Animal Spirits Podcast - Talk Your Book: The Companies Are Fine

Episode Date: December 11, 2023

On today's Talk Your Book, Ben Carlson and Michael Batnick are joined by Alex Morris, CIO and President of F/m Investments to discuss: F/m Investments Opportunistic Income ETF, interest rate risk vs. credit risk, market cap weighting bonds, knowing when to sell a bond, and much more! Learn more about F/m Investments ETFs at: https://fmetfs.com/xfix/ Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you about FM Investments. Go to FMETF.com to learn more about the FM opportunistic income ETF, which we're going to talking about today. That's FMETFs.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redholz wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. On today's show, we had returning guest Alex Morris from FM Investments to talk about the credit space. We talked to him in the past about treasuries. And the big takeaway for me, but you actually made a pretty good point that, yes, interest rates have risen, but most companies are still paying debt on much lower yields in the past, which is one of the reasons that the bond market hasn't completely blown up from all of this, which is interesting. You know, I think I might have said this.

I was almost embarrassed to have this, that this dawned on me. It just seems so obvious. But the price of these bonds have gone down to keep up with new interest rates. So Microsoft, for example, their bonds are more attractive than they were when they issued them. Is Microsoft any worse? off than it was when they issued these bonds. Of course not. Right. Yeah, which is interesting to think about credit. And now you're seeing 6, 7, 8, 9 percent yields in credit, which makes this space way more interesting than it was a few years ago. So we talked to Alex about a ton of different stuff about

credit, how they think about these bonds, the types of yields they're seeing. So here's our talk with Alex Morris of FM Investments. We're joined again today by Alex Morris. Alex is the CIO and president of FM investments and portfolio manager for FM's Integrated Alpha Group. Alex, welcome back. Glad to be back. All right. One of the things Michael and I have been talking about in recent weeks and months is obviously the bond market is exciting again, especially in the credit space. So you can look at corporate bonds right now. You can correct me from wrong, yielding, I don't know, six to seven percent in some cases, high yield probably more like eight to nine percent. That's right. So I think a lot of people are looking at that and going, well, why would I invest in stocks if I can

get six to eight or so percent in credit. We'll look at the bright side later, but let's look at the downside now. Are there any risks to this space with yields being higher and having not gone into recession yet? Well, it's always fun to start with all the negatives, right? But I think it's fair, right? That's a bond thing, right? It's a bond thing. We just have this, like, deeply pessimistic view of the world always. But maybe I'll turn you around to that in a second. I mean, so obviously, this first thing to remember, if you look at bonds, is they do have an expiry on. them. So bond you're buying today, you know, unless it was minted a couple of days ago, has a coupon that was set based on conditions at some point in the past. So you're going to buy it

at a price and it has a yield and now pricing yield are going to work themselves out. So high yield or a high er yield doesn't always mean a higher coupon rate, right? It's a combination of the price you pay and the cash flow is you get overtime. This is why folks really despise bond math. But if you look at, say, some of the high yield or junk names today by rating, they may still have a five or six percent coupon because that's what junk debt, you know, would need to offer to be acquired, say two or three years ago, even if it has a 10 percent yield today. A lot of that is just price change. And that means you're going to get that experience if you stick around to when the bond matures. So there's, aside from the inherent factors of do you have a credit that

might not be able to be refinanced for a business that might not be able to pay it back, you also have to say, am I going to get the return I think I'm getting on the tin, based on the time period, I want to hold this security? And am I going to get the cash flow I expect? I think that's probably the biggest downside to investors is not, they just look at the headline yield numbers. They see that number and it doesn't exist in reality. Now, we're going to next year come up with some products that actually fix that where you can buy more into the current coupon cycle. So then when you say, hey, it's yielding six, like there'll be something that actually gives you six and sticks with it as opposed to this sort of accumulation of historical prices

and cash flows and other bad things, right? But if we took a turn for just a second, and if I can make just a moment of what maybe of optimism, let's remember that debt is actually like a really deep statement of optimism, right? And we all do this in our personal lives if we have a mortgage, right? Our aspiration is that in the future, we will do better than we are today. We kind of lose sight of that in Bond World and that Jared Dillian did a great piece on this where he went through the sort of math and the emotions behind it.

