This Week in Finance - 7/10/08

Welcome to WallStreetOasis.com's latest This Week in Finance newsletter, where we profile the hottest investment ideas, substantive market data, incisive financial blogging, and the best under-the-radar research Wall Street has to offer.

Investments: Atop the capital structure is where you want to be

As the S&P 500 officially enters bear market territory, down 20% from its October, 2007 highs, investors continue to grow weary of value traps and equity markets in general. Fixed income investments, on the other hand, have outperformed, but with a hawkish fed spurred on by inflation fears making rising interest rates more and more likely, this may soon end as well. Additionally, with corporate defaults rising, bonds, which are unsecured and may suffer severe losses, do not seem like a safe place to park money.

In a company's capital structure, secured bank loans are the safest asset (the "top" of the structure), as they are backed by a lien against the company's assets ("secured") and they normally have shorter duration (less interest rate risk). Leveraged loans are made by banks to lower-rated companies, often as part of the financing of a takeover or merger. During the recent market turmoil, these securities have traded down to historically low levels as banks and other investment structures (CLOs, SIVs) continue to sell off assets (even good ones) in order to raise capital, deleverage, and in some cases, completely liquidate. Though it is difficult for the retail investor to gain direct access to the leveraged loan market, there exist a number of closed-end ETFs that hold a portfolio of these assets. On top of the yield that these securities offer, due to the nature of closed-end funds, which can trade at a significant discount to the underlying NAV, there is additional equity-like upside in many of these securities. As an example, for a closed-end fund priced at a 10% discount to NAV, where the underlying loans are trading at an average of 85 cents on the dollar, if the underlying portfolio moves closer to par (say, 95 cents), and the closed-end fund discount moves back to neutral, an investor would make nearly 25% on this appreciation alone, before even taking into account the monthly interest collected.

SeekingAlpha has a good write-up on a number of these closed-end funds. ETFConnect.com has an entire section devoted to loan participation funds. You can also compare multiple funds on one page (total assets, current discount to NAV, current yield) using the site's "Find a Fund" feature. Finally, be sure to take concentration (how big are the top 10 holdings as a percentage of the fund), liquidity (how much does the CEF trade), and leverage (how much does the fund borrow vs. its total equity) into consideration for any potential investment.

Research of the Week: Only for the very brave

As mentioned above, investing in equities right now is not an easy thing to stomach. Volatility remains high and stocks that seem "cheap" by any historical standard have faired poorly against headwinds of continued selling in the market. In fact, momentum stocks have significantly outperformed cheap ones over the past year. However, for those with a longer-term outlook and the guts to take short-term losses, many stocks are priced very attractively. Zacks Investment Research is a great place to obtain free (well, a lot of it is free) equity research - everything from various screens you can use to filter and find attractive stocks, to in-depth analyst reports, to various blogs, advice columns, and investment metrics. If you're looking for ideas, this is a good jumping off point.

Blog-Wrap: The Death of Bear Stearns

Portfolio.com delves into the fascinating Vanity Fair article that details the final days prior to Bear Stearns' collapse and the ensuing negotiations surrounding its rescue by JP Morgan and the US Federal Reserve. Whether or not you agree with this blog about "pointing fingers," the article is a fantastic read for those who enjoy both high finance and high drama.

TWIF Notes: Did you know...

...that if you invested in the S&P 500 10 years ago, you'd be DOWN right now.

...that JP Morgan's CEO Jamie Dimon sat down with Charlie Rose for one of the most insightful amd interesting interviews of the year.

...that the trader who nearly single-handedly caused the largest hedge fund collapse in history, Brian Hunter (of Amaranth fame), granted his first interview to Fortune Magazine and not surprisingly, makes few apologies.

New WSO Recruiter Database

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Questions? Comments? Send an e-mail to Hedgehog@WallStreetOasis.com or send a private message to him at WallStreetOasis.com. To read previous issues of This Week in Finance please click here: http://www.wallstreetoasis.com/xtracker/type/simplenews

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