February 7, 2020
By Steve Blumenthal
“For when the One Great Scorer comes to mark against your name,
He writes not that you won or lost, but how you played the game!”
– Grantland Rice
In 1907, sportswriter Grantland Rice saw what he would call the greatest thrill he ever witnessed in his years of watching sports. During the Sewanee-Vanderbilt football game, Vanderbilt center Stein Stone made a spectacular catch on a double-pass play that was then thrown near the end zone by Bob Blake to set up a touchdown run by Honus Craig. It was the winning play, the one that beat Sewanee at the very end for the SIAA championship. In Spalding’s Football Guide’s summation of the season, Vanderbilt coach Dan McGugin wrote, “The standing. First, Vanderbilt; second, Sewanee, a mighty good second.”
Early in his career, Grantland worked for the Atlanta Journal and the Cleveland News, before becoming a sportswriter for the Nashville Tennessean. Sewanee Tigers coach Billy Suter hooked him up with the job at the Tennessean. They met when Suter was coaching baseball teams that Rice played against during his time as a student at Vanderbilt. That role led to a number of big-time gigs at major newspapers across the Northeast. More than a century ago, he wrote his first Sportlight column in the New York Tribune, and contributed monthly Grantland Rice Sportlights to Paramount newsreels from 1925-1954.
Starting in 1925, he began selecting the College Football All-America Teams, following in the footsteps of Walter Camp, and making a real name for himself. Grantland also referred to the backfield of Notre Dame’s football team as the “Four Horsemen” of Notre Dame—pulling inspiration from the bible—in a New York Herald Tribune piece that helped make him famous. His captivating description of the October 18 Notre Dame vs. Army game at the Polo Grounds is as follows:
Outlined against a blue-gray October sky the Four Horsemen rode again. In dramatic lore they are known as famine, pestilence, destruction and death. These are only aliases. Their real names are: Stuhldreher, Miller, Crowley and Layden. They formed the crest of the South Bend cyclone before which another fighting Army team was swept over the precipice at the Polo Grounds this afternoon as 55,000 spectators peered down upon the bewildering panorama spread out upon the green plain below.
I just loved Grantland Rice. My mom, who knew of my fondness for sports, bought me a book that summarized Rice’s New York Tribune Sportlight stories. He had a way of pulling you into the story and I found his writing style easy to read.
My mom’s message to me was simple: “It’s not that you won or lost but how you played the game.” But…
They are known as famine, pestilence, destruction and death. These are only aliases. Their real names are: Stuhldreher, Miller, Crowley and Layden. The crest of the South Bend cyclone… I just had to know who won that game.
I promised I’d share a few takeaways from this year’s Inside ETFs conference in Hollywood, Florida. We’ll do that today. I’m also sharing with you an investment idea around high and growing dividend-paying companies. I conclude with one last tribute to Kobe Bryant.
Given today’s ultra-low interest rates, there is simply no way a 1.65% 10-year Treasury can help an investor’s portfolio the way the higher yields of years past did. Factor in inflation and our returns will likely be negative over the coming ten years. I think we are nearing the end of the long-term secular move lower in yields. So, I headed to Florida with an eye on finding a few ETFs that focus on high and growing dividends.
If you are not familiar with ETFs, they are an excellent investment structure with favorable tax advantages. Let’s say you have an investment in an individual stock you’ve owned for years. Or perhaps you have a high percentage of your wealth concentrated in Amazon, Google, or Berkshire Hathaway. Wealthy families think in terms of managing their wealth over multiple generations. Great wealth is generally created from family businesses and targeted risk exposures. You’re not going to get rich investing in a 60/40 stock and bond portfolio.
For many families, there comes a time when creating wealth turns to defending wealth. That’s where broad diversification comes into play, and that may mean selling a stock with a low-cost basis. The tax burden may be too great, yet so is the risk of failure. One only has to look at General Electric to see the risk to a family’s wealth should an unimaginable fall take place.
I learned a great deal more at the conference about how to move highly concentrated positions into an ETF structure in a way that doesn’t create a taxable event. Say you have most of your wealth in Amazon stock. Through the process, you can deliver your stock into an ETF that will give you the broad stock market exposure. Something your family can own for multiple generations. There are some complexities to the process, but that’s the gist. That information alone was worth the trip.
ETFs are a unique tool. No tax event and better diversification. There is a way to do this and have it make sense. You can even create your own multi-generational ETF for your family. If you are a wealth advisor working with high net worth families or an individual investor and would like to learn more, shoot me an email. I’ll point you in the right direction.
