May 2020 IssueLong scroll reading

What I’m Thinking

By Charles Boccadoro

David asked each of MFO’s traditional contributors to share a few words about what we’ve been thinking as we watch events, both near and distant, personal and political, transpire.

I think …

I’m starting to feel a little better about things generally. Just these last couple days actually. Maybe seeing more cars on the U.S. Route 101. Maybe the spring weather and a fairly active farmer’s market yesterday. People adapting to social distancing. Maybe hearing Cuomo say NYC is on the downswing. If we don’t see a resurgence in the next few days, as towns start to reopen, we may spring back faster than feared.

Given how much money governments have injected, I trust we will stave off depression. Hmmm. What would markets look like today, bond and stock, if you were to take away current Fed injections? Probably not so good. But, given there is $25T in US funds, I suspect they are just simply too big to fail.

The world seemed utterly unprepared for this crisis. That’s only partly the fault of the most over-matched US president in history.

Maybe we will develop better processes/procedures for the next unknown virus. And, better focus on things that matter. Perhaps too we address health and infrastructure and inequality. Perhaps many companies will revisit just-in-time delivery with supply chain hedges. Perhaps ROA won’t just be about reducing the denominator; that is, reducing a company’s total assets to goose its short-term ROA.

I think the measures we impose to contain the virus (social distancing, working from home) and most of the rescue aid we provide (Fed “liquidity” injections) disproportionately favor the wealthy. 

We’ve have had 6 trips canceled so far. Some big (France) and small (Palm Springs/LA to see the Getty Museum). But we are healthy and I know of not a single person who has this horrid virus. The scenes though of NYC and Italy will never go away. And, so far, the US seems to have avoided the worst-case scenarios.

What else? MultiSearch at MFO Premium now breaks down bond funds by quality, not just at the aggregate. Back to basics! After the 11-year bull run, I think we’d grown complacent. Just how many BBB bonds are in an Investment Grade bond fund? How many on the verge of being downgraded? There is also a new metric called Junk, which simply adds up everything less than BBB including Not Rated. You will also find breakouts of duration. So, the former gives better insight into credit risk while the latter tracks interest-rate risk.

The one other key risk, which rocked my world, is liquidity risk. And, discounts/premiums on ETFs like JNK (SPDR Bloomberg Barclays High Yield Bond ETF) or LQD (iShares iBoxx $ Invmt Grade Corp Bond ETF) may be a sort of “canary in a coal mine” when it comes to liquidity issues in the broader market. I’m also adding an estimated fund flow metric (dollars and portfolio percent), so some insight in purchases/redemptions.

I’m still weighing the pros/cons of different structures when it comes to bond funds … OEFs, ETFs, CEFs. With OEFs, long-time shareholders can get left holding the bag on degraded portfolios during liquidity crunches. March was a real wake-up!

A 50/50 S&P 500 SPT/ iShares 20+ Year Treasury Bond ETF TLT portfolio seems quite simple and sane. It delivered 7.6% annually across the last full cycle with 60% the volatility of either … and, much lower MAXDD.

Good to see Eric Cinnamond re-engaging.

If the SP500 holds, those tracking to month-only performance never entered a bear market. Can you believe that?

Congratulations on 9 years! Very beautiful.

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About Charles Boccadoro

Charles Boccadoro, BS (MIT), Post Graduate Diploma (von Karman Institute, BELGIUM). Associate editor, data wizard. Described by Popular Science as “enthusiastic, voluble and nattily-dressed,” Charles describes himself as “a recently retired aerospace engineer.” He doesn’t brag about a 30 year career that included managing Northrop Grumman’s Quiet Supersonic Platform and Future Strike Systems projects, working with NASA and receiving a host of industry accolades. Charles is renowned for thoughtful, data-rich analyses and is the driving force behind the Observer’s fund ratings and fund screeners.