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The Weekly Summary


The long-awaited government bailout package finally materialized last week, providing concrete support for the U.S. economy and ultimately for investor sentiment. Literally trillions of dollars in federal money are now on the verge of being unleashed to fill the hole the sudden erasure of entire industries left behind. Restaurants across the country may be closed, but the government is eager to replace paychecks until people can get back to work. Likewise, airlines, landlords, hotels, manufacturers . . . all getting a safety net to preserve their operations while the virus circulates.


These companies aren't going to evaporate immediately. We have been saying that all along, but confirmation comes as a profound relief to many people on Wall Street. This is not the end of the world. Simply validating that fact triggered the best rebound for stocks since 1938. It was a huge week.  BMR stocks and the blue-chip Dow industrials surged nearly 13%. The S&P 500 and NASDAQ bounced 9-10%, doing in a single week the work that usually takes the market an entire year to accomplish.


It's proof that there is still an enormous amount of strength and power in U.S. companies. They can get through this. The long-term future for shareholders looks as bright as ever. After all, viral outbreaks don't last forever. People get sick but most recover in a matter of months. We get back to work producing and consuming. The impact recedes just as surely as every single outbreak in the past has slipped into history.


We just need to get there first. Tonight we heard that the 15-day shutdown is being extended another month, which means April 30. That's the amount of time government doctors believe is required in order to prevent a secondary wave of infections once the primary outbreak is defeated. China is reporting that people are carrying COVID into regions that were previously clear of the disease. Places like Hong Kong are getting hot again as tourists return.


We don't want that to happen. Until the entire country is clear, domestic activity is going to be slow. That's going to be a big drag on corporate earnings . . . as far as we're concerned, the 1Q20 numbers we'll see in a few weeks are effectively meaningless now and it's starting to look like 2Q20 will be similarly isolated from all previous or future trends. All the next few rounds of earnings reports will tell us is how bad the outbreak was. They can't tell us anything about the underlying health or prospects of each company.


That's where we are. Stocks will trade in circles of sentiment, largely divorced from the fundamentals we can't see or evaluate for months to come. Fighting the disease comes first. When we see the medical crisis recede, corporate leadership can get back to work capturing opportunities and solving the challenges left behind. We suspect it will be a volatile season. All investors should shelter in place.


Meanwhile, despite a great week, stocks across the market remain depressed. We're still on the edge of bear market territory along with the S&P 500 and the Dow. Only the NASDAQ has now recovered enough ground to escape the bear's grip for now, and it doesn't take a lot of selling to push it back. This is simply how market shocks work. It takes time for the wounds to heal.


But there's always a long-term bull market here at The Bull Market Report! Gary Jefferson is back and The Big Picture gets real. The High Yield Investor continues its survey of stocks that now present breathtaking income opportunities . . . lock them in while you can. And we're talking about some of the biggest and best stocks on the planet this week with tour of the Stocks For Success. These are our core recommendations, our favorite companies. If you want to buy the dip, this is the place to start.


Finally, we'd like to repeat: Reach out to us at any time. We will do our best to address your concerns and answer your questions. We are truly all in this together. And if you don't hear back fast, reach out again. These weeks have been a drain on everyone attention and we are watching a lot of things changing every day.


Key Market Indicators




BMR Companies and Commentary


The Big Picture: How Long Recovery Takes


In our experience the important thing to keep in mind (professionally as well as financially) is that these things do eventually end and life gets back to something like "normal." We are lucky in the market to know what that looks like because everything is quantified . . . and we have enough numbers to ground expectations on statistical reality.


The market can hit extremes when the world lurches but it's always reverted to the mean. That mean has held up consistently over roughly the last 120 years. We were in a position to run the numbers manually going into the 2008 crash and coming out and everyone was shocked to see the long-term mean remained roughly unchanged in the depths of the crash (-38%) and then in the early recovery (+23%). That's a period that includes the Great Depression, both world wars, 9/11 and the 1970s oil shock, not to mention the worst recession in 70 years. You probably recall how scary that was. It was scary, but it just didn't bend the numbers much at all. That was revelatory.


