Tuesday, October 25, 2011

Junk Bonds are Back in Business (For Now)

For individuals just struggling to get an honest list of the best checking accounts offers in a bad economy, junk bonds probably sound like a bad idea. Generally speaking, they'd be correct; the potential yields of junk bonds, otherwise known as high-yield bonds, are far from the safe assurances of certificate of deposit rates. In fact, these particular bonds belong in their own class solely because they're rated below investment grade and are therefore too risky to pool with other bonds. In typical economic tough times, experts tend to advise investors to stay away from high-yield bonds – the risk for struggling entities failing to oblige to the returns is just too great.

But these are not typical economic tough times.

No doubt about it – it's tough right now. But it's a different kind of tough. It's so different that nobody really knows where the market is headed, and that's reflected in the wily way in which we've seen investor confidence fluctuate in recent months. Europe in particular is fighting to avoid economic calamity on a historical scale. Up until now this has resulted in major abandonment of junk bond dealings in favor of the much safer alternative – U.S. Treasuries. Both foreign and domestic investors have flocked to Treasuries, which has resulted in a lowered yield, creating an unprecedented gap between Treasury yields and those of high-yield corporate bonds.

Typically, such a gap was bad news for junk bond enthusiasts. But as it turns out, the European safeguards against high-yield default are much more bearish than what analysts say is necessary. Current buyers of junk bonds linked to the Euro are being compensated for a 7% default scenario, a much higher rate of default than experts believe is going to be the case in the European high-yield market. Even lower anticipated rates of default exist in the U.S., encouraging investors to give junk bonds a second glance, at least in the meantime.

That means that, for now, junk bonds are looking like a sure bet to many investors. The current trend is to descend on the best-rated of these bonds – those rated B or BB. But if the division between Treasuries and bonds stays true while European debt fears subside, you may even start to see investors brazen enough to buy up lower-rated bonds, although experts caution that these riskier junk bonds are bound to come with higher default rates.

Will small-time investors and those used to CDs suddenly become junk bond aficionados? Probably not. But at a time when uncertainty is the only sure thing, speculative bets on risks – and the benefits of enough bond buyers doing that – might just become the next big thing for amateur financiers.

Saturday, October 15, 2011

The Real Cost of American Oil

The Real Cost of American Oil

Americans tend to act like a group of addicts when it comes to certain things. We are never going to give up our massive addiction to fatty foods, as seen by protests against trans-fat bans in major cities. We are always going to want lower taxes and more freedom, as seen in the Tea Party demonstrations, even though we don't really know the cost of it. We are also working more than most of the other countries on the planet, and often getting less accomplished while we are there.

But the biggest addiction we face as a nation has to be our reliance on automobiles and the internal combustion chamber. We have always had an unhealthy relationship with our personal transportation devices, but the obsession has grown to staggering new heights. The aftermarket car parts industry accounts for $257 billion of our economy, which comes after the initial vehicle purchases. While the automotive industry makes great money, the oil industry profits from continuous fuel-injections.

When we think of the skyrocketing prices of oil in America, it is easy to conjure up images of terrorists and unstable dictators in the Middle-East. While the media tells us that people like Muammar Gadaffi and Saddam Hussein needed to be killed in order to tap into their strategic oil reserves, about 36 percent of our oil is produced domestically. Texas, California, Oklahoma, the Gulf of Mexico, and even North Dakota are some of the largest producers of oil in the US.

While a good portion of our oil comes from domestic sources, you would think that there is still 64 percent that must come from the Middle-East. Think again. Most of our foreign oil comes from places like Mexico, Russia, and our neighbor to the north, Canada. Only about 11 percent of our foreign oil comes from OPEC countries.

The price of oil is so high in this country because of the simple law of supply and demand. We are craving the product so badly that the oil companies have more reason to exploit the need and collect profit from it. We rely on the black stuff for just about everything. Getting to and from work is just the tip of the iceberg that gasoline keeps frozen. All of the shipping, delivery systems, and lawn and construction equipment we use relies on it as well. If we took it out of our economy, America would fall straight on its face.

Another reason the prices of oil are so high in America is because of corrupt speculators on Wall Street. CNN reports that a group of five oil speculators were charged with manipulating the price of oil futures contracts and making a profit of $50 million. These investors place their money on oil in hopes that it will continue to raise in price, while they simultaneously manipulate the markets in their favor.

The next time you are complaining about President Obama not keeping the price of oil down because he wants to pull out of Iraq, you should reconsider your criticism. Instead, draw your attention to those protesting the bailouts of big banks who get us into this trouble to begin with.

Wednesday, October 05, 2011

Europe: Not Big Enough Not to Fail?

Last week was filled with news that European leaders were slowly but surely sorting their debt crisis out – inciting a massive sigh of relief among international investors. This was reflected by big rallies on Wall Street. But with news this week revealing that deep-seeded differences among European leadership remains in the way of a successful compromise, investors, financial experts, and economic analysts alike are once again holding their breath when trying to postulate the future state of the global market. This is reflected by big losses on the stock market that have reminded everyone that there's still no end in sight to the uneasy European economy.
There is virtually no European country currently invulnerable to the threats of a potential financial meltdown on a continental and ultimately global scale. Even Germany – which most people consider the strongest and most financially secured European nation – is at-risk for catastrophe if troubled Eurozone nations such as Italy go belly up. Indeed, as long as a country is tied to the unifying Euro, they surely play a major role in the current crisis, either as a detriment or as a potential source of a solution. It's a failure for these nations to responsibly dish out the proper punishment to each other and collect the correct amount of assistance from one another that's keeping a rescue plan from being carried out.
It sounds all too familiar – we're basically witnessing the aftermath of the 2008 crisis in the U.S., only instead European leaders have the luxury of acting before the catastrophe occurs. It might sound proactive, but there's one primary difference between the way the United States handled it's crisis and the way European leaders are wanting to handle theirs: we bailed our big boys out, and they're trying everything they can to avoid that.
Germany and France are determined to avoid bailing banks out, and just about any other institution at risk for default, countries included. This inability to commit to a last-ditched solution, even if it's under the condition of being “just in case”, is what has the world so shaken up by the European debt crisis. When the United States economy was at risk of collapse over three years ago, the world watched and waited as we doled out the cash necessary to prevent a second Great Depression. Seeing that the United States clearly avoided such a catastrophe through bailouts, investors and economists are eager for Europe to commit to the same thing. But so far, they are not.
Perhaps they have, on some level, negotiated a backdoor strategy for solving sovereign debt crises attached to the Euro, which most certainly would involve major bailouts. But since such news would be helpful in solving day-to-day market strife, the lack of a plan being spoken of is an indicator that one unfortunately does not exist. In the meantime, European leaders race to figure out a unique way to fix their economic crisis, something that avoids the alleged pitfalls created by the quick actions of the American government when it bailed out banks and beyond.
Europe has the luxury of being able to anticipate their oncoming disaster and therefore thwart it. While this makes the continent's leaders determined to take their time and come up with a refined solution, they must understand that when it comes to the global economy, a continent is definitely too big to fail.