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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Justa Werkenstiff who wrote (2036)	11/8/1998 7:59:00 AM
From: Justa Werkenstiff	Respond to of 15132

Greenspan has been praying for this kind of article to appear. From today's NYT: Market Watch: Missed the Boat? Climb Onto Junk By GRETCHEN MORGENSON NEW YORK -- Impressive indeed, this John Glenn rally in the stock market. In the seven trading days since Glenn was lifted into space, the Dow Jones industrial average has rocketed 7.2 percent. Even more remarkable, the Dow has rallied 19 percent from its Aug. 31 low. Of course, anytime a market moves up this far this fast, it leaves plenty of investors behind. Those who sold stocks during the late summer or early fall are kicking themselves for their caution. But chasing stocks after a nearly 20 percent spurt doesn't feel right, either. What should investors do? Buy junk bonds. Because of their outsized risk, these securities are regarded more like stocks than bonds. But unlike equities, junk bonds have not yet rallied from depressed levels. That is because there's still less liquidity in the junk market; trading isn't near the usual volume for this arena. Fears of a credit pullback and another travesty like the one that befell the Long-Term Capital Management hedge fund have kept the market frozen for high-yield bonds. Although the first signs of a thaw are emerging, these bonds still trade at exceptionally high yields relative to Treasury bonds with comparable maturities. For example, the yield on Merrill Lynch's High Yield Master index now stands at 5.76 percentage points above 10-year Treasuries. That is down from the peak spread of 6.44 percentage points on Oct. 16, but still well above the historical average spread of around 4 percentage points. Junk bonds look especially compelling if you believe the bulls' case for stocks. This view says that there is no recession on the horizon, that further interest rate cuts from the Federal Reserve Board will make sure none appears, that worries of a credit contraction are overblown and that corporate earnings will not be as weak as previously thought. If the bulls are right, junk bonds will be big money makers for investors. But an appealing aspect to buying junk bonds at current levels is that the reward potential is great and that the chance of disaster is far less than it is in the stocks that are back to their all-time highs. Even if the nation slips into a recession and default rates rise on junk debt, prices of these already depressed bonds are not likely to crater. If prices do fall a bit, investors collect a considerable yield for their trouble. That high-yield bonds have not yet responded to the Fed's recent rate cuts at least partly reflects investor unease about rising defaults among issuers of risky debt. Defaults have averaged 3.3 percent of all issues annually since 1971, but hit a low of 1.4 percent in the spring of 1997. Recently, the rate has crept up to 2.6 percent. But Martin Fridson, chief high-yield strategist at Merrill Lynch, says the market in junk bonds is so beaten down right now that even a 5.5 percent default rate wouldn't trash it. Indeed, according to Fridson's calculations, junk's current premiums to Treasury yields are roughly the same as what they would be if default rates were 13 percent. Nobody believes that defaults are going to rise to double digits. The reason that the spreads grew as wide as they did was that liquidity evaporated. "In effect, you're already at a spread consistent with a default rate three or four times where you actually are," Fridson said. Because of the high costs associated with buying individual junk issues, high-yield mutual funds are the way to go for most investors in this market. Funds rated highly by Morningstar, and with relatively high yields and low expenses, include Fidelity High Income, Legg Mason High Yield Primary and Vanguard High-Yield Corporate.