Maybe once every century or so the economic realities shift, or human nature changes. We don't think so. Humans have a comfort zone and a natural cycle of efficiency and innovation . . . when things get too bad, we change course, and when they start getting good, we move to capture more of the good stuff. This isn't BMR or even investors at large. It's just the way people operate. The market tells us roughly how much that cycle is worth across good years and bad. We don't see a horrifying new normal any more than we see a utopian one on the horizon. If the future is that bad, we won't have to worry about any stocks at all. And if it's that great (which looks unlikely right now but is just as probable as the doomsday scenario . . . neither has happened so far), we won't have to worry either.


The world recovers from this just like we recovered from 9/11. The world shuddered for awhile and investors didn't make any money. A bad 2001 (-13%) turned into a worse 2002 (-23%, about like 2020 so far) and the government threw massive money at maintaining the status quo. We know New York City, for example, didn't really recover until 2003. It was a long cold time. But by the end of 2003, all the pain of 2002 and most of 2001 was healed. By 2007, even people who bought the extreme 2000 top were ahead. They might not have made much but they hadn't lost anything either.


Then, of course, the cycle started again. That was the kind of crash that happens once or twice in a statistical lifetime. In 2008 we said it had happened once every 70 years but that's because the 1929-32 crash and then the follow-up in 1937 had already started to blur into one "Great Depression" lost decade. This might be one of those eras. It might even be the worst ever. Back then, people who bought the 1929 peak were completely blown out (-87%) at the 1932 low, doubled their money going into 1937 (even in the face of a -38% "correction") and then got back to work after the war. It took 15 years. It wasn't pleasant but people lived through it and prospered afterward.


In that catastrophic double-dip scenario, someone who bought the end of 1928 and held on for 15 years would end up with a 20% paper loss while capturing about 6% a year in dividends . . . yes, that person would have made money. Maybe we're in the middle of another Great Depression and the 2008 crash was just the opening act. We don't think so, but we have to be open to what could go wrong. Someone who bought the 2007 top and lived through an entire 15-year double bust cycle like that would still be ahead of where they started when 2022 rolled around. They wouldn't have a lot of profit to show for that period but they wouldn't be down either. Downside covered. Upside disappoints but is positive. If that's the worst history has thrown at us so far (including World War 2) it's not so bad after all.


And of course someone who bought in the middle of the cycle or even the bottom would make more money. We can't pick the market cycle. All we can do is manage our own expectations, hang on through the bad times and remain exposed to the good times. Again, maybe the future is worse than the Great Depression. Maybe we're only in the first stages of a 15-year crash. Again, we don't think that's likely, but it could happen. In that scenario, expecting human beings to endure 15+ years of misery unless they can't innovate a way out of it (for the first time in modern history) is a pretty big bet against what we know about innovation and ambition. More likely, we'll figure out a way past all challenges and get back to business as usual. If not, the new "business as usual" will provide other opportunities.


But will that play out in a 2-3 year period? We don't know. History definitely says very few downturns last even near that long so we'll probably be in an upswing then. Will that upswing take us back to record levels? Sooner or later. We probably won't be looking for a bottom at that point. We just have to see where we are and make decisions when we see what resources we have available.


And you are getting the dividend yields you locked in. You don't need to sell your dividend stocks now or in 2-3 years or even in your lifetime to keep earning that income. That's why it's there. While it's coming, we would seriously use that money to double down on your favorite stocks . . . not just on the dips but in any quarter, whenever cash starts to accumulate in the portfolio. Obviously buying the dips is better math but even buying the middle ensures that the overall position will never be priced at the peak. we'd buy the most secure yield companies first to get that end of our portfolio up to around a 10% yield, which is what the S&P 500 has historically paid in a typical year over that long cycle. Once you lock that in, you've got a market return at minimal risk. The stocks can go where they want. If they go up, it's extra. If they go down, you aren't selling and your heirs still get the yield you locked in.


Finally we'd keep pushing outside income into the portfolio across the cycle as well. That's what it's all about. Someone pays us. We eat. We convert as much of what's left into the best investments we can find. That money we worked for is now working for us. We're getting ahead. Sometimes it works harder than we hoped and we cheer. Sometimes it doesn't work as hard and it's a grind. But it's working. Better than bonds right now!




Amazon.com (AMZN: $1,900, up 3% last week)


Amazon has fallen 13% since hitting an all-time high of $2,186 last month. Obviously, this has more to do with the market’s malaise and people cashing out rather than the underlying fundamentals of the company. For us, this wonderful company is poised to continue doing well throughout the mandatory and voluntary call for the population to stay home. Consumers continue to turn to Amazon to order everyday supplies. The stock’s good week is a harbinger of things to come.


