The Dividend Cafe - Replay: National Call on Covid 19 and Markets

Episode Date: April 27, 2020

Last week’s national video call brought to you podcast listeners in audio form - COVID, two market phases, and what to do from here. Watch the call and follow along with the slides here - https://youtu.be/pt-wO73Y8to Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. to cover and I'm hoping that you'll find the information I've prepared today to be useful. Hopefully those of you that are joined by video can see on your screen in the corner the PowerPoint. We can certainly make those slides available later. Those of you who are reading covidandmarkets.com every day, some of the slides will look familiar. But the content I've prepared is brand new here today in terms of some perspective issues around the health pandemic, around the market response, the economy, and so forth. There's one kind of intervening circumstance that is making me want to do a sort of interruption for my normal talk to give a little explanation to people because I've been inundated with some requests about it here this morning.

Those of you that are cursed with turning on financial media in the morning may be hearing that oil was down 50%, 60%. And technically right now, if they're being honest, they would say it is down 99% because it is trading at 21 cents right now. Oil is 30 cents and is down 99% today. Then, you know, I got a bridge to sell you. This is maybe media hype or whatnot, or maybe they're not fully understanding it, but more likely it's just them not going to the trouble of explaining the mechanics explaining the mechanics that oil trades on forward contracts, futures market, and that the delivery for May expires tonight, and that the price for June delivery as they go into the next one-month contract is trading at $22 a barrel.

And this is the May price expiring, and it just happens to be at the most severe contango we've ever seen, where the price from delivery tonight into one month out is literally that far apart. That's how much excess supply there is and people looking to take delivery have no place to put the oil. Everything I just said sounds a little confusing and yet I needed to explain it on purpose because I do fear there are some that might just see a click on a website, see a clickbait or even a corner of their screen and think that oil has gone to zero. And it's really a more technical complication.

So with that out of the way, we can actually begin the purpose of our talk here today. And as I said before, it really is to try to provide a little bit broader perspective on the things that we're facing. provide a little bit broader perspective on the things that we're facing. And we did talk similar, although we didn't have video, but we did an audio talk nationally on March 17th. So it'll be five weeks tomorrow. And if I think back to everything that's happened in the last five weeks, it is literally unfathomable. And if I think even just a couple weeks before then, it's unfathomable. unfathomable. And if I think even just a couple weeks before then it's unfathomable. A lot of you may feel this way. I'm hoping that most people feel that way because of all the things happening in their lives and in society and in the broader issue of the quarantine and sheltering in place. And that they don't feel that way for the exact same reasons that I do and I'm sure many of my

partners and colleagues at the Bonson Group do, which is being reasonably obsessed and inundated with everything happening inside of the market. But certainly there were a few weeks there in March where even people who don't do this for a living probably felt somewhat captivated by the events of what were taking place. There's been a bit of normalization. We're going to talk about that in a moment. But the fact of the matter is, even as we sit here now with an awful lot of things much better than where they were on March 17th, and a lot of the uncertainties of March 17th becoming much less uncertain, and I'm going to talk about that as well, we still do live in highly uncertain times. we are living through an experience that is is utterly surreal to have had so much of American life and

American economic life effectively shut down. So what I want to do today is talk about the short-term, mid-term, and longer-term ramifications, talk about the health realities, the economic situation, and then, of course, specifically to market and portfolio. And we're going to take as many questions as we can, and I'm going to try to follow them on my screen when we get there. And then if you want to, if you're not on the video, if you're only on the audio, if you want to send a question to COVID at thebonsongroup.com. We set up a special email

so that I'll be able to get those questions directly when we actually start the Q&A. So with that said, in terms of, let me put here my screen, the health issues right now are mostly very positive from a trajectory sense. And what I mean by that is that when you have a few thousand people a day dying, you cannot call it a positive thing. It's awful. Of course, we have thousands and thousands of people die in our country every day. But to have such a high concentration with one particular health pandemic, I'm not going to be here spending any time today minimizing the health reality of it. It's severe. It's awful. Most of us now know people who have had COVID-19

coronavirus. Many of us know people who have maybe even had it severely. And of course, Lord willing, most of us know a significant amount of people, if not all people, that had healed and recovered from it. But the reality is it is a significant issue. Even if the mortality rate ends up being as low as I believe it's going to end up proving to be, the highly infectious and contagious nature of it, the ease of spread communally has certainly made standard comparisons to the flu, I think, inappropriate. And so as we sit here now just trying to gauge the impact of the health pandemic, we do know that case growth has dramatically slowed. We were sitting at in between 10 and 15 percent per day growth a few weeks ago. We've slowed that down to three to four percent daily

growth, so it's still growing, but the percentage growth is dramatically stalled, which is how the models have recalibrated a much lower case expansion. The hospitalizations have gone down dramatically. You see in the top right quadrant on your screen, particularly in New York City, which has really been the main hub of coronavirus for our country as far as major metropolitan areas go, is in just a, and thank God for this, a drastically different situation than it was just a few weeks ago. And so we see the kind of decline of cases, decline of hospitalization, And so we see the kind of decline of cases, decline of hospitalization, much higher capacity for hospital beds and ICU. And, of course, equipment, primarily around ventilators, which had been a very concerning dynamic a couple of weeks ago.

