Friday Addition Edition

We skipped the Friday addition for the Christmas and New Years Holiday, but we are back with some ideas for you to consider outside just your bank stock portfolio.

I have been focusing a lot on income-generating investments in these special editions. That's because I think that's where the most significant opportunity is right now for longer-term investors. Cash producing assets are highly likely to outperform high multiple growth stories over the next few years. The 2020 performance of some of these tech stocks will be challenging to replicate, and I anticipate backing and fulfilling in some of these names.

I read the latest macro update from Henry McVey and his team over at KKR during the break. McVey is a clear thinker who has been right about the economy and markets a lot more than he has been wrong, so I make it a point to read his updates when they come out.

One key takeaway is that he expects a combination of pent demand from consumers exploding in the second half of the year, along with increased government spending and stimulus will combine to push the economy to 5% GDP growth year over year.

That growth could mean that longer-term interest rates have finally bottomed and will begin what could be a decades-long march back toward normality.

I think that probably right with the caveat that I think the bulk of the growth occurs in the second half of the year.

With 19 million people receiving unemployment benefits and 35% of mom-and-pop businesses unable to pay rent in December, the stimulus in the first half of the year is merely holding off the economy's collapse until we have widespread vaccination.

The jobs report this morning paints a picture of what's going on right now. We lost jobs for the first time since April, and it's because bars and restaurants are closing their doors. Almost all of the job losses were in the hospitality industry.

If we don't get those people some money, rent does not get paid. If rent doesn't get paid, mortgages do not get paid.

If mortgages do not get paid, credit dries up.

If credit dries up, the economy sinks pretty quickly.

Once we do have widespread vaccination and start to see real job creation in the second half of 2021, I think McVey and his team are right. There will be an explosion of demand, and there is a lot of cash that has been building in consumer's bank accounts to drive that demand.

That creates a perfect storm of opportunity for one fixed income asset class. Floating Rate Senior loans should outperform under McVey's scenario. The expanding economy will mean excellent credit conditions with borrowers meeting their obligations. Because these rates do float, payouts on the loans could go higher in 2021 and beyond.

Most big mutual fund companies have senior loan funds, so we could just buy one of these funds from a good no-load fund group and call it a day.

The even a few senior loan exchange-traded funds we could buy to gain a little exposure to this asset class.

If you have known me for a while, you know I am going to do this differently. We can buy discounted closed-end funds and buy senior floating rate funds for less than the value of the assets they own.

Right now, the Apollo Floating Rate fund is trading a discount to the net asset value of about 11.55. The yield is 5.6%, and there is a good chance that goes higher by the end of 2021.

When I consider closed-end funds and BDCs that invest in unrated or lower credits, I prefer to use a fund that has a private equity sponsor. PE guys have borrowed and paid back tens if not hundreds of billions of dollars over their careers. They know what a good deal looks like and what a crap deal smells like.

Apollo is one of the best PE firms on the planet and has a solid credit business as well. I have a soft spot for Apollo as the co-founders all worked with Michael Milken at Drexel, and I have probably learned as much from studying Drexel in the 1980s as I have from anything else in my career.

That and, of course, the fact that they are very talented and successful investors in equity and credit alike

You might also want to consider the First Eagle Senior Loan Fund (FSLF) and the Eaton Vance Senior Floating Rate (EFR). The reason to look into these two funds is simple. Boaz Weinstein’s firm Saba Capital has an activist position in both funds and has been pushing for management to take steps to narrow or eliminate the discount. He has made recent purchases of both.

The Eaton Vance Fund is trading at an 8.24% discount and yields a little over 6%.

The First Eagle Fund is at a 10.81% discount with a yield of about 6% as well.

Try to buy down days when there is a little selling pressure to give you a better entry point in these two funds. The shares trade above Saba's last purchases, and I like to get in as close to even with the activist as possible in CEF activist investments.

Posted to Banking on Profit on Jan 08, 2021 — 1:01 PM
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