Broken Pie Chart

Marcel Benjamin, Fixed Income Strategist with State Street Global Advisors SPDR ETF Fixed Income Group, joins to present a deep dive into the High Yield Fixed Income space. What makes a bond part of high yield? What are the risks with High Yield Bonds? How do the ratings differ across the spectrum? Plus, what makes a company a "Zombie Company"?

• • US What does it mean to be considered high yield?
• • Differences in companies who go from BBB to Junk.
• • CCC vs BB
• • Size of high yield market
• • Size of high yield market by rating
• • Risk of defaults historically
• • Defaults 2008 vs 2020/21 so far
• • Spreads widening vs narrowing.
• • Short duration high yield vs longer duration
• • Implied risk of default by yield spread.
• • Historical recovery rates
• • Brief explanation of default process for bonds

• • Zombie Companies

• • What are they (i.e., 3 years Operating Earnings
• • Interest coverage ratios

• • % of companies now vs historical considered zombies
• • How companies may recycle and roll debt upon maturity

Mentioned in this Episode:

Information on State Street Global Advisors SPDR fixed income products https://www.ssga.com/us/en/intermediary/etfs/capabilities/simplify-investing-with-fixed-income-etfs/sdpr-fixed-income-etfs

CCC High Yield Spread from Federal Reserve Bank of St. Louis (FRED) https://fred.stlouisfed.org/series/BAMLH0A3HYC

High Yield Spread from Federal Reserve Bank of St. Louis (FRED) https://fred.stlouisfed.org/series/BAMLH0A0HYM2

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Spencer Wright from Halbert Wealth is back on the program to engage in a discussion around what makes up the Federal Budget. How much does all this cost and where do revenues come from? Plus, some thoughts around why MMT or Modern Monetary Theory may never work despite some economists' best intentions.

US Federal Budget Items

What does the US government spend money on?

What is the net interest payments on the national debt?

Where does the revenue come from?

Comparing US government tax revenue collected across high and low tax rates.

Overview of MMT or Modern Monetary Theory

Reflect on our attempt to predict the US 2020 Presidential Election

Maybe the Keys to the Whitehouse were correct after all?

How wide is the US federal budget deficit?

Mentioned in this Episode:

JP Morgan Guide to the Markets (check out slides around page 27 for what we were looking at) https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

US Treasury Direct Average Interest Rates on US Treasuries Issued March 2021 report https://www.treasurydirect.gov/govt/rates/avg/2021/2021_03.htm

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Recently I looked up Google Trends to see how terms like inflation and stock market bubble were doing? They have been popular which means people are searching for them. Is this contrarian? How to play armchair stock market valuation game by looking at expected earnings. US Treasuries had the worst quarter performance since 1980 and third worst since 1830. GDP growth according to Goldman Sachs will be 8%. Is that inflationary?

Goldman Sachs says 2021 GDP growth will be 8%

Does this point to higher inflation or just a regaining of the previous trend?

US Treasuries issued in 1812 to fund the War of 1812.

US Treasuries performance worst since 1980 and third worst going back to 1830.

Share buybacks plus Dividends equal total return of capital to shareholders.

Estimating the intrinsic value of the stock market using earnings expectations

Google Trends highlight popularity of investment search terms like inflation and market bubble.

Real GDP accounts for inflation

Mentioned in this Episode:

Hussman article on the option value of cash due to market expectations https://www.hussmanfunds.com/comment/mc201201/

Professor Aswath Damodaran S&P 500 valuation model using earnings estimates https://twitter.com/AswathDamodaran/status/1345461746622898176

Podcast episode where we talk about hedged equity and valuation timing https://directory.libsyn.com/episode/index/show/brokenpiechart/id/18495611

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Recently John Hussman put out a piece that the expected value of a 60/30/10 stock and bond portfolio over the next 12 years would be -5%. Future projections can be wrong or right, but what he explained that the option value of cash or a hedged equity approach may be more suited. So how does hedged equity play into this? How Deal or No Deal game show explains the expected value calculation. And why bonds with low rates and risk of rising rates might present challenges in the typical 60/40 portfolio.

How to Calculate expected value

Deal or No Deal Example on expected value

Exploring Hussman's option value of cash

Expected returns based on valuation.

60/40 stock and bond portfolio vs hedged equity approach

Container shipping revolutionized trade like the internet?

