Election Hopes, Buoyant Banks, Labor Labors Less, FDA’s Remdesivir Thumbs Up

Election Hopes, Buoyant Banks, Labor Labors Less, FDA’s Remdesivir Thumbs Up. Plus, a quick look at Southwest Airlines and why it remains the one …

Thursday Night

What did you do? Did you watch the debate? The football game? Maybe you went to sleep before either came to a conclusion.

I did watch a lot of the debate. It was far more civil than the first debate between these two candidates. That in itself was a positive. The football game was a good game played by bad teams. Speaking just for me, I watched more of the first, less of the second, while definitely guilty of hitting the rack prior to the completion of either.

The fact is that at last count the number of registered voters who have already cast ballots is more than 45 million. The number of those truly undecided this late in the game is probably extremely minute. While the debate did hold my interest, I am not sure that the needle, wherever it may lean, can be moved at this point. I do know that I will be glad to see this election grow smaller in the rear view mirror. It could take a week. As long as there is a winner, and as long as there is a loser, and as long as both are gracious in the result, we can move on. If one candidate leads on Nov. 3 and then ultimately loses, half a nation will feel cheated. The loser, more than the winner, is going to need to show leadership.

Markets

Equity markets seemed to barely notice that there was a debate, either ahead of the event or in overnight markets afterward. The Thursday session was notably different in that there was no late-day selloff. That trend finally broke. Large-cap indices moved slightly higher on lackluster trading volume, while small- to mid-cap stocks showed considerably more strength. Instead of hitting the “sell” button 60 to 90 minutes ahead of the closing bell, traders hit the market with a “buy” program about 90 minutes after the opening bell in response to positive comments made by House Speaker Nancy Pelosi that may have signaled progress (yet again) on reaching a large fiscal support package.

Interestingly, I think we take a look at this new phenomenon. Instead of closing toward the bottom of the day’s range as the Nasdaq Composite had done for four consecutive days, we now see two “up” days (ever so slight) in the past three while the index appears to have closed at nearly the same level now for four consecutive days, all while also opening at almost that same spot for the same past three. How odd is this?

Not just how odd is that. Rather, where would the markets be without the financials, suddenly? Both the S&P 500 and Dow Industrials out-performed the Nasdaq Composite, while the Nasdaq 100, the only major index that completely excludes the banks and financial stocks, actually closed in the red on Thursday.

In Focus

We have spoken of this new focus on the long end of the Treasury yield curve this week. The market’s emphasis was clear on Thursday. We know a few things. We know that markets are ready to keep selling the long end of the curve if a large stimulus deal seems apparent. Call it hopes for improved growth, inflationary expectations, or a plain old response to already increased supply that will only likely expand.

The deal is this simple. When investors sell longer-term U.S. Treasury debt (10-year notes) like this...

… and the Fed anchors short-term rates, the spread between short- and long-term yields (3-month/10-year) does this…

Then, knowing that investors value banking stocks through the prism of net interest margin more than through anything else, bank stocks do this….

…. and regional banks that have less ability to lean on investment banking and trading do that even more so….

This is where, all of a sudden, your bull market is. The industrials have been hot on and off of late. The airlines are dependent upon fiscal support. Aerospace and Defense, though not in nearly so deep a hole, is just as reliant upon policy. The rails are going to need organic economic growth, which will be difficult to predict. You all know (if you read me much) that it has been a long time since I have been bullish on traditional banking. In fact, I spent the whole summer with literally zero single-stock exposure to the entire industry.

Only going into earnings did I even get long some JPMorgan Chase (JPM) as a “best in class” (my opinion) play. I think I may need to add a regional bank to my most actively traded portfolio. One name that reported earlier this week and broke out on Thursday while still cheap enough for retail investors to get involved (I am not involved as of yet) would be Regions Financial (RF) , operating in 15 southern and midwestern states. It’s worth taking a look at, anyway.

Identifying trends is more than half the battle. Are higher yields at the long end Biden-proof? Trump-proof? Both will borrow heavily if they can get it past the legislature. How steep a yield curve will the Fed tolerate? If I knew that for sure, I’d be famous. Only kidding. Actually, you’d never hear from me again. Only kidding again. I’d buy a major league ball club and make myself the centerfielder.

