Today’s post is about what not to buy (or to sell if you hold it.)
music selection: “Distant Early Warning” — Rush
weigh-in: 222.0 (2.2) #loser
The Fed’s ZIRP policy has led to a lot of reaching for yield. Junk bond yields have been depressed for a long time as a result. Recently, yields have been rising. This could be a danger sign. See, much of that high yield debt has gone to highly leverage oil and gas exploration companies. Those companies are in trouble with oil at 45 dollars. Several have already gone bankrupt and more are coming.
Debt crises are more contagious than equity crises. When a company’s equity is wiped out, it usually ends there because few companies own the other of other firms. But many (MANY!) companies own the debt of other corporations. As the [stuff] hits the fan, a lot of companies that were otherwise in good shape will find themselves hurting. This can lead to panic selling. Panic selling will crash the prices of junk bonds. They are just too dangerous right now. Don’t buy (or sell) HYG and similar junk bond issues. Also avoid banks in Texas, Oklahoma, and Louisiana.
Another area of trouble is subprime auto lending. Millions of Americans who can’t really afford a new car have been extended credit on 84 month terms at usurious interest rates. They will not have any equity for 60 months or more. By this time their cars will be highly depreciated. A downturn in the economy will cause many of them to mail the keys back to the dealer. General Motors (GM) is the most exposed; don’t buy! Santander Consumer (SC) also holds a lot of subprime auto debt and should be avoided.
Finally, avoid banks that have heavy exposure to student loan debt. The government is making it easier to defer payment, hurting the cash flow of student loan lenders. Most important to avoid is Navient (NAVI). This is the company that used to be Sallie Mae. In addition to being in a very difficult industry and market environment, they face a ton of litigation for abusive practices by the former Sallie Mae. They have been losing these cases. Do not buy NAVI!
Devour your prey raptors!