But it's true. And I think that's a really important point. As we look at credits here, right, hope is not a strategy. But these companies are investing in themselves, and they're investing themselves in a meaningful way. And then when we do this underwriting process, it's really to work out, are those aspirations going to be obtainable? And are we going to reliably be paid on those? And that's how we try to find a good credit in this world, even if, you know, some of the ratings, some of the other math doesn't look like it should hold out. That is an interesting paradox that people with higher debt loads, are optimistic about their ability to service that.

And that was a really interesting post by Jared. I read that as well. But there's a difference between the individual's propensity to take out debt and corporations doing the same thing. Can you just talk about that dichotomy? Sure. I mean, so obviously, in our own lives, we need it because we just don't have that big pool of money, corporations, particularly those are profitable, are now trying to balance

how do they deal with cash flows, right? I want to invest in a project today, for which I need to have a big, money, and now I expect to get some regular repeated cash flow based on that debt. And you've got to hope as a debt offer, because you're going to part with your money today, that that company is going to do two things. One, I actually execute on some plan to do this, and two, that the market conditions aren't going to go against their ability to repay you. And where I think, you know, like you hear junk bond, you think of Michael Millen, all these other things in the background, right? I think that the key to remember in the debt world is we're buying companies.

and we're exchanging cash flows, and the hope is that they'll be able to continue to do this. And there's two types of companies, really. Those who need debt to continue and those who are using debt to grow. And if you looked at the NASDAQ, circa, I don't know, 1995, let's say, the vast majority of those companies needed debt to grow. And that's why interest rate risk was so high. Like if interest rates went up, many of those companies couldn't afford to refinance their debt from two or three years ago, they weren't going to make payable. And that just isn't true for many of those companies today. Like at one point, believe it or not, that was true for Apple, right?

Apple was on the brink of bankruptcy a handful of times. And now it's one of those profitable companies in the history of mankind. And they've gone from that, hey, I'm an issuer who needs this to just stay afloat, to I'm an issuer that is using this as a mechanism to grow or in lieu of issuing more equity and deluding equity investors. Yeah. No, I'm sorry. I'm sorry.

Finish your thought. Well, so it's kind of a weird phenomenon, right? also issued debt through bank loans. So we're kind of looking at through the same way. And a lot of bank loans get re-securitized into debt in the public marketplace. And the U.S. is oddly good at this. I don't know if you guys read the unhedged pieces from the F.T. But they made a really interesting point that there are very few zombie companies in the U.S. and there's a lot of zombie companies in Europe and Asia, these companies that have just broken, dysfunctional, non-working business models. But they sort of cutthroat ruthlessness of U.S. banks in the U.S. bond market kind of prevent those

companies from existing. So you think that even with the zero and straight world, because a lot of people were saying that, like, we have all these zombie companies that aren't being allowed to fail because rates are so low, that didn't really happen. I think the ones that are here have found a way to make it work, and the ones that are failing have largely failed. And there have been some pretty big name bankruptcies, right? By-bye baby and Bed Bath and Beyond are gone, right? Like, some of these happen. But the ones that are here. Right, my bye-bye baby down the street is turned into a spirit Halloween. There you go. Like, if that's not the best. How is there a spirit hollow? It doesn't even make sense to have a seasonal story. Is that seasonal? Does it?

Does that, does it leave? Yeah, I think it's, I think it sees them. And then it turns into a Jake's fireworks during the summer. There you go. So, Alice, this is an interesting dynamic that I had it really considered. It's, and I'm sort of embarrassed because it sounds so obvious what I'm about to say. The relative attractiveness of bonds that were issued, say, three years ago is better, right? Because prices have come down, rates have gone up on these bonds.