Remember when the company started as a bookseller? It is so much more than an online purveyor. It “seeks to be Earth’s most customer-centric company,” noting it is guided by “customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking.” We say, well done, Amazon!


The company services consumers through online, and believe it or not, physical stores. Its electronic devices include Kindle and Alexa, and its products are sold at low prices and are easy to use. And then there is Amazon Prime, a wonderful service that offers unlimited free shipping and allows customers to stream movies and TV shows. For sellers, it offers programs to help sell products, fulfill orders, and grow their businesses while Amazon acts as the middleman. And guess what? When you get Prime you are hooked and order more and more stuff each year. Note this: The company says it now has over 150 million Prime subscribers, and that more people joined Prime during the fourth quarter of last year than any other quarter in the company's history. Since its last milestone of 100 million subscribers in 2018, more than 50 million people have joined.


How good was the company doing before the coronavirus hit? There is no superlative strong enough to describe it. Sales were $280 billion last year, 20% growth, and profits were up 15% to $11.6 billion. With the company now immensely profitable, it is hard to imagine there was a time when the company was expanding into different areas and operating at a loss. This translates into huge amounts of cash flow - $38.5 billion in 2019. Based on empirical evidence, people have continued ordering through the coronavirus pandemic, and have in fact increased their spending.. They just shifted to everyday items like food and paper goods.


BMR Take: We believe this is an opportune time to pick up some shares at an attractive level. Our Target Price is $2,200, and, remember, the stock almost hit the level at the end of February. That seems like a lifetime ago, but it’s a shade over a month ago. This company touches every facet of our lives and we don’t expect it will miss a beat during the current crisis. This kind of staying power is why we don’t have a Sell Price.





Apple (AAPL: $248, up 8%)


Apple was one of the first companies to warn that its revenue would be affected by the coronavirus. Last month, it stated that its supply chain and consumer demand was impacted in China, back when there was the notion that the virus was contained. After hitting $328, an all-time high, the stock has fallen 25%. This was a good week for the company, rising 8%, showing its potential once people came back to the market after the stimulus bill made its way through Congress.


Everyone knows this company’s products and the “cool” factor.  The iPhone, iPad, AirPods, Apple TV, iPod touch. The retail stores are a sight to behold, sleek and modern, where you can try all the products and receive amazing customer service.


Last year, iPhones comprised 55% of the company’s FY19 (ended September 28th) $260 billion of sales. Sales of the product fell by 14% to $140 billion, primarily driven by lower unit sales. This rebounded in fiscal 1Q20, with iPhone sales growing 8% year-over-year to $56 billion, helping drive the 9% total sales’ increase to $92 billion. Income rose 10% versus the prior year, reaching $22 billion.


There is also a new version, iPhone 12, on the horizon, which should boost top-line growth. While there is no publicly available release date yet, people are speculating that it will occur in September in keeping with other product releases. Experts hope that this is a big upgrade with great features like 5G and a new camera screen. If that’s the case, we expect this will be a huge hit and drive sales increases for some time.


BMR Take:To paraphrase legendary investor Warren Buffett (who owns a big chunk of the company), our holding period is “forever” with this company. That’s why we haven’t implemented a Sell Price. Our Target Price is $375, reflecting our optimism in the stock once the market’s nervousness abates.





Berkshire Hathaway (BRK.B: $180, up 6%)


Even Warren Buffett, the Oracle of Omaha, is not immune to market forces. Since the end of February, the stock has dropped 22%, from $229, which was near its all-time high of $232 that was reached in January. On Monday, the company hit $160, a 52-week low. News about the progress made on the stimulus bill propelled prices upward later in the week, helping Berkshire, which gained 6%.


The company is a collection of companies and investments headed by Warren Buffett and his partner, Charlie Munger. The businesses are not as difficult to understand as it first appears, even if they are in far-flung areas. These include insurance operations, which includes Geico (remember those clever ads?) and reinsurance, freight rail transportation (Burlington Northern Santa Fe), utility and energy generation, and manufacturing businesses (Industrial Products, Building Products, and Consumer Products which encompass companies like Precision Castparts, Lubrizol, Clayton Homes, Shaw Industries, Benjamin Moore, and Fruit of the Loom).


