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Home > Blog > Monthly Archives: March 2020

Monthly Archives: March 2020

What Will Wall Street do With the Junk Bonds in their Inventories?

As the Wall Street Journal noted this morning (‘Investors, Fearing Defaults, Rush Out of Junk Bonds’), “the specter of widespread corporate defaults in the coming months has caused a massive selloff in junk bonds around the world, as many debt-laden companies face the prospect of going weeks or months with virtually no revenue.”

In fact, “investment-grade ratings plunged at their fastest pace in history in March, money managers said, stunning investors and hitting levels that portend a deep recession with scores of company failures. While some junk-bond prices recovered slightly in recent days, investors say the broad declines – of about 20% this month alone – have been exacerbated by Wall Street’s reluctance to help cushion the market by stepping in to buy the bonds and risk getting stuck with them on their books.”

Just a few months ago, “the junk bond market was priced to perfection at the start of 2020. Risky companies were borrowing at near record-low rates relative to U.S. Treasury yields, the culmination of a years’ long reach for higher returns by investors world-wide. They poured cash into a range of risky assets, pushing returns down. Companies took advantage of the flood of money by issuing more non-investment-grade debt.”

According to the WSJ, “U.S. junk bonds are on average trading at about 81 cents on the dollar, after bouncing off recent lows of 79 cents, according to an ICE Bank of America index. In early March, the average price was close to 100 cents. More than 1,400 bonds – 43% of those tracked in an influential $2.1 trillion index of global junk bonds – are currently trading at what investors consider distressed levels, with yields that are more than 10 percentage points above those on risk-free U.S. Treasuries, according to a global ICE index. Less than three weeks ago, before the rout began, that number was below 450. The wide spreads indicate the market expects default rates to climb significantly.”

In fact, earlier this month, Moody’s Investors Service said that in a “pessimistic scenario,” close to 10% of speculative grade issuers could default.”

While “the Federal Reserve earlier this week said it would help support the markets for highly rated corporate, mortgage and municipal debt to alleviate market strains and unusual dislocations, junk bonds weren’t part of the package, meaning that segment of the market has little backstop.”

Perhaps this is the reason that “large and small investors have pulled tens of billions of dollars out of high-yield bond funds, forcing asset managers to liquidate their holdings and deepening the slide in prices.”

Recently a number of corporate bond funds took substantial hits to their prices. For example, during the 2 week period between March 6th and 20th, the Invesco Corporate Bond Fund (ACCBX) declined from $7.89 to $6.75 per share which equated to a 15% loss; the Pimco Investment Grade Credit Bond Fund (PBDAX) declined from $11.37 to $9.68 per share which equated to a 15% loss; the Fidelity Corporate Bond Fund (FCBFX) declined from $12.77 to $11.12 per share which equated to a 13% loss; and the Vanguard Intermediate Term Corporate Bond Index Fund (VICSX) declined from $25.61 to $22.80 per share which equated to an 11% loss.

Will Wall Street attempt to dump these bonds on investors who are seeking more potential income in these uncertain times?

If you are an investor who has any concerns about your bond investments with any brokerage firm, please contact attorney Steven B. Caruso in the New York City office of our firm at (212) 837-7908 for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Oil & Gas Investments are Getting Crushed by Volatile Market Conditions

As the Wall Street Journal noted this morning (‘The Oil Crash is Hitting this Investment Hard’), “the plunge in crude-oil prices is sending shock waves through closed-end funds tracking the energy sector, highlighting how the market turmoil is hitting products popular with ordinary investors seeking to boost returns during the long bull market.
Shares of the Goldman Sachs MLP and Energy Renaissance Fund have fallen 78% this month, while shares of the Kayne Anderson MLP/Midstream Investment Co. and the Kayne Anderson Midstream/Energy Fund Inc. have fallen 74%, respectively. Shares of the Tortoise Energy Infrastructure Corp. and the Tortoise Midstream Energy Fund Inc. have lost more than 80% of their value.