But the companies are not necessarily in a worse off position. to pay the coupons when they took it out. Like, if anything, some of these companies are actually in a better position. Net interest expense for companies, paradoxically, has gone down because they're earning more on their cash than the new debt that they have to service. So isn't that a weird dynamic where companies are not in all cases, but in some cases as well off or better off, but their bonds, the attractiveness of their bonds has increased dramatically? It is. That's exactly what happens and what has happened. So if you look at,

you know, who's like the real buyer of super short-term corporate debt paper tends to be much more the money market space? And that's why it's hard for them to generally, for money market funds, buying that sort of paper to make a lot of money. You have to kind of buy it a year or so out where there's still some risk. But now as that thing gets closer and closer to par, that company has enough cash on its balance sheet already. And it's earning more money than it's going to pay out. So it's incentivized to just sit there. The question, the fear becomes, all right, it's safer to buy that debt. They have the money to pay me, but it might be much more expensive for them to get net new debt. So are they going to make

best use of that cash because it's super safe to just sit on it, right, and pay out less than you're earning? But at some point, they're going to pay out that cash. It's gone. And now they're going to need to go back to the debt markets to get fresh debt to continue to grow. Or they just decide they want to get off the debt train. Turns out, though, that's fairly rare. any company, most large companies that can get a reasonable debt stack will, and they'll continue to use that for growth, which is a good thing. R&D ultimately drives equity value in the long run. The big worry, I think, for a lot of people in credit space would be, listen, we've been preparing for a recession for 18 months. It's coming eventually. When that happens, spreads are

going to blow out, and then credit is going to get dinged. Is it possible, though, that since we've already had this huge rate hiking cycle, that spreads do blow out, but it's only because treasuries are falling and not because corporate credit interest rates are rising. Is that a possibility in any world or do you think that's not possible to go into recession? I think it's possible. And I think recession happens or fears of recession happening, right, doesn't actually need to be a recession, just needs to look like from enough people's view that there might be for that to happen because spreads will tend to lead the market, not the other way around. And I think if that were to happen, because treasury rates fall, the credits that you own are

probably still going to be cash good, right? And that company's theoretical ability to buy more credit might actually start to go back up in its own odd little way for companies that are well-rated and that have a history of prudent debt service. I think that's where, you know, things get a little funky in the credit world, in the bond world. We think about, it's about 5,000 stocks in the U.S. today, right? That's basically the total stock market, including some of the OTCs. There are over two million Q-Sips for fixed income instruments. So it's not like every issuer is made equally, and it's not that every debt that that issuer has is made equally.

And that's where underwriting matters. And when we look at like X-Fix and the way we go about it, think of us as more like a value investor, you know, traditional equity value investor, but as opposed to trying to just buy a stock at a depressed price, hoping it goes up over time, we're able to look within a company, find one who's a prudent user of capital, and then find the right space in that capital stack where we've got multiple ways to win. if they pay us back, hey, we made a nice coupon and we're really excited. If the company gets better over time and gets upgraded, which is really what we're shooting for, we now get immediate

capital appreciation and we still get our cash flows, right? So there's a couple of ways for us to win there. And that's where it gets exciting and that's when you look at recession. If a recession were to happen, there are some companies that are going to be hit terribly hard and some that are not and they still have business models that work, right? Even in recessions, people still go to Starbucks. So debts of those types of companies are going to work. I don't know that I'd want to be holding on to Carnival Cruise Lines because I don't know what the salvage value of a gigantic ship that became a meme is when people stopped going. But there are plenty of places in between where those companies have proven time and time again that they have management that rewards debt holders. And they do a good job of paying their debts back and managing their treasury. And those are companies you're still going to want to buy. And the debt that's out there will become more valuable because it'll be. just be harder for them to issue new debt. So you're going to want to hold on to those other credits as long as you can. Carnival's money good.

