It's been a wild ride this week, and I hope all RM readers are safe and sound. This week's rally, though we are off today's highs as of this writing, was a natural reaction to stocks falling through my fair value estimate of 2,400. The great Jeff Gundlach of DoubleLine tweeted last week that for the first time in years he had no shorts and I joined him in that stance Tuesday. I closed out the last of my Tesla (TSLA) puts as the market roared higher, not at exactly at peak value -- I never hit exact bottoms or tops, congratulations to you if you do.
So, for the first time since December 2018, with the S&P crashing through 2,200 and the DJIA threatening 18,000, stocks were cheap. I didn't buy a single one.
Why? Because the opportunities were greater among corporate fixed income securities, specifically preferred stocks and listed bonds. So, sure, Boeing (BA) looked cheap in the double-digits, Bank of America (BAC) looked appetizing at $18 per share, and I would even admit that Ford (F) , a subject of frequent criticism in my RM columns, a stance that I held in my days as a sell-side autos analyst, looked cheap as it brushed $4 per share.
But Ford and Boeing have suspended dividends and, while BAC will continue to pay dividends, the company joined its Financial Services Forum cohorts in suspending share repurchases. So, incremental capital is no longer being returned to shareholders in so many different cases in Corporate America, and that's what this rally is missing.
Yes, the stimulus that now seems to be sure to pass Congress and receive the president's signature will be beneficial for the U.S. economy. This morning's BLS report of an astounding 3.28 million initial jobless claims last week shows that we need it. But "gubmit" can only stop the economic bleeding. It cannot create shareholder value for individual companies. In fact, it can actually reduce that value by demonizing share buybacks. Share repurchases aren't "woke" now, and until that changes, an incremental buyer -- some would say the incremental buyer over the last three years -- of stocks is removed from the game.
So, I stick with securities that are valued on their cash flows, which of course derive from the cash flows of their parent companies. Buying preferreds at 20%-40% discounts (and, in a few extreme cases, 60%) to face value has allowed me to lock in yields of 10%, 15% and, again in extreme cases, greater than 20%.
Timing is everything in the market for corporate fixed income securities, and this month's selloff in corporate bonds -- as evidenced by the extreme blowout in high-yield and high-grade credit spreads that I mentioned in several RM columns last week -- was a tremendous buying opportunity,
But I have to be a little cagey here. I will say that I think the stock market is, after a three day move of 20%, back to being overvalued. It was fun while it lasted, right? So, today, I bought some very small bearish positions (via put options) on Tesla and Bank of America. Those options serve to hedge the unrealized gains I have in my bond preferreds.
On Monday and Tuesday, in contrast, all asset classes were still quite cheap, and I bought and actually used the maximum amount of leverage that I could through my firm. I bought those securities to lock in the yields, and I certainly won't be selling them any time soon, regardless of the newsflow on Covid-19.
What did I buy? I would love to plaster my picks all over the Internet, but, darn it, I have to make a living. As the stock market jumps on socialist solutions, there are still a few good old-fashioned capitalists out there. I am one of them.
