Junk Bonds Flash A Warning Sign

July 29th, 2014
in contributors

X-factor Report 27 July 2014

by Lance Roberts, Streetalk Live

Over the last several weeks, I have noted the burgeoning spread between junk bond yields and the S&P 500. As I noted last week:

"The divergence between junk bond spreads to treasury yields and the stock market will be corrected soon. Either rates will jump sharply or stocks will decline. With economic data weaker than headlines suggest, geopolitical conflicts brewing and markets surging as the Fed continues to pull away liquidity - there are plenty of catalysts to send stocks lower. Complacency and the 'yield chase' are at extremely dangerous levels."

Follow up:


However, this past week there has been a notable change in the chase of "junk" related assets.

Over the last three years, the key to "outperforming" the S&P 500 was to buy stocks with the absolute WORST fundamentals. As noted by Zerohedge:

"Since The Fed's extension of Operation Twist (and subsequent unveiling of QE3) in 2012, the stocks of 'weak balance sheet' companies are up over 100%. In that same period, the stock prices of 'strong balance sheet' companies are up a mere 43%."


"The "dash-for-trash" that the Fed's financial repression forced upon an investing public has enabled the worst companies to not only survive (creating yet another mal-investment boom) but squeezed their share prices to thrive. However, the last week or so, as geopolitical risks rise and it appears ever more likely that the Fed's free money pipe will dry up, the dash-for-trash has reversed."

20140724 dash2

"The last five days saw 'strong' companies outperform 'weak' companies by the most in three years - something appears to be changing."

Furthermore, as I have repeatedly stated over the last several weeks - bonds are not buying the current market rally. As shown in the chart below, despite the ongoing chorus of "sell all your bonds as rates are about to rise,"money flows into bonds has been picking up steam.

The following chart shows the flow of funds by mutual fund investors into equity funds versus bond funds. I have highlighted the point at which equity flows turn negative after being positive. As you will notice such events tend to denote at least short-term market tops.


While I am not suggesting that the market is about to fall into a full blown correction, there is mounting evidence that being aggressively invested on the long side of the market may be getting more "risky" than you realize.

This is getting a bit long winded so I will continue with more analysis on the current market situation on the website next week.

The Road To Retirement

Each week brings various people, places, and ideas with their challenges. There is nothing more rewarding in the financial services industry than knowing you have sought and found solutions for a new client's objectives throughout their working lives. Financially sound advice should come with the security of guarantees and most of our regular readers understand this leads down the path towards permanent insurance being placed snugly in the beginning (preferably) of your journey.


Every program the government sponsors may not be a good thing. In fact, if they've sponsored any benefit it is likely that the benefit will cost you dearly on the other end.

When employers join with the government to sponsor a program, how would they benefit should be a question?

What's in it for me should be your true question that you vehemently require a complete and full answer to before signing up for anything, whether a match is offered or not. Consider your ways.

How is it that all of us believe in "free money" for retirement yet have not instituted appropriate savings for our children to gain an education?

Where is the reward in saving for retirement if we cannot enjoy a lifestyle befitting of our labor currently?

Case In Point

Young couple with two children under the age of five needs to take care of day-to-day life, ever increasing taxation, inflation seen when the grocery bill is settled weekly and realize a savings program will be required to get those children an education.

A large portion of this two income-earning family has been convincingly been set aside into 401k retirement plans. They rely on an employer to provide the benefit if either of them meets early demise. The 401k money is actually at risk and could drop 30% or more if a fluctuation takes place like the accounts did in 2008. This is not an area of expertise for either of them.

How About This

Instead of locking up 401k deposits for 30+ years hoping nothing erodes their earning power. Instead of agreeing not to touch any of those funds for lifetime events, automobile purchases, vacations, emergency needs, college funding, etc., why not place them in something they have control over? Why not establish a permanent savings system where you have use of the money between now and retirement? Why limit your savings solely to retirement instead of taking care of the current needs your family has or emergencies that may arise? Why not establish a system you could use if you or your spouse needed a new car or you decided for a family vacation? Why not find a way to take care of the remaining family if you passed away before retirement? Why not find out what your grandparents knew years ago. Nothing's changed. Well, almost nothing. Truth is, LIMRA statistics indicate that the advisors who understand how to establish those systems are decreasing rapidly through retirement. The stats indicate that 50% of them will be gone and retired in less than 5 years. Sad.

The government's lack of ability to tax those programs still exists today. In fact, the tax laws that make these type of programs significant have not changed since 1990. What's truly sad is that many of us will not meet the right advisor to do the right thing if we don't pay attention right now.

You don't have to be a millionaire to begin. You only have to be willing to start.

Lynette Lalanne (Email: lynette@streettalkinsurance.com)

Streettalk Insurance

Have a great week.

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