The Dividend Cafe - TBG INVESTMENT COMMITTEE MARKET UPDATE – April 29, 2020

Episode Date: April 29, 2020

The Bahnsen Group Investment Committee is back together for the first time in weeks to discuss all matters of the market, Covid, and investing. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. locations. I don't know if you're seeing on the video the same way I'm seeing it on my screen or not. I'm sitting here at my study at my house in Newport Beach, California, where I've been working all day long for about six weeks. It looks like my partner, Brian, is out at his place in Park City. Is that right, Brian? Yes, I am. Been here a few weeks and I've been working from the office here. And you got a picture behind you there of some of the wildlife of Utah there, right? The Mountain West. Yeah, you can't see the room, but it's quite westernly themed, I guess. Good. Then over next to me is Julian Frazzo, our Director of Equity Research at his home near the beach.

Julian, working away. We're in middle of earnings season on calls with analysts every day. What did we have? I think we had eight companies that released this last week and we have nine now here in the next few days. Yeah. In the total for this week is the, is the biggest one is the,

is the busy week of the season. I think in total, it's going to be like 14, but there's already, there were three today. There's another four, two more, I think. And then, you know, as you said, another nine by the end of the week.

So yeah, very busy. So a lot of our companies releasing earnings, and we're going to comment on that in a second. I have a couple of questions for Julian about it without talking about any individual companies. But of course, it's also the heaviest week for the whole S&P 500. I believe 200 of the S&P constituents are reporting over this week. So that is all moving along as

well. And then below me in our little Brady Bunch box and over to the left is Robert Graham. And Robert, I got a strong feeling that you are actually at the office unless you have a Bonson Group sign at your house. Tell us what you're doing there. I might have a Bonson Group sign at my house, but you are right. I am at the office practicing some social distancing from my two energetic little boys. Yes. Well, I envy your decision there and commend you. So good so good good good to have somebody checking in on the office and uh keeping everything moving there uh daya how are you doing there in the middle doing good doing good i'm also in the office although uh robert's uh on the other other side of the hallway there so there's about 50 feet of distance between us. So I'm certain we should be okay.

I'm certain as well. Well, it's good to have all of us together. There's been an awful lot of Dividend Cafe communications and COVID and market communications. Obviously, you guys are all reading and that we're sending out to clients and people who follow the Bonson Group's material and viewpoint. And I think we've had an extraordinary need to continue being highly engaged in markets and creating a lot of this content we're creating. But right now, as we all sit here from our different remote locations, I thought we'd spend our time today on the podcast, kind of giving clients an idea, not merely of what we've already really been presenting over and over, and that is so core to everything, you know, the basic kind of

reiteration of our behavioral principles, the reiteration of our aversion to market timing, the sort of necessity of asset allocating throughout this period. Those reminders and those principles, I believe, as an investment committee, done a very good job at consistently reiterating through this now, let's call it two-month period of market turmoil. And yet I do believe that there's some appetite for us to talk a bit about maybe some more opportunistic areas, some things that we think tactically in the present environment might be getting attention from us being implemented into client portfolios and areas that the present state of dislocations has perhaps provided an

opportunity that is a bit more attractive. And so I'll kind of tee it up myself and then we'll sort of rotate around. I want to turn to you, Brian, in a moment because you and I have been obviously invested in this space in different ways since the financial crisis, which was the time period where I chose to try to learn a lot about the world of structured credit. And I think that right now, you've seen stocks really rebound quite a bit from their March lows. There's still plenty of room to go and there's still plenty of pockets of tremendous opportunity in the equity markets. But I wonder if one could say for the most risk tolerant and opportunistic of investors that structured credit is perhaps over a three,

six, nine month timeline where some of the most outsized returns could be found. And by structured credit, and by the way, in this week's Dividend Cafe, I've written already a pretty extraordinary amount of material on this space to really try to provide a deeper dive into what we mean by structured or securitized credit. But when you look at the commercial mortgage-backed world, when you look at the asset-backed securities, you look at these high yield spreads, do you see a value trap, a death trap as the economy inevitably fights through a recession? Or do you see an opportunity for investors who have the risk appetite for it? No, I definitely see the opportunity there. I mean, you had in March, and I'm sure you'll relate

too. I mean, it was reminiscent for me of the financial crisis where you basically had just this massive unwind of leverage in the system and it was sort of everything being sold. There were no buyers, whether it was a high-grade corporate or even treasuries or agencies, govies. I mean, everything's sold off and nothing more so than some of those sectors that you mentioned, which is that securitized credit, some non-agency commercial mortgage-backed securities, just some more esoteric, not illiquid stuff that had to catch a bid at the lower price. And it reminds me of a similar opportunity, maybe not quite as big, but a similar opportunity in the financial crisis where you had TARP that came out and you had basically this big pool of money to be able to sop up all these assets from the banks that were