Those boomers are going to be on cruises for the next 30 years, Alex. Have you been on one recently? I've never been. I've never been on a cruise, but I love the concept. It's actually pretty fun. I'm going to make it a mission of mine to do that. So for your fund, is this fund entirely credit? Can you also want treasuries?

What is the actual strategy? So it's a largely credit-based fund. We can own some treasuries, and for cash management reasons, we do from time of time. We can also buy preferreds and other places within the cap stack that are non-equity that allow us to sort of maximize the income capability. And that's really what the fund is, right? It's trying to shoot for income. And income where we have other ways to win through capital appreciation, through, you know, how debts that get converted from one type to another. But practically speaking, it's that income component is really what we're trying to optimize for. And then we want some added security for that income to be returned. What does that mean to edit security? So obviously, you can always go and find a higher coupon by accepting a subordinated debt or being further down, should something go wrong. And we want to be in a position where that's less risky for us.

So you'll find us buying more higher up in the security level as opposed to just the true junk and aspirational items. But by the same token, we want to get rid of issuers who just are imprudent, right? To the point earlier, the debt markets tend to reward folks who issue a lot of debt. Well, that's like saying the person who has the most mortgages or car loans is the person you should give more debt to, right? And that's true for some people. There's a reason why having no credit is risky to your mortgage lender. But at some point, having some credit is good, having much more credit is a bad thing. So let me ask you about that. So that's been one of the pushbacks on why cap-weighted index funds in the bond market might not be the best option.

Because as you just mentioned, this idea that buyers are sort of indiscriminately rewarding people that are overly levered. So whereas the case, if you're an individual, of course, the bank would look at your ratios and say, well, this is out of whack. But doesn't the market do the same thing? The market is not oblivious to the fact that there are companies that are just issuing tons of debt. And won't the market punish those companies demanding higher rates? Yes and no. You think so, but the math doesn't bear that out. And we're actually, as we look at 2024, coming up with some ETFs that will do much more equal weighting and much more, shall I say, realistic weighting of securities to get away from that concept. But if you look at, say, the two or the three-year credit indices, about two-thirds of all of the names are going to be banks. And it's because banks are prolific issuers of debt. They give loans out and then they issue debt to help fund those loans. And that's their business model. But if you go through it even further, if you looked yesterday, in the top 10 in the high yield space, as an example, five of the top 10 names were different Ford Motor Company credits that were traded. And it wasn't Ford making

vehicles. It was Ford giving out auto leases and auto loans, right? So, and Ford's got everything from, you know, a six and a half percent coupon to a two percent coupon, all of which were issued recently and all of which are due in the next six years. So it's kind of all over the place. Companies that have an underlying business model where they're cash good tend to not have to take that premium. Companies that issue a lot of debt and don't have a history of actually making good investments with it are the ones where they get penalized. But in some level, in this mad rush for debt, a lot of companies who may not be able to do a whole lot with it are able to raise that credit. And some of them actually pull it off, whether they meant to or not. And as a result, there's a sort of indiscriminate

buying behavior that happens. And if you talk to folks on very large desks, they'll tell you, we participate in every new issue. And some of that's because some of the larger bond funds have so much money. They kind of have to participate in every new issue because they otherwise wouldn't have anything to invest in. And that would fall outside the mandate. So there's this weird balance of just the supply of capital in the credits world, right? That just keeps issuing and buying the new credits versus the selectivity of how much those things have to be sensitive. And in all fairness, six five, six four, six, six, right? Sometimes the deals just get priced because that's where the market is that day and it gets priced. It doesn't have enough time for all of the participants to sit down

