A Little Good, Much Bad and Some Ugly
Many of the best articles in Barron's aren't the big ones that are featured on the front page, but rather smaller pieces that are hidden within. A great example of this is a piece in this week's issue by Tom Sullivan titled "A Little Good, Much Bad and Some Ugly."
In the piece Sullivan talks about Jim Swanson, the Chief Investment Strategist at MFS Investment Management and his thoughts on the economy and how his company is investing in the current climate. On the recent rally in the markets Swanson states "optimism is premature."
You might as well call me Jim, because the following statement by Mr. Swanson echos what I have been saying in my blog for a while:
Swanson doesn't expect a depression, but he doesn't anticipate a V-shaped recovery - one in which the economy snaps back almost as quickly as it tanked...The U.S. economy "will not grow by 3% [a year] for a long time," he says. Thus, he advises stock and bond investors to put money in the financial markets "in very little parcels."'
I'm a little more pessimistic than Swanson, who expects the economy to bottom in Q4, is...but our thoughts are very similar.
The main statistic that leads him to be skeptical of the rally is interestingly the continued drop in aggregate hours worked in March. Usually hours worked begin to rise when unemployment begins to bottom as companies have more work but hold off on hiring new employees until they are positive that the economy is really getting better. If the unemployment does continue to rise, it is bad news for consumers and consumer spending which still makes up a huge chunk of the U.S. economy..."Disposable income is not going up," said Swanson.
Swanson is really high on junk bonds right now, particularly non-investment grade bonds in sectors like steel and energy, where the assets are plentiful. I am following a similar strategy. When investing in bonds, I look for senior debt of companies that have "stuff" that would be valuable in the unfortunate event that they had to sell some assets to service their debt or even worse file for bankruptcy and liquidate. Of course, as a retail investor it is much easier for me to purchase investment grade (ha, whatever that is because the term relies on the idiotic ratings agencies) bonds in my Schwab account. Investment grade issues are a little more liquid and can be purchased with a few clicks of the mouse rather than having to call a broker on the phone.
Here's what Swanson has to say about corporate bonds right now:
"I love them to death," Swanson says of corporate bonds. During the depths of the Great Depression in 1932-'33, a measly 1.6% of investment-grade bonds defaulted. Currently, yield margins on 10-year corporates average 4 percentage points over comparable Treasuries. The typical spread in good times is around 1 to 1.20 percentage points.
I am convinced that the U.S. will experience very slow growth for a number of years when this recession does finally bottom. As such, I am investing in instruments that will pay me to wait this mess out, like dividend paying common and preferred stock and relatively high yield bonds.