So I think that a lot of the markets rebound in the last couple of weeks has been related to the fact that some of the big tail risk, the really worst case scenarios, some of the doomsday scenarios about, I think one famous hedge funder said hell was coming because all the hospitals were going to be overrun and so forth. And most people have been able to discount that possibility out. And yet, nevertheless, we still struggle with the spread and trying to get that curve not only bent, but now fully declined where the coronavirus can be behind us. Economically, then, the subject comes up because of the remedy. The virus had the risk it represented in society. And the remedy that our policymakers chose was effectively a shutdown of the country. And it is very true that a lot of the forced shutdowns did not take effect until right at the time I was doing our last call, which was in the 24 and 48 hours after March 17th,

particularly in California and New York. But the reality is that effectively many pockets had kind of been in a shutdown already just sort of voluntarily because people now with the fear and the awareness and so forth were already sort of staying home, not going out and so forth. So you had a kind of declining economic activity. And then it led to a mandated shutdown of economic activity. And the damage has been severe, highlighted in the unemployment number over the last several weeks. First, the industrial production came out last week.

You see a very significant drop in manufacturing. Auto manufacturing declined dramatically. And again, this is with maybe a month of some normalized industrial activity. month of some normalized industrial activity. Retail and food services, after such a huge build-up of consumer and economic activity post-financial crisis, you just saw this kind of completely collapse in the second half of March and certainly now into April, with a significant amount of restaurants around the country shut down, albeit a lot of fast food restaurants still having drive-thru and obviously restaurants having delivery service. But shopping malls, retail, you can imagine it's just utterly awful. But I mentioned the job situation, and this is where a lot of the stimulus comes in, a lot of the policy targets are focused.

Right now, with four weeks of initial weekly jobless claims we're at total 22 million and that is sort of from the first week of shutdown all the way through the last four started at roughly three and a half million then we had two weeks over six and a half million then we had another five and a half million last week so as far as people who have made a claim of joblessness, you had 22 million people in the last four weeks. Stimulus checks have started to hit. First of all was the direct payment to taxpayers, $1,200 for individuals who made under certain income thresholds for married couple $2,400 and then $500 for two kids under age 17. So you basically have $3,400 injected directly.

But as far as the unemployment side, you have an additional $600 a week unemployment benefit from the feds. And then you also have the Paycheck Protection Program for small businesses to try to keep people on payroll. And we'll see what that does after the economy is able to partially reopen to stem the tide of some of the unemployment that we're experiencing. But it's very difficult to have any kind of constructive view on the economy in the present tense. I do not, I really want to be very careful in the way I say things. If you happen to see me on maybe a television interview or even in our time here today,

anything I write about at Dividend Cafe or whatnot, there is absolutely no possibility that I will be belittling the violence of what's happening in the economy. I couldn't if I tried, statistically and qualitatively. It is just simply extraordinary. When I refer to not being surprised by a bad economic number, it's not because I don't think economic is a big deal. It's because I'm assuming all economic numbers are going to be atrocious for the month of March, April, and then we'll see as things kind of tether into May and beyond. And a lot of those things are certainly the more important aspects for markets

and probably not even May for markets, but into June and then well into Q3 and even Q4. But I think economically, we know that there is some range of bad. There's no possibility of good. It's just a matter of is it this bad all the way up to this bad and we're somewhere in between. I looked at housing starts last week and was somewhat shocked to hear that building permits were down like five or six percent, housing starts were down 22 percent because I sort of figured that it would be down 100 percent. Like I couldn't imagine that there were people pulling permits to start building new homes and of course some of the building permits are commercial and there was obviously the first week of March where maybe a lot of activity happened but the reality is that all the numbers are awful and some you could have thought would be worse some you might have thought

would be better but I don't think that we should be confused about any of this. The economy is more or less shut down and therefore everything's going to be awful in the industrial side of the economy, the consumer side of the economy, and of course there's certain pockets where things that are still happening, certain service sectors are still able to get some things done. Obviously there's some businesses that have a greater amount of business that, you know, because of the product they sell, food delivery services, things like that. We see an enhancement. But in a macroeconomic sense, the aggregate demand has been sucked out of the economy,

and therefore the aggregate supply gets sort of stuck in place, and we await for the economy to reopen so that we can begin to normalize both supply and demand functions in our economy. So this leads me to where we are kind of from a market standpoint. And I want to reiterate some of the things I said back on March 17th, because it really remains my view now. It's just that we're a few weeks further along into it. If you recall, March 17th, I was speaking the day after I believe what was the worst day of the whole market crash in March. I think the Dow was down 3,000 points on Monday, the 16th. It had been down 2,000 points on two different days the week prior. And we ended up still getting lower all the way to the 23rd and morning of the 24th the following week.

