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BMO's Ablin on Corporate Bonds: I Don't See Much Value (Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Pelle. That's a Bloomberg Business flash. You're listening
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  Speaker 1: to Taking stock with Kathleen Hay and Pim Fox on
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  Speaker 1: Bloomberg Radio. Taking stock of the stock market continuing to
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  Speaker 1: look to higher levels, although today a bit of a
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  Speaker 1: mixed reading. The Fed's Beige Book not giving bond investors
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  Speaker 1: too much direction in terms of where the Fed heads next,
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  Speaker 1: but bond investors don't seem to need it, as the
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  Speaker 1: thirty year bond yield sold today at a record low
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  Speaker 1: two point one seven and thirty year German sovereigns selling
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  Speaker 1: at a negative yield for the first time ever. Jack
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  Speaker 1: Ablin joins this now, chief investment officer at BMO Private Bank. Jack,
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  Speaker 1: welcome back to the show. So Branxit seems to be
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  Speaker 1: fading as an impeditive impediment, certainly to the U S
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  Speaker 1: stock market, right, and even the pound is rebounded tomorrow.
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  Speaker 1: We have the Bank of England maybe cutting rates, but
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  Speaker 1: they don't do it tomorrow, maybe in August. Let's start
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  Speaker 1: with US stocks, though, what is the focus now? If
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  Speaker 1: I'm trying to figure out if it's time to keep
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  Speaker 1: buying or if it's time just to keep my powder dry. Boy,
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  Speaker 1: we've got our powder dry. Um. You know, part of
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  Speaker 1: it is so mechanical, Cathlete, because it's really not individual
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  Speaker 1: investors that are necessarily buying stock. In fact, if you
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  Speaker 1: look at UM. You know, individual investors and mutual mutual
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  Speaker 1: funds and institutions, they've been net sellers of stock, and
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  Speaker 1: particularly in the first and a lot of the second quarter,
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  Speaker 1: at least the way I've seen it, and in fact
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  Speaker 1: as buy backs that are making up the difference, uh
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  Speaker 1: and then some So really a lot of the demand
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  Speaker 1: for these company stocks are coming from the companies themselves, Jack,
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  Speaker 1: I want you to follow up on that, because buy
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  Speaker 1: backs have also contributed to the number of shares being
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  Speaker 1: pulled out of the market. And just to put a
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  Speaker 1: number on individual investors pulling fifty two billion dollars from
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  Speaker 1: US stock, mutual funds and exchange traded funds in the
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  Speaker 1: first half of the year. Where's all that money going? Yeah,
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  Speaker 1: I think it's it's probably UM going into cals ship's
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  Speaker 1: it's going into stockpile. You know, keep in mind it
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  Speaker 1: maybe going into bonds actually, because you know, one of
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  Speaker 1: the things that these negative rates have done is really
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  Speaker 1: UM backfired in many respects. You know, if you consider
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  Speaker 1: that if you're a retiree or if you're an insurance
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  Speaker 1: company looking to generate a certain amount of income per year,
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  Speaker 1: and bond yields go down, you have to buy more bonds. Uh.
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  Speaker 1: And so what we found, for for example, in Japan,
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  Speaker 1: that more investors are hoarding cash and and and buying
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  Speaker 1: more bonds when rates come down. So it's a it
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  Speaker 1: seems to be a backward situation. Yeah, it is certainly
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  Speaker 1: one that is making life interesting. Do you put any stock?
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  Speaker 1: I mean, Jack, you're you're great at certain kinds of
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  Speaker 1: big picture signals that help you make investment decisions. I
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  Speaker 1: always think of the time when you know, you looked
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  Speaker 1: at you saw commit a signal from the commodity for commodities,
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  Speaker 1: you got bullish on commodities, right, and it worked very
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  Speaker 1: well because you got on before a lot of other
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  Speaker 1: people did. But now the flatter yield curve recession used
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  Speaker 1: to be an indicator. But it just seems it's hard
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  Speaker 1: to read signals in the bond market is meaning anything
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  Speaker 1: for the economy now, right? I mean, look at look
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  Speaker 1: what what investors or or or what's leading the market higher?