and have a very reasoned debate about it. And if you've got capital that has to be invested, at some point you got to buy the Ford credit that came out or, you know, the bank credit that came out or the something else that came out that day. And that's where a lot of bond managers end up doing. This might be hilariously dumb. just as a thought exercise. What do you think a fixed income portfolio that mirrored by waiting the S&P 500? So if you have a bond portfolio and 80% of it was Apple debt and 5% of it was Amazon debt or whatever, you know, what do you think that would look like? Would that just look like sort of a generic LQD type of type of ETF? I think it would look probably fairly

different than what you see today. It's just because so much of the debt that's out that I said are just banks. I mean, the bank sector, and to call it 20 names, just dominates those indices in general. Okay. So the equity market is overweight to information technology. The bond market is overweight to financials? Absolutely. That makes sense. And if you think about from a standpoint of the company itself, Google doesn't need to, it issuing debt is really just an exercise in what's cheaper for me today, debt or equity. And for a while, they're issuing debt more or less exclusively to buy equity back, right? Because they could get, they could get debt at near zero and buy equity back. That was a great game. It worked. It worked. And it worked for a long time. And some of that

debt is still outstanding. And great news is the equity value return was so high that it worked out. The other companies that tried that didn't work out so well. But, you know, statistically, I think you'd have an interesting portfolio, but I don't know if that's a portfolio you want to own because the bigger, the equity, take the companies in the information technology space, I don't know that those are always the best credits because many of them now are so profitable that they can command really, really low coupon rates. Some of them trade. Some of them don't.

If you look at take LQD out of it, but look at the ag or AG or a handful of these large funds that track traditional bond indices about, you know, you'd have to go and check the math up, but I assure you, not every security in those indices trade. every day. They all have prices. They've been asked spread, but they have no actual volume. And if you go in the Muni world, it's even worse. There could be a large percentage in the community that doesn't trade on any given day. And you look at a bound deal that comes out, right? Ford has one equity. It's got a thousand other Q-Syps, but a new deal might have 10 or 15 different tranches in it. They don't all become as liquid as folks think. They doesn't say there's no

market for it. They just don't have trades. Isn't that actually a good thing about the fixed-income market? Like, they shouldn't be trading so much? Maybe, I mean, until you want to trade and then you're in trouble. Like, there's the balance of liquidity. Like, buying more liquid things is better. You can look at an OAS or you could adjust that for duration and say, okay, where do I want to be? And there's that balance. Institutional investor who knows I'm going to hold on to these credits until maturity doesn't

care about liquidity at that point. They just want to know that they're cash good. But as individual investors, particularly those looking at bonds or us, you know, putting things into X-Fix or SMAs, we care very much about liquidity. we want to know that the price you're getting marked at is a fair price that you could buy or expect to sell at tomorrow. Otherwise, why would you give us your money if the first thing that's going to happen is you lose some percentage of it to bad pricing? And in general, we've done a good job of avoiding that. And you see this all the time, right? Like a bond will come out exclusively in round lots. And the first thing that happens to it is it gets distributed into all these different

odd lots. And the odds lots trade with a different price than the round lots. And then you watch as folks who are sellers of it, for whatever reason, go to a broker dealer who picks up the odd lots, eventually accumulates them to they get to a round lot, and then it can go off to one of those. Alex, can you just, for the listener, just explain the difference between the two? Sure. So, you know, like, folks are very used to go into an exchange to buy security. You put one share in, and someone will give you a price.

That price would be pretty close to the NBBO today for liquid stocks. But in the bond world, you know, you start trading things in $1,000, $10,000 face, and you start of accumulating a different set of bonds. So the round lot unit in the bond world is worth, you know, a certain trading factor that you see that bid ask spread on. But now when you're going to sell individual bonds or smaller numbers of them, right, 17 here, 256 there, the actual pricing is different. There's no exchange. A broker dealer is actually going to buy that from you and probably sit on it for a day or two before they can find someone else to buy it. And when we allocate, we tend to allocate to round lots. We don't tend to allocate to odd lots. It

just wouldn't make sense from the investment standpoint. So to overcome that risk, the pricing for an odd lot is just historically worse than the pricing for a round lot. And the broker-dealer industry for bonds is very developed because there's no exchange. So if I have a bond I want to sell, I put out a request to a handful of brokers I work with, and then they'll come back and start bidding the prices. But they're not necessarily aware of what anyone else in that process is bidding. So there isn't this like open amount of information. So pricing and execution becomes much more in the manager's hands, which is good if you're good at it. If you're an individual, though, it's kind of bad news because you're not plugged into the same source of liquidity that the folks on the street are.

