January 2020, the first month of the new decade, started with positive momentum for most asset prices. Gold and the S&P 500 spent the month jockeying for best performer as both the hard asset and the major US index started the month strong posting 3% gains within the first 21 days of the month.
Several developments occurred which put downward pressure on the S&P 500 while putting a tailwind behind Gold. The major development was the discovery and expansion of the Coronavirus in China. In the end, Gold finished with a convincing win returning greater than 4%. The S&P 500 gave back most of the returns finishing under +1%. In addition to gold, long dated United States Treasuries (10+ years) moved higher in price while the interest rate on the long end of the yield curve moved lower. The 10-year United States Treasury decreased from 1.91%, at the beginning of the month, to 1.58.
The stock market and economy have severely separated from one another which is concerning the established institutional investors. The separation of stock market to economy is reaching historic proportions and implores monitoring closely. The performance in markets over the last 3-4 months illustrate the power of the Federal Reserve.
Speaking of the Federal Reserve, market participants were greeted early this month with the release of the December FOMC (Federal Open Market Committee Report). The noticeable development within those minutes detailed a few voting members pondering whether the Federal Reserve should look to buy 1 and 2-year Treasury obligations in lieu of short dated T-Bills (less than 6 months in length) as they have been doing for the last 4 months. If this plan were to be executed, interest rates on the 1- and 2-year Treasuries would move lower and encourage more risk taking by market participants.
Market participants have been rewarded by the Federal Reserve over the last 4 months. With the Federal Reserve financing the estimated $1.1 Trillion Government Budget deficit via debt monetization. With the Fed supporting financial liquidity, the stream of cheap capital continues their way to market participants. Armed with this cheap capital, participants can make levered bets in a wide range of financial assets, but the major investment has been in the stock market. We continue to be alarmed by the historic amounts of debt around the world. Per the International Monetary Fund, global world debt sits at approximately $245 Trillion and growing. Compare this to the “income” being produced by the world to pay these debts (Global GDP), being around $85 Trillion. This current Debt to GDP ratio is much worse than the time of the 2007-2008 Great Recession Crisis ($116 Trillion of Global Debt vs $58 Trillion in Global GDP). The Federal Reserve and other central banks around the world are allowing these historically high amounts of debt to try and reflate the global economy. We focused on fixed income as we believe interest rates will struggle to sustain momentum higher as a material increase in interest rates will make this high level of debt too expensive to service.
Please review the following updates from some existing positions that we manage:
BlackRock Credit Allocation Income Trust IV (Ticker: BTZ)- On January 2nd, the largest asset manager in the world announced that they were going to hold a tender offer to purchase up to 10% of shares outstanding at 98% of Net Asset Value (NAV). The investment has been a very good one for the year that we held it, collecting a 7% dividend yield while obtaining 13% unrealized gain going into the tender offer producing a solid total return. On January 15th, we had decided to tender all of our shares back to the company in an effort to realize an immediate gain on investment by reducing the spread between the discount at the time of our investment initiation and their tender price relative to NAV. For the last 5-6 years, the fund averaged a discount to NAV of around 8-9% and we believe that fund will continue to trade at those discounts to NAV after the tender expires.
CVR Refining 6.5% Senior Unsecured Bond due 2022 (CUSIP: 126634AC8) and PBF Logistics LP 6.875% Senior Unsecured Bond due 2023 (CUSIP: 69318UAB1)- The two independent refiners announced a week apart from one another that they were looking to redeem our separate bonds early. First on January 7th, the Carl Icahn-led CVR Refining announced they were going to call their bonds due in November of 2022, early. Seven days later, PBF Logistics announced they will be retiring their bonds due in May of 2023. Our CVR bonds were retired on January 27th at par value plus a 1.08% premium and accrued interest. The PBF Logistics bonds will be retired on February 24th at par value plus a 3.44% premium and accrued interest. While Carl Icahn related companies (CVR) have been very active in the debt markets over the last 2 years refinancing at cheaper rates, it was disappointing to lose the PBF Logistics bonds. We anticipated that we would have had the bond for at least another 18 months after the company announced a transaction involving cash over purchase of the Shell Martinez refinery in California. At the date of early redemption, the return has been estimated to be 6.4% per year for the CVR Bond and 7.9% per year for the PBF Logistics Bond.
Genesis Energy 6.75% Senior Unsecured Bond due 2022 (CUSIP: 37185LAH5)- If 2 early calls and a tender were not fun enough, later in January, we received another early redemption notice from Genesis Energy. The Master Limited Partnership announced a new bond raise, which raised $750 million dollars, with the declared intention of calling our bonds and paying down a credit facility. The interest rate of the new bond was surprisingly high at 7.75% for the new 8-year bond. We will continue to monitor the new bond but have not allocated capital to the new offering as of this writing. Capital markets have been tough on energy companies whose balance sheets remain leveraged. The company will redeem the bond on February 16th for par value plus a 1.69% premium and accrued interest. The annualized rate of return, based on the mid-February call date, was approximately 6.8%.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.