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  Speaker 1: We hitting all time highs led by telecommon utilities. What's
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  Speaker 1: that telling you? I don't see happy days are here again?
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  Speaker 1: This to me sounds like investors are buying can goes
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  Speaker 1: at the grocery store before the storm. Does that include
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  Speaker 1: companies such as Home Depot or even McDonald's and United Health.
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  Speaker 1: I think the theme here, Tim, is investors not able
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  Speaker 1: to get the adequate yield out of the bond market
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  Speaker 1: thanks to UM, thanks to all of this, uh, you know,
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  Speaker 1: the central bank buying. In fact, they are the bond
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  Speaker 1: buyer worldwide, And so investors are looking at equities as
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  Speaker 1: a income alternative, which is rational. UH. In fact, UM,
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  Speaker 1: you know, these companies that you mentioned are ones that
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  Speaker 1: have had a pretty good track record of maintaining and
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  Speaker 1: growing their dividend over time. So you know, these aren't
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  Speaker 1: necessarily the highest yielding players. Um, these are the ones
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  Speaker 1: who at least with the most persistent so I think,
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  Speaker 1: and I know I've talked to I've talked to retirees
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  Speaker 1: about it. I said, look, you know, if you have
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  Speaker 1: UH an income requirement of two and a half percent,
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  Speaker 1: let's say, why wouldn't you buy a portfolio of UH
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  Speaker 1: two and a half percent dividend yielding stocks that have
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  Speaker 1: had a long track record of maintaining and growing that dividend.
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  Speaker 1: Buy it clipped here dividend and don't care about what
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  Speaker 1: happens to the price as long as those dividends are intact,
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  Speaker 1: you're set. So I think a lot of that um
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  Speaker 1: brasionale is driving. What's what's going on in the market today, Jack, Uh?
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  Speaker 1: Corporate bonds UM. We just saw the largest daily inflow
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  Speaker 1: ever to a corporate bond ETF. That was a story
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  Speaker 1: two days ago on the Bloomberg. I believe there about
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  Speaker 1: a billion dollars worth of inflows into corporate bonds frond
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  Speaker 1: in a day. Negative yields creeping in a new issue
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  Speaker 1: corporate bonds in Europe? What's an investor to think? Here?
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  Speaker 1: Do corporate bonds lease? US corporates offer value as if corpse?
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  Speaker 1: Some corporates are even going so lower in the negative territory?
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  Speaker 1: What do you What do you see there? I don't
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  Speaker 1: see much value there Kethley. And then you know McDonald's
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  Speaker 1: last December did a ten year bond deal in the
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  Speaker 1: US UM for about three point five percent. McDonald's just
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  Speaker 1: completed a bond deal in Europe ten years for zero
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  Speaker 1: point seven five UM. So you know, clearly, UM, they're
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  Speaker 1: finding great value there. Uh. And as long as the
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  Speaker 1: the bond yields they're paying are lower than the free
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  Speaker 1: cash flow yield they're generating. I guess it makes makes sense.
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  Speaker 1: So you know, I can't blame the treasures for issuing bonds.
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  Speaker 1: I'm not sure who's buying. I don't think individuals are buying.
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  Speaker 1: I think it's the ECB. In fact, that McDonald's issue
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  Speaker 1: was did qualify for ECB purchase? Jack? What's the worst
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  Speaker 1: investment right now? Oh? Boy, me look through my portfolio here,
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  Speaker 1: bunch um. In otherways, what's the most unloved investment? I
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  Speaker 1: would say unloved investment that I think has legs is
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  Speaker 1: you know, Kathleen mentioned it at the beginning of the show, commodities.
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  Speaker 1: You know, commodities are now offered at a probably seven
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  Speaker 1: sixty sixty to seventy percent discount to where they were,
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  Speaker 1: and they're starting to show signs of life. We started
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  Speaker 1: purchasing commodities back in May after they kind of broke
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  Speaker 1: out a little bit. Uh. And interestingly, you know, we
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  Speaker 1: know we we have oil trading uh roughly below production
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  Speaker 1: costs here at home, but we also have agricultural products
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  Speaker 1: trading at fifteen to sixteen percent below production costs. So
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  Speaker 1: that's you know, if you uh, you know, believe that
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  Speaker 1: eventually that's got to right itself, either the price has
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  Speaker 1: to go up or the production has to come down.
