Guzzo the Contrarian

With all of the flight to quality lately, the phrase “junk bond” doesn’t conjure up any warm and fuzzy feelings. As a matter of fact, it does just the opposite. The junk bond (high yield) sector has been hit hard this past month, and investors have been “hightailing it” in droves.

I watch The Vanguard Group’s, High-Yield Corporate Fund (VWEHX) on an almost daily basis and have watched it tank quickly as investors fled to the safety of treasuries. While the stock market has fluctuated wildly over the past 30 days, VWEHX has consistently continued to drop in price daily ever since September 22nd. Even after the stock market rebounded over 900 points on Monday, VWEHX still lost 4 points.

As I wrote in a previous post in August, I watch VWEHX partly as a stock market indicator. But, I’ve also been watching it because at some point, I believe the benefits of owning it will soon outweigh the risks associated with it investing in it. Since it’s 52-week high in October, until yesterday’s 52-week low, VWEHX has decreased in price almost 30%. This is the lowest price in it’s existence, and it now sports a yield of almost 12%!

Well, something unusual happened today. Even while the stock market ended up in the red, VWEHX stopped it’s downward trend, and actually closed up 4 points today.

Now why would that happen? Does that mean that investors have quit panicking and come to their senses? Is this some kind of vague signal that perhaps it’s time to buy VWEHX? Who knows?

There’s still plenty of risk in the financial markets, and although a total meltdown may have been averted, the economy is still in poor shape. It’s almost a given that VWEHX is going to experience some near term defaults. BUT, will those defaults lead to further price declines, and does the 12% yield more than make up for any potential losses?

Just something to think about.