Credit: Shutterstock photoIn his book "Telecosm," author George Gilder called this financial titan "the key source of organizational changes that have impelled economic growth over the last 20 years."
However, this figure's critics label him as the epitome of greed and all that was wrong in America during the 1970s and '80s. He earned more than a billion dollars over a four-year period as an employee of Drexel Burnham Lambert in the late 1980s -- at the time, the record for employee compensation in the United States.
His success was attributed to an incredible trading record of only four losing months out of 17 years prior to the firm'sbankruptcy in 1992 -- as well as the creation of a new kind of financial product popularly known as junkbonds .
In fact, this man became so popular and notorious thatGordon Gekko , the chief villain in the movie "Wall Street ," is said to have been based in part on his persona. As many tragic financial tales end, this once-mighty financier was accused ofinsider trading . Although he was acquitted of those charges, he was convicted of several securities and tax violations; he spent nearly two years in prison and agreed to pay a total of more than $1 billion in fines and settlements with investors.
Forever banned from the security industry, this former financier has reinvented himself in the public eye as a philanthropist and innovator in medical research. Talk about an amazing and impressive career!
If you haven't already guessed it, I am talking about the junk-bond kingMichael Milken .
Milken is credited with developing themarket for the high-yield bonds also known as junk bonds, which transformed the way in which companies raisecapital . These powerful financial tools have never really gone away.
In fact, they are experiencing a resurgence in popularity, and it's easier than ever for investors to get into the action.
Unlike in the 1980s, average investors can now access junk bonds through exchange-tradedfunds ( ETFs ). And boy, are they popular.
In 2012, nearly $10 billion flowed into junk-bond ETFs. These inflows have been followed by another $1 billion so far thisyear .
Toput it simply, today's low-rate environment has increased demand for high-yielding (if risky)investing tools.
Backing theETF demand, issuance of the underlying junk or speculative grade bonds has experienced close to $100 billion so far in 2013 alone.
The most popular junk-bond ETFs include the iShares iBoxx High YieldCorporate Bond ( HYG ) and SPDR Barclays High Yield Bond ( JNK ) . These two ETFs have a total of nearly $30 billion in combined assets under management. Over the past 52 weeks, JNK has returned 12.5% and HYG has returned 12.1%.
However, investors have pulledmoney from the ETFs during the same period. This has potentially set up a buying opportunity in both of thehigh-yield bond ETFs for risk-embracing investors.
Risks to Consider: Standard & Poor's is predicting an increase in default rates over the next 10 months. In addition, the spread between junk bonds and Treasurys have declined sharply this year. This could be forecasting continued yield declines. In fact, junk-bond yields have dropped 1,300basis points since 2008. Not to mention that short interest in the major junk-bond ETFs hit an all-time high in March. Make no mistake, despite their popularity in this yield-hungry environment, junk bonds and their corresponding ETFs remain a high-riskinvestment suitable only for investors who understand the risk involved.
Action to Take --> The disconnect between falling junk-bond ETF prices and the aggressive increase of the professional dealers exposure to junk-rated debt indicates that this may be a potentially unique buying opportunity in JNK and HYG. Remember to use stops and to use only risk capital for this type of investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
