered after the Federal Reserve recently lowered its base rate down to zero, making colerporate lending easier for US companies but offers a couple of likely explanations :

One possible explanation is that credit markets are behaving as they sometimes do after dramatic Fed actions — bears rush out, then bulls rush in but end up burned.

Something similar happened after big Fed cuts in September 2007 and January 2008, notes Brian Reynolds, chief market strategist at WJB Capital Group. Each time, credit enjoyed a brief rally that ended in tears. This time, credit speculators may be hedging their bets by shorting stocks.

and if this is not the case he has another couple of explanations ready at hand:

A more benign interpretation is that stocks are simply lagging credit, as they have for much of this crisis. Thin holiday trading could be exaggerating moves in credit or muting the stock-market response. That suggests the stock rally that began after Nov. 20 and petered out on Dec. 15 could resume with the new year.

But another possible explanation is that, while credit has improved some, it hasn’t improved enough to offer assurance to stock investors. Even after their recent rally, high-yield bonds still fetch nearly 20 percentage points more than Treasurys, a bit wider than at the recent stock-market bottom on Nov. 20.

Whilst he admits the usual relationship between bonds and equity is not clear as present he does not see any signs of the US economy slipping into the much-feared Depression though despite the lacking US stock market uptake:

Given the massive jolts of stimulus being fired at the economy, a depression seems unlikely. But the economy isn’t healthy, either. The upshot: Credit could recover even further without sparking much of a response in stocks.

Randall W. Forsyth of Barrons.com draws parallels to the 1930s Depression when it comes to the corporate bonds’ spread:

Yields of Baa-rated bonds fell from about 9.25% when that column ran to a little bit over 8%. That decline roughly paralleled the plunge in U.S. Treasury- bond yields over that span, which means corporate bonds’ spread — the extra yield investors demand to compensate for risk — has remained near the peaks of the 1930s. The question is whether corporate defaults will equal those the Great Depression.

Looking ahead Forsyth quotes two leading players in the bond market for predicting further price gains and hence yield declines :

The narrowing swap spread is a harbinger of further contraction in corporate bond spreads, according to Michael T. Darda, chief economist of MKM Partners and an early bull on Baa corporates at their peak yields in October. He sees further price gains (and yield declines) ahead. Darda notes that corporate bond yields peaked 17 months before the economy bottomed in the last cycle. That would be consistent with his forecast of a recovery coming not until late 2009 or 2010. Junk bond yields topped out 11 months before the economy’s trough, so there’s still time to buy speculative-grade debt by that schedule.

Similarly, Jeffrey Rosenberg, head of credit research at Banc of America Securities, also thinks high-grade corporates yielding over 8% offer return potential that’s competitive with equities, but with lower risk. He also favors sticking with investment-grade bonds until the default picture in leveraged finance becomes clearer-before being tempted by 22% yields on junk debt.

Whether or not investing in high-risk debt as junk bonds are is the way forward in 2009 obviously remains to be seen but it seems that analysts agree that the market situation at present is quite unique and may offer good returns for the risk prone investor. The question is of course if Junk Bonds is a better option that buying back into the stock markets which now seem set for some kind of return if not a bull market come the 2nd half of 2009.

This blog will continue to follow the at present off relationship between bonds and equity.

Bond Investments, Investment Securities, Investment opportunities, US Investments Bond, Credit Crunch, Federal Reserve, Investment opportunity, Junk Bonds, US base rate

The US Dollar has had a turbulent year, first dropping to an all time low against the Euro in July only to surge to around the 1,20 level in October / November on the back of dropping equity markets, working as a safe haven for investors.

In recent days the Dollar has again dropped significantly in value against major currencies and especially the Yen & the Euro and the question is now what we can expect to see from the Dollar in 2009 with an ongoing credit crunch and crisis, wavering economies and lack on consumer demand in most sectors and countries ?

This post looks into some of the prevailing views on where the US Dollar is headed in 2009.

MarketWatch highlights the irony of the strong Dollar in the second half of 2008 which was based not on a strong US Economy but rather the fact that investors and governments alike fled into the Dollar as a safe haven and falling US interest rates too supported the increasing Dollar:

In 2008, the dollar did what most analysts expected it to do, but not for the reasons most had expected.

The U.S. economic recovery that many had predicted failed to materialize. Instead, the credit crunch morphed into a crisis, the slowdown turned into a full-blown recession, and U.S. interest rates went further down instead of up.

But the dollar still came roaring back to life in the second half, buoyed not by better U.S. fundamentals but by a mostly unexpected rush to safety.

The consequences of the dollar’s strength in the second half of 2008 will be seen throughout the first half of 2009. The prior strength of the dollar will eat into the profit margins of many U.S. companies that are doing business abroad,” said Kathy Lien, director of currency research at GFT in New York.

“This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.

Currency, Investment News, Investment Securities, Investment opportunities, US Investments bonds, Currencies, Euro, US Dollar, US Treasury, Yen

SEC Chairman Christopher Cox

 

The Bernard Madoff investment fraud scandal is still evolving with Mr Madoff having been brought before a judge in NYC recently and lately with an open admission of guilt by the SEC Chairman Christopher Cox.