Improving Labor Conditions

At least we think so. Thursday morning saw a nice surprise on the low side as far as weekly Initial Jobless Claims are concerned. A seasonally adjusted 787,000 filed for new state-level unemployment benefits, well below expectations. Another (two-week lag) 345,000 filed for Pandemic Unemployment Assistance. This is a 13-week federal program meant to aid freelancers, sole proprietors, “gig” workers and all those who do lose jobs where they were not quite considered to be employees in the traditional sense.

Continuing Claims also dropped quite considerably. Deciphering how many laborers have been called back by employers and just how many have rolled off the back end of their state’s benefits programs is difficult to ascertain. Then there’s the state of California, which just seems too large to do anything right, or possibly count anything accurately.

You all saw the disappointing PMI surveys across the European Union on Friday morning. These sagging numbers are due to the incredibly rapid increase in the spread of this evil virus across the continent. No, we are not special. Is the U.S. handling the pandemic better than Europe? Probably not. Europe is three weeks to a month ahead of North America seasonally, and perhaps in (economically) damaging mitigation efforts. I remember talking to a friend in Milan last spring. She said simply (paraphrasing), “You people have no idea what’s about to hit you.”

She was right.

Noted

Gilead Sciences’ (GILD) Remdesivir became the first antiviral therapeutic approved by the Food and Drug Administration (FDA) for the treatment of hospitalized Covid-19 patients. Remdesivir received an Emergency Use Authorization from the FDA last May. Oddly, this comes a day after the beleaguered World Health Organization found that the drug had no impact on mortality, but just weeks after the New England Journal of Medicine showed the drug to be superior to placebo in shortening recovery times. Follow the science?

Take it from someone who suffered this virus and the never-ending period of recovery. The scientists are not a whole. Many disagree on even the basics, and many have also changed their minds on Covid-related matters several times over. Not really their fault. There has been nothing to study up on. That’s what “novel” means. There is no playbook. No way to actually follow the science. That argument is made strictly to gain political advantage. There are few actual experts and six to eight months ago, there were none. It’s extremely frustrating on the patient’s end.

Charts of the Day:

Remember when I wrote to you and said that if I had to own one airline it would be Southwest Airlines (LUV) ? Well, I followed up on my own advice, and so far so good. What you see here is an ascending triangle, which is usually a bullish pattern. Basically, an ascending triangle is a series of higher lows that run beneath a level area of resistance until the two lines meet and hopefully provide an (upwardly) explosive move. My price target is $51.

Sarge, doesn’t the whole industry look like that? Not exactly. LUV has a better-looking chart. Look at the Dow Jones U.S. Airlines Index over the same period.

Oh, you still have a closing triangle. Just that when a series of higher lows couples up with a series of lower highs, directionally, the explosive move that we look for is less predictable.

Economics (All Times Eastern)

09:45 – Markit Manufacturing PMI (Oct-Flash):Expecting 54.6, Last 54.6.

09:45 – Markit Services PMI (Oct-Flash) Expecting 53.4, Last 53.2.

13:00 – Baker Hughes Oil Rig Count (Weekly): Last 205.

The Fed (All Times Eastern)

No Public Appearances Scheduled.

BlackRock is bullish on China’s domestic bond market. Here’s why

BlackRock has a “positive” view on the domestic bond market in China, said Neeraj Seth, the U.S. investment giant’s head of Asian credit. “We still see …

SINGAPORE — China’s massive onshore bond market offers investors a level of returns that may be hard to find elsewhere in the current environment of low interest rates, a BlackRock portfolio manager said on Thursday.

The U.S. investment giant has a “positive” view on the domestic bond market in China, where economic data and continued monetary policy support point to a sustained economic recovery, said Neeraj Seth, BlackRock’s head of Asian credit.

“We still see China bond market to be fairly attractive,” he told CNBC’s “Street Signs Asia.”

“You have high nominal yield, potential to generate returns in an environment where rates are pretty low globally, and a portfolio diversification,” he added.

Foreign investors remained under-invested in Chinese onshore bonds, accounting for just slightly over 2% of the $16 trillion market, noted Seth. He said foreign participation is set to increase as more Chinese bonds get included in major global indexes.

Explaining the case for Chinese bonds, Seth said the market offers many choices to build a portfolio that is both diversified and resilient — two important attributes that investors typically seek.