just shedding assets at the time at 30, 40 cents on the dollar. And all those funds obviously recouped and did very well. And I think the opportunity is similar there. There's downgrades throughout that credit space, and some downgrades are going to be warranted, and some of those tranches may not perform. But then there's going to be things that are downgraded that will ultimately perform. And if you are able to sift through and really analyze those credits, it's a great risk-adjusted reward. And that's one of the things we've been talking a lot about. Now, Brian, we're not going to sit and go through those risk-adjusted credits, the underwriting, the credit fundamentals. So talk a little bit about the criteria we'd have for the managers we'd pick to go into that space without mentioning some of these managers. And really, we don't even actually have to get into the LP side of it. I'll just sort of get it out of the way. There's hedge funds structured as limited partnerships that would be

really where some of the most phenomenal talent lies in this space. But not every investor is going to be eligible there. They're probably going to be long and short. They're probably going to have leverage. They're probably going to be using derivatives. So it gets more complicated. But in the 40-act space, what our listeners would just know is mutual funds. What are some of the things we'd look to, to kind of evaluate who is best in this space at doing that work that would be really impossible for a retail investor to do and outside of our normal scope, other than doing the due diligence on the managers. Yeah, no. And we have several managers that we would work with in that 40,

the mutual fund space, the liquid mutual fund space. And you want to have teams that have been around. This is a tough space. It's illiquid. The funds are all down, you know, they're down 15, 20%, something like that. And so at this point, you know, you're entering into something where you really do need expertise. And those fund managers, they have to have been through it before and know exactly what to look for. They can really analyze the covenants of each individual security. You know, and so I would say it's experience, it's, you know, it's staying power, it's liquidity, and all of those things. And ultimately, we tend to shy away from, you know, this isn't something we're swinging for the fences necessarily on. I mean, we are looking at this at a pretty level-headed approach. I'm not looking for a triple C credit only or anything like that. I want a manager that's going to be on the upper end of bad, on the upper end of junk in that space. So those are the things, a little higher quality, a lot of expertise, those things. I think that what you just said is probably even true in the corporate debt markets that within

high yield, some of the least bad in the junk space and some of the least good in the high quality space represent kind of better opportunities. But again, having to make that kind of individual bottom up determination is so important, particularly with the uncertainty right now around the macro environment that we're in. environment that we're in. I would add too, for those that are interested in our interest in structured credit, we've done really substantial due diligence in some of the manager partners that we're working with. And it's not just the experience in securitized credit, it's this experience in securitized credit through market cycles. And I think that the great financial crisis was a time in which you had not only fundamental vulnerability, but you had technical dislocations. And that's what Brian and I experienced. Brian in particular became really gifted with high-yield municipals and did well for his clients out at the high-yield municipal space in

2009. But see, that was a technical dislocation combined with fundamental vulnerabilities that had to be understood. The structured credit space has exploded over the last 10 years. Managers who didn't necessarily go through the financial crisis, I think would be less appealing by not having had that experience with both the technical and fundamental backdrop in the space. Does that make sense, Brian? Yeah, it definitely does. And that's an important factor of it all. And like you said, it's in these environments where there's no 809 or this March, basically of 20, you basically just have baby thrown out with the bath water. And so what we're looking for is to sift through

what was thrown out, um, that didn't deserve to be and, and stick with that kind of quality. So those are the managers that we work with that have that kind of experience. Well, um, Dan, instead of toy switching gears, before I go to Robert about some of the emerging markets issues and Julian with some of the equity areas, I think that illiquidity has been a theme of ours all year. It's probably more so for me right now than even it was four months ago. And you look into middle market lending and you look at some of the things we're doing, we'll manage your selection there, lending, and you look at some of the things we're doing, we'll manage your selection there,

both on the collateralized loan space, direct lending, and then even real estate as a sort of different asset class, but related in the fact that it is offering access to an investment class without daily liquidity that brings in a different type of investor. It brings in a more sophisticated investor, but also one who's not able to hit a sell button on a given day so easily. So obviously, there's plenty of fundamental questions around lending to businesses right now. I mean, half the businesses in the country aren't even open as we're sitting here talking, although many are getting ready to reopen. but that trickles down to real estate as well. It's hard for an office building, a retail space, industrial space to be collecting rent when the businesses are themselves maybe not even operating or operating at full freight.