Stuck container ship causing global trade snafu.

Real returns on bonds after inflation

Mentioned in this Episode:

Hussman article on the option value of cash due to market expectations https://www.hussmanfunds.com/comment/mc201201/

The Box book on Container Shipping by Marc Levinson https://amzn.to/3dcx8jO

Buy and Hedge Book https://amzn.to/31kXXfV

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Watch CNBC for more than 5 minutes and you are bound to hear discussion around is inflation coming? Are rising interest rates going to sink the stock market? But what has the stock market done historically during periods of rising rates? You might be surprised to find out. Take a look back at S&P 500 Returns in rising rate environments, rising inflation, rising unemployment, and more.

Once again, worries about the stock market led us to a Hedged Equity Strategy

How have stock markets performed during rising rate environments?

How have markets done during rising inflation?

Is this time different with the recent rise in rates?

Looking at historical market returns over cycles.

Surprising that during late seventies GDP grew and President Carter had average annualized growth in stocks.

Markets climbing the wall of worry.

Risk heightened in bonds due to record low interest rates.

Comparing bonds in 1970's with high coupon rates to today

Mentioned in this Episode:

Risk for bonds with lower and rising interest rate environments https://directory.libsyn.com/episode/index/show/brokenpiechart/id/18089738

Numbers show stock markets have done ok during rising rate environments historically https://zegafinancial.com/blog/historically-markets-have-done-pretty-good-in-periods-of-rising-rates

Stagflation explained and data on CPI inflation, unemployment, and GDP growth 1965-1985 https://zegafinancial.com/blog/historically-markets-have-done-pretty-good-in-periods-of-rising-rates

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Recently financial news media mentioned that bearish short bets against the US Dollar were the highest since 2011. But what is the dollar index and is it the best measure? What is the Trade Weighted US Dollar Index? What is the good and bad of a strong vs week US Dollar?

US Dollar Index

Trade Weighted US Dollar Index

Pros and Cons Strong Dollar

Pros and Cons Week Dollar

Short US Dollar position reaches highest level in a decade.

US Dollar and commodities

How to figure out how many US dollars needed to exchange.

Exchanging foreign currency into US dollars.

US Dollar and Interest Rates

Global US Companies benefit from weaker dollar

Mentioned in this Episode:

Current Weights in US Trade Weighted Dollar Index https://www.federalreserve.gov/releases/h10/weights/default.htm

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Interest rates made a historic move higher last week as the treasury bond market sold off. But is this spike in interest rates previewing a higher move in inflation in the short term? What are breakeven inflation rates saying? Is the FED owning 30% of the TIPS bond market skewing inflation expectations?

What is duration risk in bond portfolios?

How does lower rates extend duration risk in bonds?

Investor expectation of annual returns equal to the current yield to maturity?

2018 when both stocks and bonds via the US Aggregate Total Return Index were negative.

Fed has purchased 30% of the TIPS Treasury Inflation Protected Bond Market

2nd highest precent change in 5-year treasury yields back to 1962.

CPI Consumer Price Index

Weighting of the CPI index components

COVID-19 impact on consumer prices and inflation

5-year breakeven rate inverted with the 10-year breakeven rate

YTD bond funds down even on a total return basis

Mentioned in this Episode:

How do TIPS Treasury Inflation Protected Securities Work? https://brokenpiechart.libsyn.com/fed-buying-which-etfs-and-bonds-how-do-tips-treasury-inflation-protected-bonds-work

CPI Consumer Price Index release for January 2021 https://www.bls.gov/news.release/cpi.nr0.htm

Understanding TIPS bonds https://www.pimco.com/en-us/resources/education/understanding-treasury-inflation-protected-securities/

Explaining negative yielding bonds https://podcasts.apple.com/us/podcast/wacky-negative-yielding-bonds-need-for-alternative/id1432836154?i=1000442461907

Real returns vs nominal returns above inflation https://podcasts.apple.com/us/podcast/importance-real-returns-above-inflation-how-to-calculate/id1432836154?i=1000440384756

Myths of the 60/40 stock/bond portfolio https://podcasts.apple.com/us/podcast/discussing-myths-around-the-classic-60-40-portfolio-part-i/id1432836154?i=1000434346248

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

Bonds prices are a function of current interest rates compared to their present value of cash flows and return of capital (baring defaults) at maturity. So, with interest rates so low around the world, is this a period of higher risk in bonds (fixed income)? How much more sensitivity to interest rate changes do we currently see in the sector? How do callable bonds mute the positive effects of reductions in market rate of interest? How does the US Aggregate Bond Index compare to the Global Ex-US Aggregate Bond Index from a yield and duration risk comparison? Derek Moore discusses these and other aspects of evaluating risk in bonds due to changes in interest rates.

