The Stories You May Have Missed Last Week
Last week had its moments. For many of you, that likely included Friday's dramatic down day in stocks. But remember: stocks remain the "sexy" asset class that attract everyone's attention; it's a good habit to pay attention to other asset classes to really get some sense of what's going on out there.
With that in mind, we begin with that quick disappearance and reappearance of the news about the Third Avenue junk fund's announcement that not only has it's net asset value plunged, but it is refusing to redeem shares from some unspecified period of time. That may be the most important development of the week. If you re-read our last post, you see that it's a big deal that a normal, everyday mutual fund (i.e., not a hedge fund) has refused to redeem it's shares. The impact on the mutual fund industry remains unknown at this point. But if you remember last August's stock market plunge, you may also remember that some ETFs experienced extreme volatility in pricing during the trading day. Mutual funds, by contrast, were comparably steady, and its was pointed out that if you had a fund, you had no pricing problems. But wouldn't you rather deal with extreme temporary volatility and get your money when you need it, rather than wind up having your money tied up for some unknown length of time? In any case, mutual funds, always considered "liquid" in the past, may never be seen in the same way.
But whether or not junk mutual funds lose favor in the eyes of investors, we note that it will be hard for Wall Street to paper over the fact that the junk market, which has been giving signals of distress in the credit markets since 2014, now likely signals more trouble to come. This shot across the bow should rivet your attention on markets heading into 2016, a year that may find a new crisis of some sort and magnitude manifest itself. More on that another time.
Stocks, of course, did wobble, although we don't know if the wobble will spoil the usual "Santa Claus" rally that typically provides holiday cheer in December. That, we believe, depends on Wednesday's Fed announcement about whether or not they will raise rates. (Yes, it's coming this Wednesday folks.) Count on the media pumping this up to a fever pitch over the next couple of days. But whatever the decision, also remember that October's stock market rally may have taken the "oomph" out of any potential rally in December. Usually we don't find rallies in October. What would really be interesting would be if December 2015's Santa brought us all coal for our portfolio stockings, rather than candy canes.
The long bond, countering the stock slide, rallied, after some degree of correction in weeks previous. It therefore fulfilled one of its designated missions as a good counterweight.
Gold continues to wallow in its doldrums, giving little misleading signals of revival from time to time, then sinking back into the muck. Not much going on there.
Finally we have oil. Ah, oil. How many pieces crossed my digital desk these past months trumpeting the "bottoming" of oil! Yes, buy oil now. Buy oil stocks. Over and over we saw the prognostications of "oil rising." Reasons a-plenty flowed from the honeyed tongues and fingertips of those speaking and writing about all the fundamental reasons oil was undervalued. But, alas, it seems oil has now breached support and may be heading down yet another leg. If so, we face the specter of accelerating defaults - which brings us back to junk bonds. A significant percentage of junk consists of borrowings by energy companies whose ability to pay back their creditors depends on the price of oil remaining above $50. That's 50 as in F-I-F-T-Y. We're definitively under $40 now. Add to this the recent observation by bond guru Jeff Gundlach that many of the borrowers have oil price hedges that will expire in the coming months, leaving them fully exposed to the plunging price, likely spawning cascading defaults in the space. Not good.
So how do we summarize last weeks' goings-on? Well, to lighten the spirit a bit - it being the "holiday season" and all - how about this limerick created just for this Monday morn:
Hope your week brings good news. And remember, Christmas is just around the corner!
With that in mind, we begin with that quick disappearance and reappearance of the news about the Third Avenue junk fund's announcement that not only has it's net asset value plunged, but it is refusing to redeem shares from some unspecified period of time. That may be the most important development of the week. If you re-read our last post, you see that it's a big deal that a normal, everyday mutual fund (i.e., not a hedge fund) has refused to redeem it's shares. The impact on the mutual fund industry remains unknown at this point. But if you remember last August's stock market plunge, you may also remember that some ETFs experienced extreme volatility in pricing during the trading day. Mutual funds, by contrast, were comparably steady, and its was pointed out that if you had a fund, you had no pricing problems. But wouldn't you rather deal with extreme temporary volatility and get your money when you need it, rather than wind up having your money tied up for some unknown length of time? In any case, mutual funds, always considered "liquid" in the past, may never be seen in the same way.
But whether or not junk mutual funds lose favor in the eyes of investors, we note that it will be hard for Wall Street to paper over the fact that the junk market, which has been giving signals of distress in the credit markets since 2014, now likely signals more trouble to come. This shot across the bow should rivet your attention on markets heading into 2016, a year that may find a new crisis of some sort and magnitude manifest itself. More on that another time.
Stocks, of course, did wobble, although we don't know if the wobble will spoil the usual "Santa Claus" rally that typically provides holiday cheer in December. That, we believe, depends on Wednesday's Fed announcement about whether or not they will raise rates. (Yes, it's coming this Wednesday folks.) Count on the media pumping this up to a fever pitch over the next couple of days. But whatever the decision, also remember that October's stock market rally may have taken the "oomph" out of any potential rally in December. Usually we don't find rallies in October. What would really be interesting would be if December 2015's Santa brought us all coal for our portfolio stockings, rather than candy canes.
The long bond, countering the stock slide, rallied, after some degree of correction in weeks previous. It therefore fulfilled one of its designated missions as a good counterweight.
Gold continues to wallow in its doldrums, giving little misleading signals of revival from time to time, then sinking back into the muck. Not much going on there.
Finally we have oil. Ah, oil. How many pieces crossed my digital desk these past months trumpeting the "bottoming" of oil! Yes, buy oil now. Buy oil stocks. Over and over we saw the prognostications of "oil rising." Reasons a-plenty flowed from the honeyed tongues and fingertips of those speaking and writing about all the fundamental reasons oil was undervalued. But, alas, it seems oil has now breached support and may be heading down yet another leg. If so, we face the specter of accelerating defaults - which brings us back to junk bonds. A significant percentage of junk consists of borrowings by energy companies whose ability to pay back their creditors depends on the price of oil remaining above $50. That's 50 as in F-I-F-T-Y. We're definitively under $40 now. Add to this the recent observation by bond guru Jeff Gundlach that many of the borrowers have oil price hedges that will expire in the coming months, leaving them fully exposed to the plunging price, likely spawning cascading defaults in the space. Not good.
So how do we summarize last weeks' goings-on? Well, to lighten the spirit a bit - it being the "holiday season" and all - how about this limerick created just for this Monday morn:
I once bought a fund with some junk
To give my investments some spunk
But now it is said
The junk's in the red
So my money's not worth what I thunk.
Hope your week brings good news. And remember, Christmas is just around the corner!
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