What are your thoughts on opportunity versus risk in real estate and in, um, direct lending and collateralized loans. But I, again, I'm separating this from, uh, like a publicly traded re I'm more talking about it,

let's say in a kind of alternative asset class environment. Sure. Uh, and, you and Brian talked, uh, about the, uh,

technicals, uh, and around the middle of March, uh, as we had seen, we started to have a full-fledged liquidity crisis on top of a looming economic recession. And a lot of these mutual funds and a lot of these ETFs that hold some of these assets that are not so liquid, whether they be on the real estate side, the securitized side, or on the credit side, you started to see some serious dislocations in the bid-ask spread that a lot of these securities were showing on the screen, essentially. So just to look at investment grade bonds, which is supposed to be very liquid, very tight, very stable asset class, you had spreads. So the spread of what those investment grade bonds were yielding relative to treasuries were high, but also what the bid-ask spread. So if you're actually trading an investment

grade bond, as far as you were offering, you're buying and selling, that little spread was significantly higher than is justified by what that level of yield was. So we started seeing that across all ask classes. And essentially, if you're in a more liquid type of trading vehicle, that's something that you would have gotten impacted with a lot more than some of the private structures that David is talking about. So we have many managers we use that are within a private structure that are not susceptible to that sort of, those sort of outflows and those markdowns that could happen in a more daily intraday traded vehicle. So, I mean, on the middle market side, I mean, we have a manager who's taking opportunities

and middle market loans, obviously, there are loans to private companies that are earning before interest tax depreciation amortization of around $10 to $50 million. And they're typically making loans that are more senior. So if there was ever a default or something, that borrower would be first on that pecking order in order to collect any recovery. And we've seen some stability there as far as good collateral pools are concerned. And those managers, those loans aren't traded to, there's not really a secondary market for those loans. So a manager in that asset class, it's going to be tough to be tactical and opportunistic. But what we have seen them doing is adding to BDCs, business development companies, which is a publicly traded vehicle where the underlying securities are

middle market loans, but they typically have more leverage. And as I mentioned, they're publicly traded. So those have sold off quite a bit relative to their private counterparts. The manager we use was down about three to 4% in Q1, where the publicly traded vehicles that use more leverage and are liquid were down over 20%. So that manager's actually using a small allocation to buy some of those publicly traded vehicles that have sold off quite a bit to take advantage of some opportunity. I think the BDCs overall that you refer to were probably on average down closer to 50%. But a lot of that is because they're at such a big discount to their own NAV and their NAVs only get updated quarterly.

So it's a little hard to get a mark to market. But in terms of the broad spectrum of BDCs, to draw that contrast you're drawing versus the entities that hold these loans without leverage on top, there may be as much as a 50% difference between how both structures might have performed in Q1. Yes, that makes a lot of sense. Although both have recovered quite a bit in April. Right, right, exactly. And yeah, that max drawdown is around that number.

And it's pretty stark contrast from how our manager did and where they're not those... The vehicle itself is not being priced on a day-to-day basis, is not acceptable to, you know, to outflows. So it's really important, structure, at the end of the day, structure matters. And it's really important to be aware that the liquidity you're offering your investors is, you know, is married to the liquidity of the underlying assets. Well, I think that these vehicles represent great opportunity. And yet, a lot of it, it's important for us to say, is not based on just the belief that the world will keep on turning, although I maintain the belief that the world will keep on turning. And it's not necessarily tied to a particular timeline or outlook on economic recovery.

You know, there's varying degrees of optimism and pessimism as to when the economy may recover and how much it may recover. And I don't really think I'd be that attracted to the space if making money in this investment was dependent on us getting those things right. You know, whether it be equity or debt, it's going to be very difficult to time and to fully grasp the magnitude of what economic recovery will look like. I don't think you can find two economists out there that agree right now on either the shape or timeline of the recovery. But to your point on structure, I think that if you assume most of the more negative economic scenarios, a significant amount of the senior debt space that's so dislocated

in price and offering those yield spreads still seem very attractive. Right. And you're talking about a structure as far as some of those liquid structures that have been sold off? Well, actually, in this case, I'm even just referring to the seniority of the debt in the basic CLO space that those tranches having the first payment rights, and not to mention that there is even a default, which we know the default rates for these AAAs going back to financial crisis were effectively about 1%, and the recoveries were very, very high out of distress events.

So I'm kind of viewing it like even apart from the leverage side on the BDCs, just the underlying assets offer a, even in, you know, kind of a very difficult financial environment, ultimately offer a lot of support on the back end. Just on a fundamental basis. And absolutely, if you look at some of the prices some of these securities are trading at relative to fundamentals, they're very attractive. And like David was talking about, if you look at what some of these, what the default rates that were priced in relative to realized defaults, realized defaults ended up being a percent or two. When I think at their maximum, some of these securities were pricing in like,

you know, 30% default probability or something around that. So there can be quite a huge disparity. And when there is a disparity, there's a lot of opportunity. Forgive me. Yeah, a couple opportunities here. You have defaults hopefully not being anywhere near what maybe had been priced. And then you have recovery out of defaults being so much greater than the risk being priced that you end up with a pretty good risk reward trade-off. And then along the way, cash flow carry and other things to make the asset class opportunistic. So I think that this represents something that we were mildly interested in pre-COVID, but are more than mildly interested in coming out of COVID. And so it's a space we're

