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Frequent Contributor

From Barron’s, May 25, 2020 (Part 2)


Pg 7, Up and Down Wall Street: People at home are hooked on streaming, videogames, cooking/baking and day-trading. Zero-commissions, fractional-trading [now everyone can own little bits of AMZN, GOOGL, TSLA, etc], deep stock dive in March, CARES stimulus checks and being stuck at home have contributed to the growth of day-trading. The odd-lot volume is up; small lot [ < 10 contracts] options volume is up; bank transfers to brokerages are up. TINA and FOMO are in full force due to ZIRP. They are not all chasing momentum and speculative healthcare stocks but are also playing with depressed stocks [airlines, energy, F, GE, etc]. This retail stock mania has been a significant factor in +30% move from March lows, but is it sustainable?

High-quality munis are offering higher after-tax returns [accounting for federal, state and local taxes] than some HY corporates; 30-yr AAA munis have yield spread of 60 bps over similar Treasuries; mentioned are some examples from GA, OH, CA, NY. Strong states include WA, WI, FL, VA, UT; weak states include IL, KY [guess who recently suggested a bankruptcy route for states?], NJ. Munis are lagging as they haven’t gotten the same boost from the Fed as corporates and MBS. There are also concerns about soaring Covid-19 related state and local budget deficits [$200 billion?] – these aren’t directly related to the previous pension deficit problems. Funds mentioned are OEF VWLTX; CEFs BTT, NEA.


Pg 9, Streetwise: People at home are doing more outdoor activities – biking, boating, barbeques, inflatable/regular pools. Private L.L. Bean online sales are up even with most of its stores closed [its normal in-store sales are only 25%]. Beneficiaries include RV makers [WGO], pool suppliers [POOL], picnic/camping products [YETI], decking materials suppliers [TREX], landscaping suppliers [SITE], etc. These are in addition to the typical at-home plays [ZM, PTON, WORK, FB, AMZN, EBAY, etc]. Retailers with significant e-commerce operations are also doing well [WMT, TGT, LOW, HD, etc].

[Hough’s piece wasn’t picked but it fits here] ViacomCBS [VIAC] will have live sports in June [PGA on June 11; NFL in Fall; initially without fans] to supplement entertainment and news. Its ad-supported free streaming Pluto TV has grown rapidly globally. There is a backlog of shows and their production will start ASAP in Summer. Ads are picking up in Q2 and Q3 will be much better. Film releases have been delayed [A Quiet Place 2, etc]. Work from home using Zoom/ZM has been fine. The stock has rebounded from the low.


Pg 10-11: No important meetings noted.

Hot at-home stocks Netflix [NFLX] and Clorox [CLX] may now be overvalued. They acted poorly last week on positive vaccine news. What will happen when states reopen, and people aren’t stuck at home anymore?

J.C. Penny [JCP/JCPNQ] bankruptcy reorganization plan is to split into an asset-lite retailer and a REIT holding most of its properties [valued at $910 million with stores open, $545 million if empty]. Concerns about viability and liquidation remain. JCP is a large presence in malls owned by PEI, CBL, WPG, MAC, SPG.

Data this week [bad reports keep coming]: Consumer confidence, new home sales, home price index, Dallas Fed Texas manufacturing outlook on Tuesday; pending home sales, durable goods report, initial jobless claims [total unemployment claims 38 million] on Thursday; Chicago PMI, personal income & spending on Friday.

Closed: US stock and bond markets on Monday.


Bullish Recommendations: Retail giants getting stronger [WMT, TGT, HD, LOW; they also have resources to develop e-commerce and for operations during long recovery; weak retailers include KSS, URBN; pg 13];

Dropbox [DBX; 2018 IPO; profitable; modest growth; runs own cloud platform; an overlooked early cloud storage player; 600 million users but 97% use free basic service; tough competition from MSFT, GOOGL, AAPL, etc; pg 17].


Bearish Recommendations: See other stories.


Pg 12: By imposing national security laws on HK that will allow direct operations by Chinese police and security in HK, concerns have heightened about HK status as international trade hub. HK dollar and HK’s special trade designation that exempts it from US tariffs may be impacted. It depends on whether the steps have limited political scope or whether they compromise China’s one-country, two-systems policy. It adds a new element to already growing US-China tensions.


