Investor Insights

October 2019 Investor Report

Published: November 30, 2019Updated: February 19, 2020

Financial asset prices continued to benefit from the worldwide support of Central Banks. Among other developments, this support has included the Federal Reserve’sthird rate cut in four months and the New York Federal Reserve’s $215 billion allocation for repo market participants. The European Central Bank’s outgoing President, Mario Draghi, in his farewell press conference, offered his view on monetary policy; low interest rates are here to stay. The People’s Bank of China (PBOC) has injected the Chinese economy with an estimated 400 billion yuan in the form of various liquidity instruments. This development follows the PBOC reduction of the required reserve ratio in early September; this reserve ratio cut was akin to an 800-billion-yuan infusion into the banking sector. Considering the actions and statements from the Central Banks representing the three largest economic bodies in the world, it becomes easier to see why financial assets prices were higher overall. The S&P 500 was positive by two percent, the Dow Jones Industrial Average was up 0.57 percent, and the NASDAQ Composite was up 3.47 percent for the month. Gold prices and the price of our widely held iShares Gold Trust Exchange Traded Fund (ETF) were higher by almost one percent. Year-to-date returns for all major asset categories remained positive.

We continue to monitor the overall liquidity of financial markets. One of the Fed’s primary roles is to provide market liquidity, as needed, so we expect it will continue with repo market participation, increasing reserves, and growing at a rangebound rate. We expect that the Fed will need to find a way to increase its operation as US Treasury issuances grow and the federal government’s budget deficit are reaches $1.2 Trillion by the end of 2020.

Consumer confidence continues to falter, with October headline confidence falling to 125.9 from 126.3 (September). This is disquieting as the holiday season approaches and overall prosperity can be influenced by consumer activities. Stagnation in the retail sector has been a persistent obstacle for months and if this holiday season is weak, retailers’ balance sheets could be adversely impacted. This possibility is problematic from a macro perspective, as the overall US economy and GDP have been strongly tied to consumers while long-term business investment has slowed. Headline durable good orders fell 1.1 percent for the month and core capital goods orders fell by 0.5 percent. Federal Reserve officials remain focused on the lack of spending and investment from businesses, driving additional interest rate decreases in the near future.

Please review the following updates from some of the existing positions that we manage:

RLJ Lodging Trust— (Symbol: RLJ-A): The hotel Real Estate Investment Trust (REIT) announced the closure of a previously announced disposition of 18 non-core hotels. The RLJ’s portfolio is now 109 hotels and approximately 23,280 rooms. The sale appears to have been prudent and continues to improve the underlying credit and our confidence in the position. The coupon on our preferred stock is north of 7 percent (even adjusted for the current 8 percent premium in price above par value). This position is likely underappreciated by the market, possibly reflecting investors’ confusion over the convertible nature of the preferred stock. While the preferred stock is convertible, it is highly unlikely that it will ever be called. This is because the preferred stock can be called and converted into common stock only if the common stock appreciates by almost 300 percent; a profoundly unlikely outcome. On the last earnings call, Sean Mahoney, Chief Financial Officer said, “the preferred are not callable under the contract, I think that is an instrument that is relatively expensive relative to our debt and something that we’re going to continue to monitor.” There is reason to have confidence in a holding in which the management team feels the buyout would be costly. Additionally, this dividend does qualify for the tax break (20 percent of dividend is deducted) provided by the recent income tax legislation of pass-through entities.

Enviva Partners Bond—7.1 percent Yield to Maturity (11/01/2021) / 4.58 percent Yield to Worst (Call on 11/29/2019) — (CUSIP: 29413XAB3): On October 29, credit rating agency Moody’s upgraded Enviva Partners’ credit rating while maintaining a stable outlook. Moody’s lead analyst, Domenick Fumai, said “The upgrade reflects Enviva’s improved revenue and EBITDA generation visibility, an increased backlog of long-term take-or-pay contracts with stronger, more diversified counterparties as well as our outlook for a continued favorable regulatory environment in Europe and Asia over the rating horizon.” This assessment reflects our own outlook of one of the Graham Capital’s largest positions. We continue to forecast leverage ratios decreasing over the next several years, lead to a comfortable refinancing of our unsecured bond. An early call of our 2021 bonds is possible. As always, if you should have any questions or concerns about our analysis or your account, please do not hesitate to contact us. We always appreciate the opportunity to hear from you and thank you for entrusting your Graham Capital Wealth Management with your financial needs

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.