From Barron’s, December 25, 2023 (Part 2)

[yogibearbull]

Pg 9. PREVIEW & REVIEW (consolidated). Buy-now-pay-later (BNPL) programs are popular with the younger generation. These are offered by PYPL, Afterpay, AFRM, Klarna, Zip Pay. Interest rates are low/zero.

DATA THIS WEEK. Home price index on TUESDAY; Richmond Fed manufacturing survey on WEDNESDAY; weekly jobless claims, wholesale inventories on THURSDAY.

CLOSED. US and many global markets on MONDAY.

www.barrons.com/magazine?mod=BOL_TOPNAV

Data This Week Link,

www.barrons.com/market-data/market-lab?mod=md_subnav#consensus-estimate



BULLISH. Small-caps (BANC, BLMN, DIN, HI, ONEW; SP SC 600 fwd P/E 14 vs SP500 19.4; SP SC 600 is a better index than R2000 that has many unprofitable companies; SCs have been hurt by higher rates and tight credits, but the worst may be over; while the SCs have rallied, many opportunities still remain; pg 11);

Chinese EV maker BYD Company (BYDDY; fwd P/E 13, PEG 0.5; compare with Tesla/TSLA fwd P/E 64, PEG 2; counting plug-in hybrids, BYDDY sells more EVs than TSLA; it has earnings; it’s more diversified, but is mostly in China so far; it lacks in-house autonomous driving but partners with others on that; Chinese EVs face 10% tariff in Europe, 27.5% in the US, and those may go up; other EV companies are struggling – LCID, FSR, PSNY, EV operations of GM, F; pg 19).



BEARISH. Fintech Tellus (private; offers high rate “Boost” accounts backed by real estate loans (including bridge loans, distressed financing, speculative real estate); not a bank or broker, and not under any federal or state banking or securities regulator; has VC backers; tiny unimpressive HQ; started as an app for property management – rentals, ads, tenant communications, now “deposits” and loans; EXTRA).



Pg 20, FUNDS. Hot-hand managers are coming to active equity ETFs (TCAF, QLTY, FBCG, CGDV, DCOR, ARKK, etc). There is a flood of active ETFs with 240 new YTD. Much of the growth has been for active equity ETFs after the SEC approved several models a few years ago. The ETF wrapper offers tax-efficiency due to its in-kind creation/redemption. However, most indexes (broad or customized/special) also tend to be tax-efficient. So, active managers have headwinds vs indexes. The active ETFs may have significant differences from their OEF cousins even when both are run by the same team(s) – the ETFs may have fewer stocks or use fewer portfolio strategies. Active ETFs may be only a bit cheaper than their OEF cousins.



Pg 22, FUNDS. davidsherman (58) uses value strategies for short-duration (0.75-2 years) HY bond fund CBLDX (ER 0.91%). He also looks for event-driven opportunities – early redemptions, change in control, selloffs following disasters, etc. He expects the yield-curve to normalize in 2024.



Pg 23, INCOME. Higher rates came and went. But bond funds with short/intermediate duration offer high current rates and will benefit from rate declines. Barbell strategies are also good. Mentioned are OEFs STYAX, VMBSX; ETFs AGG, TOTL, PSK (preferreds); CEF PMM (muni).



Pg 25, ECONOMY. FUNDS. Boring won in 2023. This skinny bull driven by Magnificent 7 did wonders for index funds. So, investors who didn’t do much deep analyses and just dumped some money into the SP500 or total market index did well. The SP500 index funds are now 10.7% of the fund universe, the total stock market 6.8%, with both accounting for 17.5% vs 8.76% in 2013. Very interesting considering that the 1st retail SP500 fund in 1976 (Vanguard) was a flop – it raised only $11.3 million in its initial period vs $150 million expected; it could afford only 280/500 stocks; Vanguard total market index fund followed in 1992 and many TDFs hold it. How has the tide turned from the humble beginnings? The SP500 index funds with only 2-4 bps ERs are formidable benchmarks to beat.



Pg 24, TECH TRADER. A lesser-known AI play is Synopsys/SNPS (fwd P/E 40), the largest provider of electronic design automation (EDA) software used to design semi chips. The latest twist is the design of AI-chips. New CEO Sassine GHAZI starts on 1/1/24 (was COO); the founder and current CEP moves to Executive Chairman. It partnered with MSFT for Synopsys.ai Copilot. The competition is CDNS and Siemens EDA. This industry operates with long-term R&D contracts and is insulated from cyclical semi production and sales.



Pg 26, Q&A. Joel TILLINGHAST, Fidelity Small/Mid-Cap FLPSX (almost global). He has managed the Fund since its 1989 inception. Considering the regime shifts going on (inflation, taxes, regulation, energy transition, AI, etc), this market is too calm and cheerful, almost like 1999-2000. He likes to see steady and predictable cash flows. Investors may have an edge on small/mid-caps as they are less followed by analysts and institutions. Indexing is very popular now, but active managers will do fine in the long-term. Peter LYNCH taught him to be flexible when things/facts change; to accept errors and move on. He is retiring in 2023, leaving FLPSX in good hands (PECK, CHAMOVITZ), and will devote more time to mentoring, traveling, gardening, and book writing. Previous book, Big Money Thinks Small, 2020.



Pg 54, OTHER VOICES. Matt PETERSON, Barron’s Staff. Disruption of the Suez-Red-Sea shipping corridor has raised global oil prices. But US oil production is keeping things under control. While OPEC has been cutting production, the US producers ramped up production to 13.2 million barrels/day as oil prices rose (and not because the Administration or politicians wanted that). Globally, OPEC now accounts for 51% of global oil production. Oil has also continued to flow despite Western sanctions; the price-cap was an ingenious exception devised to limit the negative effects of its own sanctions.