And since then, the markets have not revisited those really low levels at $18,200 and the Dow closed roughly around $19,000. So that represents the intraday low and the closing low that we had seen back in the third week of March. But on March 17th, what I spoke to was this concept of two phases, that the markets were so violently oversold, there was such an incredible amount of forced selling in the marketplace, that there was going to be two different phases of recovery of people looking to see equity prices restored to kind of the values that we had seen just a few weeks before coronavirus. And in fact, what I believe took place over these last 5,000 points, technically it's closer to 6,000 from the intraday bottom, but 25 to 30% recovery in stocks at this time represents a lot of that elimination of the for-selling, that sort of phase one. And then I think we will soon,

as the economy gets ready to reopen, be able to enter phase two, which I'm going to be calling the grind. Now, let me first kind of give you a little context on phase one. Phase one, I would just refer to as the time period after the national margin call, where almost every forced seller in the country was having to put forward assets to sell to redeem for cash. In a lot of cases, that involved stocks. It also ended up involving all kinds of high- quality bonds, mortgages, and so forth. There was no asset that one could easily redeem for cash with so much selling pressure in the market at that time. And it led to tremendous dislocations and tremendous technical selling pressures.

tremendous dislocations and tremendous technical selling pressures. And I was pleading with clients at that time to not sell in the midst of a full-blown stampede, that there would come a point in which the technical pressures would be lessened and that there was some degree of mathematical recovery that was going to come very quickly. And so I believe that that could have taken four months. It could have taken two months. I didn't think it would happen in two to three weeks, which has thus far been the case. Now, by the way, before I go to my next point, someone can say, are you saying that we won't go lower, that that first half of the recovery has now taken place, a bottom has been put in? I am not saying that. I do think it's entirely possible day by day. There is nothing the markets could do right now that will surprise me. The only thing that surprises me is being

surrounded by folks in the media, the other financial professionals that express surprise every day, whatever might be happening up, down. They seem to get all surprised, and I'm surprised that they're surprised. I think I said that right. The reality is that I'm referring to selling pressure that was technically driven at the heat of that panic level two, three weeks ago. At this point now, actually four weeks ago. that panic level two, three weeks ago. At this point now, actually four weeks ago. Where markets go from here, up or down, I believe will be more fundamentally driven, and that's what we have to kind of talk about. But the slides you see on the screen right now allude to what I'm referring to. I don't think most people understand what risk parity is.

Forced selling is a great way to put it because it captures all categories of forced sellers. But risk parity essentially had about $400 billion of risk sellings, primarily large hedge funds, in a given strategy. Their ratio of assets, relationship to one another, got so broken it was forcing, mostly from algorithms and computers, violent amounts of equities to be sold into the market. And then, of course, a lot of other bonds ended up getting sold, too. You look at various quantitative strategies, market-neutral strategies, let alone various rebalancings and individual panic selling out of mutual funds that have daily redemptions. selling out of mutual funds that have daily redemptions. The amount that was being pushed through the funnel in a couple of days ended up being hundreds of billions of dollars.

So when you look at this chart here, and you see where the Dow was before coronavirus at the top, then that pretty significant drop at a couple of hiccups up on the way, but then where it kind of hit that bottom level, and then you see where we are now. It's not exact to the math, but the basic point I'm going to try to make today is that more or less, we had lost about 10,000 points, and more or less, we made about 5,000 back. And so I'm dividing the two phases of this into the first 5,000 points and the second 5,000 points.

And this is pretty much the way I described it five weeks ago as well. And it is my belief that the first five weeks was my belief it was going to happen very quickly. And it is my belief that it did happen quickly, even if there ends up being some sell-offs and checkbacks from here. even if there ends up being some some sell-offs and checkbacks from here the point being that the wherever the move from let's call it down 24 25 000 to 28 29 000 that to me is going to be a much different experience a much longer process more of a grind through the economy but again more driven by various fundamentals and right now, uncertain fundamentals. It isn't that that can't happen because the fundamentals are too negative to let it happen. The point is the fundamentals into Q3, Q4, what's going to do well, what's not

going to do well, the magnitude of recovery, all of these things are what we have to talk about today. And I'm going to share with you the way we plan to approach it prudently at the Bonson Group. So that represents kind of the construct I want you to have of the two different phases and the grind phase really presupposes that we are getting ready for a sort of reopening of America and I think that the when is going to have a lot to do with how long it will take if we were fully completely shut down in our country for all the way through the end of June let's say another two months plus change that leads to a much longer recovery period than if we start reopening in say a couple of weeks none of what I'm here saying today is advocating for what state should be reopening, in what way, when. I have a lot of opinions on all those things. My opinions

should be taken for exactly what they are, just my personal opinions. But I guess the point I'm making is that I don't believe we can totally understand the when of our recovery until we understand how long the shutdown is that we have to recover from. And I think it's becoming more and more apparent on a daily basis that there will not just be a light turning on on May 1st or May 15th or whatnot. There will be some degree of reopening taking place very soon. And then that will be phased over a period of time in my saturday covet and markets i um uh provided i think a pretty succinct and hopefully helpful summary of the federal government's uh kind of deck around reopening the guidance they've given on to governors that basically calls for a phase one

after 14 days of improved what they call gating in their own state and then phase two after another 14 days of not seeing it worsen and then a phase three after another 14 days. So I imagine there'll be some states are going into phase one on May 1 and will be well into phase three by the middle of June, which is almost a full reopening. And I think there's some states that most clearly will not be. So that will represent a very divergent response geographically, but macroeconomically, it kind of points to the challenges that lie ahead engaging supply and demand in our economy as we get out of this sort of worst part of the health pandemic. And so my job as the Chief Investment Officer at Vonson Group and what our investment committee is doing and what our investment professionals, the advisors that steward client capital,