watching carefully and that Daya is leading a lot of our research into. Daya, let me come back to you on real estate. I want to switch gears to go to Robert real quickly on emerging markets. And Robert, I'll let you kind of take the lead if you want to emphasize more the equity or the debt side. I guess probably more people are interested in the equity side, but I think the story in emerging markets debt in March is one

that got absolutely no press, none that I've been able to find. Even now, you're seeing like today, the Financial Times had a big story on CLOs. And certainly most financial press was covering the dislocations in the mortgage market and the corporate bond market. The Fed obviously paid a lot of attention there as we saw with their TALF facility. But I saw very little coverage of what was happening in EM debt. But that world just went to hell and back and now has almost recovered all of that drawdown. Maybe talk a little bit about the dollar shortages, the dollar liquidity fears that are really so fundamentally important in our global economy, and then where you see some opportunity in the

emerging market space. Yeah, sure. So the first part on the dollar shortages, I think, is a great place to start. So what happens just for listeners sometimes is that in times of duress, people around the world, not just US citizens, but people all over, they want dollar-denominated assets and dollars themselves. A lot of times, foreign central banks have a hard time accessing those U.S. dollars to get to their respective domestic banks and to their citizens. The Treasury and our government did a great job addressing that really, really quickly in reestablishing what's called swap lines, dollar swap lines across the world. Swap lines were primarily used in the 2008-2009 financial crisis. Some of them stayed on to major partner countries, Canada, the Swiss bank, ECB as an

example. But a lot of them that were temporarily shut down or shuttered were reestablished. For emerging markets, the most notable reestablished swap lines are those to Brazil and Mexico. They were, as I was looking through emerging markets, two of the countries that I thought would be perhaps most impacted, not just by the COVID issue, but probably more so by the falling oil prices. Because it is kind of the perfect storm for oil producers or countries in the EM world that are net exporters are dependent upon higher oil prices. So with the access to the dollar lines, that gives them a little breathing room.

Oil prices coming down certainly hurts those countries, but it helps a lot of other countries as well. And that's been amplified kind of twofold by this crisis because falling oil prices helps the consumer in those places, which allows them potentially to buy other goods with their limited disposable income. So a good example of what we saw in India is that India might have been having some issues, but their oil prices came down significantly for the consumers. And what the government did over there is they were able to incrementally raise taxes a little bit on the oil side and on the

energy side. So it's not going to hurt their budget as much to distribute aid to their citizens over there. So I thought that was kind of an interesting balance sheet mechanism for India that happened as a result of the- But is the way that oil prices affected different emerging market economies just as simple as differentiating commodity exporters from commodity importers? No, absolutely not. And I think a lot of it kind of comes back to how much do they have in dollar reserves? It just happens that a lot of the exporters, the bigger ones have more reserves. You think about the Russians, the Saudi Arabias. Swap lines weren't reestablished with them for not just that reason, but I think more

of geopolitical and rather political concerns. But no, it's not just that factor. It's going to be other things as well. Like what else are they spending their money on domestically as well? The countries that were struggling beforehand are going to be struggling more as a result of falling oil prices if they're dependent upon that as their core source of revenue. One other point where I think oil is really crucial to this whole discussion is inflation. So a lot of these emerging markets countries, and this will kind of feed into the bond side as well, that inflation is either a major target, if not the only target for some of

the central banks there. And with oil prices coming down, which is a factor in how they measure inflation, that can give them some stimulative leeway to decrease rates. They're saying, hey, if inflation drops down a little bit, we can lower the Fed rates a little bit and provide some stimulus on the monetary side to the countries. So it helps a lot of those nations as well is what I'm seeing. On the bond side, something you touched on that's absolutely fascinating is, and it's something we've been talking about for a long time, it's the countries versus companies differential out there. So I've been looking at these various charts and things, looking at the slope versus the

credit rating. When you're looking at credits across different countries versus credits on the company basis, there's not much projected growth from the countryside. And a lot of the spread and the slope rather that I would want to take advantage of is in the company-specific arena. And that's just on the bond side. And more than ever, I think the bond side is informing our view, our consistent view on emerging markets is that you don't want to be touching these country ETFs. You want to be very selective and go in and find the companies that are going to survive

this with the balance sheet strength. And would you apply that principle differently in equity than you would in debt? Well, certainly. I think the debt side is, none of it takes less research or more research, but I think the debt side takes quite a bit more unpacking. And I think that's where a lot of the attention has been shifted away from it because people are saying, hey, I'm worried enough about the collateralized markets of the United States. I don't have time to look at the EM side, even though I think there's some great opportunities there. Very certainly. People want to know more about the equity side.