OTC Markets Group adds Blue Sky Data Product for secondary securities to its premium data offering

… stay in compliance with State Securities rules for more than 16,000 OTC Equity Securities and 80,000 OTC Corporate Fixed Income Securities.

OTC Markets Group Inc (OTCQX:OTCM) has introduced a premium Blue Sky Data Product to help broker dealers stay in compliance with State Securities rules for more than 16,000 OTC Equity Securities and 80,000 OTC Corporate Fixed Income Securities.

These securities are traded on the OTC market rather than on an exchange, and the regulations that govern them, known as blue sky laws, vary state-by-state for investors and broker-dealers.

That’s where OTC Markets’ Blue Sky Data Product comes in. The group has compiled a data feed that provides its subscribers the tools they need to evaluate blue sky compliance for more than 96,000 securities from some 50,000 issuers.

READ: OTC Markets Group beefs up online investor resources with bank holding company data

The product differentiates itself on both the unparalleled depth of coverage and timeliness of accurate data, the group said. By integrating these data feeds into their daily operations, broker-dealers can streamline compliance with state securities laws for secondary trading.

“Our blue sky data product will help broker-dealers and investment advisors automate a key compliance function for the growing OTC equities and debt markets,” EVP of Market Data and Strategy Matthew Fuchs said in a statement. “Blue sky data can radically decrease the time and effort spent on state securities law compliance while opening up the world of OTC securities to Advisors, [separately managed] accounts and investors.”

Automating the blue sky whitelisting process lets brokers do more business in securities that meet those laws and enables brokerage firms to block bad trades before they are entered, the group said. OTC Markets’ data reduces regulatory risks, lowers compliance costs and enables advisors, brokers and research analysts to recommend and cover OTC equities and fixed income.

The data itself is powered and delivered daily by OTC Markets’ data sets and cloud-based architecture. Compliance professionals can also access historical data for each security through the group’s Canari web application.

To get a more granular view, users can also utilize Canari to access state-by-state compliance data. Additional dashboards provide a blue sky compliance map, summary level data by jurisdiction and time period selection.

The New York-headquartered OTC Markets Group operates the OTCQX Best Market, the OTCQB Venture Market, and the Pink Open Market for more than 11,000 US and global securities.

Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com

Follow him on Twitter @andrew_kessel

Opinion: Zombie companies are proliferating — here’s how to keep them out of your stock portfolio

Stick to mainly mega- and large-cap stocks and seek out ‘runners’ and ‘fighters’. AFP via Getty Images.

There are investments lurking in portfolios today that, if left unaddressed, may wreak havoc on longer-term investment returns. Zombie companies — those with excessive debt levels and failing business models — are presenting new and unforeseen challenges for investors.

Read:Schwab’s Liz Ann Sonders: Stock market today is ‘a small handful of winners and a heck of a lot of pain’

Minimizing zombie risk

In the first half of 2020, the number of zombies more than doubled. In certain sectors, this trend has become even more pronounced: The tally of energy and consumer discretionary businesses that fell into the zombie abyss tripled over that same time period. Smart investors have already seen that across the entire corporate landscape, technological changes and shifting consumer preferences have rendered many business models obsolete.

Fortunately, there are ways to minimize the risk of ill-fated zombie businesses to one’s portfolio.

First, with this pandemic-induced environment in mind, it’s worth putting into perspective the impact of zombies by simplifying the equity universe into three types of companies: runners, fighters and zombies.

Runners, in short, are growing companies in growing markets. The most visible examples are the mega-cap technology firms. But runners exist in other markets, too. They can grow in a Covid-19-infected economy and can do so profitably. Even as some runners risk growing too large and attracting attention from regulators, they’re making life worse for the zombies, with every percentage point of gained market share coming at the expense of these companies.

Fighters are those companies battling for, and winning, market share in flat or low-growth markets. Fighters may have growth-like characteristics or may trade at low valuations. They’re not limited by geographic or size distinctions. Technology and a landscape permanently altered by Covid-19 are presenting new opportunities for these companies to reinvent themselves through innovative customer experiences, for example. Large retail brands featuring a direct-to-consumer relationship and omni-channel capacity are illustrative of fighters finding new life in a challenged space.

Which brings us to the zombies. Losing share, losing pricing power and being kept alive by debt servicing, zombies ultimately cannot cover their cost of capital. Fundamentally, zombies lack a path to profitability.

