Out of the Box: The Time to Buy is When There is Blood in the Streets

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“The time to buy is when there is blood in the streets. Even if it is your own.”

-Baron Rothschild

Well, I am sitting on the gutter in America. I am watching the stuff slide underneath my feet. Mark Grant is telling you, “There is blood in the streets.”

It is a medical crisis, which has become a health crisis, and which has enlarged further, into a financial crisis. We are in the thick of it. We are surrounded by it, as we are all directed to “shelter in place.” We are caught, surrounded, and glued, resolutely, into a very small personal space now. We can not get out of our own way because various governmental entities here, and in the rest of the world, will not allow us to do so. We are trapped.

Get this into your mind: Trapped.

The markets, both bond and equities, cannot get out of their way fast enough. Balances and counterbalances, that have held for years, no longer hold. The hedge of yesterday has become the speculation of today, and almost no one is even aware of the change that has taken place. The reliance upon the experience of the past has become moot. New methodologies of thinking must now take hold. New strategies must be put into place. Listen up, before your ears get caught in the cycle of old, that will not, not, not, determine the future.

The governments of the world are now caught in a quagmire. Is the needle threaded by the health of their citizens or the health of their economies. It is a fine line between doomsday and crawling out of this mess and governments, being whom they are, will make promises to us at every turn, in the hopes of some kind of medical resolution, or political resolution, which will not be soon forthcoming. Money can’t cure what money can’t buy and pandemics are not based upon fiscal concerns. We can throw money against the wall and hope, but money, alone, cannot cure our present situation.

This is a horse of a different color, as the Wizard of Oz once, correctly, surmised. The first and foremost hope is a vaccine that will cure the coronavirus. However, there is not one in sight and likely not one that will be arriving any day soon. You will hear rumors of one, there will be bold statements made that one is coming, any day now. I am told, by several highly placed people in the medical profession, however, that I know, to keep my hopes in line with reality. Things are in the wind, but nothing is on the table.

Therefore, various governments are doing what they can, which is to toss out lifelines to those that get caught by this deadly beast. There is really not much else that they can do, at this point, and so I do not criticize them, for doing what they can. Having placed people’s health at the top of the woodpile we must then look next at the markets, to try to determine how to deal with a medical emergency that we have not really witnessed since the Bubonic Plague in the thirteenth century. In my opinion, that is how far we have to go back, to assess the severity of the situation.

That far back!

One good thing that I see, eventually, coming out of our mess, is a change of attitudes. Fine, China, and other Asian nations, may make pharmaceuticals or whizz-bang parts, or electronics cheaper and that has been the overwhelming consideration to date. I think this will change and dramatically, as America, and other countries, and their corporations, place safety over cost. Fine, it costs a few extra bucks to be made in America, and purchased in America, but that will become a Hell of a lot better now than any type of exposure to viruses and other health issues. Manufacturing, in my view, is going to become way more American centric and that will be a positive for U.S. companies, a very real positive, in the longer term.

The trick then, as in all financial crises, is not to panic. Fortunes are going to be lost in our present financial quandary and the main issue for all of us, personally, or for our businesses, is that it is not “our” financial fortune, that is lost, whatever we may have accumulated.

Having some cash now is fine. However, the majority of the cash should be waiting for the massive opportunities, which will be presented, in the days ahead. This is not the time to stuff it all in a drawer, never to be taken out. “Preservation of Capital” always rules but sometimes that means buying at lower prices, and higher yields, to lock-in your initial investment for later gains. Patience, good old common sense, which is never that common, and an eye to the future will determine where to go and how to get there. This is not a time for “appreciation plays, in my estimation, but for “cash flows,” that will hold you in place. The time for appreciation moves will come later. The time for “cash flows,” and income streams, is NOW!

Some entire industries, in my view, will not survive in their present form. They may be around in some form, but not in the way that they are constructed presently. I point specifically to cruise lines, hotels, the travel industry, in general, restaurant chains, bars, retail shops, property and casualty companies full of business interruption insurance, shopping malls, where, even after the coronavirus gets hopefully cured, will leave an indelible mark upon our psyches which will demand more personal space and more personal safety. The virus of today could transform itself into the new virus of tomorrow and people will expect businesses to overtly be prepared for this possibility, before they interact. What was not thought of before, must be thought of now.

I am a fan of closed-end funds, as is generally known. They have large portfolios so that one or two companies, cancelling their dividends, does not bend you over, all by themselves. I like the closed-end funds that pay monthly and the double digit dividend, that you were delighted with before, may now be 1.5 times, two times or even more now. Choose wisely but there are opportunities that can be taken here. Also, leg money in. No “Hail Mary” passes.

These funds are not like ETF’s, or many mutual funds, where forced selling is now on the table. Of the funds that I like, none are that close to the statutory leverage limits of fifty percent. Consequently, in my opinion, the closed-end fund group will raise their leverage limits, if necessary, long before that will stop paying their dividends, though it is also fair to say that some dividends may be cut, in the meantime. However, starting with a double digit yield will also help to curtail the pain.

Bonds are also an interesting play now. They have gapped out, and out, and out, against Treasuries. I am not particularly taken with the methodology of the rating agencies, these days. Their criteria is now, in my view, based upon standards which no longer exist. You have to do your own homework, look at the industry they are in, and then look at the leverage. It is assets, as compared with liabilities, and the leverage, in both, that will determine which bonds may ultimately succeed or fail. Just forget the rating now. Look hard at the numbers.

I said earlier that “Fortunes would be lost.” I am also here to tell you that “Fortunes will be made,” in our present circumstances. When the financial markets are bent this far out of shape, something that has not occurred in this century, with the possible exception of the Great Depression, in my opinion, then many will fall, but a few will rise from the ashes.

Better to be a Phoenix, than a slaughtered Bull or Bear.

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc. & B. Riley Wealth Management
[email protected]
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities. Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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