You know, they're looking for the easy buys, those Russia ETFs, the Saudi ETFs, the stuff that's going to hopefully not end up badly, but maybe it will down the road. Well, one of the things that I know that Brian and I have encountered in our meetings in New York over the years with our EM managers, that has always intrigued me, and it's not changed, is the country allocation that most EM equity investors on the passive side are so obsessed with, and even active side, their top-down focus, the country concentration is just night and day different in an EM equity ETF than it is an EM bond ETF. There's far greater country diversification in the bond side. And yet, for the top-down folks, you end up with such a concentration in China, Hong Kong, South Korea,

Taiwan, these big exporter countries, largely from a certain Asian area, as opposed to on the debt side, it really does tend to capture a very different economic landscape for good or for bad. But I think that your focus and what we've really believed in so strongly for over a decade now around bottom-up company performance driving equity is that you actually can do that, right? You can actually analyze fundamentals and growth and return on invested capital in individual companies where on the debt side, it's so much a currency story and therefore macroeconomic. And so these really become very, very different asset classes, even though there's some degree of overlap.

And yet I think that the debt dislocations that were largely remedied, as you pointed out with these swap lines the Fed brought in, it points to vulnerability in the global economic system. And it makes it almost laughable when people talk about the dollar losing its status as reserve currency, when most of these countries apparently cannot get out of debt without having access to dollars by which they've denominated their own overly indebted balance sheets. So these things are true when we're not in a crisis, but I guess some of them become more true in the midst of a crisis. Why don't I switch up to Julian?

Because I know a lot of people want to talk on the stock side of things, and we've talked a great deal, Julian, already and throughout the last, let's say, five weeks as we kind of began some of our repositioning after the really violent sell-off of March. where we thought there was most severe dislocation and then also adding to the quality at great yields of some of those more stable companies, lower beta and just very reliable multi-decade type dividend stories. And so we've spoken about the barbell approach of having kind of one side be much lower beta

but great companies, and the other side being also great companies, but just a little bit more opportunistic. So on that opportunistic side of that quote-unquote barbell, maybe aren't the consumer staples names, maybe aren't even the healthcare names, which have continued to really do very well for us, one of our biggest sectors.

But again, I know it's a little constricting when we can't go into individual companies, but financials and energy continue to be two heavier weights for us. They've both performed quite well here in April, but we're among the most beaten up in March. Talk about our convictions in financials and energy. Yeah, I guess it's been interesting first three, four months. And we had a great opportunity in March with the dislocation in the market to move things a little bit and seize opportunities. And I guess we haven't really changed too much our allocation really in terms of sectors.

I think we just increased the quality of the names we could own because we were given this opportunity when there was this huge sell-off in particular in the second half of March. So I guess since then, it's amazing to see how much the market has recovered. And if you look at the S&P now, we are like down 10% on the year. And year on year, we're actually almost flat. We're down 2%. So it doesn't feel like we're flat from last year, but that's pretty much where it is at the moment. But that's really the market picture.

If you look sector by sector, and to answer your question specifically, clearly some sectors that are more cyclical like energy and financials have been hit a bit harder. And I've seen some pretty serious dislocation in March with stocks that we like, that we think have been graded on payers being down more than I think 50% from peak. And that's, you know, if you look at the old sector, for instance, you know, people, you know, just rioting these companies because they are unable to cover their cash flows in the short term. But you have to look at, you know, their hedging program.

L may be trading in May or June futures at $10 or $20. But most of, you know, the old majors, they will have hedged their 2020 production in the 50s or in the 60s. So it's really irrelevant to them. Then you have to look more about what they're hedging for 2021, 2022. But there's other things they can do to adjust to the environment. They all can in CapEx and they are managing the short-term disruption. But if you look at the long-term, we are not past peak maximum consumption. That's clearly a lot of oil demand is here to stay.

So it's been disrupted for a quarter or two, maybe three, but it will come back. People will go back to driving, go back to flying. And that's just one sector to talk about energy in particular. I plan to do my part to help with oil consumption by resuming flying again as soon as I possibly can. And I bet some of you plan to do your part with driving. I think some of you like driving maybe more than I do.

So it's oil demand that has to come back on. And then these companies have maintained their ability to manage their challenged financials through the down period. Then we get out of the down period and we see greater opportunity. Talk about the pipeline side versus the oil majors. The majors are complicated because many people, and I don't think you guys would believe how many inquiries I've gotten from clients, but also even non-clients, expressing utter confusion and mystery around how well these oil majors have done over the last couple weeks, while oil has, according to their screen, gone from $28 to $10 or allegedly negative 40 last Monday or whatever. And of course, we know that there is

both the refiner story, the downstream story, and the production story that makes an oil major an oil major. But the midstream side is pretty pure to its business of transportation and storage. And if there's no oil coming out of the wells, they're not going to have much oil to move. So why do we still like the midstream energy names that we like? Well, first, oil is just part of the business the midstream guys are doing. A big portion is also gas, so it's not you know all linked to all uh only so gas keep moving around and and also the roi and you have to look at them as more you know owners of of the

