On the Rise of Junk
By Barry Ritholtz - March 26th, 2010, 2:15PM
From an unnamed investing buddy of Bill Fleckenstein:
A final note regarding the rise of “junk” recently. When “junk” takes off EARLY in a new uptrend, as it did back in April of LAST year, it’s a bullish sign, indicating a revived willingness to assume risk.
HOWEVER, when the junk takes off AFTER a well-recognized up trend, it often suggests slow learners are coming to the party trying to play catch-up. This usually accompanies a big “hot-new-issue” boom and THAT phase ALWAYS marks the end of all bull markets.
We don’t have that “new-issue” fever or a rampant “take-over” fever suggesting a major top but there are plenty of warnings that a correction could hit at any moment and all it would take is some unanticipated “news” event.
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March 26th, 2010 at 3:18 pm
“Taking off early” might also have something to do with lack of any profitable competing investments. When the time value of money is zero, speculation rises.
March 26th, 2010 at 3:40 pm
Ah, but P Kedroskey just posted yesterday that we’ve had 4 well received IPO’s in ’10. All up for the year and profitable first day. A “healthy” IPO market 4 does not make, but it is a start…
March 26th, 2010 at 3:45 pm
The frenzy over LuLuLemon on CNBC for weeks had me wondering if it isn’t time for a correction. Not only has their “Fast Money” crowd been all over it but I noticed the Yahoo Finance site speculating today that the company might be a buy out. (Hype/Hype) Then there was the hooplah over speculation of Ichan take over of Lion’s Gate as if it was more big Momentum for M&A to be coming back strong. They even had Ichan and a Lion’s Gate Rep on doing negotiating on the show. FM said it was a first!
Seems to be a lot of pushing. I consider “LuLuLemon” chic junk.
March 26th, 2010 at 4:07 pm
This made me look up Fleckenstein and this Frontline interview from like 1996. he said there was $1.5 trillion in mutual funds back then. That’s like… Fidelity now.
http://www.pbs.org/wgbh/pages/frontline/shows/betting/pros/fleckenstein.html
March 26th, 2010 at 4:48 pm
He is not unnamed, Fleck nicknamed him “Mr Skin”. I have no idea why.
March 26th, 2010 at 5:02 pm
I first have to say that I’m a long-time reader but a first-time post:
My husband, who does not follow the markets (other than what he sees in the headlines ) told me last night that a friend of his was recently telling him what a great buy AAPL is. None of his friends have any deep knowledge or understanding of the markets . Although AAPL is a blue chip company (not junk), I took it as a sign that possibly the “greater fools” theory is starting to work its magic. My husband lamented that the stock is over $200 and will never go back down (as though he missed a once-in-a-lifetime chance – though I don’t know how he would even made the purchase since he has never executed a trade in his life).
March 26th, 2010 at 5:57 pm
When I first saw the ref. to junk, I thought you meant bonds. There lots of shaky companies taking advantage of the opportunity to sell junk bonds right now and they seem to have an easier time selling them than the Treasury does. This was pointed out by Mish and, I believe Rosie. Here’s the Bloomberg article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aX86gIC7aoJY&pos=6
Plus, there was a junk bond rally last year, bigger than the stock rally according to Rosie.
With many being shy of the equity market, it may be that bonds are the risk proxy for what usually happens in stocks.
March 26th, 2010 at 6:30 pm
UH… except were still closer to the “begin” of the recovery than the “end”… and thats obvious to me.
But you’ll see it in 6 months, I guess.
March 26th, 2010 at 6:34 pm
You dont “recover for 1 year” and then dip. It – does – not – happen. FULL STOP.
And IF it did, it would be driven by some event — 9/11, meteor, large Fed rate increases.
Generally… the recovery is in an early self-reinforcing stage. What do you think 3 months of 300k NFP growth will do? What will $18/share in Q1 earnings do (besides raise TTM Eps by $10 on SPX to $70 and FTM Eps by $7 to $80+)?
March 26th, 2010 at 6:40 pm
@Mike in Nola Says:
March 26th, 2010 at 5:57 pm
When I first saw the ref. to junk, I thought you meant bonds. There lots of shaky companies taking advantage of the opportunity to sell junk bonds right now and they seem to have an easier time selling them than the Treasury does. This was pointed out by Mish and, I believe Rosie. Here’s the Bloomberg article:
——–
Bill Gross today said buy “International Bonds” …the site quoted was recommending the ETF Bond Funds of Emerging Markets. I checked out one of them that seemed “promising” and backed away from it.
