The hunt for yield…In Junk Bonds Lesson 126

  What are Junk Bonds? They are bonds that are 'BB' or lower because of their high default risk. Should you be investing in these, read on...

  The hunt for yield is drawing many investors into the junk bond market, so many in fact that there may not be enough supply to keep up with demand. A strange dynamic with  potentially interesting outcomes.

  Recently there have been huge inflows into mutual funds that buy into high yield junk bonds, and yet there isn't enough supply to keep up.

  The hunt for yield is fierce, and we're only nine weeks into the new year. At this time there is almost as much cash money coming into the high yield market as seen in all of last year. The inflow doesn't seem to be stopping.

  As investors get more comfortable about taking more risk, they are increasingly putting more money into high risk assets like high yield.

  For the issuers of high yield the current situation is great, and many of these issuers have already refinanced their debt in the last couple of years. Coming out of the debt crisis, they didn't want to wait.

 Maturities have already been taken out by the refinancing at much lower rates, and the supply needs to come from somewhere to meet all the demands coming to these high yield funds.

  There are two opportunities...One is Europe, arguably the bigger opportunity. European companies represent about 30% of the global supply, and that's growing faster than prior years.

  In Europe many of the commercial banks are pulling back, and is creating a void that J.P. Morgan would like to step into. (Lending is not happening in Europe to constrict their balance sheets to lower the asset levels).

   Investors in the U.S. want the price risk, and so believe they can get a higher yield by going into the European market and taking the commercial banks out of their paper. The opportunity is very large, in the tens of billions of dollars.

   Some of the current funds that are taking in money now are giving it back because of inadequate supply to put money to work. This hasn't happened in twenty years.

    The problem as a portfolio manager is to beat the index, and if the index has no cash in it, and if you have too much cash and you can't deploy it productively, you're forced to give it back.

   There hasn't been more merger and acquisition with all the money that is available, perhaps because of the worry of paying too much for assets, and perhaps sponsors are taking more care into how they construct these deals...But capital is plentiful with cheap debt. Low confidence and history may be the reason for the extra care in spending.

  We may see more dividends being paid going forward and perhaps more leverage-buyouts. Dividends paid to the owners of businesses are an easy way for sponsors to get capital off the table without having to go to the IPO market. This could be a major theme in 2012.

  Credit Spreads (the spread between Treasury Securities and Non-Treasury Securities that are identical in all respects except for quality rating). For instance, a company must offer a higher return on their bonds because their credit is worse than the government's.

   If you look at  credit spreads, there is not a bubble being created in the high yield market. Spreads relatively speaking continue to be wide, and the high yield market hasn't yet rallied as much as some of the other markets. Example: The high grade markets having record issuance.

  Maturities inside the U.S. are relatively low, making Europe for 2012 and 2013 the place investors will be moving their money.

  Daily market information can be found at Twitter.com/StockMktTeacher..Follow me.

Comments on Today’s Market Lesson 125

 It’s great having a little follow through from yesterday’s big up day.  The big concern was if yesterday’s move was just a one day event, or if it would be the beginning to the market pushing through to higher levels.

  So far today, we are seeing a nice little continuation to the up momentum, not very strong, but enough to keep optimism going, but on disappointing low volume. Volume is low in buying and selling, with no clear direction in either way.

  It’s nice having strong banks leading the way in today’s trading, with a tech giant Apple, the leader of all stocks right now leading tech. Many things in the market are being pulled along, a really good sign.

  Volume is hugely disappointing. The upside volume wasn’t as much as it could have been, but the downside volumes were equally as light too. It’s hard to make a big deal one way or the other.

  It’s very disappointing that the total equity market volume has been on a down trend and not stabilizing and improving at all.

  Low volume may be due to competition in many different products, but also shows that there is lots of money on the sidelines. If and when there is desire for investors to get back into equities happens, it could be a monster move.

  We had been expecting a pullback in the market after its constant rise, and the 200 point pullback recently, was less than expected. We’ve spent so much time trying to punch through 1370, and as I write this (8:15am) we’re almost 30 points higher than that, we may be seeing a sign, that if you’re on the sidelines, it may be time to get in to prevent missing out.

Bruce Cortez

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What’s driving oil prices higher? Lesson 124

  Crude Oil has rebounded in the last couple of days, WTI Crude today settled at 106.79 up 0.59%, but crude is still down about 2% in the last week and were still talking about $106, a barrel oil.