our firm have to do is take a given client's financial plan and their own objectives and optimize the portfolio solution given the macro circumstances we face that make sense for that particular client. And we have to do that of all sorts of clients of different temperaments, different cash flow needs, different timelines, and so forth. And that's why I think customized money management becomes very important in a time like this. So I'm going to talk right now about our focus on dividend growth equities and how we're approaching some themes within our portfolio. But it's important to understand that some clients may have a 70% weighting into dividend stocks right now, or may come out of this with a 70% weighting. Other clients might

only have a 20% weighting. The weightings of asset classes, the way in which we're moving knobs right now, is really being done with a highly customized basis. Now, the summary right now I want to give you is not totally scientific, but I think it gives you kind of a loose understanding because really you could argue that health care at different times might be a cyclical or less cyclical type space. I think it generally is much more non-cyclical than cyclical, and that's especially true right now. But we have really divided up our portfolio,

which is a dividend growth portfolio is entirely consisting of stocks that we believe are going to continue paying and growing their dividend. And it's the reason why March of 2020 was the worst month in equity markets and what our equity prices would have been going back to the financial crisis. This has got to be true of any equity investor. And yet the income we generated in March of 2020 was higher than the income we generated in March of 2019. And in 2019, the stock market was up 25%. And so that point of the underlying dividend growth being what's driving our decision making, I can't make clear enough how important that is

and how relevant it is to income-oriented investors in a period like this. Having a somewhat negative or cautious or careful view of the stock market doesn't speak to what cash flow generation goals would be or the most optimal way to achieve them. That's what we're trying to solve for in the portfolio decisions we're making. Now, when I talk about the sort of division of non-cyclical, cyclical healthcare, what I mean is by far the best performing sector has been healthcare and they basically have an aggregate, a positive return through this whole period. But my point being that there is a sort of technical and fundamental backdrop to the healthcare sector that every company we own,

we own because of the company fundamentals. And those companies we own because we believe that they will continue to perform and grow the dividends that they're paying us as investors. And yet, we don't really fit them into a cyclical versus non-cyclical bucket, where we wanted to have a kind of non-cyclical bucket, which is our way of saying companies that we think are going to perform very well, that are not going to be facing credit risk, are not going to be impaired as a result of the obvious macroeconomic damage

that the present shutdown is doing. And you look at more stable companies that have more durable products, durable businesses, often more blue-chip oriented, but these are companies that we think if anything might even benefit out of the needs and economic complexities of COVID. These kind of really staple type names that we think provide a lot of balance sheet strength and we think provide a lot of balance sheet strength and we think provide wonderful dividend opportunities from now till kingdom come. They're more stable, they're lower beta, and when in fact markets are rip-roaring, we don't think they're going to do as well,

but they give a lot of stability and a lot of muted volatility in the portfolio. But it's the cyclical side of things that we want to pay a lot of attention to because we very much want our clients to benefit from the recovery. Certainly these names have led the really big move up in stocks over the last several weeks. Some of the names in our kind of cyclical bucket have done very, very well from their bottom points, but they also are the ones that were down more going when markets were headed down. Wherever we go in the third quarter, fourth quarter, over the next three, six, nine months, we think these names represent bigger opportunities and yet have higher volatility along the way, expected volatility because of their beta and them being just not more susceptible, but more prone to sentiment-driven issues, as well as some of

the macro overhangs, particularly in the energy sector. So what I'm going to do right now is walk you through a few different themes that we have as equity investors, and certainly feel free to send any questions you may have when we get to the Q&A. We do not believe that these healthcare companies that perform very well are overpriced. You'll remember that some of them even have a certain consumer division. They're always doing new R&D. There's always M&A possibilities. The ones we own tend to have better balance sheets so they can be acquirers. There might be some names we've owned or own now that we would view as potentially being acquired as well.

But fundamentally, their free cash flow generation and their return of that cash flow to us is why we own the names. So I think we have a very healthy portfolio of health care dividend growth names that happens to be with some of the industry leaders. be with some of the industry leaders. Now, when you look then to the types of things that we really want to see both in cyclical and non-cyclical portion of our portfolio, I want to remind people that the basic things that were needed to run the world before coronavirus and right now during the quarantine and even when we get on the other side of the quarantine, many of those things are going to be the exact same things. Microprocessors to feed computer technology use is not going away. The need for networks and servers and routers is not going away.

The need for laundry detergent and hopefully with antibacterial soap, the need is going even higher. I believe we'll end up with a wonderful society of hand washers, as certainly everyone in my family has become. So across the consumer staples, your bottled waters, your snacks and beverages, I mentioned some of the types of stores that sell low-priced goods that people need to be able to access quickly. Oftentimes, they have a great e-com platform as well. And you look into the wide array of sector diversification that we have in our cyclical and non-cyclical portfolio. We don't believe that any of the things that are represented in the companies we owned pre-COVID or right now or post-COVID,

that any of those items are any less needed or will be any less needed than ever. We think they're profit margins, they're profit aspirations, and we in fact think in some cases there will be a higher demand for those products. What we want to very much avoid is the belief, and I alluded to this last week in Dividend Cafe, talk about a new normal and there being all these different new trends that mean something they don't mean. There's going to be plenty of new trends. Some of them will be very short-lived. Some of them will be longer lasting. I would not want to form an investment policy right now on guessing how Americans are going to live in two years based on how they've lived in the five weeks of quarantine, but I would certainly

