Boating Through The Dire Straits

Summary

• Almost every article that you read in the Press these days paints an economic picture that is so bleak that it is downright frightening.
• I do not buy into this philosophy.
• Significant downturns, one of which we are now in, present opportunities.
• One of the sectors that I am very positive about is energy. I am also eyeing the real estate sector.

I don't know how it happened

It all took place so quick

But all I can do is hand it to you

And your latest trick

- Dire Straits, Your Latest Trick

It's bad. It's badder. It's worse than badder. Almost every article that you read in the Press these days paints an economic picture that is so bleak that it is downright frightening. You feel as if you should own nothing and build an underground shelter to protect yourself and your family.

I am sorry. I do not buy into this philosophy. I have read all of this kind of stuff in 1987 and 2008/2009 and the cries of forthcoming disaster are mostly the touts, the pimps, if you will, of people and institutions that will benefit from our current position.

I also point out that significant downturns, one of which we are now in, present opportunities. Let the amateurs and the faint of heart go into panic mode. Let them sell everything and run for the bleachers. Their loss can be our gain and my investment timeline is longer than one millisecond, thank you. These people and these articles are just so far away from me.

Here I am again in this mean old town

And you're so far away from me

And where are you when the sun goes down

You're so far away from me

- Dire Straits, You're So Far Away From Me

One of the sectors that I am very positive about is Energy. The price of oil and natural gas, already significantly off its lows, has further to rise in my estimation. We have had a demand problem, as coronavirus has upset the applecart, with many industries closed or close to closed. I am well aware of the problem. Yet, as I so often say, problems create opportunities and the demand for Energy will return.

There are investment grade bonds that I like here paying very nice yields. There are some high yield names that I also find quite attractive. Also, the closed-end funds with energy portfolios have generally not caught up with the recent rise in WTI and some of the yields here, for monthly paying funds, are well into the low double digits.

Look, the ten year Treasury closed Friday at 0.612%. The Fed is in buying Treasuries, investment grade bonds and even high yield bonds. There is now a kind of floor here built by the Fed's support. Moreover, double digit returns will eventually compress in against Treasuries and I do not see yields going significantly higher any day, or month, or even year soon. We are chained into a low yield environment if, for no other reason, that the government of the United States cannot afford to pay higher rates on all of the money it has borrowed, and is borrowing, and so the Fed will make sure that interest rates remain at very low levels.

Consequently, in the Energy sector, you have all kinds of positives going for you. Sure, they will be bankruptcies and reorganizations. However, the product, itself, is not going anywhere. Yes, Saudi Arabia and Russia may continue to chip away at each other but eventually they will reach some accord because their economies require a solution, if nothing else. Both countries virtually have no economies except for energy and so the politicians will be forced into some agreement before revolt or revolution occurs in their countries. There is just not any other choice.

I am also eyeing the Real Estate sector as another good opportunity. Here, again, there will be bankruptcies and reorganizations, but the Real Estate properties will remain. The product, itself, like oil and natural gas, is not going anywhere. It is just a question of its valuation and cost. Several years ago, many pieces of Real Estate were very highly valued, and the cash flows made no sense. Now, cash flows are down and so the valuations make all kinds of sense especially if they can be purchased from banks and other debt holders that are in trouble. Our coronavirus pandemic has opened the doors here, and I invite you to examine entering.

I have often pointed out the pitfalls in the hotel industry. They are certainly present as no one ones to congregate but even here, there are opportunities that abound, if you have a little patience, as this will change over time. There will be conventions and meetings and events again and if you can buy at some of the almost historic low valuations that exist today then Alpha, in my view, is likely to be achieved.

Office properties are another area I like because people will be going back to work. Social distancing, of some kind, will likely remain in place and if you think this through it would mean that many companies will need more space, and not less space. You have to look out just a little further than your nose.

My point today is that yes, we are in "Dire Straits." This, however, in any known language, does not translate into "the end of life as we know it." We are just in a tough position. Having said that, tough positions always create opportunities and there are several stand-out opportunities that can now be utilized, in my opinion. It is Dream, Think, Plan and then Execute.

Just listen to the music and begin to dance.

You get a shiver in the dark

It's a raining in the park but meantime

South of the river you stop and you hold everything

A band is blowing Dixie, double four time

You feel alright when you hear the music ring

- Dire Straits, Sultans of Swing

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[lewisfrazer]

Mark, love your choice of music. Mark Knoffler is the real deal. Also agree with energy sector bonds. OneOk is my current favorite. Once the lockdown is lifted, Jazzfest in NOLA should be on your list.

[Sourdough98]

The fact that the FED is stepping in to buy corporates and especially junk is just a sign of how desperate they are to maintain the status quo and keep the bubble alive. Stocks are no where near bargain levels.

I agree that cherry picking some sectors with a focus on strong balance sheets can be profitable. With XOM and CVX I just wonder when the dividend cuts are coming. Taking on more debt to pay dividends is not a sustainable strategy, in fact it weakens the long-term viability of the company, and both companies were doing this before the recent crash in oil prices. Additionally, I think it is important to consider that the demand side is weakening, not only because of the virus impact, but because EVs are slowly eating away at demand on the edges and this trend is likely to persist. Natural gas is probably a better play for stability for supplying the grid with fuel. But natural gas is a relatively small part of the oil majors income compared to diesel and gasoline.