SO MUCH DISINFORMATION….unless you are a trader! Barry does have folks here who are NOT TRADERS…We try to speak up about this RAMPING!
March 26th, 2010 at 6:58 pm
Then there was the hooplah over speculation of Ichan take over of Lion’s Gate as if it was more big Momentum for M&A to be coming back strong. They even had Ichan and a Lion’s Gate Rep on doing negotiating on the show. FM said it was a first!
March 26th, 2010 at 7:07 pm
“Mr. Skin?” ………OMG….after watching a week of PBS Dickens Theater….that name really rings a bell with me..
“Back to the Future?” ……..or…Back to the Past.
Check out “Bleak House”/PBS Latest……….or any DICKENS………
It’s incredibly Prescient!
March 26th, 2010 at 7:11 pm
Link to Bill Gross about “International Bonds:”
http://www.nakedcapitalism.com/2010/03/guest-post-the-case-for-buying-foreign-bonds-from-low-deficit-countries.html
March 26th, 2010 at 7:27 pm
Oh… also… havent I been saying it for a few months — credit losses peaked in Q3/Q4 last year.
Q1 marks the turn in financials and the credit cycle… lending will now expand.
See — ZION, HBAN, RF, MTG, C, BAC etc… what are those? up 30-80% ytd?
March 26th, 2010 at 7:49 pm
“slow learners are coming to the party trying to play catch-up” Johnny Retail. You got to wonder how many times they have to get fried before they realize they’re playing a game that is way over their head.
March 26th, 2010 at 7:55 pm
@cognos: Will STFU, please?
March 26th, 2010 at 7:56 pm
We get your point already. We know full well where you stand, so please stop unless you have something new and different to say.
March 26th, 2010 at 8:28 pm
@Mannwich: agreed. Cognos is another species of selective pontification, trying to plant strategic biases into the minds of weakened fools. But he is wasting his time here. I don’t even read what he says anymore, and this is probably true for many others. However, it is just a harmless necessity for ole Cognos, that I’m sure Barry quite kindly allows him to scrawl his drivel nonetheless.
As for my comment on this post … I think the large number of unemployed, semi-employed, and reduced employed (making less wages than a few years ago) will be a heavy yolk for quite some time, barring new investment or a large-scale jobs creation occurrence beyond innate population growth. The private sector debt is quite large and will be a further burden on consumption and growth. State coffers will be in distress for more than one or two years. Last year more than 20 states need the Federal government to loan them money. The same will be true this year and probably the next few years.
The recent rise is due to the low rate of interest on bank CDs. As an aggregate, the sum total of wealth and savings by upper income people and investors is getting only 1% on certificates of deposit. A lot of them are trying to put their money into other securities and bonds to get better rates of return in the short term, rather than waiting it out and pouncing when the time is right.
That’s what I’m doing folks.
March 26th, 2010 at 8:37 pm
I apologize for this being off subject but I just read it and heard it earlier on TV. Can someone explain to me how these two correlate?
WASHINGTON — “A parade of financial executives warned regulators Thursday that restricting the volume of speculative trading in metals futures would drive business overseas.”
March 26th, 2010 at 8:40 pm
“UH… except were still closer to the “begin” of the recovery than the “end”… and thats obvious to me.”
because you are such a fucking genius cognos-
and a complete dick
March 26th, 2010 at 8:56 pm
@Pat G. Says:
March 26th, 2010 at 8:37 pm
I apologize for this being off subject but I just read it and heard it earlier on TV. Can someone explain to me how these two correlate?
WASHINGTON — “A parade of financial executives warned regulators Thursday that restricting the volume of speculative trading in metals futures would drive business overseas.”
————
Clueless about this, also. Seems we need to all go out and see “Alice in Wonderland” in “3-D” this Weekend…maybe we will be enlightened by that.
All very “wooo…….wooo……” these days. What’s Up is Down …What’s Down is Up…and Who knows?
Jibberish reporting by Partisans on both sides and the rest of us with ALICE! Blue Pill/Red Pill/ Mad Hatter’s Tea Party in the Markets? WHO KNOWS!
March 26th, 2010 at 9:05 pm
@TakBak04
Thanks. I was beginning to think that I was getting it.