grant that there will be plenty of social and societal ramifications. But from the vantage point of monetizing with stability and minimizing risk, you want to be focused on things the world needs to run. And I will propose to you that everything we own in our dividend portfolio comes out of companies we think are making goods and services that pre, during, and post-COVID are needed to make the world run. world run. Now, someone could say, okay, well, oil and gas, and I mentioned earlier, you know, the whole kind of misunderstandings of the oil pricing here today. Certainly, the demand is eroded right now for oil and gas, with no one being able to go anywhere, and then the supply in the month of March had hit record levels high. It was a perfect potpourri to collapse oil prices. But, of course, oil ultimately has to be priced along a forward curve. And that forward curve right now is in the most contango we've

ever seen. It is not backward, meaning there are higher prices for short term months and lower prices long term. It's the opposite. Because of course, those that are having to make bets and set expectations within their own businesses are well aware that they believe oil is going to cost more when the economy is running than when it is not running. And our belief is that oil and gas were priced for the shutdown, but they have not been priced for the reopening. And, yes, it's true that some of the oil and gas companies we own are really up in the last several weeks. I've seen huge percentage moves to higher, where they were down big in March, have come back a lot in April. But the fact of the matter is, we want to be invested along the theme of where companies will be in six months and a year,

not where they'll be in six hours or six days. And oil and gas as a commodity is a great example of differentiating between short-term and more intermediate-term concerns. Now, along those lines, both with the oil and gas producers and the pipeline companies, we have reallocated our equity portfolio to be pretty much exclusively focused on what we consider to be the strongest names in the space, the biggest, baddest, richest names in the space, meaning their balance sheet, their access to credit, their access to liquidity, their profits, their lower leverage ratios, their debt to various measurements, that those pipeline companies that may have impairments to their business ultimately benefit as some of the weaker pipeline companies end up going away and more opportunities come to the stronger companies.

Same thing in the production side. History is filled with examples of this. So it's a huge theme of ours, not only to not abandon the concept of oil and gas, but to be invested in it with strength, not with weakness, both in pipelines and producers. I think that it is a really important concept to wrap our heads around when people start thinking about areas that there will be opportunity for investors coming out of this era opportunity for investors coming out of this era to understand that a lot of the greatest innovations, some of the greatest changes and investable opportunities will start with private companies. They will not necessarily all start with $300 billion multinational conglomerates. That I think a lot of the great opportunity will come out of private equity

and to the extent that illiquid investments are already a big theme of ours that we see a huge non-correlation theme for that alternative sleeve of our client portfolios but for those investors who are not needing current cash flow from this portion of their portfolio we very much believe current cash flow from this portion of their portfolio, we very much believe that you will be able to better monetize some of the opportunities that come out of post-COVID innovation in private equity than you will in public equity. Along those lines, it's a somewhat different subject, but it has a connection. There's a couple of publicly traded alternative asset managers, but one of the things that is so interesting to me is that there was this huge liability hanging

over them and other names in that space, the private equity, private credit managers. Throughout 2019 and coming into 2020, I probably read a hundred white papers or research papers on how are these companies going to do when they're sitting on so much excess cash. They have so much dry powder and there's just not going to be enough investment opportunity out there. Everything is so richly priced. There's not enough new innovations. So these private equity players with all this cash are going to have to settle for lower return opportunities because they have to invest that money at some point and there won't be something to invest it in. And all of a sudden,

the weakness in credit, the deleveraging, the kind of Darwinian effects in the marketplace, and a lot of the new opportunities and transformational things happening around COVID and going into a post-COVID society have meant that that cash on hand, that dry powder, for some of those asset managers, that dry powder becomes a huge asset. Now, we can't do anything about the volatility these names trade with to the extent that a lot of their fees come back to performance. And if there is a slow period, there may be concern in the market

that they're not going to generate what's called the promoter, the carry at the same level. I don't share those concerns. I feel very optimistic about the names, but I don't have any outlook for them in the next month or three months. These are longer-term views, but we really believe thematically that the liability of dry powder has become an asset, and we want to be invested alongside of that and make money with that on behalf of our clients. This is very much in line with what I said about the whole thing doesn't necessarily make the whole world work.

But see, I've been talking about this for almost 20 years. I've been in love with the consumer staples sector forever, and a whole lot of names I've always loved in that sector became uninvestable for me over a certain period of time because they just got so high in valuation, their dividend yields fell so much. There's always been a few names that we've really had and enjoyed. But one of the reasons I like the consumer staple space

pretty much all the time is it's never the highest performing sector or very rarely if ever and never the lowest performing sector it's always kind of that middle of the ground space and and and middle of the ground can be negative from the whole markets negative it can be positive it generally is when the whole markets positive but it's usually what you would refer to on a baseball analogy since we're not watching any real baseball. A sector that hits a lot of singles and doubles, but doesn't hit a lot of home runs and doesn't strike out a lot.