The pandemic has accelerated the zombie’s demise, and certain industries have become more infested with them. The energy sector, particularly exploration and production firms, are plagued by low prices, weak demand and leveraged balance sheets. Banking, already squeezed by a diminishing branch footprint, has been negatively impacted by the flattening yield curve, a record-low rate environment and stagnating loan growth. The communications industry is also a breeding ground for zombies, as shifts in consumer preferences for content, including more customized streaming options, have made legacy structures obsolete.

One obvious question arises about zombie companies: How long can they survive? It depends, but a zombie’s negative impact to your portfolio can last for years — and the issue is exacerbated by today’s monetary environment. Even as their fundamentals decay, zombies continue to shuffle forward, underperforming the market and introducing unhealthy competition to the real economy. The wave of monetary stimulus since the 2008-09 financial crisis has made access to capital historically easy, providing fresh food (cheap debt) to the business model with no future.

Next steps

So, in this uncertain world, how should investors manage the risk posed by these fundamentally doomed companies? As policy decisions drive market performance and prop up failing businesses, investors must carefully assess the characteristics of their holdings to discern the living from the living dead.

First, go big. We believe an overweight to mega- and large-cap firms (Russell Top 200 Index, Russell 1000 Index) will shift equity holdings to a significantly safer neighborhood than the more zombie-populated small-cap universe (Russell 2000 Index) can provide. Certainly, there are plenty of large-cap zombies as well, but the likelihood of being exposed to a failing company is higher in small-caps.

Next, seek runners and fighters. Finding long-term winners in the current environment is a difficult undertaking, but rigorous analysis can help uncover fundamentally good business. For example, maintaining an equity bias toward growth characteristics could help limit zombie exposure. Even within the much-maligned value equity universe, looking for stocks that can grow profitably — by gaining market share or by building brands — often distinguish the runners and the fighters from their doomed peers.

Finally, play offense in fixed income. Yes, fixed income proved to investors in 2020 that credit can, and will, break out of its lower-volatility slumber quickly in response to new information. That said, we’ve seen a remarkable normalization in the level of volatility in fixed income markets, and we see opportunity in investment-grade and preferred securities as an effective means of driving additional risk-adjusted yield. Within high-yield fixed income, zombie risk is best addressed with an active approach that limits potential drawdown risk from zombie surprises.

Within the credit universe, to identify those industries with the highest incidence of zombie companies, we review several criteria including debt interest coverage. When examining this metric within the high-yield market, the consumer-discretionary and energy sectors show the highest prevalence of zombies, while in the investment grade credit space, energy and industrials show the most extensive occurrence of zombies.

By taking steps to minimize the negative impact of zombie companies, investors will be better positioned to navigate financial markets as this exceptional time unfolds.

Todd Jablonski is chief investment officer of Principal Global Asset Allocation at Principal Global Investors.

Investment Strategy In Government Bonds

It is hard to say how much investing in government bonds will help your pension portfolio, but there are some unique benefits for those willing to take their time. Those who invest in individual bonds can often choose between 1 – 2 bond funds or buying in a broker account. If this seems too complex to broaden your investment portfolio, or if you don’t want to use a financial adviser as a guide, there are two other ways to add fixed-income instruments to your investment. Buying bonds in the form of a government bond fund or private equity fund can be a headache, and consulting a qualified asset manager can help you choose the best approach to take now. [Sources: 7, 8, 9, 18]

Like shares, government bonds can be held and sold to other traders on the market. Investors can also buy government bonds on the secondary market from banks and brokers who buy them directly from the government or from a bank or broker in exchange for government bonds. [Sources: 10, 13]

If you need short-term investment grade bonds, you can buy ETFs in the same way as government bonds. You can reduce your risk by combining a government bond portfolio with a portfolio of other high-quality bonds, such as equities or bonds from other countries. [Sources: 7, 17]

If your main strategic objective when taking out bonds is diversification, you can choose an active or passive bond selection strategy. Investors seeking capital preservation and income diversification can simply buy bonds and hold them until maturity. This approach has the potential to lead to long-term investment in government bonds and other high-quality bonds. [Sources: 12, 16]

Since bonds with longer maturities typically have higher interest rates, this strategy involves investing in long-term bonds. Treasury bonds carry the risk that interest rates will rise over time, reducing the value of the bond. [Sources: 1, 11]