March 26th, 2010 at 9:07 pm
@BlackSquirrel Says:
March 26th, 2010 at 5:02 pm
I first have to say that I’m a long-time reader but a first-time post:
My husband, who does not follow the markets (other than what he sees in the headlines ) told me last night that a friend of his was recently telling him what a great buy AAPL is. None of his friends have any deep knowledge or understanding of the markets . Although AAPL is a blue chip company (not junk), I took it as a sign that possibly the “greater fools” theory is starting to work its magic. My husband lamented that the stock is over $200 and will never go back down (as though he missed a once-in-a-lifetime chance – though I don’t know how he would even made the purchase since he has never executed a trade in his life).
—–
I remember back in early 1999 where we went out to dinner at our favorite Pizza Fiday Night family restaurant and the next table over was a family…Grandma/Grandpa and Children with the Grandchildren all there for the Fr. Night out. Suddenly a loud voice piped up…from what appeared to be the son of the older couple there…and he went into an argument about why it was such a great time to invest and why the older folks there (assuming they were grandparents on his side or wife’s of the children there) should be preparing for the future by giving “HIM” money to invest some big bucks in “EMC” the darling stock at that time and that he could make a Fortune with this stock. We were choking down our Pizza as voyeurs of the conversation at that point. (But, caveat…we are conservative investors)
A year later and the Nasdaq High Flying went like a kite without wind…to the GROUND.
APPLE! It’s a good product. Who could tell you whether it’s over or under valued at this point. They’ve got the “I-Pad” coming out……BUT…there are competitors. Price Range in these hard times for common folks? Who knows…
It’s just amazing that the BUZZ still lives. Lot’s of Optimists still out there…and that’s a good thing to balance us Pessimists.
March 26th, 2010 at 9:09 pm
Oh, I forgot to add. We don’t go out to 3-D movies anymore once we learned that theaters were going to charge us $2 apiece for the glasses regardless of that fact that we both had a pair. I wasn’t in line for one of those Panasonic 3-D TVs either. Both are just another angle concocted to separate you from your $$.
March 26th, 2010 at 9:16 pm
” Both are just another angle concocted to separate you from your $$.”
without a doubt Pat G- it’s all a big medicine show trying to entice a person to part w/ their cash-
and when they get bored- there will be some new product to excite them
March 26th, 2010 at 9:20 pm
@ahab
You know, if more Americans said kiss my a** and walked away those a**holes would stop pulling this shit… Because there would be NO demand.
March 26th, 2010 at 9:26 pm
>> don’t even read what he says anymore, and this is probably true for many others.
[wunsie raises hand]
The f’d up thing is: cognos could be right, so long as the government goes to further and further lengths to obfuscate and bail out the reckless speculators (incl. home-owers).
Yes, Bennie’s F/F programs are supposed to end soon. That’s a big reduction in the flow of new money into the market. But, is he installing backdoor programs? Will we ever return to mark-to-market?
Don’t know if it’s been coined before but I came up with this twist to an old favorite: the government can stay irrational longer than the shorts can remain solvent.
March 26th, 2010 at 9:36 pm
wunsacon-
I have no problem w/ Cognos’s opinions- it’s the way he expresses them- but maybe he is looking for attention?
regarding your spin on the “old phrase”-
we can create money at will- forever- until TPTB are punished by the market for their actions-
hasn’t happened yet
March 26th, 2010 at 10:44 pm
Calling Mr. Ritholtz:
Did I miss it, or have you failed even yourself for shameless self-promotion with your NPR interview:
http://www.npr.org/templates/story/story.php?storyId=125229165
March 26, 2010
Robert Siegel speaks with Barry Ritholtz, founder of the financial blog, The Big Picture, about the ethical implications of the government’s new mortgage modification program to prevent foreclosures. Ritholtz argues that the program rewards homeowners who borrowed beyond their means while punishing those who didn’t.
As I was listening to it, I had some questions regarding some of your comments. For instance, if the government is giving the mortgage company “up to 21% for every dollar they agree to forgive from the mortgage,” isn’t that still making the banks take a haircut of up to 79% of the forgiven debt? Or did I misunderstand the new program?
March 26th, 2010 at 11:00 pm
So… its an interesting point that “all I do is say the same thing”. True. It seems to fit, so I say it. I think being repetitive is helpful. There arent that many interesting things to say… find a few, repeat them.
Course… I think most of you guys say the same thing — Mannwich, Ahab, Dead Hobo, Rootless. Same stuff, every post – “sky is falling, govt is corrupt, damn the bankers, all the debt will sink us, no one has any money”.
