Bond Ladder

Bond Ladder

 

 

The Bond Ladder has recently emerged as the hottest trade on Wall Street. Laddering bonds is both elegant and efficient; investors parcel out their cash via "steps," or purchases, of certain denomination & maturity bonds which yield a certain annual rate. These "steps" form the proverbial rungs of the Bond Ladder. As rates steadily rise, the investor is locking in that higher rate with each new rung.

This strategy is particularly effective in a rising interest rate environment. With a Bond Ladder, the investor is frequently rolling cash into new bonds at higher rates. So for example, using a $120,000 cash position to build a bond ladder an investor could buy Treasury Bills now yielding over 5% at multiple maturities. In this instance, an investor could buy twelve (12) $10,000 Treasury Bill positions maturing each month for the next year. Every month that $10,000 would come due, and the investor could roll those funds into new, and possibly higher paying, Treasury Bills.

 

With the Federal Reserve hellbent on breaking the back of rampant inflation in the United States, it seems highly probable. In fact, Greenlight Capital's David Einhorn suggests investors should be "Bearish on stocks and Bullish on inflation." Meaning? He suspects that the Federal Reserve will raise rates higher than the existing consensus of 4.50-4.75%.

 

 

 

With Treasury Bills yielding over 5% now, this should be a concern for investors as selling rates are exceeding predicted rates, ie Einhorn is probably correct assuming the Fed raises again in March. There's an old axiom on Wall Street: "Don't fight the Fed." For those investors looking to preserve a portion of their capital, and earn a "riskfree" rate of return, a Bond Ladder here might make sense. 

 

Covered Calls

Covered Calls

Similar to the legendary Rodney Dangerfield, Covered Calls don't "get no respect!" Although investors should always consult with their advisor, the Covered Call Investment Strategy has many appealing components, and may offer advantages to the classic "Buy-and-Hold" philosophy hammered into the psyche of the public by index fund providers. Indeed, much like Rodney Dangerfield, investors may come to love this strategy.

First let's have "the talk." If you are investing in the stock market it is by its very nature speculation, and as 2022 clearly demonstrated, it can be EXTREMELY volatile. Volatility is ten-letter word for "risk" or "loss" or "sleepless night" or "anxiety." Basically the opposite of a Bull Market, which can be summarized also with a single word: euphoria. 

 

Investors need to internalize the FACT that holdings in the stock market can and do fluctuate, and a "linear return" is fallacy in the short-term. On any given day, the markets can swing in multiple percentages up & down. As 2022 taught us, these downward trends can be sustained for months. For those old enough to remember to the 1970s, with the wrong economic policies these trends can be sustained for YEARS. That's the bad news.

Now on to the good news. Given that there are a limited number of places to put your hard-earned money in life (gold, stocks, bonds, real estate, and business ownership come to mind) there is a good chance some or most of your liquid assets will be held in the stock market.

 

Without diving too deeply into "the history of Wall Street," the stock market offers (generally) almost daily liquidity, established exchanges, and highly-regulated firms. All the major governments of the world are immersed in the global stock exchanges. So with that said, there is a reasonably good chance that owning a basket of stocks over time will turn out well.

As a Portfolio Manager (PM), my job is to select those securities which I have studied and researched which I believe with a high-level of confidence offer a solid rate of return for my clients. From a mechanical perspective, I also want to add a couple layers of additional protection. One, as frequently discussed on this blog, are dividends.

 

Dividends are cash payments companies make to their shareholders typically on a quarterly basis. It is a reminder to corporations as to who they work for, ie you. It also, obviously, a return on investment for the shareholder doled out at recurring intervals. Timing is notoriously tricky, but I believe it is better to get returns drizzled out over time than pray for a rainstorm.

Second, let's start embracing Covered Calls. Covered Calls are Call Options written (sold) on existing stock positions. These contracts are traded on similar hours as the underlying stocks themselves. Each Call Contract represents 100 shares of the underlying stock. So for example, if you own 1,000 shares of XYZ, then you could write up to 10 contracts on that position.

 

Part of the Portfolio Manager's job is to determine the likely TIME and LENGTH of that Covered Call. That is extremely challenging. It is often the confluence of volumes of data, and of course greed. How much do we think the stock will go up over a certain amount of time? Are we more concerned about losing the stock or leaving money on the table? How much is the premium paying? What is the likelihood of expiration without losing the stock?

A LOT of variables go into deciding the best course of action, and a lot depends on the client's goals. Ultimately, investing boils down to cash flow. Covered Calls are unique in the investing world in that you are paid UP FRONT for the premium on a contract in the future. Investors know with certainty how much they will be paid the moment the contract is sold. Cash from a Covered Call sale is deposited into investors' brokerage account instantly. And to segue to the third layer (first dividends, second Covered Calls),  that premium cash can then earn additional interest in very nice 5% Treasury Bills currently.

