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They're back! - Yield hunt pushes funds into CLOs, CDOs
What a surprise - no one learned anything from 2008 (which, four years later, I think is the main lesson from 2008, that no one involved was going to learn anything from it) and the situation with yield forces managers to look for bizarre derivatives.
Reply to @hank: I think it's sort of the philosophy of having to do something.
It's an investment world where a manager doing something that he or she knows is troubling (derivatives counter-party risk, yadda yadda) is better than sitting in cash. Things in the economy are likely going to be fixed by time (and, you know, actual work from politicians), but we have to do SOMETHING, even if it's all about short-term positives that have a considerable long-term cost.
I mean, people get upset with funds like FPACX or ARVIX for being too much in cash. How many funds have the ability to go to cash in the way that these funds or Yacktman do? Not many. While one can question cash in this environment in some regards, certainly, in general, why is it there are so few funds that have the ability to dial up and down cash level/risk?
You have these fund managers who would rather invest in a triple-leveraged, completely unsecured mortgage on a Pizza Hut in Jersey than sit in cash because they have to do something. Fundamentals? Screw fundamentals, look at the yield!
In fact, I'm going to sell some CDS protection on this Pizza Hut (sell CDS protection on pizza hut, long cheese futures pair trade - and yes, I know there's not cheese futures, it's a bad attempt at a joke), maybe short some interest rate swaps, a little CDO there, etc - and then, I'll just lever it all up - what, 25X?.
Everyone's gotta find something to do because they've got this pressure to perform (and now pressure to find yield in bizarre places), then occasionally, the music stops and you hope the manager you invested with finds a chair before the other ones do. Yet, there's never really any realization of the why or how, the first thought is how quickly can we go back to doing the same thing again with the same derivatives.
There's always another triple-levered, unsecured Pizza Hut, and the next one is a couple of months late on its franchise fees (and that last part is somehow "financialized" in a new derivative I can't even imagine - franchise fee swaps?) There's no real fundamentals under the thing, but hey, look at that yield!
"What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant. We said this a month ago when we cautioned, precisely about Chesapeake, that "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses."
I wonder why some people have lost the faith in investing these days.
Comments
http://investmentfraudpro.blogspot.com/2008/12/recovering-losses-in-oppenheimer.html
It's an investment world where a manager doing something that he or she knows is troubling (derivatives counter-party risk, yadda yadda) is better than sitting in cash. Things in the economy are likely going to be fixed by time (and, you know, actual work from politicians), but we have to do SOMETHING, even if it's all about short-term positives that have a considerable long-term cost.
I mean, people get upset with funds like FPACX or ARVIX for being too much in cash. How many funds have the ability to go to cash in the way that these funds or Yacktman do? Not many. While one can question cash in this environment in some regards, certainly, in general, why is it there are so few funds that have the ability to dial up and down cash level/risk?
You have these fund managers who would rather invest in a triple-leveraged, completely unsecured mortgage on a Pizza Hut in Jersey than sit in cash because they have to do something. Fundamentals? Screw fundamentals, look at the yield!
In fact, I'm going to sell some CDS protection on this Pizza Hut (sell CDS protection on pizza hut, long cheese futures pair trade - and yes, I know there's not cheese futures, it's a bad attempt at a joke), maybe short some interest rate swaps, a little CDO there, etc - and then, I'll just lever it all up - what, 25X?.
Everyone's gotta find something to do because they've got this pressure to perform (and now pressure to find yield in bizarre places), then occasionally, the music stops and you hope the manager you invested with finds a chair before the other ones do. Yet, there's never really any realization of the why or how, the first thought is how quickly can we go back to doing the same thing again with the same derivatives.
There's always another triple-levered, unsecured Pizza Hut, and the next one is a couple of months late on its franchise fees (and that last part is somehow "financialized" in a new derivative I can't even imagine - franchise fee swaps?) There's no real fundamentals under the thing, but hey, look at that yield!
The real-life example is this:
http://www.zerohedge.com/news/why-corporate-balance-sheets-just-dont-matter-new-zirp-normal
"What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant. We said this a month ago when we cautioned, precisely about Chesapeake, that "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses."
I wonder why some people have lost the faith in investing these days.
Actually you're wrong Scott. There are cheese futures. (-:
http://www.futuresmag.com/2010/05/05/cme-group-expands-dairy-complex-with-cheese-future