pipelines that are they're renting to these majors that you know that needs to move the their production around so you know the the roi there is is are they going to be able like a landlord to collect the rents from from um from these guys and uh and they have you know, the way there is, are they going to be able, like a landlord, to collect the rents from these guys? And they have, you know, long-term contracts. So the risk is more, I guess, the liquidity or the bankruptcy risk of their clients. And, you know, from what we read from the transcripts or the presentations, they are, you know, they are not seeing any of this materializing at the moment. So there's really, you know, it's tough for them as well in this environment, but I guess they're less exposed than their own majors being, you know,

renters of the pipelines, basically. So speak to that, and I'll make a comment, and maybe you can chime in on it. When people refer to the credit risk and financial risk of some of these counterparties, some of the maybe weaker players in shale, there's got to be some names that are going to end up going bankrupt, and it's debatable how many it will end up being.

We don't know what governmental support there up being. We don't know what governmental support there will be. We don't know where bank lines can be extended. There's a lot of financial flexibility that could change people's negativity that exists within capital markets. But if you take out that bottom quartile of weakness in shale and then you look to just sort of the higher quality producers, even those that are going to themselves have really impaired businesses for a while. Doesn't that make up the entirety of the counterparty universe for the better pipeline companies, the larger ones, again, without mentioning names, the two that we're invested in. the larger ones, again, without mentioning names, the two that we're invested in.

And so to the degree, Julian, that there does end up being distress with some space of the producers, you get creditors that come in, you get acquirers that come in. Even if you get banks that just say, I now want to own wells and rigs, which sounds like a pretty stupid business for a bank to be in. But even if they came in, don't they need pipelines to take the stuff away? That's right. I guess they might have to speak to someone else instead of talking to the management. Now they speak to the administrator who was running that company when he went bankrupt, but he'll still be there and they'll still have to move their gas or oil around. And one, I think, thing that was surprising,

I was just on a call yesterday on real estate, and it feels like they were talking about the cruise liners being able to finance themselves at this moment. And that's a big difference with the great financial crisis in 2008. If you think about the cruise line industry, this is probably the worst industry you could be in at the moment. And they're able to refinance. And what's surprising as well is that the bookings for 2021 cruises

are up from 2019. That's a study that was done by UBS. So yeah, for sure in the short term, it's really awful. But even industries like that, that I guess people think are doomed at the moment, you know, can get financing. Brian, are you going to go on any cruises in 2021? No, I'm not. And full disclosure, I've never been on a cruise. So that's not saying much. So if I went on one, it would be 100% increase, but no plans there. I agree with your energy comments. I'm just going to throw in there the pipeline space.

And I would say two things. There's a couple of names that we own. And so if there's carnage in the area, those types of balance sheets survive and thrive. They can take advantage of lower prices and build out their network even more. And then the other thing is when demand actually does come back, and I'm pretty sure that since the world is still spinning, the demand will eventually come back once the economy reopens. A lower priced commodity moving through a pipeline is not necessarily a bad thing. The cost of moving it through the pipeline is about the same. And technically, demand should pick up a little. Something's a little cheaper. Maybe people consume

a little bit more of it, which would be a little bit more revenue for those pipeline companies. So just two kind of closing comments on the energy space. Well, and I also think Julian's point about natural gas, in the case of the names that we own that we consider to be of a higher credit quality and possess stronger financial metrics, which I would agree is really important right now for people that are going to be invested in midstream energy. The beauty of what we did, where I think we got a little bit lucky, was that it wasn't like the bad quality was sold off dramatically

and the high quality was only sold off a little. It was all sold off the same. And so we got to buy the high quality at the distress prices that the low quality were residing. And so to me, I think that it was a really good trade on the risk reward calculus. But that natural gas component, Julian, that you spoke to, it isn't just that they also have natural gas. They predominantly do natural gas, like 66% of revenues, give or take, and I'm trying to use round numbers across the couple of companies. So the natty gas world and the crude oil world have got to be differentiated. In some cases, they're competitors of one another, not just complements, to the degree that, of course, it's shale, the producers. You're talking about drilling in the

same rocks, and so there's going to be overlap at the financial strength of that apparatus that exists, whether it's Permian Basin, Marcellus, the different geographical regions. But I really do think that the economic cash flow model for transporting natural gas should be thought of as a different business than all the distresses we see in crude oil right now. Do you follow what I'm saying? Yeah, I totally agree. I mean, I think it's just the way a lot of things trade at the moment. You know, it's like MLPs and some of these names they've seen as all proxies and people, you know, see all price futures at 10 or negative and they think, okay, what do I sell? And these are traders, they're not investors. They don't really think about the business and what it means

