FLASH UPDATE: When will the Big Fish Hit?

The fisherman carefully baits his line and casts it into the perfect spot.  He patiently waits, because he knows that big fish come by this spot regularly.  He doesn't panic, rather the wait makes him feel a certain sense of inevitability.  His decades of experience remind him that this series of actions almost always results in a big catch.   He is not concerned that no other fishermen know how prolific this hole has been.  He notices his bobber get pulled under briefly, but it pops up again...he remains patient...Again the bobber goes under, but it seems like just a nibble and it comes up to the surface...he remains patient but his anxiety starts to build...The bobber goes under for a third time, but the feel of the line is familiar this time and suddenly the reel starts to empty...FISH ON! 

We are getting multiple opportunities to add to our short high yield positions at asymmetric price levels.  Since July, volatility in the high yield market has picked up considerably, with both positive and negative swings.  This is our bobber...We are still able to short significantly challenged companies at prices above par and at or near the call price.  The opportunity is here and now.  

What is most interesting is that we have seen this many times before:  volatility picks up, sensational headlines start to draw attention, bond prices start to feel shaky and companies start to falter.  Our many years of experience make this feel like a repeated pattern of events.  The outcome is predictable, but the route to get from start to finish often provides exciting new experiences.  It is the exciting new experiences that take most stragglers and tourists out.  The yield-chasers will be burnt.  We know that we will survive those exciting new experiences, but are you prepared?   

Have a nice week,

Richard Travia

Portfolio Manager, Director of Research