A lot of these names are traded because they do make cleaning supplies or certain durable household items that are almost somewhat connected, even though they're not pharmaceutical, connected to the COVID situation. But even when you look at the kind of food and snack items that really don't go up and down with the economy, that people are generally still drinking water and soda pop and juices and things like that at any period of time. We really like the consumer staple sector and we think we have invested in very high quality names in our portfolio that, again, don't just have a few years of consistent dividend growth and not only have the balance sheet to continue that even through difficult times, but have decades upon decades of dividend growth that should give investors all of the optimism they need to feel good about this going forward

as we wait to get on the other side of this COVID-driven cyclical recession. When you get into the financial sector, that's been the area that's been beat up the most, most recently. It was probably the second worst performer behind energy in March, and now Energy has been one of the best performers in April, yet the financial sector has still struggled. But it's imperative that we understand the nature of the struggle. In 2008, you can call it, quite literally, an existential struggle. They had negative equity. That's pretty existential, don't you think?

It means they were functionally insolvent companies, that the leverage they had taken on around mortgage, that as it blew up in the financial crisis, had resulted in them having a negative equity in their business. And it was a liquidity infusion, but ultimately a solvency issue that was at the heart of those financial institutions, brought on by an unbelievable amount of leverage that then had to play out over time and ultimately involved very controversial measurements both from fiscal through TARP and then from monetary through the Fed. Well right now there is no question that banks make less money when there's a lower demand for credit and there's a lower demand for credit when no one can leave their house and when no one can go to work and when businesses can't go expand, there's going to be a compression of loan growth.

And yet I would say that banks are not facing anything close to existential. They are dealing with a dramatically lower leverage, dramatically higher liquidity, significantly higher equity. So comparing the experience of banks and what is the cyclical challenges now to the structural challenges of 08 is not comparing apples to oranges. It's comparing apples to a desk. It just doesn't make any sense at all. All that said, tactically, similar to our theme with staples and energy want to be focused in strength we have two more traditional type bank names one life insurer and and one kind of custodian asset manager all that represent the financial portion of the portfolio again that are going to come out

of this in a much better place and maintain their dividends along the way. So when you look at those equity themes, you do see some constants, mostly focused around where we believe things will be on the post-COVID side, and yet maintaining that dividend growth for our clients who withdraw money along the way, and opportunistically for clients who don't withdraw money, we want to keep that dividend reinvestment going, because we want to be able to get that share reinvestment at lower prices. So that accumulation benefit and that consistency of withdrawal capacity is very important in our philosophy. That was obviously true well before COVID. It was obviously true for many, many years for my career. But right now we're living through

a kind of stress testing of the philosophy that I believe is being met exactly how we would expect it to be, given the severity of everything going on. On the fixed income side, I want to move forward quickly so we can get to Q&A. It is very much our opinion that bonds, meaning treasuries, we have a 10-year offering below 1%, effectively 0% rates for all shorter data type bonds. The only bonds offering any income at all are bonds that have a spread to treasuries, and that would include right now municipals, it would include corporate bonds, and it would include other riskier bonds that we would call credit. So whether that was high yield, bank loans, emerging market debt, they're in a kind of riskier category. But they have a wider spread to Treasury. So they're

offering a little bit of opportunity. First and foremost, on the municipal side, they've recovered about half, about 40%, getting close to half of that kind of missed marking from that took place in the month of March. When you had AAA highly performing mini bonds that just simply couldn't get sold, there was no bid. A lot of that normalization has come back for some of the lower rated or more thinly traded or odd lot municipal bonds. There's still some dislocation and we're dealing with the traders. I'm literally talking to the portfolio managers every single day as we try to work towards that. And we think that inevitable move towards normalization.

The Fed has provided some support here. But keep in mind, they legally, in the facility they set, can only buy six-month paper. So they've really helped a lot on the shorter-dated municipals, not as much on the longer-dated. But it has still nevertheless provided a much healthier backdrop into municipals but when we look into that structured credit side i put in a chart here of the asset-backed security sell-off during the end of march so you could get a chance to see just on a relative basis how much spreads blew out in asset-backed securities. Week by week, you always had a widening spread, but then all of a sudden it blew out of nowhere. Now, a lot of those spreads have come in to some degree, but again, with really highly senior secured assets that are collateralized by baskets of credit card debt or auto loans or other issues where they are highest up in the cap structure they get paid first and so lowest in the risk pool to the we believe that there's a great opportunity but there's going to be volatility there we don't

want to be in the space for people that do not have a kind of tolerance for volatility. When one treats their bonds like bonds as a safety parking lot, it's high-grade investment corporate bonds, it's treasuries, it's Fannie and Freddie or agency residential mortgage-backed securities. But when one wants to be more opportunistic, we think that there is some really significant shakeout coming that will be quite opportunistic, and we've been really heavily researching the ways in which we plan to take advantage of that as well. But as a broad conclusion

about bonds, not the more opportunistic structured credit space, the securitized silo, but looking into traditional bonds, we talked a month ago about our plan being that we wanted to be able to trim off of bonds to be prepared to allocate some of that capital into equities. And right now, we think that we accidentally have gotten very lucky in that our inability to sell bonds at prices we wanted a few weeks ago helped us because now, whether it's in two days or two weeks, as we're able to trim 15, 20, 25% off of our bond allocations, which would raise somewhere from 7% to 12% to 15% cash, we have no intention of dumping that all into equities at one time. equities at one time. Now, some clients have requested that we do so. And some clients, you know, probably are wise to want that they have a risk tolerance that they don't care about the volatility that might come in the next three, six, nine months. But because we believe that we're that phase one of that equity recovery happened so quickly, and that phase two is going

