With all the chatter about junk bonds lately, Jim Cramer has a hard time believing that investors would really consider them cheap. In fact, he’s throwing that conventional wisdom out the window — especially now that the Fed has just raised interest rates for the first time in nine years.
“Having been knee-deep in researching the funds that own this kind of paper, I come back and say that the classes of junk bonds are so bifurcated that the notion of ‘cheapness’ is ludicrous,” the “Mad Money” host said.
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Yes, there are some cases of health care and consumer junk paper that are connected with companies that have not yet gone public because of a weak IPO market. And there is certainly a lot of debt connected to retailers that have gone private in the past few years. But Cramer still has no conviction for those.
“I think they are worth less than what you paid for them because you may be the only sucker out there who is willing to buy the stuff”
In his research, Cramer found that the vast majority of distressed paper revolves around minerals, mining, steel, iron, coal, oil drilling, oil service, natural gas and oil. Given how difficult all of these industries have become, there is no way Cramer would touch them with a 10-foot pole.
“The moment these bonds come off the proverbial lot, so to speak, I think they are worth less than what you paid for them because you may be the only sucker out there who is willing to buy the stuff,” Cramer said. (Tweet This)
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There is a massive amount of debt relating to coal, but Cramer thinks coal is done in the U.S. Additionally, any investment in metals, mining or steel related bonds is really just a gamble that the Chinese economy will come roaring back, soon, and Cramer does not see that happening.
As for oil and gas, right now there is more natural gas than anyone can actually use and the balance sheets for many of these companies are under stress.
In Cramer’s perspective, the same pundits who are chattering about junk bonds being cheap are the same ones who thought emerging market debt was cheap.
“All I can say is that these people who claim it is cheap tend to have one thing in common — they have some junk to sell you,” Cramer said.(Tweet This)
Ultimately, Cramer warned investors to beware of the debt merchants that bear gifts. Those are also the same companies that will not want to show the true prices of their junk paper at the end of the year.