April 4, 2015
By Steve Blumenthal
“Deals are getting worse and worse for the investor, and they have been powerless to stop it. The only winners are issuers and their underwriters.”
– Martin Fridson
I circle back to the high yield bond market frequently because I believe it will signal a coming recession. While I provide no guarantees, of course, it has historically done a good job as a leading indicator. Equity markets decline approximately 40% in recession.
I wrote a piece for Forbes this week about how the investors’ chase for yield will end badly. The quality of new issuance is – simply junk. A default wave is ahead. That’s actually good news as I see one of the greatest buying opportunities of a lifetime in the not too distant future. Remember the 20% yields on high yield bonds in 2008. My two cents is that the coming opportunity will be even better. We’ll see.
In the piece, I share a simple trend following strategy you can use to help identify the change in cyclical trend. I hope you find it helpful. For now, the high yield bond trend is positive.
Included in this week’s On My Radar:
- Junk Bonds Are The Investment Opportunity Of A Lifetime, Just Not Yet
- Trade Signals – Trend and Sentiment Remain Bullish, Bond Models Bullish
Junk Bonds The Investment Opportunity of a Lifetime, Just Not Yet
It is what’s happening beneath the surface that we should set our focus. Moody’s rates covenant quality on a scale of 1 to 5, with 1 being the most restrictive and 5 the least. In February, the average covenant score for all new bonds was 4.51, worse than the previous high of 4.43 last November. Such “covenant lite” bonds mean that the advantage goes to the borrower; thus, the investor is accepting more risk.
An outstanding investment opportunity in high yield bonds is growing closer. Just not yet. Be patient. Let’s take a look at what you can do to identify the opportunity and act on it. I explain in detail and show a trend following approach that may help identify the opportunity in an article I wrote for Forbes.
Trade Signals – Trend and Sentiment Remain Bullish, Bond Models Bullish
The Zweig Bond Model and our CMG Managed High Yield Bond Program have both switched back to “buy” signals. The overall equity market trend remains positive as measured by Big Mo (Momentum) and the 13/34-Week EMA. Sentiment is neutral.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
- Volume Demand Continues to Better Volume Supply: Bullish for Stocks
- Weekly Investor Sentiment Indicator:
- NDR Crowd Sentiment Poll: Neutral Signal from Optimism (short-term Neutral for stocks)
- Daily Trading Sentiment Composite: Neutral Signal from Pessimism (short-term Bullish for stocks)
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bullish
Click here for the full piece.
Personal note – Pop and Old Spice
As a kid, the gift I gave my father was either a cheesy tie or some Old Spice after shave. It was his smell all day, every day. I don’t think he ever missed a chance to reapply. My old man graduated (I like to say) four years ago this month and one of his wishes was for us to spread some of his ashes on top of his favorite mountain.
So there we were, standing at 11,000 feet atop Snowbird, Utah, huddled together in prayer to connect with Pop (he loved being called Pop) and thank him for many things, including the gift of skiing he gave to us. We each took a small handful of his ashes. As we were about to lift his ashes into the wind, grandson Tommy shouts out, “smells like Old Spice!” We all broke out in laughter. I forgot his smell. He never missed a day. Old Spice, my old man and love. What a nice family celebration. I’m sure Pop loved it as much as we did.
Wishing you and your family a warm and wonderful holiday celebration. Happy Easter and happy Passover.
Have a great weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
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