I think none of that is true. Its like crying over “spilled milk” from 2006-07. At least I have been on the right side of things for 1 year. How do you guys do it… continuing to say those things as market moves into 18 month highs, GDP posts +5.6%, USD is stronger, inflation is low, recovery looks good?
You just say — “oh its just the govt”, “another bubble”, “crash is right around the corner”.
IT ISNT. There is just ZERO evidence for that. Data continues to support classic RECOVERY.
How do you guys do it AGAINST 18 months of evidence and data?
March 26th, 2010 at 11:07 pm
Hey Okie!
March 26th, 2010 at 11:41 pm
Cognos,
You have said it yourself – the U.S. economy does not stop and turn on a dime. How did we go from being a breath away from a second Great Depression to a normal business-cycle recession that will have a V-shaped recovery simply because the Fed elected to throw money at the problems?
What you are calling a normal recovery looks more to me like the normal oscillation that occurs when reverting to mean – the first step is invariably to overshoot on the downside, then overcompensate on the way back up.
I wouldn’t start adding in that 300K monthly increase in jobs you see coming up until the economy actually starts producing that amount of jobs.
March 26th, 2010 at 11:52 pm
Someone earlier mentioned “johnny retail”…….This indicator still signals another leg up in the market.
The retail investor is still far from being properly invested……bond funds are still an easier sell than equity funds…….At this point, I would say the retail investor has possibly gone from disinterested to starting to pay attention, but still more distrusting than eager to invest…….
March 26th, 2010 at 11:55 pm
“You dont “recover for 1 year” and then dip. It – does – not – happen.”
Sorry for the double post but I meant also to ask Cognos if he included the Nikkei and the lost decade in the above claim?
March 26th, 2010 at 11:59 pm
Winston – or 1981-1982
March 27th, 2010 at 1:36 am
TakBak04
You get my drift, though I don’t know if it has so much to do with optimism or pessimism- it is just commentary about what is happening today. That is all I know. Is that of any value? Hindsight will reveal truth.
March 27th, 2010 at 1:54 am
“…a correction could hit at any moment and all it would take is some unanticipated “news” event.”
I agree, but what is the value of a statement that is ALWAYS true. He could have said this back in March 2009 and he would have been right…
March 27th, 2010 at 6:18 am
I’ll ding in .. “A parade of financial executives warned regulators Thursday that restricting the volume of speculative trading in metals futures would drive business overseas.” .. I heard talk about how businesses need to hedge for materials as a matter of good business sense .. maybe this internet thingie does work and I get what I wanna see – ie the commodities trading needs to be more ordered – grower/diggers bounce to manufacturer shipping depots with less money pile pushers inbetween .. real working for a living … so to the statement a warning you can’t control this now that pandoras box is open
on thread and that .. what ever happened to investing into a businessmans dreams with cash on the barrel and if it don’t work out .. well – whats left is inside those castle walls .. call the auctioneer
“what ever happened” – the world got super engineered super connected and is super populated and now in a super mess … I’ve seen (not myself) days like these in history books
March 27th, 2010 at 8:18 am
BlackSquirrel Says:
March 26th, 2010 at 5:02 pm
My husband lamented that the stock is over $200 and will never go back down (as though he missed a once-in-a-lifetime chance – though I don’t know how he would even made the purchase since he has never executed a trade in his life).
reply:
—————-
Thank you for this post!! If you are being truthful, then this is an excellent sign that Fed engineered and commissioned sales pundit fortified rally is kaput. On 3-31, the last of the Fed fuel gets used up. Now real money will be required to keep the pump alive. Fat chance.
March 27th, 2010 at 8:32 am
I dont know why people are overthinking this environment. What we have here is a good old fashioned carry trade built upon fed policies/guarantees put in place to recapitalize the banks. The liquidity ultimately finds a home somewhere and in this world, and for past 12 months, its been anything with a yield. The search for yield continues.
If you wonder why this trade has continued even in the face of a recent dollar rally, you can hear what one of my insider buddies at a HUGE HF tells me: “The vast majority of HY and equities are in USD anyhow so the FX component is not too relevant. It would really only matter to investors overseas investing here and vice versa.