There is a lot of uncertainty about what will happen in the hotel business. It is difficult to say what the long-term effects on demand are going to be. Virtual meetings may significantly eat into business traveling ... permanently.

Personally, I will stand aside until prices are a bargain on well run companies with strong balance sheets. We are nowhere near that.

[hawkeyec]

I haven't yet seen one of the big banking houses do a study of this, but saying we came back from 2008 gloriously is to a certain extent a mirage. Virtually all of the net stock buying in the last decade has been the result of US corporations spending four trillion dollars, much of it borrowed at sweetheart rates, to buy back their own stock. I'd love to see what the pros think the market would have looked like if that huge buyback orgy hadn't happened. Because that orgy seems over for now and many companies are looking at their own balance sheets with some trepidation when they see what they have wrought. A recent rise in personal savings, even at nearly non-existent returns, will take more cash out of the market. My own sense is that we are beginning a fourth long period since the late 1950s where the market goes sideways and slow economic growth will be the norm. We survived the three 15 year plus "flat" market periods in my adult lifetime and we will survive this one, but we won't be cheering.

[jpmist]

Thanks for the Knopfler lyrics, one of my faves. That said, you're going to be correct about energy, but there's going to be a lot of pain waiting for energy prices to come back. My money is in agency mortgage REITS as they're still discounted to book value. Best of luck.

[hawkeye46]

Would you care to list some ticker symbols you have looked at

[Mark J. Grant]

I can't. As the Chief Global Strategist for B. Riley I am heavily governed by Compliance. Someone would have to be a client of mine to get that

Mark

[e-mail]

[veebj]

Mark, what do you say to those who argue those high "dividends" of which you speak are an illusion? That CEF payouts are not really "dividends" in any traditional sense when they represent mostly distributions of capital, not profits. That the so-called high "yield" becomes illusory when your initial investment inexorably shrinks over time. If it affords some comfort to receive monthly distributions of your own money, that's fine (though the same thing could be easily accomplished with a bank account). What say you?

[alphaseek2018]

It depends which cef you are owing. If you own a fixed income bond CEF, most of the distributions are from earned interest from their holdings.

[alphaseek2018]

Look at NHS. All of its distributions (currently yielding at 11.2%, pays monthly cash income) are from 'income earned' from its investments in 287 holdings of high yield debt; NO ROC.

[veebj]

Maybe I'm missing something, but if you bought NHS a few yrs ago in low teens, you're initial investment is down around 20-30%. So what's the real ROI after accounting for capital loss? Thanks..

[DRH2350]

You like the energy sector. Does that include energy mutual finds and ETF’s.

[Mark J. Grant]

I prefer closed-end funds. Higher yields

Mark

[alphaseek2018]

I like BGR. It yields about 8.2% after a 30% reduction in its distributions. The fund owns mostly integrated oil and gas majors.

[denden1949]

It would be nice if U could make some specific recommendations. Your recommendations are too general.

[randalloyd]

So you're saying I just need to relax and listen to some Dire Straits.

[Mark J. Grant]

Recently, I have been contacted by a number of people who need some help with their investments. These are tricky times. Yes, I do have a strategy, a cash flow strategy, with monthly dividends, that I use for individuals. If you do need some help then please let me know and I'll see what I can do.

I do not charge any management fee.

Mark

[e-mail]

[sheepdip]

Maybe it's time to sing " I don't look good naked anymore"

[ccas4444]

"Look, the ten year Treasury closed Friday at 0.612%. The Fed is in buying Treasuries, investment grade bonds and even high yield bonds. There is now a kind of floor here built by the Fed's support. Moreover, double digit returns will eventually compress in against Treasuries and I do not see yields going significantly higher any day, or month, or even year soon. We are chained into a low yield environment if, for no other reason, that the government of the United States cannot afford to pay higher rates on all of the money it has borrowed, and is borrowing, and so the Fed will make sure that interest rates remain at very low levels."
I disagree. They will lose control of interest rates and rates will rise. The "FED" controls rates for the short term but not the long term Especially after November. The situation reminds me of when interest rates were at 21% and no one would buy stocks at a DOW of 877. The reverse is true now, everyone in stocks and no one but Warren Buffet is in cash. The banks are getting ready to cut credit card limits and the 30 million are wondering how they will pay their bills further adding a squeeze on rates/debt of all kinds. Change is coming- Vanguard treasury bill only money market fund closed last week to new investors. The fact that interest rates are near zero and the DOW Jones is near record highs tells you there are significant internal problems within the economy. It's like me going to the bank and buying a new car with a credit rating in the 500 s' and getting a premium low rate.

[fhbecker]

ccas4444

Suggest you might want to rethink your comment "The FED controls rates for the short term .... but not the long term" Think the Fed has shown its ability through QE or what ever they want to call it, the ability to control interest rates for all duration's and the bond market did not blink....so far

[ccas4444]

When the 30 year treasury goes under 1% as the stock market plunges the plan should not be to buy debt. You have better odds standing over a hole in the ground yelling that there is gold in that hole in the ground, and calling it a gold mine.