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Newedge Senior Director of Corporate Credit Sales Larry McDonald on the future for the junk-bond market.
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We can't say rush -- has got to chug along the high yield bond market.
Which has been a super hot trade seems to be running out of a little gas so why should we care.
What does that really mean for stocks.
Specially if you don't have exposure to junk bonds why would you care you should Larry McDonald the securities was -- with senior policy strategist.
He says the market may be flashing -- -- signal by a little bit of weakness in the jump on world.
Well ever since I wrote a book -- was -- trader Lehman of the dedicated to analyzing risk and.
What put us back up sure that you're picking convertible bonds is -- high yield bond -- -- -- -- -- wonderful campus market.
-- you know what -- what I've seen over the years is.
It's good leading indicator when when high yield bond sell off typically -- from 2007 on.
It's a leading indicator for equities so if you look at the crash of -- wait look at the global meltdown of 2011 both times high yield bonds for selling off before those equity melt up.
So we're looking at the far right part of this screen to show that the S&P 500 that while looking a little bit higher.
The Blue Line.
ETFs here it's a high yielding TF.
Has sold off so you're saying that the yellow one of the S&P 500 might not be far behind.
Well I think for a lot of reasons stocks are overbought here this lot of from its mind on systemic risk indicators from -- -- rising so I think stocks are still here.
But -- -- look at more more deeply.
The reason high yield is off also is this the LLP -- right so when there's a big -- on the market it's the sign of a new Renaissance potentially.
In LBOs leopard spot Leveraged Buyouts and what that means is going forward all -- -- minister -- street a lot of them are looking okay what's the next LBO.
What they do is.
They start selling down those bonds as high yield bonds investment grade bonds ahead of the deals one -- could trigger that kind of move in the 20042007.
Cycle it was unbelievable -- -- here's what investors watching us right now should take away.
The key is -- wanna see more LBOs because it's a cycle of multiple LBOs is bullish for stocks -- sign that CFOs.
In private equity people are bullish they're pretty good risk takers at the beginning of the cycle as we saw 20072008.
They were weren't very good risk takers there.
But you want to see more than one LBO.
-- and we we have a I mean.
That they do come in fits and starts but let's -- say what's the trade Larry you if you are correct although we've had very Smart people standing in that very spot saying.
Why not just yesterday Carol pepper who has high net worth clients of more than a billion dollars.
She said don't wait for correction poured money into stocks you're saying no let's say you are right -- sick people by him.
What is the trade.
Short the S&P C.
Since -- the only people would have -- -- the market.
Bought political fear and sold in -- -- -- complacency so I would break here.
Laid up on stocks okay if you did -- 201120101112.
If you did that at this time in the spring of 20101112.
Stocks were up.
If you sold it to those that strength -- outperform the market so going forward here.
I would get long volatility I would -- up in stocks I think -- much we are shorting some sectors like retail looks very.
Very vulnerable oil -- moved.
Eleven dollars it.
56 days.
Oil that's a big problem for retail buy -- -- -- explain to people how he would -- others to think you can buy puts spreads on indexes puts spreads are nice that or you could celebrate short.
The did the feel most people at home bit there what they might own they might -- retail stocks you just just laid out.
You know just lighten up almost -- what's that into get along volatility you can buy.
Futures on the -- and things like that out is that the junk bond has issued a shock as the jump -- trade continue or we're starting to see that.
To have little teeny bit from that chart move down -- it's it's it's a long cycle in them if there are more LBOs.
The market be under more pressure in it's a very good leading economic indicator.
He is a survivor folks he survived leave it at that he is now more than it has survived -- -- its large -- McDonald outcome of if that's why the surviving and always push -- -- -- -- -- McDonald bought can't Larry McDonald new edge senior policy strategist.
Thank you thank you see you going to be closing.