to be a grind, if you remember my word from earlier, we want to basically tether the money we're able to pull from healthier prices out of bonds into equities over a four-month, six-month, nine-month process. And we're fully prepared for the fact that maybe we're going to end up buying equities at higher prices than they are now along the way. But what we think is very likely is not that we're going to be buying at $29,000 or that we're going to be buying at $29,000 or that we're going to be buying at $19,000, but that we're going to be buying at up and down prices because of the volatility we expect around the new cycle and around the sort of challenges the economy faces in the months and quarters ahead. So the macro realities that I'm going to conclude with here, very important. There's nothing I

learned more out of the financial crisis than the primacy of liquidity and the fact that cash cannot in a global economy go hide under a bed. And I've read as many books and white papers and academic journals on this subject as anybody could. And the one really kind of easy pedestrian takeaway I can offer you is that when liquidity is reflating in the economy, it absolutely means there will end up being investable opportunity. Cash cannot go hide under a bed. It has to be in its eternal search for a return on that capital. And you can look where I've circled here on the

chart there, the amount of treasuries, mortgage-backed securities, this quote-unquote other is about to take on new form because they're coming into the corporate bond space, municipal bond, a greater percentage of asset-backed securities. The Fed is going to be essentially creating several trillion dollars minimum, very possibly much more than that. I may be on the low end of how much they end up adding to their balance sheet, which then gets put on the excess reserves of banks. And the idea is for it to circulate into the economy, to reflate the corporate economy. I have no opinion when I say this about what day all of a sudden you're going to see the Dow jump up because of it. My opinion is that there will be investable opportunity that comes of it that will play out, perhaps starting in 2020, certainly in 2021 and whatnot,

that becomes very opportunistic in private equity, in public equity, in credit, in risk assets, that that reflation will be a significant trade on the other side of COVID. From the safety standpoint, and right now when I look at the things that are most important for us on a risk-adjusted basis, people say, what are you going to do? How do you price earnings right now? Well, they're exactly right. You can't price earnings right now. There's no way to really understand a normalized understanding of what a company earned in the last few weeks or months, and there's not going to be a way to understand it for several weeks and months going forward. And that's obviously how ultimately stocks get measured, is an

encapsulation of their discounted earnings. What you will know, though, are companies that have balance sheets that can get through things, that have cash on hand, that have a more mature debt profile, that maybe have no debt profile, lower leverage rates. Balance sheets are going to trump income statements, and that's where we want to be very conscientious of the balance sheet stability we're bringing to our client public equity holdings. Don't fight the feds in eternal truism. We can talk about the fed. I do it as much as anyone ever should, much to my family's chagrin.

We can talk about the things that the fed does that we don't like or don't believe in. But what we cannot do is talk about the investment merits of fighting the fed. It has not been a very good trade for about a hundred years. To the degree we have a lot more visibility right now what the Fed is doing and what their mentality is in 2020 then we did in late 2008 early 2009. That visibility came in stages over the months and even years to come throughout the Bernanke era, the Fed has, in a very quick period of time, told you their intention in supporting capital markets.

And quickly, so we can get to Q&A, it would be hard for me to have a more bearish view on Europe. My view is essentially that Europe is going to come out of this worse than the U.S. and Asia, and that they started off worse than the U.S. and Asia. the U.S. and Asia and that they started off worse in the U.S. and Asia and therefore the currency pressures, fiscal pressures, and macroeconomic sort of incoherence that exists in the continent of Europe we think is going to be worsened by the COVID situation. I very much expect a categorical change of China's relationship to the US and the world that has a lot of stock market implications it has a lot of macroeconomic implications

and of course it has a lot of geopolitical implications and I plan to be fully covering this in the weeks and months ahead in Dividend Cafe and I think this is is kind of a restatement of some things I said earlier but the Fed policy evolution will be eventually downstream asset support, meaning they've started off really supporting some of the highest quality assets. Ultimately, as we saw with TALF back in 2009, we think they'll have to move downstream and some of the assets they support either directly or indirectly. They've already created some of the facilities to do so. We don't want to lose sight of that. But then the thing they have not done yet that is really important for people to

understand is what we would call yield curve control. When the Fed is essentially the only buyer, when the government is issuing so much treasury debt to fund its deficits, and the Fed is the one going in to buy hundreds of billions of dollars of treasuries, they can essentially control the shape of the yield curve by how much 30 years, 10 years, 5 years, 30 days, 90-day T-bills. They can shape the curve the way that they want, and it will be very important for astute investors, particularly on the bond side, to get in front of that. So I did chew off quite a bit, and now I'm going to go into the Q&A. One individual asked, repositioning around some of the equity portfolio, particularly some of the pipeline changes and so forth. And I think I spoke to that

earlier. It was really just part of a very, very high conviction belief that the highest quality pipeline companies in oil and gas traded down to a level of generational dividend yield opportunities. A lot of the technical reason that the high quality names traded down so much is because they were part of the ETFs that were just getting killed, margin called, sold off. So there was this constant selling pressure, and good names gave us a chance to swap out the baskets of MLPs, oil gas pipelines, and replace it with just what we consider to be the best of breed names. It was entirely driven by a quality swap. And that was why we made those changes.

