Thursday, March 26, 2020

Shortages are just a mind trick

After several weeks of admonitions from great governor of California and Los Angeles mayor that there are no shortages of food or supplies at grocery stores, that supply chains are in tact and working, that there is no need to hoard anything, my mind continues to play tricks on me. When I visited Albertson's yesterday, there was no TP, no kleenex, no wipes, no hand sanitizer, no soup (except mushroom), few canned meats, and no spaghetti. Since there aren't any shortages, it must all have been a hallucination. Well, let's get a few things from world's biggest store, Amazon...

More mind tricks! I add stuff to my cart, then Amazon empties the cart for me due to something called "unavailability". Oh well, emptying the cart automatically saved me a few clicks.

Monday, March 23, 2020

Individual bonds vs bond funds

"(Bloomberg) -- A crisis in credit markets deepened on Sunday as a cluster of funds that own mortgage bonds sought to sell billions in assets to meet investor redemptions, sparking pleas for government intervention."

A lot of smart people argue that bond funds are as safe or safer than owning individual bonds. This is why I disagree. In extreme financial distress, everything not nailed down gets sold. Liquidity dries up in the bond market, but redemptions continue forcing the fund to sell at fire sale prices. If you own individual bonds, you suffer the same liquidity problems, but panic sales from other people don't lock in losses for you. As long as you can ride out the storm and the issuer doesn't go bankrupt, you come out OK. My high quality, curated bond ladder is holding up for now. There are low or no bids for many of them, but since I always planned to hold to maturity, that's not an issue.

Thursday, March 19, 2020

Fed projects 2% chance of recession

The ever vigilant Fed has their chart of recession chances, updated March 2, pegged at 2%. From the FRED web site, "Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales." Now, a lot has happened since March 2, including a widespread epidemic of SARS-CoV-2, although the first case was detected back in January. The Fed has initiated dozens of rescue vehicles and two emergency rate cuts to set short term rates back to 0%. If you argue that the chart is not up to date, then why only update it once a month when clearly conditions can go from 52 week highs to 52 week lows in less than that time? In other words, why publish a useless, untimely chart? Maybe so they can update it after the fact to show this model was somehow predictive. Fail.

Wednesday, March 18, 2020

Huge spreads in AA rated bonds

High quality corporate bonds acted as a safe haven when equities started to crash. With a hard economic stop being forced by government, bonds are getting hit now as well. Questions about the ability to service huge corporate debt loads and general liquidity concerns have blown out bid/ask spreads to margins not seen since 2008. Margins might even be higher in some cases. For example, the current bid for BNP Paribas 5% bonds is 92.996 (a yield to worst of 14.43%, while the ask price is 101.037 with a yield to worst of 3.69%. My guess is these are garbage bids to scoop up distressed positions due to low liquidity more than concerns that BNP Paribas will be unable to pay, but who knows. It's a sign of distress in the bond market.

Thursday, March 12, 2020

Ken Moraif of RPOA predicts DOW 31,000 at end of year

Ken Moraif is a radio personality that also runs the Retirement Planners of America, a financial advisory firm. In January, he made a fearless prediction for 2020 of DOW 31,000. In the interview, he stated there will be a recession and bear market some day, but not this year.

I'm pointing this out because as part of his radio pitch for new customers, he brags about having warned all his clients in 2007 to get out of the stock market, then to buy in 2009. I don't know if he did or didn't, but if he did, it was clearly luck. He claims their models can see recessions coming and he can protect your nest egg by letting you know when to sell. Just another example of hubris. I am chuckling at how he is going to spin this on his show. More likely, he'll ignore it and just talk about great recession like the current meltdown never happened. Good luck, Ken!