Thursday, 22 September 2011


the headline is a little unfair to the following link;

BlackRock Buys Junk Debt at Spreads Exceeding Bearish Scenarios

but there are several things that I dislike about it, as I commented on twitter;

1) the first is a general point. VALUATIONS ARE NOT AN INVESTMENT THESIS. Especially when you are comparing a risky number to a historical realization for a long term instrument. Yes it is appropriate to look at historical default rates, but to compare them to a risky market number is not. It is naive to ignore liquidity risk, risk of recovery, a market price to those risks AND then to forget about how short a sample of history one is looking at.

2) it is very consensual to believe that commodity producers and China are more stable. That the represent the future, and that Asia is insulated from the economic cycle. Although it is en-vogue to laugh at decoupling, there are more than enough people that treat it as a resting principle. The sectors that they proceed to say they are targeting demonstrate this;
"[the] firm is targeting bonds of speculative-grade companies involved in energy, mining, oil, natural gas, cable and wireless operations"


"You want companies that have more stable and visible cash flow streams, so their earnings quality is a lot higher and more stable to withstand economic downturns"

now these two statements are very much at odds with one another in my mind.

Mining, Oil, Nat Gas, these are all dependent on the industrial cycle. Sure you can see a mine, and see that there has been good historical demand, and that China had a massive fiscal stimulus, but to extrapolate that into the future isn't clear cut.

"a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself—a rental property, office building, condo—does not cover the debt incurred to buy the asset."

I believe that he is talking about Chinese property in this quote from his interview with Bloomberg Business Week, but surely that applies to mines, oil and nat gas investments?

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