This post highlights his admission of lack of control and investigation and considers what the experts feel about the same.

In a MarketWatch article on the subject Mr Cox is quoted for saying :

In a statement Cox said an initial probe into how Madoff’s alleged fraud remained undetected revealed “multiple failures” by the regulator to thoroughly investigate the former Nasdaq chairman and his firm.

“The Commission has learned that credible and specific allegations regarding Mr Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action,” Cox said in the statement.

He’s revolted by what he found out, but it’s also in his interest to be revolted,” said James Cox, a securities law professor at Duke University in Durham, North Carolina who isn’t related to the SEC chairman. “He’s taken a lot of heat over SEC enforcement.”

Cox said he has ordered a full review to investigate the past allegations against Madoff and why they were not found to be credible. The probe, to be led by the regulator’s inspector general, will also look at all staff contact and relationships with the Madoff family and firm and whether they had any impact on decisions by SEC staff.

Equity Investment, Investment Banking, Investment Company, Investment Fund, Investment Management, Investment News, Investment Securities, Investment Services, US Investments Bernard Madoff, financial scam, Insider trading, The Securities and Exchange Commission (SEC)

As if it isn’t enough for private as well as institutional investors world-wide to have the worst financial crisis upon them in decades, if not ever, to deal with, the world markets were rocked last week by the shocking exposure of the Bernard Madoff investment fund.

Investors are now scrambling to assess an alleged fraud up to US Dollar 50 billion and every type of investor is involved and exposed it appears, many of them high-profile (click here for a list over investors exposed). Mr Madoff’s Investment Securities firm is supposedly, and in the founder’s own words, “all just one big lie” and “basically, a giant Ponzi scheme”.

These investors are now angrily asking each other and more importantly the regulatory authorities : How could this be allowed to happen ?

This post looks into some of the prevailing arguments to this scandalous story of fraud, lack of control  and personal greed.

Bloomberg reports that The Securities and Exchange Commission (SEC) apparently never inspected the firm:

U.S. regulators never inspected Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, after he subjected it to oversight two years ago, people familiar with the case said.

The Securities and Exchange Commission hadn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.

Investors and analysts are shocked that a scam of this proportion could be allowed to go on for so many years and the article quotes a leading expert:

“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. “It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems.”

CNBC has an interesting storyon a firm, Aksia, that during its due diligence of Madoff’s firm and fund discovered several reasons for not engaging in business with the company:

The firm, named Aksiaand run by Jim Vos and Jake Waltour, based its warning on several red flags it discovered during an investigation. Those included ….

1. The Madoff investment strategy, called “split-strike conversion,” is known to be very volatile; it involves trading huge positions around options expirations. Despite that volatility, its returns over the past decade were an amazingly stable 8-10 percent.

2. Aksia discovered a 2005 letter to the Securities and Exchange Commission from a financial advisor who supposedly studied Madoff’s operations. That letter asserted Madoff was running a Ponzi scheme. There was also a Wall Street Journal story at the time about one of the Madoff’s associated “feeder funds” getting shut down in 1992.

3. Madoff’s strategy was bizarre: He said he would move $13 billion in various trades at once, yet Aksia couldn’t find traders who saw his trades. There were also no regulatory filings. And family members were running the firm.

The Wall Street Journal points to even more red flags having been raised towards Madoff’s investment fund:

Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real.

“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.

Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.

The article continue and quotes another expert, Chris Addy, for saying that there were also conflicts of interest involved:

Conflicts of interest also proved a concern. “There was no independent custodian involved who could prove the existence of assets,” says Chris Addy, founder of Montreal-based Castle Hall Alternatives, which vets hedge funds for clients seeking to invest money. “There’s a clear and blatant conflict of interest with a manager using a related-party broker-dealer. Madoff is enormously unusual in that this is not a structure I’ve seen.”

And the article goes on:

Recent securities filings showed that the firm held less than $1 billion of shares, raising questions about where the rest of the money was. Some of Mr. Madoff’s investors say they were told the firm put the bulk of its money in cash-equivalents at the end of each quarter, explaining why the public filings showed so few shares, but raising questions about where the proof was for all the cash.

Until at least November, 2006, the firm, which claimed to manage billions of dollars and be among the largest market makers in the stock market, used as its auditor Friehling & Horowitz, a small New City, New York firm.

Mr. Vos says his firm hired a private investigator and determined that the accounting firm had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office. His firm felt that was too small an operation to keep an eye on such a large firm operating a complicated trading strategy. A message left for the accounting firm was not returned.

Finally check out this video from YouTube on the scandal:

This post will continue to follow this amazing story ofd what could turn out to be the largest investment scam in decades if not ever.

Equity Investment, How it all works, Investment Company, Investment Fund, Investment Management, Investment News, Investment Securities Bernard Madoff, Fraud, Investment Scam, The Securities and Exchange Commission (SEC)