By Steve Blumenthal
December 14, 2015
There have been four significant high-yield market dislocation events that I have witnessed and managed through over my nearly 25 years of trading high-yield. Each of them was a set-up to great investment opportunities though they didn’t necessarily feel that way at the time. It was a recession and the failure of Drexel in the early 90s, the currency games that led to the Long-Term Capital Management crisis in 1998, the recession in the early 2000s and the great financial crisis (and recession) in 2008. This may be the beginning of another dislocation (though another dose of QE could push the timeline a bit further down the road). What is clear to me is that too many lesser quality companies received money (via debt issuance) and many won’t survive.
What I’d like to stress is that such events create great opportunity. Importantly, when dislocation in markets come, they tend to come quickly, so it is important to stay flexible. Flexibility is the key and this is where cash can be king. It enables you to sidestep a decline and then hopefully invest at lower prices and higher yields. In 2008, the great financial crisis sent prices down sharply and yields up to near 20%. Once the selling wave passed and lesser quality companies defaulted, prices were set to move higher and investors (and our clients) were able to capture the much higher yield.
Stay patient and opportunistic.
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A Note on Investment Process:
From an investment management perspective, I’ve followed, managed and written about trend following and investor sentiment for many years. I find that reviewing various sentiment, trend and other historically valuable rules based indicators each week helps me to stay balanced and disciplined in allocating to the various risk sets that are included within a broadly diversified total portfolio solution.
My objective is to position in line with the equity and fixed income market’s primary trends. I believe risk management is paramount in a long-term investment process. When to hedge, when to become more aggressive, etc.
Trade Signals History: Trade Signals started after a colleague asked me if I could share my thoughts (Trade Signals) with him. A number of years ago, I found that putting pen to paper has really helped me in my investment management process and I hope that this research is of value to you in your investment process.
Provided are several links to learn more about the use of options:
For hedging, I favor a collared option approach (writing out of the money covered calls and buying out of the money put options) as a relatively inexpensive way to risk protect your long-term focused equity portfolio exposure. Also, consider buying deep out of the money put options for risk protection.
Please note the comments at the bottom of this Trade Signals discussing a collared option strategy to hedge equity exposure using investor sentiment extremes is a guide to entry and exit. Go to www.CBOE.com to learn more. Hire an experienced advisor to help you. Never write naked option positions. We do not offer options strategies at CMG.
Several other links:
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
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Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).