- Martin Sosnoff
Structure A 7% Yield, Live Happily Ever After
In the good old days, 1960’s, I’d run 150% long and curse the FRB chairman when he took away the punch bowl and raised margin requirements from 50% to 90%.
Poor boys can’t get rich, unleveraged. I was on a first name basis with money brokers who let me margin myself 90% on convertible bonds. You got markets-to- marked daily, but so what? Converts in Boeing, Eastern Airlines, and United Airlines took me to the moon, doubling and tripling when the jet age unfolded early sixties.
I have to laugh when Buffett says he’s content with his Bank of America stock position. He backed B of A when they were on their ass in 2009. Providing billions in liquidity in return for a high yield preferred stock with a packet of warrants. Berkshire made billions on this gamble. I bought a bunch of the bank’s $25 preferred stock at 5 bucks, yes! $5 and change. Buying a bank’s preferred stocks at par $25, yielding 5% is a suckers game.
These days, Big Board’s yield is minimal. When totally depressed like in the financial panic of 2009-’10, it yielded 5%, sold at book value and 10 times earnings. Buffett would say there are days when you’re supposed to buy Mr. Market on the cheap.
But Mr. Market currently sells near a 20 times projected earnings power this year with a minimal yield. The sole yield stock group I’m conversant with is Master Limited Partnerships in energy, like Enterprise Product Partners, yielding 7%, a compatible distribution that edges up, annually. EPD is tied to oil futures quotes, methodically, rising or falling with them. Slim pickings in electric utility stocks, which historically approximate a 5% yield, like Duke Energy.
If you can withstand pain, there’s plenty of single B and BB paper with duration no more than 7 years. Few takers here, barring specialist analysts who may have a defined viewpoint that such bonds are money good, that fundamental risk is cyclical rather than terminal. I play in this category if I sense fundamentals can wax better within a year or two. Yields to maturity range up to 7
My Depressed Junk
Company Maturity Price
Ford Motor 6 5/8s of 10/28 101.6
Teva Pharmaceutical 6 3/4s of 3/1/28 99.37
Murphy Oil step up 12/1/42 84
Macy’s 4.5% of 12/15/34 70.75
Spirit Aerosystem 4.6% 6/15/28 81.75
US Steel 6.65% 6/1/37 92
Cleveland Cliffs 6.25% 10/1/40 83.75
Macy’s debentures, at $70, 30 dollars below par, suggest low volatility but, risk is serious. Traders make markets for 500 bonds at a spread no more than a point.
Aside from the financial meltdown of 2008-09. I remember, fondly, the flop of growthies during the recession of 1973-’74, and then again in 2003 when Paul Volcker was hell-bent to rid the country of built-in wage inflation for automobile workers, elevating 7% per annum. Jimmy Hoffa’s thumb print was impressive.
Lemme deal with the 1973-’74 recession triggered by overspeculation in commercial and residential real estate. Currently, the back-up in commercial office space is likewise alarming. Nobody saw it coming that office workers would be working-at-home most of their hours. The conversion from office space to co-op apartments can take years, is costly with mortgage,carrying costs comparably high like in 1973-’74
I remember co-op owners of Big Apple apartments walking away from their commitments because of high monthly maintenance charges.
For me, this spiral for interest rates was particularly pressing. I was in the midst of a hostile takeover of Caesar’s World. Banks and private investors were willing to back me, but the going rate for preferred stock financing was 9%. Yes, 9%. I couldn’t take such a tariff so I folded my hand and walked away.
For the country, wages peaked during the recession of 1973-’74 at 69% of GDP and then worked down to 60% in the financial meltdown of 2009-’10. We are lower now than early postwar years. The tax rate too, for U.S. corporations likewise has trended lower sinse early postwar years. We’re at 30% of late, vs well over 60% during the fifties. Nobody ever mentions such fair weather numbers provided to the corporate world, but it’s reflected in high price-earnings ratios.
Meanwhile, the positive spread, some 50 basis points, between 2-year and 10-year Treasuries seems absurd. The sole rationalization I can imagine is players are betting on looming recession which could drive down 10-year yields, when everyone hides in this paper.
I’ve a loss on my position in 2-Year Treasuries. It’s the old story. You do what appears conservative and then lose their money doing so. The 60–40 pie chart construct for wealthy investors, delivered a minus 16% return last year which nobody had penciled in. At least, my 2-year paper makes me whole in 18 months.
All I’ve lost is opportunity cost.