Yesterday was one of those days in the markets that felt like surrealism in action. Salvador Dalí must have been twisting his handlebar mustache looking down on yesterday's trading. The clocks certainly seemed to be melting between the Fed's announcement of extraordinary stimulus measures at 8:30 am ET and the close of trading for the holiday shortened week at 4 pm ET.
The Fed basically removed the specter of mass bankruptcies from the U.S. economy and, as has happened at every step during the Powell Chairmanship of the FOMC, did exactly the wrong thing. One of the reasons that the U.S. markets are such magnets for global capital of all types is the orderly, codified bankruptcy process we have developed over the past century. Without that, the natural curve between creditors and debtors is bent, and we will have what economists call an externality.
How to play this?
As I mentioned yesterday, the FAANG, MAFANG -- whatever acronym one chooses for the Tech Titans -- play is dead. The stock price charts of those West Coast big boys all look similar with an extraordinary inflation after President Trump took office. That free ride is over. Yes, Microsoft (MSFT) , Apple (AAPL) , etc. will rise when the market rises, but not by as much, and they are certainly exposed to downturns based on disappointing earnings, which will be reported in the next few weeks. In a world where "trash is cash", the real earnings and cash flow (except from Netflix (NFLX) , which hemorrhages cash) from the tech giants seem very passe. They will underperform the broad indices -- S&P 500 and Nasdaq 100 -- until that changes.
Trash is cash of course relates to the high-yield debt market as well. My firm had a terrific day yesterday as high-yield spreads narrowed. According to the St. Louis Fed's FRED database, the average spread for high-yield bonds versus U.S. Treasuries narrowed yesterday to only 796 basis points. Of course that's an elevated reading versus the 2017-2019 level, but it is actually below the peak of 864 basis points recorded just before the "Dimon bottom" of the markets after the commodities crash in January-February 2016.
Were things really worse in February 2016 than now, with the horrific human toll taken by Covid-19 and the economic effects of global lockdowns just being felt? Of course not. But Powell and company are bailing anyone and everyone out and even buying the (HYG) high-yield ETF (they announced the purchase of the (LQD) high-grade ETF in a prior stimulus actions) so risk is well and truly on. I was adding to positions in "junky" credits -- bonds and preferred stocks -- yesterday, and you should be, too.
Finally, to throw out one more cliche, one man's trash is another man's treasure. The extraordinary dislocations in the markets in the past eight weeks have created esoteric buying opportunities. Did you know that low oil prices and elevated contango in the oil futures markets have driven rapid rises in the rates for oil tanker shipments? I did, and I have been using the maximum amount of leverage afforded to my firm to buy shares of Nordic American Tankers (NAT) , Navios Maritime Acquisition (NNA) and preferreds of Tsakos Energy (TNP) to take advantage of this. Obscure names, to be sure, but oil shipping is one of the few sectors that is seeing improving fundamentals in this market. Oil is not dead. It may be asleep for a while, though, and in these surreal markets, renting a tanker that can hold 84 million gallons of the stuff (as a single VLCC can) is a smart way to play that.
So, it's time for you to put on your thinking cap and reject the group think investment strategies that have dominated the market for the past three years. Surreal markets demand surreal investing tactics.