And you have to really balance those two. And the bigger you get, the easier it is to move, you know, volume with dealers who will give you better pricing, better, you know, overall service. And then don't forget, let's say I try to buy something. from broker dealer today, go and say, here's what I want to buy. And they know they've got a client that has it. They can go to the client, get the client to sell it, and then sell it to me. But now I've got to hope that that security makes it to my account on time. So then you enter this whole other world of settlements and it gets complicated. I think it's why a lot of folks, there's a lot of reasons that bonds are intimidating. Then the actual, hey, I push the

button, I bought it. And what do you mean? I didn't get it in my account yet. You know, kind of enters the equation. And, you know, obviously we have systems to handle all of that. But that all goes into part of that math of what is the price I pay and is that a credit I want to hold. The less liquid the credit, the harder it is to get it somewhere, the harder it is to buy or sell it, the less, the worst the bid ask spread on that process. And then you've got to start asking yourself for us as a fun. You know, we're very concentrated in 20 to 40 credits inside of X-Fix, but we want to know that we're not going to take six months to live out of a position. So we balance all of the things we want to buy against the ability of it to be liquid, which means we can get out if we need. need to or get more of it if we need to, but also you as a buyer of the ETF know that that price

is relatively stable. It's not going to be hit by someone trying to buy or sell on any given day. And then we have to rebalance the portfolio. And what we thought was worth X is actually worth 5% less because that's what the market would give that day for a thinly traded name. So you have to balance a lot of different factors when you're constructing an index. As a buyer or as a potential investor, what's the TLDR? Are you trying to maximize for for price stability, for default risk, for coupon, or is it maximum coupon adjusted for all these sorts of things? How should an investor think about X-Fix? So, I think investors should look at to us to try to make that trade. We are optimizing more

towards income for you. So, you know, we're not trying to just give you long-term capital appreciation, give us your money in 10 years. Let's hope it works out, right? We're trying to find things that have a high current pay rate, whether that's through coupon or through capital appreciation that we expect to come and then trade out of, balanced with liquidity where you don't have to worry, you should worry less about whether or not we're able to actually secure those credits and then sell them if we need to. How active are you? Are you buying and holding these things to maturity?

Are you trading? And if so, what are some of the triggers that would cause you to say, okay, you know what, good trade, bad trade, we're out onto the next? So it's not that active. I mean, it's concentrated, but, you know, we're not turning the portfolio over every day week or month. You know, these things do take time to underwrite and you want to get some juice out of them. The sell discipline on the upside is when we recognize whatever catalyst brought us into the name. So if we thought it would be upgraded and we got that upgrade and now we see more

attractive opportunities, we'll sell and we'll move back into another name that might have that ability to grow. If we like the credit and we like the pay rate, you know, might just hold on to it. We don't necessarily take them all to maturity. We have a few securities that are actually perpetual. So they just keep paying and they kind of issue themselves forever. It's like a think of a bond that looks more like a stock, as it were, but it's actually a bond. From a downside, you know, when ideas don't work out, you find out pretty quickly from the markets and it's time to move on. You know, we're not one to trim things that didn't work. We'll kill our darlings and move on. You know, a name blows up. They have bad earnings. That goes down, you know, five or ten percent