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  Speaker 1: Gold gold, of course, has been a favorite flavor for
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  Speaker 1: people watching Brexit, betting on the fed nut race, seeing race,
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  Speaker 1: maybe even betting that there are some disinflationary forces gathering
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  Speaker 1: strength around the world. What do you see for gold
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  Speaker 1: and a continued rally? Yeah, I mean I think that gold,
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  Speaker 1: you know, certainly serves a purpose. Um. You know, historically
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  Speaker 1: gold has always been uh that that opportunity cost of
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  Speaker 1: carrying gold, Um, given that you've had to forego income
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  Speaker 1: and you know, pay some sort of storage fee. But
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  Speaker 1: you know, that incremental disadvantage has pretty much gone. So
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  Speaker 1: it does serve an interesting diversification. And you know, probably
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  Speaker 1: you know, if if you do want to venture your
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  Speaker 1: way into the stock market and buy at these levels,
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  Speaker 1: maybe an equal measure of gold could be a decent offset.
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  Speaker 1: Do you recommend looking at emerging markets at all? We do? Um,
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  Speaker 1: you know this is um, this is this is one
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  Speaker 1: where put it put it this way. We got it
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  Speaker 1: very early in emerging markets. UM. We were enticed by
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  Speaker 1: the valuations and they've been going nowhere for three years.
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  Speaker 1: We've maintained our position there and I think, you know,
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  Speaker 1: I haven't looked lately, but last time I checked, emerging
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  Speaker 1: markets were the best performing equity market category this year.
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  Speaker 1: And you know that's if that has its nice little
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  Speaker 1: stealth rally behind those scenes, so be it. But um, yeah,
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  Speaker 1: I think that that's probably a place where, um, you know,
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  Speaker 1: out of the way of Brexit to some degree, out
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  Speaker 1: of the way of some of the other challenges certainly
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  Speaker 1: here at home with the election. Uh. And you know
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  Speaker 1: when you get for example, China that now is approaching
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  Speaker 1: ten thousand dollars per capita gdp UM, you know, domestic
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  Speaker 1: demand will start to flourish there. So I think that's
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  Speaker 1: you know, at least a longer term signal for emerging markets.
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  Speaker 1: So central banks said, you've got the Bank of England,
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  Speaker 1: maybe they're going to cut race tomorrow. They don't, They'll
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  Speaker 1: do it in three weeks. Mark Kearney, who's the head
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  Speaker 1: of the d O, he certainly seems to signal that
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  Speaker 1: how big of a deal are any of these moves
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  Speaker 1: now for equity markets and bond markets for that matter. Yeah,
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  Speaker 1: it's you know, I would have I would have said
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  Speaker 1: three or four months ago that investors were annured with
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  Speaker 1: the the actions of the central banks, knowing that they're
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  Speaker 1: really not doing very much anymore. But you know the
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  Speaker 1: fact is they've captured the imagination and have driven you know,
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  Speaker 1: a lot of things higher. Um. My sense is what
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  Speaker 1: I'm I'm really waiting for is that next leg and
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  Speaker 1: that what I'm looking for as fiscal stimulus. You know,
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  Speaker 1: the fact is that the British um pretty much voted
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  Speaker 1: against the political elite in in in Brussels. Um. You know,
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  Speaker 1: Trump supporters are looking to do that here at home,
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  Speaker 1: and I think at some point, you know, Brussels, looking
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  Speaker 1: at the E and the EU, have to throw their
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  Speaker 1: constituents of bone um and so perhaps it comes in
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  Speaker 1: the form of fiscal policy. Thank you very much for
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  Speaker 1: for enlightening us. Jack Ablin always a pleasure. He's the
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  Speaker 1: chief investment officer for b MO Private Bank, helping it's
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  Speaker 1: a manage approximately six see eight billion dollars of customer assets.
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  Speaker 1: Based in Chicago. You can follow him on Twitter at
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  Speaker 1: jack Abley. You're listening to taking Stock, we take you
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  Speaker 1: through to the clothes and this is Bloomberg