by Bryan Perry
March 10, 2020
So much for living through one’s Golden Years off of a portfolio driven by yields in fixed-income assets! Anything with a maturity date and an investment grade is seeing its yield crash. The flight to safety is causing Treasury yields to fall to levels never seen before. There is genuine panic in the bond market in a world awash in sovereign liquidity that wants to own U.S. Treasuries – no matter what the maturities.
Take a look at the rapid rate declines across the U.S. Treasury maturity spectrum last week:
Investment grade corporate bonds are also in the midst of a herculean rally, as the 10-year chart of the widely traded iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) clearly shows (below). The current yield on LQD is 3.11%, with a 2.32% yield to maturity. This is an ETF with $33 billion in assets, 1,985 separate holdings, and an average duration of 9.45 years that pays monthly – all that some investors want – a simple, safe ETF paying 3% and experiencing a firehose of capital inflows.
Granted, when the stock market finally settles down, shares of LQD may retreat by 5% to 7%, but don’t count on that happening anytime soon. The bond market operates out of fear.
Anything outside Treasuries and investment grade corporate debt is under severe stress – even investment grade preferred shares paying around 5% are seeing spreads widen out and share prices starting to buckle. This class of security has seen a real nice bonus yield of a couple points over the investment grade corporate bond market, but has since “lost that loving feeling,” at least as of last week.
Where there is serious hand wringing and gnashing of teeth is within the junk bond space, where spreads are starting to blow out. From the 5-year chart below, we can see how the current sell-off in high-yield debt is starting to resemble the corrections in the first quarter of 2016 and the fourth quarter of 2018.
For the time being, the recent price deterioration might be construed as just another garden variety correction that will right itself over the near-term. But with Saudi Arabia officially sparking a new all-out oil war that is crushing oil prices, debt-heavy energy companies are now on serious “default watch.”
The fallout of the OPEC+ meeting last Friday is going to send a lot of leveraged oil and gas companies into bankruptcy. This wave of yet-to-be-determined number of junk bond blowups will impact the broader junk bond market that now stands at over $1.5 trillion in issued paper, up from $700 billion in 2007.
For all of 2019, the default rate in the junk bond market was only 1.9%, well below the historical average of 3.3%, according to Deloitte. During the recovery from the Great Recession, the portion of the market made up of investment grade bonds fell to 78.6%, down from around 90% in the previous two recoveries.
The double whammy of the coronavirus bringing stress to global supply chains and the latest oil price war puts the junk bond market on high alert. Though I personally believe this sector, like the overall market, will eventually recover when the number of COVID-19 cases plateaus, this won’t be true for junk debt in the energy patch. There is real trouble brewing and investors with exposure in the energy sector that is not blue-chip should consider lightening up ASAP. I’m well aware that energy stocks have been severely punished, but they could become even more volatile, which will be reflected in bond and stock instability.
The ground has shifted greatly under the markets, with high-quality yields in fast decline and valuations for low-quality debt sliding hard – so what can income investors do to compensate for this volatility?
Sell some out-of-the-money covered calls on blue-chip stocks and put the market’s volatility to good use.
Most investors I’ve talked to are content to ride out the coronavirus correction, but there will certainly be a hit to earnings, because the situation is still highly fluid. As a result, option premiums have expanded big time in the current market, both in puts and calls.
Case in point: Shares of MasterCard (MA) are trading 60 points off their recent all-time high of $347.25, and yet investors can sell the $350 Calls for June for over $500 per contract. Do I think MasterCard shares will rally when the virus fears start to subside? Of course. Do I think the stock is going to trade above $350 to a new all-time high by the June 19 expiration to where the stock gets called away? Nope.
Navellier & Associates does not own LQD, HYG, MA in managed accounts or a sub-advised mutual fund. Bryan Perry does not own LQD, HYG, MA in private accounts.
Buying Treasuries and investment grade debt after this torrid runup is fraught with risk, when the good news surrounding the virus eventually crosses the tape. Why not use these 1,000-point rallies to bank some volatility wherever and whenever possible? After all, selling covered calls is just another name for “free money.” And if we’re going to wait out this wild trading range, we might as well get paid to watch.
Also In This Issue
A Look Ahead by Louis Navellier
Treasury Yields Fall to New Historic Lows
Income Mail by Bryan Perry
Selling Covered Calls Is One Income Solution
Growth Mail by Gary Alexander
Are We Being Scared Senseless? (Or Scared Backed to Our Senses?)
Global Mail by Ivan Martchev
With Saudi Help, Oil is Headed into the $20s
Sector Spotlight by Jason Bodner
History Indicates the Market Could Bottom Around March 20
View Full Archive
Read Past Issues Here
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing firstname.lastname@example.org. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported performances should be considered mere “paper” or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates’ Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.