2019 Is the Year of the Debt Diet

2019 has started out to be a great year for corporate debt investors (and many of the equities most linked to their bonds and loans). General Electric and Anheuser-Busch InBev , two companies that were forced to cut their dividends, have rebounded strongly this year as they have taken steps to shore up their balance sheets. But they are not the only companies that started to seriously consider bond markets given its importance to their equity holders. AT&T , which has also taken steps to transform its balance sheet, announced that a portion of the CEO's compensation would be linked to maintaining some metrics linked to the company's credit. You have likely seen a lot of overblown fears about investment-grade credit. They were wrong and will continue to be wrong. In fact, we finally saw the rating agencies start to upgrade some banks, a move that was long overdue. While it is easy to see that almost all banks and many financial companies were over-rated ahead of the financial crisis, they have remained under-rated now for several years. Their assets have improved, their tail risk has been mitigated and their borrowings have been extended, all three of which helped contribute to the improving credit profile of banks. If you are invested in a company that has given no indication that it feels it needs to address its credit profile now that equites and bonds have rallied, you may want to reduce risk, but for the vast majority of investment-grade companies the fear-mongering over risk of BBB credits was immensely exaggerated and hurt many people's returns by causing too much fear at the wrong time, for the wrong reasons. Judging the Trade Deal Two weeks ago, I was 98% certain we would get a trade deal announcement with China in the next few weeks (not a comprehensive deal, but a sufficiently defined working framework that markets can respond to). I am still getting all the right signals, but I have to admit that my confidence is decreasing. Call it 90% likely that a deal is announced in the coming weeks. If we don't have a deal announced by the end of March, expect stocks to swoon and if it looks like no deal is likely at all, then expect stocks to return to their December lows, rapidly. I think the market will initially try to sell the news regardless of what the news is. A lot will be made that we didn't get the intellectual property protection we wanted. That is likely to be true, but it also doesn't matter that much as it is difficult to quantify that impact. The two key elements that I am looking for Direct Access to Chinese markets. I have been told again and again by U.S. corporations that the current access, which in many cases is tantamount to handing business acumen over on a silver platter, cannot continue. We need decent -- not great, just decent -- open access and the sell the news will be bought. Liquid Natural Gas. China needs LNG as its imports are increasing. Chinese efforts to more away from coal, both for pollution reasons, but also critical for some improved manufacturing methods, is real and will continue. China should want to secure a safe source of LNG, which is the U.S. I emphasize LNG so much because I think that gives the most bang for the buck of any commodity that China can agree to purchase. There will be massive infrastructure spending domestically and in China on the back of any long-term commitment. That will create high-paying jobs as building LNG export capabilities will quite literally fuel the economy. After that, President Trump can play nice with other countries or he can escalate tariffs with Europe and Japan on autos and undo much of the good any trade deal with China will do. If the President simply replaces one enemy with another, markets will respond badly. Bond and Stock Markets Are Saying the Same Thing I've heard a lot of chatter recently that bond markets, with the 10-year Treasury yield back near 2.6%, are saying something different about the outlook than stocks are. That is quite simply, not true. They are both saying the same thing -- central banks are our friends, again. Treasury yields aren't dropping because it is all doom and gloom on the bond trading floor (or at least not more than we usually have) but because the Fed is telling us they want the economy to run hot. That they won't hike rates until they are done shrinking their balance sheet. That they will leave the balance sheet larger than previously planned. They aren't telling bond investors that the water is warm, they are pushing them in hand over fist. One of my favorite curves to look at is the spread difference between the 30-year Treasury and the 5-year Treasury. That closed at 61.5 on Friday, up from 50 at the start of the year and from 25 in October. China has been stimulating their economy. The European Central Bank has reversed course and stopped hiking before they even started and will re-implement some crisis era tools like LTRO (long-term refinancing operation). Bonds are responding more to monetary policy than to any perception of economic weakness. So, for now, it is consistent for stocks and bonds to rise together in what I like to call the 'Quantitative Easing' trade. That won't last forever, but don't let low Treasury yields scare you out of taking risk. Bottom Line I am still aggressively in favor of taking risk, though I want a bit of cash to be able to buy any sell the news response to a trade deal announcement. Buying some deep out-of-the-money puts as a potential hedge is something I would support as well (I would not be selling puts here, with volatility so low, the premium you are getting paid is not commensurate with the risk you are taking in my opinion). In an algo-driven trading world, long grinds higher with sharp declines is the norm and we should be continued to be prepared to trade and invest in that type of market environment, given current market structure. How Much Money Will I Need to Retire? Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert Mr. Retirement Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.

2019 Is the Year of the Debt Diet

Fear-mongering over risk of BBB credits was immensely exaggerated and hurt many people's returns.

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