A closed-end fund is similar to a mutual fund, but its shares trade on an exchange. A professional manager oversees the fund’s holdings, deciding what to buy and sell. Unlike mutual funds, closed-end funds issue a fixed number of shares, after which capital rarely flows in or out of the fund. Also, unlike mutual funds, they tend to use leverage to juice their payouts – borrowing at short-term interest rates and investing the proceeds in longer-term securities that pay higher returns.
That is a tactic that makes them attractive to investors when things go well, but one that can also amplify losses when markets sour. There are laws that cap the funds’ leverage, so when the value of their underlying securities falls, they often need to reduce their leverage by selling assets, as they cannot easily raise capital by issuing new shares.

That is what is happening now: As crude prices have plummeted, hurting shares of energy companies and the market value of the funds’ holdings, several have been forced to reduce their leverage by selling securities. That has cut down on the amount of money available to pay investors, which likely will lead to funds cutting their distributions, asset managers say.”

Although all brokers and investment advisors have the obligation to ensure that any investments held in a customer’s account are suitable and appropriate for their customers based on their investment objectives and risk tolerance, when significant price declines are experienced and/or dividends/distributions are substantially reduced, what may have been an appropriate investment a few months ago may now be inherently unsuitable.

If you are an investor who has any concerns about your energy investments with any brokerage firm, please contact attorney Steven B. Caruso in the New York City office of our firm at (212) 837-7908 for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Have You Experienced Investment Losses?

In March of 2020, America has experienced the unprecedented pandemic known as the Coronavirus. The US stock market has declined by more than a 1/3 from its all-time high in February 2020. Some investors have watched their own portfolios decline by 30-50%.

In some instances, your investment losses could be normal market decreases. However, in other instances your losses could be due to mistakes made by your financial advisor. You could have been unsuitably invested in a portfolio that was too risky for you. Some of your investments could have been inappropriate. The risks of your investments may not have been accurately discussed with you. The typical American investor needs an experienced attorney to help him or her evaluate whether their losses are actionable against the advisor or firm that recommended them.

At Maddox Hargett & Caruso, P.C., we have been advising clients about their investment losses for over 30 years. We give investors free initial evaluations to help them understand the viability of their case against their financial advisor and his firm. If you are trying to understand whether your investment losses are attributable to normal stock market declines or breaches of duty by your advisor or firm, please contact us. We are here to help you make an informed decision. Call us at 317-598-2040 or check out our website at www.investorprotection.com.

Margin Accounts May be Inherently Unsuitable in Volatile Market Conditions

As volatile market conditions continue and seem to be accelerating on a daily basis, questions are being increasingly raised regarding the risks posed to investors and the relationship of margin to those risks.

Generally speaking, investors who sign a margin agreement can borrow up to 50% of the purchase price of marginable investments (the exact amount varies depending on the investment). Said another way, investors can use margin to purchase potentially double the amount of marginable stocks than they could using cash. In the same way that a bank can lend you money if you have equity in your house, your brokerage firm can lend you money against the value of certain stocks, bonds and mutual funds in your portfolio. That borrowed money is called a margin loan, and it can be used to purchase additional securities.

Each brokerage firm can define, within certain guidelines, which stocks, bonds and mutual funds are marginable. The list usually includes securities traded on the major U.S. stock exchanges that sell for at least $5 per share, though certain high-risk securities may be excluded. Also, keep in mind that you can’t borrow funds in retirement accounts or custodial accounts.

All investors must be aware that the sudden change in the market value of a security may result in an unexpected margin call and a customer’s failure to meet the call may cause the firm to liquidate the securities in his or her account. The financial consequences of a margin call or an account liquidation may be most severe to customers with accounts at retail brokerage firms in view of the fact that their accounts may be more likely to be subject to liquidation.

Although all brokers and investment advisors have the obligation to ensure that any account which is being traded on margin is suitable and appropriate for their customers based on their investment objectives and risk tolerance, investors must recognize the significant risks that are associated with margin accounts.

These risks, which must be fully explained by brokers and investment advisors – and understood by their clients – include the fact that: you can lose more money than you have invested; you may have to deposit additional cash or securities in your account on short notice to cover market losses; you may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities; your brokerage firm may sell some or all of your securities without consulting you to pay off your margin loan; you may not be entitled to choose which securities your brokerage firm sells in your accounts to cover your margin loan; your brokerage firm may increase its margin requirements at any time and may not be required to provide you with advance notice of the increase; and you may not be entitled to an extension of time on a margin call.

If you are an investor who has any concerns about your margin account investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).


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