Tuesday, February 17, 2009

Are junk funds safer than stocks now? Really?


Holmes Osborne has a provocative article “Some Junk Bonds Look Safer than Stocks” on “The Street”, reprinted from “Real Money” (which seems to require subscription). The link on "Street" is here.

Osborne goes into a fictitious bankruptcy, and equates (I think) junk bonds to “junior debt” that would get more of the pie if the judge gives the underlying assets more value (which means that the “senior debt” doesn’t wipe them out first). Junk, he thinks, makes more sense if the underlying asset is a car factory that could make hybrid vehicles or electrics some day than it if is a bank with a lot of credit card receivables. Makes sense to me. But then, the stock out to come back some day, shouldn't it? It seems like a matter of time and scale. Go read about "senior debt" and "preferred stock" on Wikipedia.

Is this the time to bring back “Mike Milken” from the 80s? Then, “junk bonds” were his discovery and present to the world. He actually recovered his life and eventually did good things.

Of course, conservative investors, especially those closer to or in retirement, have to pay attention to what any mutual funds they have actually hold.

What would Jim Cramer say?

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