Seneca Pressroom

Strategist optimistic after Fed
Source: Prospect News High Yield Daily - September 19, 2007
September 2007

SCM Advisors' Chief Strategist Maxwell Bublitz was quoted extensively in an article by Paul Deckelman and Paul A. Harris on where the markets might be headed after recent Fed rate cuts.

Quoted from Prospect News:

Max Bublitz, chief strategist at San Francisco-based SCM Advisors, which manages $12 billion of fixed-income assets, including about $1.5 billion of junk bonds, said that "one of the most important things that the Fed started to do on Aug. 17," when the central bank cut the discount rate by 50 basis points and announced other measures aimed at calming the jittery markets, "was to say 'look, we've been in a kind of wacky credit environment' - one that the Fed had not been comfortable with, with risk spreads say too tight - 'and we're going to transition now into a brave new credit world and we're not quite sure what that's going to be'."

On the initial jump from the old, "risk-oblivious world" into the new"risk-obsessed world"
"What I have seen over the last four weeks is the Fed has done a great job of at least trying to take emotion out of the price-discovery process."

"Who knows where prices are going to settle? Who knows how the markets are going to react in a shipwreck [that hit the credit markets earlier in the summer] as more bodies float to the surface?"

On what might happen in the bond markets in the longer-term
"It's a little bit early, but my sense is that we're probably going to be a little more comfortable buying bonds - this whole price-discovery process, instead of dipping toes in the water, I think people will be jumping in up to their knees. I don't think anyone is totally comfortable that we've put this completely behind us. But it is clear that more and more people are participating in the process - to try and figure out what the new world is going to look like."

"Obviously, they're going to do that with the investment grade credits first - but sooner or later, we are going to see some activity in the high yield market."

On the high yield market and hedge funds
Bublitz said "the 800-pound [gorilla] in the high yield market has been the hedge funds, and for a majority of time, it was simply a carry game, a spread game. When margin clerks get involved and they have to mark books to market, no one cares about spread and everyone freezes up and they sell things - but by and large, at 9%, or 400 bps over Treasuries, that is going to attract people to come in and start playing the spread game again. You're going to see hedge funds come back in. They're probably going to fund at 51/2% or 6%, wherever Libor comes out, they're going to earn 9%, and they're going to lever that up - certainly not as much as they were two or three months ago. But the game will return - the credit markets will return, in some different form than we had a couple of months ago. What the Fed has done over the last month is said 'OK, let's speed that process up and figure out what the new world is going to be'."