The art & science of Covered Calls is tricky, and like most things in life experience is probably the best teacher. One would think the primary goal is to maximize the premium return without getting the stock called away, but that is not always the case. There are also times where the stock WILL get called away by buyers who want to capture the dividend from investors. The biggest challenge for the PM starts with "the talk."

What is the client's annual return needs vs. wants vs. probability of accomplishing that goal? Is a $30K annual withdrawal on a $500K account reasonable? What is the implied risk? Can a client mentally forgo additional alpha if XYZ stock was purchased at $125 with Covered Calls written at $150 and the stock subsequently spikes to $175? Or like 2022, clients have a low cost basis and have been raking in dividends, premiums, and capital appreciation for years and suddenly find themselves down 15%, 20%, 25%. What then? This is why "the talk" is so important.

In summary, if you're on board with actively investing in the stock market I believe utilizing a Covered Call strategy makes sense for a lot of reasons; from security selection, cash flow certainty, hedging and tax-loss harvesting to name a few.

 

One of the greatest challenges, and one humans throughout time have been really, really bad at, is moderating greed. Adding layers of risk protection goes out the window the moment we say: "Well I'm gonna close out that contract and hold the stock now because it just keeps going higher. I don't want to miss out!" Letting hedges lapse is dangerous business.

By definition, employing a Covered Call strategy almost always involves getting some positions called away. That is the nature of the beast. But if 2022 taught us anything, it is that markets are inherently volatile and in any given year long-term investors can be subjected to gut-wrenching selloffs. I like having three (3) layers of added protection when investing in the stock market, that's probably why they call me "Mr. Covered Call!" If this strategy sounds appealing to you we should talk.

 

 

 

5% T-Bills

5% T-Bills

Warren Buffett once quipped that "5% interest rates draw money from the moon." Well dear readers, we are nearly there. Today 6-month Treasury Bills due on 6 July '23 sold for a yield of 4.82%. With the economy in shambles, record inflation, and Big Tech laying people off as fast as they can email, this "risk free" asset, has surged in popularity sucking growth capital out of the economy like a vampire squid.

Yes, you are probably losing more in terms of "real interest" due to inflation than gaining on T-Bill rates, but at least you don't suffer the double indignation of seeing BOTH your buying power AND balance going down daily like the stock market. The popularity of a similar bond, the I-Bond, is such that if a proposed program to expand the existing cap from $10K to $100K passes it would most likely cause the stock market to crash. What is a Treasury Bill anyway?

Treasury Bills were spawned at the close of "The Great War." They are lasting relics of World War I's Liberty Bonds which were needed to finance America's war efforts. Because the country didn't have enough money to pay back all the Liberty bondholders, the Federal Government got the idea of rolling those bonds into NEW bonds. These new bonds became modern day Treasury Bills (up to 52 weeks in duration, with established auction cycles and a defined bidding process.)

The new auction and rolling approach would ladder out the debt. And we sure have a boatload of debt. $31,000,000,000,000 of it at the Federal Level. By the time you are done reading this blog post, another $3M dollars in interest will have accrued to our National Debt.

 

Back to Basics

Back to Basics

When all else fails, investors can always go back to basics; own dividend-paying monopolies with powerful, lasting brands across multiple sectors. Save regularly, or better yet religiously, and also keep a healthy stash of seed capital in risk-free U.S. Treasury Bills earning that juicy ~5% interest.

This Bear Market will end as every other bear market ended, when, however is unknown. Some clues will be that the Federal Reserve stops hiking rates, inflation stabilizes or falls, and/or an increasing number of stocks begin to hit new 52-week highs.

The latter point is almost always a sign we have exited a Bear Market. So for those weary investors beaten to a pulp by bad economic policy and the Fed tightening the screws on you, hang in there. Continue to build positions and keep an eye out for the end of the bear. Until then, it is back to basics and avoid the Risk of Ruin.

 

Shearing Sheeple

Shearing Sheeple

This isn't a Christmas story for the faint of heart. As the First Family disembarked from Air Force One, the gaggle of 15+ leisurely made their way to a billionaire's residence for the holidays. Though much of the country was "sheltering in place" due to a massive Arctic Bomb, the Bidens slipped off their loafers and Manolo Blahniks into flip-flops. Something, however, just wasn't kosher in the America north of St. Croix.

Yes inflation was raging and the stock market had suffered a Barrackian year; its worst performance since the elder statesman's jefe began his reign in 2008. But that wasn't it. Only capitalist pigs bought companies! Far better to extract value via a Labor Union. Invent something? Everything has already been invented! Yes crime was surging in every major urban area, but that didn't matter. "Hold your tongue and count your blessings," admonished the High Septon. No it was something else. 

