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The Sector Due for a CrashBy
Tuesday, April 15, 2014
"It's time to buy this sector," Martin Fridson proclaimed in late 2002...
Nobody knows more about this sector than Mr. Fridson. So I listened... I told my readers to buy it.
I told my readers to buy one fund in particular... I told them I was looking for "a total return of about 47% over the next 12 months."
The fund I recommended returned 47% in exactly 12 months after I recommended it (including dividends). Thank you, Mr. Fridson! (You can read my original write-up right here. It's a great background for today's story.)
In short, Marty Fridson REALLY knows this sector... and he is not afraid to say "BUY!" when the time is right.
Unfortunately, the time is not right...
Mr. Fridson is known as the "dean" of high-yield bonds. And today, he says the outlook for them is terrible...
Last week, he spoke at the Grant's spring conference. His speech was titled: "You ain't seen nothing yet: The next junk-bond implosion." My colleagues Porter Stansberry, Sean Goldsmith, and Dan Ferris were in the audience.
He told the crowd that the coming junk-bond implosion will be worse than it was in "The Great Recession" in 2008. Specifically, he's forecasting about $1.6 trillion dollars in global bond defaults from 2016-2019. (Yes, that's trillion with a "t".) He says three times as many companies will default compared with the number that defaulted in the Great Recession.
So what's happening?
First off, according to Fridson, junk bonds are extremely overvalued right now – they haven't been this overvalued since mid-2008 – right before Lehman Brothers collapsed...
The reason junk bonds are extremely overvalued is that investors everywhere are searching for "yield" wherever they can find it. Junk bonds are the highest-paying U.S. bonds today because they're the riskiest bonds. So people are buying them for their yield.
Individual investors haven't been hurt, yet, so they think they're safe. That illusion of safety leads to complacency, Fridson said in an interview last week: "there's a general complacency that things will remain steady with no worries, and of course that usually goes the other way."
Fridson says we have time... He doesn't think the picture will start getting ugly until next year.
I am no expert on high-yield ("junk") bonds. But Marty Fridson is...
If he says the next junk-bond implosion is just around the corner, then I'm listening...
He has made my subscribers money in the past, as I showed. And now, he's saving us from losing money looking ahead.
When Marty Fridson speaks, I listen.
And what he's saying is, avoid junk bonds... for a while...
Point taken. Thank you, again, Mr. Fridson.
Good investing,
Steve
Further Reading:
Yesterday, Steve also shared a warning for biotech investors... "The ride has been fantastic," he writes. But biotech just triggered his "Smart Trailing Stop"... so it's time to get out. Click here to learn how trailing stops can maximize the value of your good decisions... and minimize the impact of your bad decisions.
For safe, tax-free bond investing, Dr. David Eifrig encourages readers to consider municipal bonds. "You can buy valuable assets at 7%-plus discounts... and earn tax-free yields of more than 5%." Learn how it works right here.
Market NotesSHALE DRILLING PAYS! It pays to get in on shale plays early. That's the idea behind today's chart.
Over the past four years, we've published dozens of essays about the boom in North American oil and gas production. New drilling technologies have allowed us to unlock massive amounts of oil and gas.
One of the premier shale-production areas is North Dakota's Bakken Shale. It has allowed North Dakota to move from being a small oil producer to the nation's second largest oil-producing state, behind Texas. While parts of America are struggling, North Dakota is booming.
The top player in the Bakken is Continental Resources (CLR). The company got into the Bakken better and bigger than any other company. The result is a big stock rally. Continental shares have gained over 400% in the past five years. Just yesterday, shares struck an all-time high. Shale drilling pays!
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