#94: Coronavirus Investing Series, Part 11 | Alex Portelli | The Economics of Facemasks & COVID-19 Tests

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Coronavirus Investing Series: Part 10

This is Part 10 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

You can also listen to:

• Part 2
• Part 3
• Part 4
• Part 5
• Part 6
• Part 7
• Part 8
• Part 9

Summary

Eric Schleien and Brian Dress discuss investment opportunities in the bond market. Brian Dress is an investment analyst at Left Brain Capital Management, LLC. Brian's angle relates to value opportunities his firm is seeing in the corporate and municipal bond markets, based on the massive selloff in credit markets over the past 6 weeks. Particular discussion points in this episode include:

Discussion of Bond Markets Pre-COVID

Brian thinks the spreads were far too tight which made it very difficult to position portfolios with income to match future expenses. Investors were forced to take too much risk to attain yield. This is something we have discussed extensively before on The Intelligent Investing Podcast.

How Credit Cycles Work Historically

The main takeaway here is that credit booms and busts occur far more often than do booms and busts in the equity markets. Savvy investors should be willing to take risks on bonds in trough phases like this one and gradually lighten the load as spreads tighten, creating the capacity to take advantage of the next down cycle.

Note: high yield bonds have led stock recoveries after every market drawdown since 1980 (1982, 1991, 2002, 2008-9, 2016)

Observations In Credit Markets

Brian has noticed indiscriminate selling related to a liquidity crunch, causing bonds at all levels of credit quality to sell off heavily. Brian believes this creates fantastic opportunities across the credit spectrum, which he and his company are taking advantage of to reposition clients. I discuss that in regards to all markets, here.

COVID-19 Gameplan

Brian is upgrading the credit quality of bond portfolios, taking the opportunity to lock in large coupons on stable companies, some of which continue to trade at a discount. Markets have been starved for these types of opportunities in the bond world and, while many of these have already narrowed, plenty of mispriced securities are still out there for investors. There are still chances to lock in great coupons, along with the potential for capital appreciation. Brian believes it is important to recognize that it is likely we will be in a 0% interest world for the foreseeable future.

Bond Opportunities

After Eric and Brian discussed the general overview/strategy with respect to bonds, Brian presents a few examples where he sees opportunity.

• Qurate (QRTEA) 8.25% 2030 bonds (Yield to maturity >12% at current price levels)
• Travel and leisure: Delta 4.375% 2028s (yielding >7% at current prices) and Carnival Cruise (unsecured 2020s and secured 2023s)
• Illinois Municipals General Obligation 5.1% bonds: effective yield of more than 8% for those in highest tax bracket, possible appreciation potential with interest rates now firmly at 0.

New Service

Brian is debuting a new serv...