owning these cash flows to perpetuity. Because that's really what we're focused on is like, what cash flow are they going to generate this year when it's, you know, in this environment, that's quite tough. And then when we get out of this in next year and then next year and perpetuity. And that's investing. That's very different from trading. Now, Daya, before we get ready to wrap up, and forgive me for throwing curveball at you here,

but I think you're pretty good on your feet. So you'll do just fine. If we're going to talk about opportunistic investing and the spaces we like coming out of this COVID period, we've sat here today and talked about structured credit, securitized lending, real estate, emerging markets, energy. Most people that I'm hearing from are doing the thing of looking at sheltering in place and looking at some of the various kind of obvious changes, potential changes in American society saying, hey, it looks like streaming services are really going to be big. And it looks like home workout type companies, you know, home video companies, for example, the type of tool that we're talking on right now, you know what I'm saying? Why would that thinking not necessarily be as logical of an investment strategy as some might think? Well, it's for the very simple reason that the market is a discounting mechanism.

And the market is quicker than those folks that we talk to think it is. If you look at the prices of a lot of these, you know, work from home type companies that have done well, you can see that those prices have increased substantially and their multiple is significantly greater than when we started the year. So a lot of those expectations have already been baked in and your returns going forward uh you know are a little you know unclear so if you're trying to make it a trade i think that you know that trade's already gone i mean but if you have an underlying thesis why this company is going to be a long-term compounder and you're going to want to be stay invested in this company for the next five, 10, 20 years. That's

a different story. But trying to trade around this, I mean, at the end of the day, you're just too late for a lot of those trades. Well, and Robert, I'm seeing a couple of the quote-unquote stay-at-home companies trading at 82 times earnings if they're cheap, some are 100, 150 times earnings. Is there a chance that not only could the thesis be wrong, but that the multiple could contract, even with the thesis being right, to a place where these might represent some of the higher risk stocks in the market, not the higher opportunity, but the highest risk. Yeah. So I think I would certainly agree with in that these are trades and there's no question that so much of the flow into this was just with

the herd. I mean, we know of a kind of a major company, one that we might be using right now, that had flows not only to that name, but also a ticker that was conspicuously close to it. So people were just buying these companies based upon what they thought the ticker would be with no homework. And so the inflows inflated the prices, helped those multiples, so to speak. But then what do you think happens when the herd leaves it? What do you think happens when people go back to work and they say, hey, I'm going to unwind this smart trade that they made, so to speak? You're subject to the whims of that technical flow, so to speak. And that's not at all what we want to be a part of. These companies, many of them are startups, and they're not going to cease being startups after this whole thing passes. What happens in economics is that if someone creates a profitable

enterprise and they create margins, competitors come in to seize those margins and they make it a competitive industry. Do you think for one moment that one company is going to dominate the video conferencing world? No, they're going to learn from this. They're going to improve, but their competitors also learn from what they did wrong and are going to scale up and do a good job. There's major profitable companies in that space that are going to do probably a better job than these smaller players that everyone flocked to through this whole situation. So I would be looking for, just like in the energy sector, the sustainable companies with balance sheets to continue making investments through this period, not just having an elevated stock price, essentially.

period, not just to be, you know, having an elevated stock price, essentially. Well, and it's one of the reasons, you know, I agree that there is such thing as first mover advantage out there. But I have to say that in this kind of transitory period of sheltering in place, you know, I think there's reasonable debate as to how much, you know, are people going to all go back to work at once and what will the different transitions like in society be? I'm not sure that those things are easy to bake into a multiple right now. I think there's a lot of debate as to what really paradigmatic shift changes we're actually going to see.

I can tell you this, if people think that video office stuff is going to be a wave of the future, we're not doing too many more of these podcasts by video because we're going back to work. We're going back to our office. I mean, that's our business. And our clients want to sit in front of us and we want to sit in front of our clients. We want to sit together around our table, talking markets, talking stocks, doing what we do. The video thing has been a fine stopgap, but I would use that just as an example about a whole lot of things that I'm not sure they represent as much of a sea change. And if they do, great. But to your point, all that means they're going to invite more competition. I can't think of one short of, and this is not a new company. This is a 20 plus year old story

of the largest e-commerce company in the world. I can't think of one that has a moat that really will keep competitors out of their business. To the extent people are really excited about some of the home exercise companies and the video streaming and video conferencing and a lot of those things. I got to say, I just think they're begging for more competition, which should compress multiples, not enhance already elevated multiples. So I will stick to our theories that opportunities coming out of COVID on a risk-adjusted basis, I like the themes we've all talked about today far more than the headline stories that might seem to have a bit more of a consumer fat orientation to them right now while we're all locked down at home. Okay, let's just do it real quickly and wrap up. Brian,