Here are a few other takeaways:
Active ETFs was a dominant theme. Because of the structural advantages ETFs offer over many mutual funds, large actively-managed mutual fund families are seeking a way to package their strategies inside an ETF without giving up their intellectual property. They don’t want others seeing their poker hand, as it may be a disadvantage when they go to sell a particular stock. The ETF is simply the structural vehicle. The idea of non-transparent portfolios is the next wave of new ETF business. The movement of actively-managed mutual funds into an ETF wrapper was the biggest story at the conference.
Socially responsible investing, or ESG (environmental, social, and governance), was another big topic. My friend Eric Balchunas, an analyst at Bloomberg Intelligence, is focused on ETF shares, pointed out that “surprising exclusions from ESG funds cause them to lag the broader market.” He wrote a post-conference article concluding, “Exchange-traded funds that cater to environmental, social and governance principles are being pitched as a way for investors to sleep with peace of mind, but they better be prepared to wake up with something less than dreamy returns.”
Eric shared an example. Essentially, investors can have ESG or Warren Buffett, but not both.
So why is Buffett, one of the greatest investors and philanthropists the world has ever seen, not in these funds? One big reason is that Berkshire’s board is only 57% independent, well below the 86% average. Buffett has signaled no intention of changing the company’s business practices. He implied the independent board is a poor metric, saying many such boards he has been on are independent on paper only, with many directors just looking for a payday and typically following the CEO’s lead. Buffett has also said he doesn’t want to burden subsidiary companies, one of which operates coal-fired plants, with unnecessary rules and costs.
We’re not going to spend the time of the people at Berkshire Hathaway Energy responding to questionnaires or trying to score better with somebody that is working on that. It’s just, we trust our managers and I think the performance is at least decent and we keep expenses and needless reporting down to a minimum at Berkshire.
You can find his article here. And you can follow Eric on Twitter @EricBalchunas.
Eric said, “He believes that ESG is being sold like you’re doing something good but you’re kind of getting hosed.” Phil Mackintosh, chief economist at Nasdaq, Inc., thinks ultimately success will depend on performance.
One other interesting takeaway came from Invesco’s Dan Draper. He talked about asset manager fee wars and wondered aloud about how firms can make money with such low fees. He believes firms will shift from charging fees based on assets under management to fees based on data under management. Essentially, selling their data. Something about that sounds like a very bad idea to me. Worth noting.
GMO’s James Montier said the 60/40 is in trouble. “It won’t work the way people expect it to work. You can do better.” He added, “You can build a portfolio that can drive portfolios but it will have to look entirely different.” Here is the Seven-Year Return Forecast (as of December 31, 2019) from GMO:
Emerging Market Value ETFs anyone?
How about -4.9% per year for the next seven years? And it’s negative across the board for bonds. Avoid the research at your own risk.
So what can you do? Here’s an idea from my good friend Kevin Malone. Kevin founded and runs Greenrock Research. Think about this as an alternative for a portion of your fixed income exposure. The concept is both logical and simple: invest in companies that pay high dividends and have management teams that have a history of consistently increasing their dividend payouts to their investors.
Kevin’s been investing in high and growing dividend stocks since 1999. He was in my office this week and shared some of his research with me. Picture investing in a 4% yielding portfolio of high and growing dividend stocks and five years later that basket of stocks yielded you 7.5%. You start with high dividends and they increase as time moves forward. That to me is a much better risk bet than allocating to a 1.65% yielding 10-year Treasury.
Of course, there is market risk. Stocks will go down in price in a recession—and that’s a real risk. On my Florida conference agenda was to find ETFs with rules that seek exposures to this very theme. I found a small handful of high and growing dividend ETFs and we are adding the basket to the turnkey asset management platform we run for our advisor clients and using some straightforward stop-loss risk management rules (much like you’ll find each week in Trade Signals) to avoid the big market declines. This is something you can implement on your own or get help with from a good investment advisor. Please note this is not a recommendation for you to buy or sell any security, as I know nothing about your goals, needs, suitability, and risk objectives. And there’s no guarantee past performance will predict or guarantee future performance. But we must take risks in life, and I think this is a good alternative to fixed income, due to today’s starting conditions. Shoot me a note if you’d like to learn more.
That’s it from the conference. Hope you find this week’s missive helpful. I’ve purposely avoided politics (painful to say the least) and we might touch on the Coronavirus next week. I can tell you I’m seeing more and more medical masks in the airports.
When you click through you’ll find a link to an Andrew Ross Sorkin interview, where he discusses his book Too Big to Fail. A good reminder of the moral hazards that existed in 2008 and continue to exist today. Andrew suggests two straightforward solutions. I like suggesting solutions, rather than just complaining. Helps advance dialogue and debate.