Gas at $5? What a deal! That couldn't be it. 10,000+ new *friends* joining our country illegally EVERY DAY? How dare you criticize someone committing an illegal activity! Americans don't want those jobs anyway, especially not American teenagers who have to compete with adults lacking documentation. What is documentation anyway? Paper! The theft of resources at scale only hurts the rich anyways. No, it was a peculiar buzzing sound. Bzzz. Bzzz. Bzzz.

The noise reverberated through the night. A buzzing electric sound constant in application and thorough in design. Why it was the shearing of sheeple! Taxpaying citizens lined up in seemingly endless rows having their hard-earned wool being sheared off their backs during the peak of winter. Brrrr it was cold out there! Many sheeple were shaking. What a foolish thing to shear so deeply, but those in absolute power told us: "ALL must pay their fair shear."

So on it went day after day, until the sheeple had given all that there was to give; here, there, everywhere piles of wool lay. Much was burned to keep the shearers themselves comfortably warm, less THEY too feel the cold. Being in the Shearer's Union meant never being cold. Aye, but they left many sheeple naught enough wool to harbor in the storm! No matter, the rows were endlessly long. There would always be sheeple to shear.

Boy was it hot in St. Croix! Even staying free can be troublesome, now the dear leader would have to grant his favor on some billionaire friend. What a labor of love this job was! Along the boardwalk he pandered around, his crusty feet full of golden sands. Laughter was heard all around, how they had gotten away with it all! Joy was theirs! And if they had gotten this far, why what could be next?

On a silver tray produced was a 4,000 page Omnibus Bill flown fresh in from America to the north totaling $1,650,000,000,000. Why it was even MORE than he asked for! Would the blessings ever end? And even here, far away from America to the north, the sound could be faintly heard. Bzzzz. Bzzzzz. Bzzzzz.

Investors beware, to what you value hold dear! The shears are out and your wool will soon be theirs. Protest and mutton you may become. The tide has turned and socialism is here. America has become a welfare state with open borders. What could possibly go wrong?

 

Speed Brake

Speed Brake

If ever there was a speed brake on the economy, it is the ironically titled "American Rescue Plan." The keystone language in this travesty of a Bill is the issuance of 1099-Ks for "transactions totaling a cumulative of $600 per year." Think about this for a moment. What better way to kill small business, prevent new business, and ramp up the police state than searching for needles in the haystack? Meanwhile, the barn door is wide open out back with government spending giving drunken sailors a good name.

Similar to the laughingly false "Inflation Reduction Act," which promises to reduce inflation by spending more, the "American Rescue Plan" aims to HELP Americans by raising their taxes, lowering taxable thresholds, and adding 87,000 more enforcement agents to "help" them. Cue up the Ronald Reagan quote of the nine most dangerous words in the English language: "I'm from the Government, and I'm here to help."

Let's get serious people! As readers of this blog well know, we are big believers in the Laffer Curve. This economic principle illustrates that there is a strong relationship between taxation and tax returns. As so elegantly illustrated above, when you squeeze the lemon too much you don't get more juice. In fact, you get less juice.

Consider for a moment the contribution of Small Business to the American Economy. Small Businesses account for two-thirds of new jobs and half of all existing jobs. The Small Business sector generates almost HALF of this country's GDP.  So what happens when the jackboot of government is on the throat of Small Business? Well, nothing good happens. Productivity crashes. Output contracts. The lemon shrivels up.

There is little doubt this has been a coordinated effort to reallocate capital. Congressional bills don't write themselves. They are typically written by lobbyists paid by special interests. So if Small Businesses are the losers, who are the winners? Winners would be those who typically don't need or have a Small Business or side hustle. They would be those with local, State, and Federal government jobs, labor unions, and big business executives. Collectively 15% of the population will seemingly reap significant benefits from the other 85%, but there is a flip side to this coin.

To have Government welfare programs and an expansive state, it is first necessary to have a thriving economy. Not many people know JFK passed some of the largest tax cuts in American history. He knew that a thriving economy is based on a free-market with light regulation. Light regulation does not mean no regulation, ie bad actors like Samuel Bank-Fried and the beneficiaries of his largess need to be held to account. The French coined this approach best with the term "Laissez-Faire."

What is an investor to do? Until there is a regime change, investors not plugged into the political gravy train need to stay in their foxholes; consider dividend paying large companies with monopolistic pricing power and brand recognition. If their products are vital or addictive, so much the better. The landscape for startups is barren as the moon, never mind Mars. Raising capital in an increasing interest rate environments during a recession is pointless. Cash in this environment sits in risk-free Treasury Bills.

When the Laffer Curve is ignored, or even mocked, and a turn is taken into a socialist regime then the capitalist must look for safety, income, and muted growth until an opportunity emerges to make a move into pro-growth, low-tax, and economically sound policy. It might be a while.