The carry trade that’s on now has nothing to do with the FX carry of old. It’s that a US bank can have illiquid assets on it’s books at 40 when they are worth 10. They just make $10 a year for 3 or 4 years and write down the investment a little bit more each time around while still able to show a profit. So long as nothing drastic happens eventually they’ll have it written down to market. That’s why even if you bid 15 for it you can’t get them to sell it. Yes the carry trade is on, but if banks can earn their way out then who cares?”
Again, simple. The fed is allowing the banks to carry trade their way out of this mess and wall street is simply doing their thing on top of it to make as much as possible. It works until it doesnt anymore.
March 27th, 2010 at 8:32 am
cognos Says:
March 26th, 2010 at 11:00 pm
How do you guys do it AGAINST 18 months of evidence and data?
reply:
————–
The evidence I use comes from being educated and by paying attention to current events. I also have no problem recognizing that the people hyping the most have a vested interest in keeping people invested … they get paid by taxing the value of funds under management and some get an additional pump when the account makes money. To the best of my knowledge, they don’t have to give any back if the account goes down, plus they still make base commission up or down. Then, they true beauty of the plan comes out … they make bonus again when the market recovers, thus getting paid twice or more for the same gains. All you need are clients who believe “nobody could have seen that coming!!” or “where else are you going to put it?” or, “only dipshits sell and take profits. We don’t buy and hold. We re-balance.”
Perhaps you should just flush your evidence as opposed to studying it thoroughly after you complete your daily dump. Have you saved all 18 months worth?
March 27th, 2010 at 8:39 am
One voice: I object to the smarmy characterization of families facing foreclosure as nothing but people who willingly borrowed more than they can afford. Even in good times there are 100s of reasons people find their lives fall apart – from substance abuse, to divorce, to death of spouse, to disease, to unemployment. Now you add increased unemployment into a situation where repayment ability depended on two family incomes (twice the chance of failure.) And, there are lots of innocent bystanders, including those who were mislead as to what they were signing (I know that’s their fault but…)
I also object to the disparaging of any attempt at modification as too little or futile. At best, one can only twist the debt to a certain degree. At best, maybe 20% will see some material benefit from this. If they are already in a 5.50% 30 year loan making it a 40 year loan saves comparative pennies. Perhaps the best one can do is reset the due date and give the homeowner time to adjust their family budgets to the new situation. So, if we can assist only 20% of the FAMILIES who want to stay in their homes and neighborhoods through modification should we, Liberals?, not try to do it?
Finally, I prefer debt set-aside (put into a non interest bearing second) with a balloon (to resume repayment) to outright forgiveness. They did borrow the money after all.
March 27th, 2010 at 8:41 am
MEH and others, one of the problems is that mankind has basically “gone off the rails.” Our thinking is skewed and one aspect of this that has a real impact is that our current economic paradigm is woefully inadequate to describe the actual “way it works.”
Here’s an article for perspective (on this page, please select for your enjoyment (Hall, C.A.S., Klitgaard, K.A. (2006). The need for a new, biophysical-based paradigm in economics for the second half of the age of oil. International Journal of Transdisciplinary Research, 1, 4-22):
http://web.mac.com/biophysicalecon/iWeb/Site/Downloads.html
March 27th, 2010 at 8:49 am
Jim67545 Says:
March 27th, 2010 at 8:39 am
One voice: I object to the smarmy characterization of families facing foreclosure as nothing but people who willingly borrowed more than they can afford.
reply:
———-
Agreed that some people did everything right and are still left holding a flaming bag of crap. These people deserve some sensitivity considering the multitudes of those who thought they were getting something for nothing and now hope the government gives them something for nothing. The latter are an intended and significant beneficiary of this bailout, according to people I heard on TV.
I’m sorry for their bad decisions, but people with 2 mortgages who thought flipping properties was a god given right and whining is a god given talent deserve squat. I’d rather see some hard working family buy a new and now inexpensive home they can pay for as opposed to subsidizing some parasitic elements who have a sense of entitlement.
March 29th, 2010 at 7:12 am
Cognos,
1) I’m sorry for adding that last sentence above and making my disagreement with you personal. We have enough to disagree about without making it personal.
2) I believe that the market has gotten ahead of itself significantly and is due to correct significantly. If prices fall to realistic valuations, some form of financial regulation takes hold, and both the Fed and US Govt stop pumping the price of everything in sight, we will see a genuine market recovery follow. At that point, the equity markets will be safe to venture into. At the current moment, I believe it’s just a contrived and liquidity driven pump that holds no value for genuine investors and expect a correction sometime.