Pg 14: Convertible bond [hybrid] issuance is booming; April was the strongest month in 12 years; YTD issuance is getting close to that for entire 2019. Think of them as bonds with equity kickers; companies get lower rates; if the stock rises, it is a win-win. The convertible market is about $219 billion, and techs and healthcare dominate. Mentioned are OEFs PACIX, FISCX; ETFs CWB, ICVT; CEFs CHY, ECF. [There are busted convertibles with high yields and growth-oriented convertibles with reasonable prospects for equity payoff]


Pg 18: Ben Inker, GMO. After buying in mid-March and early-April, GMO has reduced stock exposure to only 25% in aggressive accounts/funds. Extraordinary rally from March 23 lows has priced best outcomes for Covid-19 treatment and economic recovery, but when those outcomes are realized, the beneficiaries will be the stocks that are depressed now [cyclicals – hotels, airlines, energy, autos, some industrials]. SP500 fair value is 2,000. Some international and EM stocks look cheaper. GMO keeps reviewing its models that have shown the US to be overvalued most of time except for 2008-09. US large-cap outperformance in profitability and stock valuation has been driven by tech and healthcare sectors; they have also become dominant in their industries through organic growth and unrestricted acquisitions. But the future environment for giant companies won’t be favorable. In the past, monopolies and oligopolies faced regulation. In credit, he likes EM sovereign debt, HY, ABS and cash.


Pg 21: Time is coming again for crazy pre-announced, single-day rebalancing of Russell indexes. New index lists will be announced on June 5 [based on May 8 prices] and actual rebalancing will be on Friday, June 26. There will be lots of changes in Russell indexes this time due to recent market volatility and institutional traders try to front-run changes.


Pg 23, [Online] Cover,Small Businesses Are the Key to Reviving the Economy. They Face an Existential Threat”. Many small businesses [SBs; less than 500 employees] that survived 9/11 and 2008-09 may have trouble this time. SBs account for 50% of employment, 50% of GDP, 40% of business revenues. Small-cap R2000 [a crude proxy for SBs] is still down -20% YTD vs large-cap SP500 that is down only -8% YTD. Two rounds of PPP have helped but the business hasn’t picked up enough to recall employees. PPP has been to support employees, not the SBs themselves. Many SBs that use freelancers/contractors [e.g. events-related SBs] are not eligible for PPP. Tax filing delay to July 15 has also helped. SBs have smaller cash cushions and lesser access to credit. Almost 50% of SBs remain closed; 67% of jobs lost are in SBs. Industries hurt the most will be those where social-distancing is difficult [retail, restaurants, personal services]. Retail sales are down even for grocers and other essential businesses that are open. It is unclear how many SBs will fail and how many temporary layoffs will become permanent. The fate of SBs is tied to the outlook for consumers.

Pg 27: If one is handy or in a trade or profession, one can buy a job by buying a small business at 2x-4x EBITDA. 20% down payment may be required for purchase price in the range of $300K to $4 million; institutional investors are not active in this market. There are high risks and high rewards.

Pg 28: A feature on small businesses in lobster industry in Maine. With restaurants, bars, cruise ships, casinos closed, there isn’t much demand for lobsters and the supply-chain has been broken. Many related SBs may not come back.

Pg 30: Suzanne Clark, President, US Chamber of Commerce. Longer a SB is closed, less is the likelihood that it would reopen. Possibility of gradual reopening further complicates survival. Some of the temporary SB job losses may become permanent. The first round of PPP was not effective due to banks requiring established relationships; the second round of PPP was better and made more SBs eligible; additional rounds will be needed. In order to reopen, SB owners have to be clear about the rules [social-distancing, capacity, various jurisdictions may have different rules, etc], liabilities, Covid-19 testing and whether consumers will feel safe enough to return.


Pg 32: Comanagers Brian Yacktman and Elliott Savage of YCGEX look for quality businesses with pricing power and high returns on tangible assets. They can only identify 100 such businesses globally. Fund is concentrated with top 10 holdings accounting for 47% of assets. It also uses options on some of its holdings. It is run by YCG Investments where Brian is a partner. Brian’s dad Donald and brother Stephen run Yacktman Asset Management.


