Editor's Note: We're sharing this Sure Money with you today because here Michael shows you how one simple number on an easy-to-read chart tells you when to make your move to profit from this ongoing collapse. Here's Michael…
I'll be blunt: Don't believe the stock market gains we're seeing. They're not a sign of good times.
I've spent more than 20 years in the global credit markets, and from my position, I can see a destructive wave spreading out that will hit the stock market and scuttle the economy.
That's because the credit markets are a "canary in the coalmine." What happens there always spreads to the global markets.
The unprecedented $2 billion-plus collapse of popular high-yield funds that we're experiencing right now is just the start. Those billions are a drop in the bucket compared to the $200 trillion meltdown ahead.
But… the collapse of these funds, and the chart I'm about to show you, point to an immense opportunity – one where companies in desperate need of liquidity will come to you.
We're not there yet, so there's time to prepare, but this will be big…
How We Got Here
Last week, the $789 million Third Avenue Focused Credit Fund (MUTF: TFCVX) took a highly unusual step for a mutual fund.
It announced that it would liquidate and "gate" the fund, which means that investors would not be able to receive their money until the assets were sold at a later date. This move was necessitated by the fact that the fund (which is down 27% in 2015) owned many low quality and illiquid high-yield bonds that it was unable to sell. So, in order to accomplish this, the fund sold its assets into a liquidating trust and deemed the sale a redemption from the fund that met its obligation to redeem shares without asking the U.S. Securities and Exchange Commission (SEC) for prior approval to freeze withdrawals.
This is actually unprecedented.
Needless to say, this has "upset" investors and brought SEC examiners to its offices to figure out exactly what is going on. It has also freaked out investors in other high-yield bond funds, leading to a huge sell-off across the high-yield bond market.
It didn't stop with Third Avenue, either…
Another $400 million high-yield hedge fund managed by Stone Lion Capital Partners announced shortly thereafter that it was also gating its investors after receiving large redemption requests, and that another $900 million high-yield hedge fund managed by Lucidus Capital Partners had already liquidated and was returning all of its investors' capital.
Welcome to the downside of the U.S. Federal Reserve's invitation for investors to reach for yield – and greater risk!
How Third Avenue Really Messed Up
Third Avenue's Focused Credit Fund is an object lesson in mismatching an investment vehicle and the underlying investments that it owns.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.