CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$37.5 billion.  New issuance for the week was zero and year to date HY is at $153.0 billion, which is -32% over the same period last year. 

(Bloomberg)  High Yield Market Highlights

• Junk bonds yields rose back towards the recent three-month high amid continuing equity volatility and soft oil prices, despite positive fund flow data.
• Yesterday, Junk bonds fell 0.23%, the most for a day in more than a week
• They were the no new issues for the week
• Month-to-date volume is $5.775b, slowest October since 2015
• High yield was still the best performer in fixed income with a YTD gain of 1.65%
• CCCs beat IG, BBs and single-Bs with 5.16% YTD return, though CCCs also saw the biggest one-day decline in more than a week
• IG returns were negative 3.30% YTD

(CNBC)  Sears files for bankruptcy, and Eddie Lampert steps down as CEO

• Sears Holdings filed for bankruptcy protection early Monday after years of staying afloat through financial maneuvering and relying on billions of CEO Eddie Lampert’s own money. Lampert, who has served as CEO for the past five years, will step down from that post, effective immediately, but remain chairman.
• As part of the bankruptcy, Sears will shutter 142 stores toward the end of the year. It expects to begin liquidation sales shortly.
• Over the years, Lampert shed Sears assets and spun out real estate to pay down the debt. The company still has roughly 700 stores, which have at times been barren, unstocked by vendors who have lost their trust. Many of the stores have never been visited by younger generations of shoppers.
• Lampert, who has a controlling ownership stake in Sears, personally holds some 31 percent of its shares outstanding, according to FactSet. His hedge fund ESL Investments owns about 19 percent.
• But even with the bankruptcy filing, Lampert continues to invest in Sears. The retailer said Monday morning ESL is negotiating a $300 million debtor-in-possession loan to support it through its bankruptcy. That loan comes on top of an additional $300 million it has secured from investment banks.
• Lampert also expressed regret he couldn’t get the necessary parties to agree to his last efforts to stave off bankruptcy.
• The board was in a perilous position. Its special committee had been tasked with approving Lampert’s latest plan, a bid to buy his storied Kenmore appliance business and other brands.
• Approving Lampert’s offer would have helped Sears make its payment. But that would also thrust the board into the spotlight, potentially opening them to the threat of litigation from shareholders who might allege Lampert has stripped the business bare.

(CNBC)  Talk of a US recession in 2020 is a little premature 

• Several analysts have come out of the woodwork in the last few weeks predicting not just a U.S. growth slowdown, but the start of a recession in 2020.
• Is the fiscally turbocharged U.S. growth about to come to an end? The economy is growing at a robust pace of around 3 percent for 2018 and is set to grow at 2.5 percent in 2019 (according to IMF’s latest world economic outlook): a moderation due to waning fiscal impulse and trade wars. But when does a late cycle economy transition into an economy that’s verging on a recession?
• While inflation has been rising, wage growth of sub-3 percent is still far from pre-great financial crisis levels north of 4 percent. In a note published last week, Goldman Sachs Chief U.S. Economist Jan Hatzius remarked that despite the unemployment rate standing the lowest level in 48 years (at 3.7 percent), core personal consumption expenditure (PCE) inflation — the metric the Federal Reserve looks at — has remained steady at around 2 percent.
• Rising wages would typically be associated with a squeeze in corporate profits. Perkins calculates that rising wages have been matched by productivity so there hasn’t been a corporate squeeze yet. In fact profit share, as a percentage of gross domestic product, is about 10 percent higher than it was 20 years ago, according to Perkins. Top-line earnings are still growing.
• That leaves us with asset valuations. Aggregate global debt continues to climb, U.S. asset prices are about 50 percent higher in aggregate than five years ago. And the market is certainly starting to get a little jittery if last week is anything to go by.
• Crucially however, the economy and companies’ revenues are still growing. The labor market is not showing signs of overheating. Therefore, the recession call might be premature.

(MarketWatch)  Fresenius Medical Care cuts view as income falls

• Fresenius Medical Care cut its targets for 2018, as it reported an 8% fall in third-quarter net income.
• According to preliminary figures released late Tuesday, net income at the German company fell 8% and sales decreased 6%.
• On the back of the results, Fresenius Medical Care cut its target for net income growth in 2018 to between 11% to 12%, from a previously guided range of between 13% to 15%. It also now expects revenue growth at between 2% to 3%, down from a previous target of between 5% to 7%.
• Fresenius said its third-quarter results were affected by weaker-than-expected volumes at its Dialysis Services business and contributions to campaigns in the U.S. opposing state ballot initiatives.