or something. That's a good signal that it's time to go. On the upside, you know, when you're looking for things to buy with that, that liberated capital, you know, we want things that have, like I said, they're income based. So high current pay rate or a high or current pay rate and the opportunity for that name to grow. So like we were in the Ford credits a couple of years ago and when Ford R&D looked like it was going to kill it. And then they brought out the Mustang and Mach E and the Ford F150 electric and the Bronco and the Ranger and just you couldn't literally buy a Ford. You know, like just show. up and get an IOU for a car at some point in the future. And that, before it hit the equity price, it actually lifted the bond prices, noticeably. We're able to take our wins and go home. And, you know, the bond market tends to be responsive to those types of things and the anticipation of future cash flows. The equity market has just so many other players in there who were doing things for different reasons. But most of the bond market players, we're all looking at the same data, looking at the same cash. And the views, although they're wide and varied, they're not nearly as

wide and varied as every person participating in the equity markets because they're just so open to everybody. So it tends to be a little more, you know, reactive. Are you saying equity investors don't do discount and cash flow analysis before every purchase? I'm certain they all do. Like, everyone sits there. And I'll tell you what, if someone can show me a DCF that was actually right, I'll give them a gold medal for today. Fair. For the bonds that meet your criteria these days, what kind of yields are you pulling in? So you'll see north of six and seven. oftentimes. You know, you're not going to see too much less than that. That number doesn't sound that high when folks like, oh, my God, high yield is, you know, could be 10 or 12 percent. But you

got to remember, that's a combination of that coupon rate and, you know, waiting around. If I have to wait around 15 years to get that total yield on a low coupon, that may not be worth it. It may be, you know, if that low coupon has more convexity and we think there's going to be an upgrade or some reasonableness to think that that underlying value is going to go up. But, you know, practically, you'll see us in that space, you know, pushing closer to 10%. And that's kind of where we are. If you try to go too much more than that, things get a little funky. And, you know, we're not in it to buy lottery tickets for people. They can go to the local convenience store for that. We're trying to provide a much more reliable experience. Alex, last question from me. Are you surprised

that in 2022, we had a historic sell-off in treasuries, one of the worst years ever. Credit, depending on the duration did okay, but the actual credit component of the bond did fine. Here we are basically at the end of the year, credits done fine. Are you surprised that we've been able to digest all 500 basis points of those rate hikes and credit has basically not flinched? If you'd asked me two years ago, I'd say, yeah, I'd be shocked. But looking at how it played out, not really, because to your point earlier here, the companies are fine, right? The debt really is an indirect view of can the company repay it? And businesses have been fine. Job market is still pretty tight. There is a print today that shows maybe it's a little weaker than it was before, but by historical averages,

still pretty tight job market. You know, by all the major measures, things haven't gone that wrong yet. And the yet is the question. And if we look at treasuries for a moment, sort of over the horizon, the treasury market's already priced in about 100 basis points of rate cuts in the next six to nine months. And that might be a little optimistic, but they kind of are calling mission accomplished, you know, and without needing to necessarily see a recession. As a result, the credit market should hold up. It did. If companies had cash flows that were highly impaired, this would be a totally different story. But the companies have done a pretty good job at managing through that, and they've continued to pay the debt. And even some of the high

yield companies found a way to just kind of eke through. And that's been, it's been, I'd say, a good measure of building a resilient economy and good underwriting along the way. Like, it turns out all of the, all the paperwork, all the math might actually work. And we're always a little surprised when it works out, but this is, I think, what it looks like when it does. Alex, where do we send people to learn more about the FM opportunistic income of ETF? FM-invest.com. They can expect sits up there. And, You can, any of your favorite sources, wherever you go to trade, look up X-Fix. It'll take your right to respect this in all the materials.

Perfect. Thanks for coming on, Alex. Thank you, guys. Okay, thanks again to Alex for coming on. He does always make the fixed income space more enjoyable. Try a guest speaker. All right, FMETF.com. Email us, animal spirits at the compound news.com.

We'll see you next time.