EXTRA, RETIREMENT. The good news is that Social Security payments will rise +3.2% in 2024 (old news), but the bad news is that it won’t be enough due to high inflation. Although inflation has moderated, that doesn’t mean lower prices. Significantly up are auto insurance, rents, medical care, Medicare Part B Premium. Almost 20% of 65+ are still working.



NOTE. It’s very irritating that Barron’s has stopped mentioning TICKERS for most companies mentioned. I now have to look them up. Sometimes this takes time as there are similar names, especially for banks.



(EXTRAS from online Friday that didn’t make the weekend paper version)

See Column Topics. It seems some consolidation/rearrangement of Columns is going on.

None

LINK

[chang]

“He expects the yield-curve to normalize in 2024.” [ davidsherman ]

Meaning ST yields will fall (prices rise)? Or LT yields will rise (prices fall)?

I’ve resisted going long while the yield curve is inverted. Max ~ 5yrs duration for me. (Also why I prefer active mgmt.)

[Chahta]

Pg 23 Income: Actually bonds have had an amazing year, considering. Over 7% is common and some at 11% TR. I admittedly bought early, last year, but have been rewarded.

[Chahta]

Dec 23, 2023 12:25:36 GMT chang said:

“He expects the yield-curve to normalize in 2024.” [ davidsherman ]

Meaning ST yields will fall (prices rise)? Or LT yields will rise (prices fall)?

I’ve resisted going long while the yield curve is inverted. Max ~ 5yrs duration for me. (Also why I prefer active mgmt.)

I believe inversion is due mostly to ST rising above LT due to fear of rising rates.

[Capital]

yogibearbull, thank you!

[yogibearbull]

Sherman has been tagged.

IMO, he thinks that yield-curve normalization would be mostly from rate cuts and the longer-term bonds would benefit more from that. But because CBLDX is a short-duration HY, and he doesn't bet on rate direction or macro picture, he is keeping very high cash (28% by Barron's, 23% by M*) on hand for "opportunities". I think he answered the question because he was asked, but then isn't going with his thought in this fund for now.

[steadyeddy]

Thanks yogibearbull - these weekly posts are so informative and provide a perspective on what the prevailing viewpoints are.

Appreciate your diligence and commitment in posting these!

[win1177]

Thanks Yogi for both Part 1 and Part 2!

Win

[davidsherman]

I did not specify how the yield curve would revert to normalization.  Short rates could go down, long rates could go up, or both rates could move.  The Fed dot plot would indicate 3 cuts.  The market is indicating 6 cuts.  Powell probably wants limited cuts but other Fed doves want more cuts and he wants a governance of consensus as opposed to split (especially as we head into an election cycle).  If we get many cuts ... what does that imply?  If we get few cuts ... what does that imply?  Regardless, I stick with my volatility statement and bottom up value investing.

PEOPLE GET READY
youtu.be/UG-KNy1MRTc

[steadyeddy]

Rate cut cycle that happens right after rate hike cycle (particularly a ferocious one like what we just had) can NOT be good for stocks - coz economy is about to dive. Would it go into a recession? who knows... no one does.

[Chahta]

Dec 24, 2023 17:11:33 GMT davidsherman said:

I did not specify how the yield curve would revert to normalization.  Short rates could go down, long rates could go up, or both rates could move.  The Fed dot plot would indicate 3 cuts.  The market is indicating 6 cuts.  Powell probably wants limited cuts but other Fed doves want more cuts and he wants a governance of consensus as opposed to split (especially as we head into an election cycle).  If we get many cuts ... what does that imply?  If we get few cuts ... what does that imply?  Regardless, I stick with my volatility statement and bottom up value investing.

PEOPLE GET READY
youtu.be/UG-KNy1MRTc

I am more curious how you will handle CBLDX and RSIIX. Will you add duration to either?

Interesting Barron's calls CBLDX what it is, SDHY. M* says multisector.

[yogibearbull]

M* classifications are based on what it finds, not what the fund or others say. So, CBLDX has "HY" in its name, but M* puts it in multisector bonds (not enough junk for M*). RSIIX has "Strategic" in its name (as many multisector bond funds do), but M* puts it in HY (lots of junk for M*).

For M*, HY has 65%+ in junk or not-rated, and multisector has a mix with junk or not-rated between 35-65%.

[davidsherman]

I have given up figuring out Morningstar; especially be cause some of their profile facts on our firm are consistently wrong but our correction seesms to fall on deaf ears.  I believe CBLDX is in multi-sector because the portfolio owns a diverse group of holdings with below 80% high yield and tends to be 65% for some time.  We have considered changing the name to High Income from High Yield which may be better messaging - only time will tell on the decision.  As for RSIIX, it has the tactical flexibility between high yield and investment grade; there are times in the history of RSIIX that it had significant iG focus.  That said, RSIIX is generally a "closet" high yield fund and should be in the high yield category as a defensive fund in the category.

[anitya]

Dec 25, 2023 18:32:51 GMT davidsherman said:

davidsherman , 

M* has its idiosyncrasies (to be polite).  You are better off not spending your time trying to make them see your POV.

For years after Jeffrey Gundlach started Doubleline, M* was very unkind to DBLTX, notwithstanding Doubleline trying to work with M* to get their point across.

Thanks.