For example, if you want to buy a home in 15 years, you can schedule your Treasury bond investments to match the time you expect to need the money. If you choose to capitalize on higher returns by investing more in government bonds, your position as a Treasury bond could be diminished in the future when yields return to normal. This strategy could be considered first for conservative investors – investors who are unsure how to invest but want a predictable plan for working until retirement age. [Sources: 9, 10]

Investors looking for the traditional benefits of bonds can also choose a passive investing strategy that seeks to match the performance of bond indices. This includes buying and holding bonds until maturity or investing in bond funds or portfolios that track bond indices. Diversification is key – if you are only interested in Treasury bonds, you should diversify as much as possible to stay fully invested. An iShares Treasury Bond ETF (ETF) can help investors maintain their exposure to the Treasury bond market. [Sources: 2, 8, 16]

While a passive strategy involves investing in selected bonds, an active strategy requires an individual bond selection to track the performance of the index. [Sources: 12]

Investors looking for a safe investment with high returns would need a minimum investment of £1,000 in return for flexibility. Corporate bonds can be bought on the Retail Bond Platform on the London Stock Exchange. You don’t have to access your money until the bond matures, and the fund is within the FDIC’s $250,000 limit. [Sources: 3, 15]

They can buy Treasury bonds managed by the Federal Reserve Bank of New York, the US Treasury or the Treasury Department of the Secretary of State. [Sources: 1]

For most retail investors, the best way to invest in these bonds is to buy TreasuryDirect bonds or ETF bond funds. While you can buy government bonds directly from the US government, most bonds must be purchased through the Federal Reserve Bank of New York or the Secretary of State’s Treasury. Because government bonds are better valued and represent a safer and safer investment, traders who prefer riskier investment strategies may prefer high-yield bonds to government bonds. Investors who want to diversify their bond holdings may need to take a little more risk to get involved, but forget higher returns. [Sources: 0, 4, 6, 15]

This type of bond is well suited – for purchases – and – holding strategies, because it minimizes the risk associated with embedded options that are included in the bond issue contract and remain with the bonds for life. [Sources: 14]

Buying government bonds typically carries little or no default risk, but when the bond is traded on the open market, it can lose value when interest rates rise above the face value of the bonds. When buying individual bonds, investors want to manage their interest rate risk by diversifying the maturities of their bonds. This strategy involves an investor buying longer-dated bonds rather than medium-term bonds, a financial asset invested in long-term government bonds that are limited by the government’s bond issue contract and its maturity date. We begin by looking at two types of government bonds: sovereign debt and sovereign equity. [Sources: 3, 5, 7, 18]

Sources:

(0): https://www.cmcmarkets.com/en-gb/trading-guides/invest-in-bonds

(1): https://www.fool.com/investing/how-to-invest/bonds/treasury-bonds.aspx

(2): https://www.blackrockblog.com/2020/06/02/trending-now-treasury-etfs/

(3): https://www.asktraders.com/learn-to-trade/stock-trading/how-to-buy-government-bonds/

(4): https://www.wellsfargo.com/goals-investing/investing-types/bonds/

(5): https://buckinghamadvisor.com/you-can-be-too-conservative-051313/

(6): https://investinganswers.com/articles/bonds-101-how-navigate-complex-world-bonds

(7): https://www.bankrate.com/investing/how-to-invest-in-bonds/

(8): https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-investment-strategies

(9): https://www.sdmayer.com/insights/blogs/wealth-management/is-investing-in-government-bonds-a-smart-move-sdm/

(10): https://www.acorns.com/money-basics/investing/long-term-treasury-bonds/

(11): https://www.wiseradvisor.com/article/bond-strategies-for-various-financial-goals-235/

(12): https://saylordotorg.github.io/text_personal-finance/s20-03-bond-strategies.html

(13): https://tendercapital.com/en/what-is-the-difference-between-government-bonds-and-corporate-bonds/

(14): https://www.investopedia.com/articles/bonds/08/bond-portfolio-strategies.asp

(15): https://www.realwealthnetwork.com/learn/safe-investments-with-high-returns/

(16): https://www.pimco.com/en-us/resources/education/everything-you-need-to-know-about-bonds

(17): http://www.dvzcpa.com/investment-strategies.php?item=83&catid=28&cat=Investment%20Basics:%20What%20You%20Should%20Know

(18): https://www.forbes.com/advisor/investing/how-to-buy-bonds/