The battle lines are drawn between those concerned about the reaching for yield going on these days and those who think that there’s nothing to worry about yet. In meetings and calls, the question is asked over and over, “Is the high yield market a bubble?”
On the one hand, you have the kind of scary activity chronicled by Distressed Debt Investing. On the other, there are many firms saying that it’s not time to pull back, including BlackRock and Goldman, as reported in tweets from Josh Brown and me within an hour of each other today.
I’ve seen this movie before. I know how it will end, just not how many reels are left.
By complete chance, I came across a clipping in my files today. It was an article from Barron’s, dated Christmas Eve of 2007. It was entitled, “Getting the Red-Carpet Treatment,” which was a play on the “preferred” treatment you get with preferred stock.
The subtitle said, “The stocks’ low prices and lofty yields are just a few of their attractions.” A box with the caption “The Bottom Line,” included this: “The preferred shares of Fannie Mae, Freddie Mac, Washington Mutual and certain REITs all look enticing.”
Perhaps one day I’ll do a pix showing the fifteen months that followed. The charts are quite the sight. In addition to the ones mentioned above, the recommendations were for Bank of America, Citigroup, Morgan Stanley, General Motors, Ford, and more. Many of them went down 60-80%. And I almost forgot: Lehman. That went to zero.
That’s a historical reminder, not a prediction of things to come, but neither journalists or financial experts will get many of today’s buyers out of high yield before they get hurt, whenever that may be.