20 seconds of any closing comments, and then I'll go to you, Julian, you, Robert, you, 20 seconds each, and then I'll wrap us up. Sure. So I'll go backwards forward. So on some of those names, we're talking about video teleconferencing and things. What we're doing is managing wealth for people to achieve goals. If there's ideas that seem sexy or neat or catchy because of something that's happening in the world, that's fine. Is it a place where you can put a sizable amount of money and drive a predictable rate of return at a multiple of 100 times? It isn't. And so the things that we are talking about are time tested and geared more towards those longer term results. The one thing I'll say on energy too is it is up more than the market from the lows, considerably 25 versus 15 or so

over the last month at least. And some of those CDS spreads and some of those metrics we look at as far as risk in that market are lower. So long story short is, there's opportunities in all of this. Maybe being thrown out with the bathwater and a huge market dislocation is where we have upgraded quality and equities and where we are looking for those hidden gems in the fixed income markets. Excellent stuff. One of the things I love about Brian as my partner is he and I have the same definition of 20 seconds. That's fair. That's fair. Julian, what kind of comments do you have just in terms of all the things we

touched on today just to kind of represent a closing comment? I just want to talk about equities again. It's a very interesting time with, on the one hand, valuation that looks very elevated. And a lot of deaf friends, people calling me, will say for the first time,

I want to short the market. And it's interesting. People are thinking about shorting the market whenever they need before. And the short is pretty time, oh, I want to short the market. And it's interesting. Like people are thinking about, you know, shorting the market with never done it before. And the short is pretty high, actually, at the moment. And on the other hand, you have the Fed and the Treasury, you know, putting everything out there to support, you know, risk, basically risk taking and asset prices. So, you know, I think it's a very exciting time to be doing this job and looking at all

these companies and I just can't wait to see when they can start guiding and talk about the normal world again. Well, I agree. Fascinating times. Great comments. So much more we'll get to elaborate on there in the days, weeks, months ahead. Robert, close us with your final comments. Yeah. I mean, situations like this create, of course, massive dislocations and perhaps feed through some good investing opportunities. But what is really important for me to always remember is that fundamentals matter and they matter more in times of crisis. And so that's something we stick to. Very, very good. And Dayup? Yeah, I know you've spoken about it before.

Some of these paradigmatic changes, I don't know how things might permanently change in the future. I think some people won't change and some people will. And maybe some industries will be a little bit different. But all that doesn't mean that it's bad for markets. You know, markets adjust as they always have been and entrepreneurs adjust and they find a way to, you know, make profit and be able to have successful business models despite challenges. So it's very difficult to say if one thing's good or bad. All you can do is really consult the historical record and realize that markets tend to overcome challenges in the long run. Well, and I'll piggyback off that in my closing comment. And I appreciate everything you guys have said. And hopefully our listeners know, and more important than that, our clients really know

how like-minded we all are, how aligned we are in the way we're approaching all these things. My view about paradigmatic shift is not stubborn. It is not that I don't think that there's change. It's just that I don't think change is a change. I think change is a constant. I think there's always been change and there always will be. And so it's very hard for me to feel stressed about changes. What I am stressed about is that we may misread changes or that we may misapply them.

And I guess you have less of a chance of doing that, the less you try to kind of speculate on where entirely, you know, culturally transformative type events may be happening. But Daya mentioned that markets adjust and he used the word in there, entrepreneurs. And I'm going to focus on that word to wrap us up. To the extent that there's uncertainty right now in the health pandemic, the policy response, the impact of fiscal and monetary stimulus, the timeline of different cities, counties, states, not to mention federal guidelines coming off to reopen the economy. There's a wide variance of possibilities of things that could go more right than expected and more wrong than expected. And it creates a very complicated milieu for us. And we do not have a bullish view on the, let's say, S&P 500 per se, nor a bearish view. We're anticipating range-bound markets

as we kind of struggle through this with varying degrees of opportunity within that, some of those opportunity sets that we've talked about here today. But the one issue that is, I think, really a permanent bullish perspective from the bond center is the idea that the entrepreneur adjusts, that the human spirit is accustomed to adversity and accustomed to doing what it has to do to survive and thrive through adversity. And any viewpoint that requires us to short the human spirit is not a viewpoint we're going to subscribe to. It's not going to happen. There will be challenges in the economic price level. There will be challenges in unemployment. There'll be challenges in macroeconomics. And there'll be individual companies that don't make it. There'll be individual companies that do really well out of it.

But what there will not be is a redefinition of entrepreneurship whereby the entrepreneur becomes unable to accommodate the new realities that they have to face on a day-by-day basis. Innovation and that sort of indomitable reality of the human spirit is something I will go along the rest of my investing career. I hope that's helpful for you to hear. I appreciate the uniformity and viewpoint out of my colleagues and partners here from the Bonson Group. We wish you and yours a very good, safe, and free rest of your week. Thanks for listening to The Dividend Cafe. LLC, member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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