In terms of other changes that we see forthcoming, we've already made some. There's definitely a pretty good list of about a half a dozen names we'd love to add to the portfolio. But right now we consider the dividend portfolio fully invested. And there's obviously, you know, plenty of things that are subject to change any time. One client asked if I would ever consider recommending clients invest with cheap borrowed cash. And the answer is an unambiguous, unwavering no. We do not believe in borrowing money collateralized by the risk assets you're buying to buy more of the risk assets. I'm sure there are still some advisors that didn't go out

of business in dot com and during the financial crisis that may recommend it, but we don't and never will recommend it. And so it is to us outside of the risk profile that is appropriate for investors we work with. Short-term, mid-term, long-term, what I mean by those terms, I am defining, because you're right, they are somewhat relative, but for our purposes, this isn't't necessarily scientific so the context in a particular sentence may change but i would say short term i mean three months midterm i mean a year long term i mean beyond that and generally we work with people we want to still have capital for over a year so we consider most of our primary focus to be on the long-term aspect of things. A really thoughtful question here on inflation. Will we go towards inflation with all this influx of liquidity from

the government? And it's a great question, and it's frankly one that's been really commonly asked. And I do want to point out that we luckily get to cheat a little, because we have the empirical evidence of history here that the amount of liquidity the Fed added after the financial crisis, they had approximately a $500, $600 is a more fair number, $600 billion balance sheet. And they added about $4 trillion to that balance sheet between QE1, QE2, and QE3. It lasted from basically 2009 until 2014. In this case, they added a couple trillion in just a few weeks, and we certainly see their roadmap going out several trillion more, including the leverage they're able to put on some of the Treasury Department money from the CARES Act that they will lever up to support some of these facilities they've created with small businesses, Main Street Lending,

the CALF 2.0 to buy asset-backed securities, things like that. You're talking about trillions of dollars. So the question is, will that be inflationary? And of course, the answer out of the financial crisis and $4 trillion of assets created out of nowhere was it was deflationary. It didn't create any new inflation other than in asset prices, which is what they were trying to inflate. The reason of it being that there is so much excessive debt that it constrains the ability for that money to circulate in the marketplace and be put to productive use. So there is both an awful answer to your question and then probably what some people think is a good answer. Because the good

answer is it probably won't be inflationary and it will boost up the value of your risk assets. So people holding stocks in real estate like I do and you do are probably thinking this is great. But the problem is that there's no free lunch. It comes at the cost of future growth. And so what I believe we will see, and I'll be doing so much writing on this in the months and quarters ahead, it will bother you. I believe that the post-COVID ramifications of the Fed will be bad, but not the bad people are expecting. will be bad, but not the bad people are expecting. Now, if they do become inflationary, it would be because it worked too well, that that money circulated,

and then a velocity of money picked up in the economy that necessitated highly inflationary circumstances. And of course, we know what the Fed would do to deal with a significant runaway inflation. They would extract that liquidity just as quickly as they put it in. That would be recessionary and contractionary, but they at least know the playbook for dealing with inflation. The reason why central banks are always so much more aggressive on deflationary pressures is because they don't know exactly what to do,

and so they have to kind of throw a full kitchen sink at things i think that um all of this is a moving target but in the very immediate short-term issue the inflation protected treasury bonds are pricing in zero percent inflation for five years right now so uh there are plenty of metrics that kind of help support. Of course, it's a lot easier to assume low inflation when you see $20 oil than when you get back to $40 oil. But my point being that the Fed knows that governments around the world, particularly ours, are running trillion, $2 trillion annual deficits on top of $20, $ trillion dollar national debts. Those are hyper deflationary pressures that have to be dealt with. Okay. I'm going to do one more question and then I will answer some of these privately after we close up. But just one person asking if I thought

there'd be any ramification to all this in the fall election. And there most certainly will be. I don't think that anyone could predict it right now. You understand we're in the middle of April and where we will be in the economy, where we will be in the health pandemic itself will have an awful lot to do with where we are in the actual election, you know, sentiment. So that you could easily

spin some of the circumstances right now for how it will be beneficial to the incumbent, and you could spin them for how they'll be detrimental to the incumbent. But I don't really think we know the answer because we have to see what some of the economy recovery, economic recovery and economic reflation looks like, not to mention the sort of national psyche and psychology around the health pandemic as we get further along. So there's sort of an unknown there. I hope this has been helpful for you. If we do get feedback that you did benefit from it, I'm very happy to do more of these. God knows I'm not going anywhere. So if I'm sitting here at my desk talking to you on the phone, dealing with client accounts, I'm very happy to every couple of weeks

do another one of these if they're worthwhile. But of course, between our daily COVID at markets.com, our weekly dividendcafe.com, I'm trying my very best to stay in heavy communication with you and create very real time updates on our perspective and how we're seeing the world and what we plan to do on behalf of our client portfolios. Thank you very much for your time today. Reach out with follow-up questions and we will get through this together. Be free and be well and be safe. God bless. Thank you. Any opinion, news, research, analyses, prices, or other information containing this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information reference herein.

The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower Advisors LLC or any of its affiliates.