I also came across an article in Institutional Investor magazine. The mother of all bubbles is in the bond market. I keep writing about the epic investment opportunity that is coming in the high-yield corporate bond market. The article will help set the stage and give you a sense for why the opportunity will be so big. It’s not here yet.
Lastly, a friend sent me a link to a letter Kobe Bryant wrote at age 38 to his 17-year-old self. It’s very good.
Coffee in hand? Let’s go.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Included in this week’s On My Radar:
- Too Big to Fail by Andrew Ross Sorkin
- “High-Yield Was Oxy. Private Credit Is Fentanyl.” (Institutional Investor)
- Trade Signals – Equity, Bond and Gold Signals Bullish
- Personal Note – Letter to My Younger Self by Kobe Bryant
I came across this video interview this week. You’ll find it a good reminder that the concerns raised in Too Big to Fail remain. Click on the photo below to watch. I’ll be downloading the book.
“Investors are hooked, and it won’t end well.”
Private equity assets have increased sevenfold since 2002, with annual deal activity now averaging well over $500 billion per year. The average leveraged buyout is 65 percent debt-financed, creating a massive increase in demand for corporate debt financing.
Yet just as private equity fueled a massive increase in demand for corporate debt, banks sharply limited their exposure to the riskier parts of the corporate credit market. Not only had the banks found this type of lending to be unprofitable, but government regulators were warning that it posed a systemic risk to the economy.
The rise of private equity and limits to bank lending created a gaping hole in the market. Private credit funds have stepped in to fill the gap. This hot asset class grew from $37 billion in dry powder in 2004 to $109 billion in 2010, then to a whopping $261 billion in 2019, according to data from Preqin. There are currently 436 private credit funds raising money, up from 261 only five years ago. The majority of this capital is allocated to private credit funds specializing in direct lending and mezzanine debt, which focus almost exclusively on lending to private equity buyouts.
February 5, 2020
S&P 500 Index — 3,324 (open)
Notable this week:
Most of the month-end recession watch charts are updated below. Bottom line: Low probability of a U.S. recession in the next six months. The equity market trend indicators remain bullish, the factor model favors “Growth,” investor sentiment has moved from Extreme Optimism to Neutral. With the exception of the high yield bond market, the trend in bonds remains bullish. Gold remains in a long-term bullish uptrend.
This is a good market summary from Axios Markets:
Little has changed about the fundamentals since last week’s selloff that was the worst in months, but bullish stock traders have bid back all of the the S&P 500’s losses and sent the Nasdaq to a new record high.
What’s happening: The market continues to bet on generous central banks providing stimulus to help the global economy recover from the novel coronavirus outbreak that has stalled supply chains, closed businesses and quarantined millions of people.
- The People’s Bank of China has obliged already, cutting banks’ reserve requirement ratios and pumping hundreds of billions of dollars into markets to help stabilize the Shanghai and Shenzhen stock exchanges, which fell to their lowest levels in a year on Monday.
More is expected from China in the coming days. The PBOC is seen lowering its key lending rate and continuing to pump cash into the banking system.
On the other side: Most commodity prices have seen no such rebound thus far, with oil falling by 20% from its last high and now in a bear market. Metals like nickel, aluminum and lead also have continued to fall.
- Copper prices, seen as a proxy for expected global growth, rose by 1% on Tuesday, but are down 8.5% year to date.
Why it matters: There are not yet signs global growth will recover from the coronavirus shock, yet the Dow is trading at a price-to-earnings ratio of nearly 20 and the Nasdaq’s P/E ratio is over 29, according to FactSet data.
- Both figures are well above historical averages and even higher than earlier this year when top investment strategists warned that valuations had gotten especially high and looked poised for a pullback.
- Stocks will likely need strong economic growth to live up to their current valuations.
Not a recommendation for you to buy or sell any security. For information purposes only. Please talk with your advisor about needs, goals, time horizon and risk tolerances.
Click here for this week’s Trade Signals.
Dear 17-year-old self,
When your Laker dream comes true tomorrow, you need to figure out a way to invest in the future of your family and friends. This sounds simple, and you may think it’s a no-brainer, but take some time to think on it further.
I said INVEST. I did not say GIVE.
Let me explain.
Purely giving material things to your siblings and friends may appear to be the right decision. You love them, and they were always there for you growing up, so it’s only right that they should share in your success and all that comes with it. So you buy them a car, a big house, pay all of their bills. You want them to live a beautiful, comfortable life, right?
But the day will come when you realize that as much as you believed you were doing the right thing, you were actually holding them back.
You will come to understand that you were taking care of them because it made YOU feel good, it made YOU happy to see them smiling and without a care in the world — and that was extremely selfish of you. While you were feeling satisfied with yourself, you were slowly eating away at their own dreams and ambitions. You were adding material things to their lives, but subtracting the most precious gifts of all: independence and growth.
