October 31, 2014
By Steve Blumenthal
“If you want to change the world, start off by making your bed”
Admiral William H. McRaven
“Have you heard about the Making Your Bed speech”, Susan asks me. I was sifting through a week’s worth of research trying to figure out what might be meaningful to share with you today. Next to me, with coffee in hand, her google search finds the 2014 University of Texas commencement speech by Admiral William H. McRaven. The speech is about succeeding in life, about overcoming hardship and about changing the world for the better.
“Start each day with a task completed. Find someone to help you through life. Respect everyone. Know that life is not fair and you will fail often but step up when the times are the toughest, face down the bullies, lift up the downtrodden and don’t ever, ever give up. If you do these things, the next generation and the generations that follow will live in a world far better than the one we have today.” — Admiral McRaven
I was left both moved and motivated! You’ll find the video link below.
Today, the Fed ends QE and the Bank of Japan steps more aggressively on its own QE accelerator. I believe we are heading towards a debt reset – a credit crisis greater than the last. This is an event that will provide opportunity for some and hardship for many.
Included in this week’s On My Radar:
- Make Your Bed and Never Ring That Bell – Admiral William H. McRaven
- More on High Yield and the Coming Default Wave
- End of QE – One Chart That Tells It All
- The Math of Loss
- Trade Signals – Trend Still Positive and Sentiment Favorable – 10-29-2014
Make Your Bed – Admiral William H. McRav
1. If you want to change the world, start off by making your be
2. If you want to change the world, find someone to help you paddle
3. If you want to change the world, measure a person by the size of their heart and not by the size of their flippers
4. If you want to change the world, get over being a sugar cookie and keep moving forward
5. If you want to change the world, don’t be afraid of the circuses
6. If you want to change the world, sometimes you have to slide down the obstacle head first
7. If you want to change the world, don’t back down from the sharks
8. If you want to change the world, you must be your very best in the darkest moments
9. If you want to change the world, start singing when you’re up to your neck in mud
10. If you want to change the world, don’t ever. ever ring the bell
I hope you enjoy the video – here is the link: www.youtube.com/watch?v=pxBQLFLei70
More on High Yield and the Coming Default Wave
Who Will Suffer from a Leveraged Credit Shakeout? By Charlie Henneman, CFA
Of all the noteworthy moments from the 2014 CFA Institute Fixed-Income Management Conference, the bombshell may have been the default call from Martin S. Fridson, CFA.
Fridson, CIO at Lehmann Livian Fridson Advisors, has been a leading figure in the high-yield bond market since it was known as the “junk bond” market — and he sees as much as $1.6 trillion in high-yield defaults coming in a surge he expects to begin soon.
“And this is not based on an apocalyptic forecast,” he assured the audience.
High-yield bonds, typically issued with credit ratings at the bottom of the scale, tend to suffer default surges during troughs in the credit cycle. The first high-yield default surge occurred from 1989 to 1992, and encompassed the collapse of Drexel Burnham Lambert. The second surge ran from 1999 to 2003, following the bursting of the dot-com bubble, and the third happened in the midst of the global financial crisis, from 2008 to 2009.
Fridson suggests the next default surge will be larger than the last three combined. Each surge saw an average annual high-yield default rate above 7% (which, if extended over a multi-year period, can add up to real money).
Fridson currently projects that 1,155 issuers will default in the next wave. Over a four-year period that easily surpasses the 644 defaults in 1999–2003, the largest of the three prior default surges.
For context, Fridson points to the last default surge of 2008–2009: It lasted only two years, and the market swung from a record number of defaults in 2008 to a below-average number in 2009, something Fridson “would have said was impossible.” The reason, of course, was that interventionist policies did as intended in the wake of the financial crisis, cutting the credit cycle short and giving new life to many issuers that were staring default in the face. In the absence of a strong cyclical recovery, this may only have delayed the inevitable.
Fridson noted that since 2010, the high-yield market has seen deterioration in the credit-ratings mix even as it has grown at a compound annual growth rate exceeding 10%, fueled in part by European issuers accessing the high-yield markets in lieu of bank credit, which has been harder to get thanks to more conservative bank capital requirements.
One key assumption behind Fridson’s forecast is that the Fed ends its program of quantitative easing (QE) and allows interest rates to rise. QE may have ended, but Fed guidance calls for interest rates to remain low for a “considerable time.” Fridson was asked about QE and the persistence of low rates during Q&A after his presentation, and the answer left the audience murmuring.
“If we’re in this Fed rescue mode [in 2016–2019], then I think we’re in a lot of trouble. Very serious trouble.”
Here is the link to the full piece. http://blogs.cfainstitute.org/investor/2014/10/30/who-will-suffer-from-a-leveraged-credit-shakeout/
End of QE – The One Chart That Tells it All
The Math of Loss
Portfolios must find ways to limit the impact of significant decline. This next chart tells us why.
Source: http://www.advisorperspectives.com/commentaries/streettalk_102814.php
Trade Signals – Trend Still Positive and Sentiment Favorable – 10-29-2014
Technical trend evidence remains positive and investor sentiment evidence continues to support a short-term recovery uptrend. The market remains expensively priced, the cyclical bull is aged – risk is high.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: Cyclical Bullish Trend for Stocks Remains Bullish (as measured by NDR’s Big Momentum indicator and separately by the 13/34-Week EMA S&P 500 Index Trend Chart)
- Weekly Investor Sentiment Indicator – NDR Crowd Sentiment Poll: Extreme Pessimism (Bullish for the Market)
- Daily Trading Sentiment Composite: Extreme Pessimism (ST Bullish for the Market)
- The Zweig Bond Model: Cyclical Bull Trend for Bonds (supporting longer-term treasury and Corporate bond exposure)
- Demand/Supply Chart – Quickly Back to a “BUY” Signal
Click here for the full link, including updated charts, to Wednesday’s Trade Signals post (trend and sentiment charts)
Conclusion
“Start each day with a task completed. Find someone to help you through life. Respect everyone. Start singing when you’re up to your neck in mud.” Love it! If you watched the short video, you might be nodding with me.
I can just picture the look on my children’s faces when I sit them down this weekend to watch it together. It should be fun. Of course, only to be followed every morning with “make your bed”.
Happy Halloween. Here’s to remembering the joy we had on Halloween and, more importantly, watching the joy you will see in those many little eyes tonight.
Have a wonderful weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
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