  There are a few things driving oil prices higher in today’s market. Iran is one with its concerns of a potential supply dislocation with that issue. There is also South Sudan, Yemen, Syria. All of these non OPEC sources also cut off-line. That’s a 500,000 barrel a day disruption of crude.

  There are also about 500,000 barrels a day off line in the global context , people abandoning the use of Iranian crudes, so about a Million barrels worth of supply implication is really what’s elevating this.

 The converse of this is that we’re seeing a pretty good demand implication of that higher price.

  Some think that the market will compensate for any volatility if the Straight of Hormuz were closed. There will be reaction if that happens. 20% of the world supply moves through the Straight of Hormuz. About half of that, you have relatively short term implications, in terms of being able to redirect those supplies with other pipeline systems. That still leaves about eight million barrels a day of a disruption. That would create an impact of upward in oil price.

 Just taking Iran off line, (oil exports are about 2-million barrels a day)  Our global strategic stocks have the capacity globally to satisfy an Iran short-fall for about twenty-four months. It just depends on how dramatic and how durable it is.

  The U.S. military has made it clear that The Straight of Hormuz blockage would only be a momentary period.

  These high oil prices (Nymex should be $90 - $100, Brent should be $100 - $110) do allow investors to position themselves for the opportunity. If the military strike against Iran, prices will move higher.

 If oil prices stay where they are, then look at EOG Resources (EOG 114.41), SM Energy (SM 78.17), Carrizo Oil & Gas (CRZO 29.10). These have or will transition in to much more exposure to the oil side.

  Bottom line on oil prices;

   Iran’s the wild card. Lets hope that we have a diplomatic solution through that issue. If you get that, you’re getting enough demand implication to get relief in oil price, in over the course of the year oil prices will move down $10 - $15 a barrel from current levels.

   Nymex at $90 - $100 and Brent at $100 - $110 are kind of the equilibrium levels in global context with geo-political overlay. This looks like where oil prices are headed.

  If prices stay at today’s levels, global growth and demand would be hindered, but the demand side of the the equation is what would move oil back to lower prices.

  Even with the disruptions mentioned here, there is still half a million to one million  barrels on non-OPEC growth. The demand side of the fundamental equation would remove the geo-political elements, moving us back to the lower price window.

 Bruce Cortez 

 Follow me at Twitter.com/StockMktTeacher

Investing in Today’s Market Using Technical Analysis Lesson 123

   How will the S&P perform for the balance of 2012? Looking at Charts (Technical Analysis) gives us a clue of what may very well happen, and this offers us a chance to protect our investment in the stock market. How do we protect our investment, you ask?... Buy only quality stocks on pull-backs (on sale), that pay dividends, and buy more of these same quality stocks at a cheaper price.

 For those that have money in a work place savings / investment account like a 401K what you do is move your money from the investment portion of the account to the savings portion of the account to lock in your gains while the market drops, then put your money back into the investment again to increase profits as the market again rises. Note: (401K and similar accounts have rules to promote stability in the account. They don't like lots of trading, so read the rules of your account). Example: Every few months its allowed that you make six transactions ( move into investment three times, and move out of investment three times, on line) there after to slow you down, you'll need to use snail mail to do the same thing. After more time has passed, you can then use the internet again for moving in and out of investments within the 401K account.
 Learn the rules of your account, and use them to your advantage.

 If  technical analysis is correct and very often it is, we then will have an opportunity to buy more quality stocks at reduced prices when the market offers them on sale and makes its normal 10 percent or more correction.

   S&P 500 at 1450 area is determinant level for the rest of 2012. A sequence that repeats itself is seen again with technical analysis of the S&P500.

 In 2010 from May to October, the S&P maintained a level of around 1050 to 1110, then at about September the S&P began its climb upward at a steady rate till hitting resistance at about the 1344.07 level and maintained that level from late March till July when the S&P made a correction down to 1074.77 and maintained that level till October when the S&P again began its upward climb till it hit a new resistance at 1448.87.

   This new level of support (at about 1450) could be reached by April of this year, and if history repeats itself, there will be a drop of the S&P500 to the support level of 979.45 by October of 2012.

  By keeping an eye on the charts, (Slow Stochastic, Moving average, MACD and others), we can see how the institutions are investing.  When they are buying, this causes prices to rise…or selling, causing prices to drop.

  Profits in the stock market are created by buying stocks at ‘your price’… NOT the markets, and buying when the institutions are buying. Reduce losses and create profits by learning to use charts. Learning Technical Analysis is one tool well worth learning.

 More information is at http://www.Twitter.com/StockMktTeacher