Understand that you are about to be the leader of the family, and this involves making tough choices, even if your siblings and friends do not understand them at the time.
Invest in their future, don’t just give.
Use your success, wealth and influence to put them in the best position to realize their own dreams and find their true purpose. Put them through school, set them up with job interviews and help them become leaders in their own right. Hold them to the same level of hard work and dedication that it took for you to get to where you are now, and where you will eventually go.
I’m writing you now so that you can begin this process immediately, and so that you don’t have to deal with the hurt and struggle of weaning them off of the addiction that you facilitated. That addiction only leads to anger, resentment and jealousy from everybody involved, including yourself.
As time goes on, you will see them grow independently and have their own ambitions and their own lives, and your relationship with all of them will be much better as a result.
There’s plenty more I could write to you, but at 17, I know you don’t have the attention span to sit through 2,000 words.
Kobe ended the letter sending his 17-year old self “Much love.” You can find the full letter here.
There is great advice in what he wrote to himself: “While you were feeling satisfied with yourself, you were slowly eating away at their own dreams and ambitions. You were adding material things to their lives, but subtracting the most precious gifts of all: independence and growth.”
Working with many high net worth individuals over the last 35 years, it’s clear that some families have it figured out—but many haven’t. We all have things we are working on, but one difference I see in the stronger families is a culture of empowerment that comes from encouraging independence, supporting risk taking, and investing in each family member’s personal growth. Having financial abundance certainly makes life easier. But it in no way guarantees an abundance of joy, an abundance of peace, and an abundance of love.
What does? A culture of risk taking, hard work, and viewing failure in a positive way certainly has a positive impact.
Derek Jeter spoke about his failures at the Inside ETFs conference. Specifically, he talked about not being afraid to fail. Hard to do when you pick up the morning New York Times to see your photo on the front page of the paper along with a story highlighting a loss.
But when we are afraid to fail—whatever the consequences may be—we are robbed of important learnings… and developing the motivation to improve. Jeter is a positive person by nature, and he noted that helped him. But you could feel how real and important his failures had been to him.
My wife Susan and I often talk about the young kids she coaches. If you are new to this letter, Susan is a youth soccer coach. She’s been at it a long time and she said the there is something really special about this current generation of kids. The way they love and treat each other… It’s different… The approach seems wise beyond their years.
But the parents are a different story. The enabling, the aggression, the demands, their inability to allow their child to experience a disappointment. Susan says it’s never been worse. Sometimes those love goggles cloud our vision. Kobe must have had some wise people around him.
When Susan is most frustrated (I get a little fired up too), I think about how important sports are for our children’s development—and maybe for the parents too. Sometimes the greatest gift doesn’t feel like a gift at the time.
I’m still praying for Kobe and his family. I loved the honesty in his letter, his ability to take a hard look at himself, and his comfort in sharing some of his biggest failures with us. Sage advice. I can imagine the great Grantland Rice writing about the legend of Kobe Bryant… and “how he played the game.”
I was in Dallas on Wednesday and Thursday for meetings and I left excited. I gave up my brokerage license more than twenty years ago, but I see the need to reactivate it. I’ve been searching for the right partner.
My dear friend Tom Giachetti put me in business in 1992. Back then, my father was seated next to Tom at a conference in DC. Tom said, “Marv, please excuse me, I’ll be back in a few minutes.” Dad looked up and there was Tom on the stage presenting on SEC compliance. Tom is a closet comedian and he really does make listening to regulation entertaining. When he sat back down, Dad looked at Tom and said, “We need to talk.” That was the beginning of it all, and Tom remains one of my greatest friends. There really is no bad business with good people. Tom’s good people.
We have breakfast together once a month or so to talk about our families, our businesses, and poke a little fun at each other. A few months ago, I asked Tom if there was a broker-dealer he might recommend. Thus the trip to Dallas—and I left very pleased.
Now here is the hard part. I’m a crazy Philadelphia Eagles fan, as is our entire family. The office of the firm I was visiting is in the Dallas Cowboys corporate complex.
My kids created a family-only group text called “King Miles.” Miles is our beloved overweight cat, but that’s an “enabling” story for another day. I sent the photo below to the family and Brianna texted back a fun video clip of a toddler collapsing on her bed in tears.
The Dallas Cowboys complex at One Cowboys Way in Frisco, Texas is impressive. Don’t tell my fellow Eagles fans or my kids… I really enjoyed touring the facility. I think I found the right partner, and I’m already looking forward to future visits. Love the fun and camaraderie sports create.
Wishing you many important failures on your way to great success… and happiness, always.
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
Click here to receive his free weekly e-letter.
Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.
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