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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (51192)	5/1/2002 6:18:50 PM
From: Jacob Snyder	Read Replies (2) \| Respond to of 54805

<<The forecast for defaults for the rest of the year is that they will decline considerably, down to 7% by year's end>> What's their forecast for the default rate on dollar bills? A 7% default rate should tell you, right there, that we are not talking about a "cash equivalent". Plus, that 7% rate is just a guess. At the beginning of 2000 and 2001, what were their guesses for those years? Guessing the rate of future defaults in junk bonds, is basically a macro call. No one has a good track record of making such calls. If the 1Q02 GDP numbers are a sign of things to come, then the default rate will fall a lot. If we get a W-shaped recession (and I can think of about a dozen plausible scenarios to cause that), then the default rate will soar. Basically, no one knows. You can eliminate company and sector risk, by diversification. Assuming it is well managed. Many billion dollars of Enron and Worldcom bonds (investment-grade, all of them, until very recently) in "well-managed" bond funds. But the main risk is market/macro risk, and that cannot be eliminated, no matter how well managed a junk-bond portfolio is. You can talk around this issue all you want, but there is an iron-clad, unbreakable connection between risk and return. And, by definition, a junk bond (or a junk bond portfolio, no matter how structured) is not a cash equivalent. Yes, I know (because I'm human) I have a tendency to see what I'm looking for. And not see, what I have previously decided I'm unlikely to find. I've been worried for a long time, about this issue (the general issue of risk management in their investments, not the specific issue of junk bonds). I keep finding new reasons to be worried.