The Idea Farm #8- The New World of Credit

Below is our eigth issue of The Idea Farm Weekly!  If you are enjoying the emails please feel free to pass along to your friends and colleagues.

In this issue we include the most recent newsletter from Michael Lewitt, hedge fund manager and author of The Credit Strategist.  In the issue he highlights some stocks that he likes (BP, NLY, etc), and some that he likes as shorts (BX, APO, FIG, etc.).  He also takes a swipe at the credit space and offers a few ideas:

“There is no question that the desperate hunt for yield is causing investors to chase yield, and they will inevitably chase it into all the wrong places. The increasingly Brobdingnagian high yield bond ETFs that trade under the symbols HYG and JNK are contributing to the compression of yields and spreads. Both have attracted enormous amounts of yield- and performance-chasing capital as well as capital from macro-oriented investors seeking to trade the credit markets. What these ETFs lack is any focus on the underlying fundamentals of the bonds they hold, which renders them a recipe for disaster. It is a certainty that these ETFs will be at the center of the next high yield bond market sell-off, just as savings and loans were at the center of the early 1990s market collapse and CDOs were at the center of the 2008 high yield bond and loan market collapse. It is not a question of if, but merely a matter of when these two stock symbols will wreak havoc. Investors should avoid them at all costs.

I described my view of credit at the opening of this newsletter. Credit is a key component of all financial instruments. The list of my recommended stocks is consistent with that view. It includes two bank loan names – KKR Financial Holdings, LLC (KFN) and the PowerShares Senior Loan Portfolio (BKLN) – and two mortgage REITS – Annaly Capital Management, Inc. (NLY) and Hatteras Financial Group (HTS).”

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The Credit Strategiest (October 1, 2012)

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AboutMichael has spent the last 25 years in the securities industry and the last 20 years in the investment business.  Mr. Lewitt recently left Cumberland Advisors, where he was managing high yield credit, and is in the process of forming a hedge fund to invest opportunistically in the corporate credit markets.

Michael co-founded Harch Capital Management, LLC in 1991 where he managed separate accounts, hedge funds, collateralized debt obligations and mutual funds focused on below investment grade debt for institutional clients that included LACERA (Los Angeles County Retirement Association), Texas Teachers Retirement System, Investec Bank (UK), Goldman Sachs Asset Management, JPMorgan Chase Asset Management, Highbridge Capital Management, Investcorp, Onex Corporation, Omega Advisers, Inc. and other corporate pension plans. Michael successfully invested on both the long and short sides of the debt markets during this period.

Since 2001, Michael has also edited and authored The Credit Strategist, a newsletter that covers economics, politics and the financial markets and that is widely read around the world.   Michael will continue to write The Credit Strategist as he works with Cumberland and expects the newsletter to benefit from Cumberland’s rich research and analytic resources.

Mr. Lewitt was recognized in the Financial Times as having been one of the few investors and strategists to forecast the financial crisis of 2008, and also predicted the credit crisis of 2001-2002.  Michael also serves as a regular financial columnist for the Spanish newspaper El Mundo and has written for The New York Times, The New Republic, Trusts & Estates and other publications.  In May 2010, Michael published The Death of Capital:  How Creative Policy Can Restore Stability (John Wiley & Sons), which was received favorable reviews and was included as part of the curriculum in economics and history courses at the University of Michigan and Brandeis University during the 2010-11 academic year. The Spanish edition of the book, La muerta del capital, was published in June 2011 by the Spanish publishing house La esfera de los libros.  Mr. Lewitt is also a frequent media commentator on the financial markets. Mr. Lewitt graduated from Brown University (Magna Cum Laude; Honors in Comparative Literature and History); was a PhD Candidate in Comparative Literature at Yale University; and also graduated from New York University Law School (J.D.; LLM in Taxation).  Mr. Lewitt is a member in good standing of the New York State Bar.