Black Every Day?

Third Avenue to liquidate junk bond fund that bet big on illiquid assets

"New York-based Third Avenue Management is blocking investors from withdrawing their money from a near $1 billion junk bond fund as it tries to liquidate the fund in the biggest failure in the U.S. mutual fund industry since the Primary Reserve Fund "broke the buck" during the 2008 financial crisis.

The demise of the fund is sure to renew fears that less liquidity in the corporate bond market will cause more volatility, especially as the Federal Reserve leans toward raising interest rates next week for the first time in a decade.

"People will read into this that there are some possible ramifications or concerns around liquidity and how people are positioned," said Adrian Helfert, head of global fixed income at Amundi Smith Breeden, the North American investment arm of Paris-based Amundi, which has more than $1 trillion in assets under management...."

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http://www.cnbc.com/2015/12/11/thir...ond-fund-that-bet-big-on-illiquid-assets.html

http://www.bloomberg.com/news/artic...tion-freeze-sends-chill-through-credit-market
 
My model at the time of this writting says FV for SPX is ~2115 - the two models give ~2107 and ~2124. However, it is sort of blind to bad credit and other "hidden" risks. It isn't that I don't know these are risks, it is that I don't know how to incorporate it in model terms.

My oil models are giving a mean price for oil at almost exactly where it stands. The two models give $32.06 and $40.57, with a mean $36.31 which is almost exactly where it is trading. I understand how it arrives at the two prices, but neither of those handle credit risk very well. I doubt $4 down on oil will cause huge more stress to oil debt. Oil going up will likely be bullish for most markets so that is not the worry with my current positions. But $10 down more would probably devastate a huge part of the sector, and with it add risk that my models are blind to.

My positions are definitely aiming long, but I am uncomfortable with it, particularly since it requires me to add to a losing position. This is extremely risky in way out of whack markets.
 
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It is interesting to me that in the bull market, the energy sector has decreased in percent weight. I am disappointed that tech has lagged financials, but that is from a philosophical point of view.

I wonder how much AAPL, AMZN, NFLX, and GOOG are responsible for the gains in tech % gains. Obviously, four stocks are not a market. I estimate when there are twenty tech stocks worth $1T each, we will have reached Singularity.

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https://www.bespokepremium.com/think-big-blog/sp-500-sector-weightings/
 
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It is worth running a scenario analysis of what could happen tomorrow, and stress test positions. There are three "surprise" pivots:

FED doesn't raise
Oil continues lower or explodes higher
Junk Bonds continue to implode

If Junk bonds implode, the FED may not raise.

If the FED doesn't raise, I think the DXY goes to 94. Then, what happens in each asset class depends on the second pivot, Oil. For example, say you are long the USD/NOK pair and the FED doesn't raise and oil explodes higher 10%. Uh, well, may you vaya con Dios. See? Of course, the most likely scenario is a raise of .25, with dovish comments, and oil maybe trickling higher. In which case the market probably rallies.

My point is, scenario type analysis and enumerating the possible scenarios and how those scenarios can impact your positions is probably a must tonight. Hedge.
 
Model is telling systems to start removing short oil hedges. All models pointing higher. Note, these are max 1 week to one month out predictions.
 
nitro said:
Model is telling systems to start removing short oil hedges. All models pointing higher. Note, these are max 1 week to one month out predictions.
More...
Two of the three oil models are now pointing to oil at "FV". The third says a bit higher to ~40.

Would not be surprised to see oil overshoot to the third model price, but the risk is now symmetric. I am putting some oil hedges back on.
 
First, let me state unequivocally that my models still point (SPX) higher [I have five models, two SPX and three Oil]. The following post is what I think, not what my models are telling me. I actually can't wait until they turn lower.

Debt distress level at highest since recession

"Higher interest rates are about to hit companies—just when many are ill prepared to handle them.

The Federal Reserve this month took interest rates up for the first time in nearly a decade—ending the days of free money. It might take a few years for higher rates to hit companies—as they look to refinance debt. But the troubling part is many companies aren't in great shape to eat the higher costs.

The number of companies with the lowest credit ratings and negative outlooks jumped to 195 in December, the highest level since March 2010, says Standard & Poor's. The biggest culprit for the jump in these so-called "weakest links" is the oil and gas sector, which accounts for 34 of them. But financial companies are close behind, representing 33 of the weakest links, says S&P.

The bond markets are starting to factor in the dangerous combination of rising interest rates as well as profit weakness in several sectors. The U.S. distress ratio - a measure of the amount of risk the market has priced into bonds - hit 20.1% in November, which is the highest level since hitting 23.5% in September 2009, says S&P. That's an onerous indicator since September 2009 takes investors back to the last recession..."

http://www.cnbc.com/2015/12/28/debt-distress-level-at-highest-since-recession.html
 
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