What is duration risk in bond portfolios?

Comparing duration and yields between US Aggregate Bond Index and Global World EX-US Aggregate Bond Index?

Negative yield to maturity bonds in Europe and Japan

How does lower rates extend duration risk in bonds?

How do callable bonds potentially mute upside market move in bonds when rates fall?

Bonds market value a combination of present value of cash flows (interest payments) and return of capital at maturity

What are call provisions on corporate bonds?

Investor expectation of annual returns equal to the current yield to maturity?

2018 when both stocks and bonds via the US Aggregate Total Return Index were negative

Mentioned in this Episode:

Short Selling Terms Explained through Tesla https://podcasts.apple.com/us/podcast/short-selling-explained-tesla-short-interest-short/id1432836154?i=1000463711042

Explaining negative yielding bonds https://podcasts.apple.com/us/podcast/wacky-negative-yielding-bonds-need-for-alternative/id1432836154?i=1000442461907

Real returns vs nominal returns above inflation https://podcasts.apple.com/us/podcast/importance-real-returns-above-inflation-how-to-calculate/id1432836154?i=1000440384756

Myths of the 60/40 stock/bond portfolio https://podcasts.apple.com/us/podcast/discussing-myths-around-the-classic-60-40-portfolio-part-i/id1432836154?i=1000434346248

Derek Moore's book Broken Pie Chart https://www.amazon.com/Broken-Pie-Chart-Investment-Portfolio/dp/1787435547/ref=sr_1_1?keywords=broken+pie+chart&qid=1558722226&s=books&sr=1-1-catcorr

Contact Derek www.razorwealth.com

This week Jay Pestrichelli and Derek Moore are back to discuss whether Bitcoin or Gold are good hedges. What the appeal of cryptocurrencies are? How just being long the market while have a hedged floor in the portfolio allows investors to be in the historically best inflation adjusted return asset.

Appeal of Bitcoin

How Inflation is hurting the dollar's purchasing power

Gold as an inflation hedge

Golds real return might be less than people think.

Aren't bitcoin transactions all recorded via blockchain anyway?

Stocks for the long run

Stocks real return, after inflation, higher than gold or bonds

Portfolio hedging for retirees and near retirees.

Advice on size of potential cryptocurrencies

Mentioned in this Episode:

Gamestop Short Squeeze Wall Street Bets Explained https://directory.libsyn.com/episode/index/show/brokenpiechart/id/17756252

Derek's book Broken Pie Chart on Amazon https://amzn.to/2ZbRrXT

Jay Pestrichelli's book Buy and Hedge https://amzn.to/3jLHxG8

Contact Derek www.razorwealth.com

This week we follow up on or episode last week covering what the Gamestop short squeeze was all about. Are hedge funds naked shorting stocks? How margin accounts cause risk to brokerage firms like Robinhood. Why didn't Gamestop do a secondary offering selling shares when the price was high? Why short sellers don't ruin companies outright.

Naked Short Selling

Failure to Deliver Shares Reports FTD

Short Interest Reports

Secondary equity stock offerings

AMC convertible debt into shares

How margin accounts work and raise firm risk

How short sellers (or short squeezes) do and don't affect the underlying companies

Synthetic short positions using options.

Mentioned in this Episode:

Gamestop Short Squeeze Wall Street Bets Explained https://directory.libsyn.com/episode/index/show/brokenpiechart/id/17756252

SEC Failure to Deliver Report https://www.sec.gov/data/foiadocsfailsdatahtm

Why Gamestop couldn't do secondary offering at the high stock prices https://www.fool.com/investing/2021/02/05/why-gamestop-couldnt-take-this-golden-opportunity/

Explaining Delta and Gamma Options Squeeze Robinhood vs Softbank Whale https://brokenpiechart.libsyn.com/robinhood-option-traders-vs-the-softbank-whale

Contact Derek www.razorwealth.com