 

 

Zero Legitimacy

Zero Legitimacy

There is zero legitimacy in the House Financial Services Committee after Maxine Waters refused to subpoena Democrat mega-donor Samuel Bankman-Fried, the disgraced formed FTX CEO responsible for the bankruptcy of the $32B company.

Thankfully, Waters will lose her chairmanship when Republicans take control of the House on Jan. 3rd. Waters' decision is long on a list of malfeasance heaped on the American people over the past several years giving rise to the widespread belief that there is rampant corruption inside the halls of Congress and weaponization of the executive branch under Joe Biden against political opponents.

The primal victim of the failure of political leadership has been the citizens of the United States who no longer have faith in the leaders to duly execute their oaths of office; these shenanigans have resulted in serious damage to the rule of law, First Amendment rights, and the value of citizenship itself.

A fine example of this is the attempted deplatforming of this blog! After several articles critical of rampant corruption, previous traffic pattern of several thousand views per day were blocked and views trickled to a handful of views. 

The biggest challenge is speaking the truth in today's society without getting canceled. And getting canceled is easy business when "misleading content" policy basically involves anything tech monopolies find contradicts the narrative being pushed by screening committees. Eisenhower long warned us of the military-industrial complex. Here it is in full fruition:

So we have reached a great rubicon in our country; will tech monopolies dictate what is "misleading" or will elected representatives push back and do their jobs? It doesn't look good for the latter, as tech has lots and lots and lots of money to lobby. Who is lobbying for you? 

 

The War on Small Business

The War on Small Business

Kurt Vonnegut once quipped that: "The two real political parties in America are the Winners and the Losers." With the Small Business Index at 62.1, the lowest since the pandemic, which itself was the lowest in a generation, small business owners are the losers. Given that small businesses create two-thirds of new jobs and deliver 43.5% of the United States GDP this is a BIG problem. But your elected leaders don't care. Why? Because small businesses do not have the clout to influence political change.

Case in point, why would a Veteran-owned small business like mine have to pay 50X (you read that correctly, FIFTY times) the Blue Shield healthcare premium as an illegal resident in California for the SAME healthcare plan? Answer: Because somebody has to pay the bills, and the proverbial "last man standing" is the small business owner. Freedom is expensive.

How did we get here? The war on small business has been brewing for decades, but finally the straw that broke the small business owner's back was healthcare. With the passage of the ACA on April Fool's Day 2010, pieces on the chess board started moving around rapidly. Political parties immediately started jockeying for pole position.

Since the majority of politicians never owned a small business, they were easy to influence. The labor unions got to work. Big corporations saw what was happening and they got to work too. Given that small businesses are by nature fragmented without a unifying central leadership they waited to see what happened next. Plus they were busy working trying to make a living. Bad move.

Labor Unions and Big Business effectively gamed the healthcare system so that union members and employees got cut rates on healthcare plans, and to make the deal more palatable, they also negotiated for universal care pools. But of course somebody had to pay unsubsidized premiums, and that of course would be based on income. Who better to sock it to than the silent small business owner?

Reaching out to my elected representative, Jimmy Panetta resulted in the terse reply that "healthcare is complicated." After a decade in place, it is not that complicated; depending on your income you pay different rates. Imagine if McDonald's worked that way! Your "Happy Meal" price would be a direct result of whether you worked for a union, a large company, or your immigration status! Preposterous.

Across the spectrum of wealth distribution, healthcare is the most onerous. But that is just the most glaring example. Inflation is the next one. It hurts the small business owner most, because he has to absorb more of the pricing increases and if he is to survive, passes along less of those increases. The 16% pay increase for rail workers or 10% pay increase to pilots won't decrease rail traffic or flight volume. In fact, the COST to ship freight or park a butt in a seat will simply be adjusted up, up, and away!

For the small business owner it is a death by a thousand cuts, with some "cuts" akin to a sucking chest wound. Like him or despise him, Joe Biden has done one thing really, really well...he has acted as a fine bellhop for the labor unions. When you print the money and sign the contracts to print more, inflation doesn't hurt much. Indeed, most union workers have never had it so good. 

With Labor Unions the winners and small businesses the losers, what will the impact be on larger businesses? The cost of labor is typically the MOST expensive part of creating and delivering a product or service. As we can imagine then, large business are increasing prices and laying off employees (non-union of course, and many expendable H-1B visa holders at that) to cover the cost of inflation.

Net net when the wokescreen clears, this equation balances by the destruction of small businesses, many of which will cease to exist, go heavily into the black market, and/or rapidly innovate by embracing new technology and doing business differently (low odds on the latter.) At the end of Joe Biden's reign, fewer small businesses will remain, more unions will exist, and big business will be thriving (with far fewer employees.) Invest accordingly.