One corner of the bond market, or rather credit market, is having a tough time and it may be a negative sign for the rest of fixed income. CLOs, or collateralized loan obligations, which have been a star for several years, recent tumbled. In aggregate, CLOs dropped 5% in October, and those close to the market see more volatility to come. According to Citigroup “We think there’s more volatility coming … We recommend investors reduce risk and stay with cleaner portfolios and better managers”. CLOs are a key funder of the leveraged loan market, and weak demand there can flow through to boost borrowing costs to all corporates.
FINSUM: This is akin to a warning coming out of the high yield market, as what it reflects is worries about how leveraged companies might handle a downturn.
Retail is dying, right? Brick and mortar is doomed, supposedly, but that assumption creates some opportunity. The reality is that despite the broader headwinds the industry is facing, some malls and some REITs are doing well. Macerich, for instance, is a large REIT that owns several “trophy” malls amidst its 47 properties. The stock is trading at just 7x earnings, which incredibly cheap for a REIT. Apartment REITs, for instance, are trading at 20x. Its dividend cover ratio is fairly tight, but its overall model looks solid and it is yielding 10.9%.
FINSUM: There is a lot of opportunity in retail stocks, but you need to know where to look, and it takes quite an understanding of the space to sift through the options. Macerich looks solid.
Trump went on the record yesterday telling investors that the US and China were close to finalizing a trade deal. Markets were unconvinced. Speaking at the Economic Club of New York yesterday, Trump said “We’re close to a significant phase-one trade deal with China … It could happen soon, but we will only accept a deal if it’s good for the U.S. and our workers and our companies”. Markets held ground after the comments, but ultimately fell back as Trump offered little evidence to back up the comments of a deal being “close”.
FINSUM: In our view of this situation, a deal is never close to being done, it is perpetually on the edge of falling apart and only truly done when it is signed.
The world’s leader in managing the ultra-wealthy’s money says that the rich are bracing themselves for a big selloff in 2020. The firm’s clients hold near record level of capital in cash—25%—and think the stock market is going to have real trouble next year. The two major concerns occupying the minds of the ultra wealthy are the US-China trade war and the 2020 US presidential election. The bank got quantitative results on the topic from a recent survey, which received 3,400 responses.
FINSUM: Nobody knows how the market will do next year, and it is never hard to find people that are bearish. This looks like the perfect wall of worry for stocks to climb.
Bank of America has just made a bold call on the direction of yields. The bank has sharply increased its forecasts for where bond yields will be at the end of the year. Its previous forecast for the ten-year was 1.25%, but it has just moved that up to 2%. It made similar adjustments to its forecast for German and British bonds. “Relative to our more pessimistic revision in August, the US and China are working to de-escalate trade tensions, no-deal Brexit risks have been banished for now, global data have started to stabilize, and central banks have shifted from dovish to neutral policy stances”.
FINSUM: Based on the change in mood amongst investors and central banks, this forecasted change makes total sense to us.