Pg 34: Bond investors in illiquid areas should consider interval-funds [68 such funds include PFALX, XCAPX, SRRIX]. These can be bought at any time, but redemptions are limited, often to 5% quarterly. Many are leveraged; ERs are high due to the cost of leverage; there may also be performance fees. These are in between OEFs/ETFs and CEFs. These can avoid problems like Third Avenue HY fund [2015], IOFAX, BDKAX, etc.


Pg 35: This great tech stock rally is missing out on IPOs that are down to a trickle [SLQT last week]. But more IPOs are coming as indicated by IPO filings and IPO plans. VIX around 28 is still high but not extremely high [peaked at 83 in March] – it is hard to price IPOs when the market is hyper-volatile. However, things are different now and IPOs from Airbnb, DoorDash, etc are not likely soon. Talks about direct-listings [that raise no money] have also subsided. Gone are the days of long IPO roadshows as things are now being done virtually. ETF IPO owns companies within 2 years of their IPOs and was at an all-time high last week. Several tech companies have also raised money via secondaries [SHOP, EQIX, Z, PING, ROKU].


Pg 36: Small-caps [SC] are more under payout pressure than large-caps [LC]. Debt/EBITDA is 2.7 for LC, 10.2 for SC. REITs that have suspended dividends include KIM, PK, EPR. Following are the % reductions in projected dividends due to cuts and suspensions; WisdomTree [WETF] is abbreviated as WT below:

WT US Dividend Growth Index  -7.3%

WT US Dividend Index  -8.9%

WT LC Index  -5.9%; payout ratio 58%

WT MC Index  -23.8%; payout ratio 70%

WT SC Index  -29.8%; payout ratio 90%


Pg 37: Global trade needs reform. WTO should tighten rules so that countries cannot play games with currency manipulation, discriminatory domestic laws and export credits and subsidies. WTO allows trading blocs such as the EU, CPTPP, etc, and the US should explore forming trading blocks with Asian and European countries. Cross-border investment flows have benefits, but they can also be disruptive. These are controlled by individual governments, but a global framework for them would be better.


Pg 38: Stephen Klasko, President, and Mark Tykocinski, Executive VP and Provost, Thomas Jefferson University [TJU]. Covid-19 has forced the higher education to reform, redefine and regroup in a very compressed time span. Use of digital/virtual tools became necessary for remote learning. TJU will start on-campus classes in Fall but all-digital option will also be available to students. Classes will be smaller to maintain social-distancing but there may be more sections. Studios and laboratories will be adjusted and supplemented with digital tools where possible. More AI and machine learning will be incorporated into the curricula deemphasizing routine learning and standardized tests. Residence hall rooms will be single occupancy, but some students may have to live off-campus. Events and athletics will conform to new health guidelines. These changes are called the Fourth Industrial Revolution.


Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.

Several misses this week.

Food delivery demand has soared but companies in this area are not profitable. There is tough competition and many promotional deals. Restaurants now use multiple food delivery companies. Lockdowns have accelerated some trends. UBER with Uber Eats is trying to acquire GRUB; other large players are DoorDash and Postmates.

This hasn’t been a good year for ETFs with delistings outpacing launches YTD. JPMorgan [JPM] is shutting 6 ETFs that include 4 liquid-alternative [hedge-fund like] ETFs JPLS, JPMF, JPED, JPHF and 2 foreign/global ETFs JPEU, JPGE. It will launch 2 active ETFs JEPI [domestic] and JIG [foreign].

BlackRock [BLK] is diversifying the custodian for $2 trillion iShares ETF assets now solely with State Street [STT]; changes may happen over 2 years. The iShares ETFs account for 6.3% of STT custody assets and it will lose a decent chunk of those.

TIAA has warned that negative yields may be possible for some money-market funds. Specifically, TIAA has temporarily waived some fees to December 31, 2020 for CREF Money-Market VA and TIAA Access Money-Market VA; then, starting next year, yields on these may become negative. Under the new rules since 2016, these two are considered government money-market funds. Rules differ for retail prime money-market funds [these can have gates and redemption fees] and institutional prime [these have floating NAV in addition].


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