Smart-Stock.net

If market value was an illusion when stocks were soaring, who’s to say it’s no illusion when stocks are flooring?! So say investment specialists Marty Whitman and Curtis Jenson of the Third Avenue Value fund. Arguing for optimism in this article from The Wall Street Journal, Mr. Jenson offers “…unprecedented opportunities in the distressed debt market.”

Calling many current valuations “ridiculous,” the managers at Third Value have pressed ahead with high-yield bonds.

Third Avenue Value has been buying select bonds from GMAC, as well as bonds from a trucking company — Swift Transportation — and expects either a yield at maturity of 19% or a valuable slice of equity if Swift is forced to restructure.

Indeed, in a recent letter to his shareholders, Mr. Whitman predicts some yields as high as 54%.

How do you take advantage of opportunities in high-yield bonds during these difficult times? If Jensen and Whitman are correct, the key is optimism, and a group of investment specialists who know how to value distressed assets.

With such a rapidly-changing financial scene, it might be a good idea to take a step back and gain some perspective. The New York Times has established a timeline detailing the events that defined this financial crisis. Though the picture seems dire, smart investors know that great difficulties also present great opportunities. Where is the light at the end of this seeming chain of dominoes? Read on…

Sept. 7, 2009 — Henry M. Paulson, Jr., justifying the conservatorship of Fannie Mae and Freddie Mac, tells the public that these two government-sponsored entities are “…so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in the financial markets here at home and around the globe…”

Lehmen Brothers, AIG, and even Merrill Lynch — “the thundering herd of brokers around the nation” — fell victim to the crisis. Wall Street resembled a trauma victim as onlookers wondered how to ’staunch the bleeding…’

Ultimately, the government had no choice but to rescue AIG, which was — in words that would become increasingly common in the media sphere — ‘too big to fail…’

Finally, the system seemed to be near the breaking point — even Morgan Stanley and Goldman Sachs could no longer escape regulation, and Washington Mutual became the largest bank failure in the history of the United States. Congress had no choice but to step in with a financial bailout plan. At the time, those seeking returns from distressed assets thought that they might have the government’s backing. Indeed, prior to the bailout, Paulson assured the public that the Treasury was working to “…address the root cause of our financial system’s stresses…illiquid mortgage assets that have lost value as the housing correction has proceeded…”

Ultimately, despite the best efforts of Federal regulators and foreign banks which seemed at first glance better-regulated than U.S. systems, the financial crisis spread beyond the U.S. to the shores of Europe and Asia.

Where is the light at the end of the tunnel? As we noted in our most recent post, there is room for optimism, despite the recent announcement that distressed assets will no longer be the focus of TARP.

And one thing remains certain — investors looking for tremendous payoffs can look to distressed assets that will become increasingly affordable as they are priced to sell. Despite our troubled times, any objective observer would agree that troubled assets will eventually show some return for the investors savvy enough to scoop them up at these bargain prices. For those interested in such potential, a sure-fire bet is to find a team of professionals to guide them in selecting those assets that are guaranteed to win big.