Then, there is the roughly $250 billion portfolio, which has about 80% allocated to Financial Services and Consumer Products. The equity portfolio is invested in American Express, Apple, Bank of America, Coca-Cola, and Wells Fargo. The balance is in Commercial/Industrial stocks.


For Buffett and company, these bear markets are a time when they shine. He has shown the willingness and capital to put shareholders’ money to work when the economy hits rough waters. With $128 billion in cash, we expect he will start making astute investments that will outperform over the years.


BMR Take: We have a $255 Target Price. As for our Sell Price, we simply don’t have one nor do we envision putting one in place. The bear market that makes you nervous is when the company pulls up its bootstraps and really goes to work. There is the matter of Buffett’s age, which is 89, and Charlie Munger is 96. Buffett has assured people he has a plan in place, and we aren’t worried. He has handed over more investment responsibility to Todd Combs and Ted Weschler and the former is now running the important GEICO insurance operations. He also has a plan for the distribution of his holdings, which will be mostly given to Bill Gates’s Foundation, and will be done over 12-15 years so as not to disrupt the markets.





Blackstone Group (BX: $46, up 22%)


The stock has been beaten up since February, falling from its $65 all-time high reached earlier that month. Last week the company jumped from $38 to close at $46 on Friday, still giving it a 33% gain for the past 12 months. Impressively, this came after the stock tested its 52-week low on Monday when the stock traded at $33. As an investment company, it will naturally feel the effects when the economy teeters and the stock market swoons. Not to worry since this 35-year old company has survived everything thrown at it.


This company manages $570 billion in assets. In other words, more than half-a-trillion dollars! It invests in Real Estate, Private Equity, Hedge Funds, and Credit. Sure, these are economically sensitive and will no doubt will feel the impact of the current economic situation. But as we look ahead, we believe the company will take full advantage of lower, and in some cases, distressed prices.


It makes a chunk of its revenue, about 47% in 2019, from Management and Advisory Fees. These could feel an impact if investors pull money and assets are depressed for a long period of time. This brought in $3.5 billion in revenue last year. Investment Income and Interest/Dividend Revenue are the other major revenue drivers. With 2019 revenue of $7.3 billion and $3.9 billion in income, even a temporary hit won’t hurt so bad and we fully expect the company to emerge stronger.


BMR Take: History is no guarantee of future results. That being said, we sure like Blackstone’s winning record. We don’t doubt for a second that it will come out of this temporarily bruised but standing stronger after the fight, with hands raised in victory. Even after a strong week, the stock is below our $52 Sell Price, so we understand if you feel this is not for you. After all, it’s your money at stake. For us, our long-term optimism remains in place, which is why we have a $69 Target Price.





CBRE Group (CBRE: $39, up 14%)


This is another stock that is trading well off its all-time high, $65, that was reached just last month. This economically sensitive company felt the pain last month as the coronavirus took its toll on people’s health and the economy, reaching a 52-week low of $29 on Monday. The good news is that the stock recovered 34% since that point, in the wake of the stimulus bill, which should ease the burden, with the government providing direct cash payments and more generous unemployment benefits.


Starting in 1906, the company has survived everything thrown in its way. Two world wars, the Great Depression, the stagflation economy of the 1970s, credit crunches, and the Great Recession, to name some major events. We have no doubt that this Commercial Real Estate Services and Investment Company, which generates the industry’s largest amount of revenue, will also make it through the coronavirus pandemic.


It provides services to occupiers (e.g. facilities and projection management, leasing and sales transaction and consulting services), and investors (e.g. capital markets such as property sales, mortgage origination, sales, and servicing, leasing, investment management, property management, and valuations services).


The company will weather the storm better than others as its revenue has changed to become more contract-based since it is able to provide a full, integrated suite of services. Revenue is generated from Management Fees and Commissions, split roughly evenly.


Last year, revenue grew from $21 billion to $24 billion, 12% year-over-year growth. Income rose 21% to $1.3 billion. During these times, it is important to look at cash flow. Last year, its operating cash flow was $1.2 billion, and its free cash was $930 million after subtracting capital expenditures. The government stimulus may help businesses pay the rent, although it is hard to know at this point. Even if cash flow is hurt, it won’t prove catastrophic.


BMR Take: We believe in the business that they are in. They save their clients millions and millions of dollars each year. Our mentors used to tell us to go where the money is. That’s where CBRE is. Big, big real estate across the globe. For those willing to take the ride, our Target Price is $71.





Microsoft (MSFT: $150, up 9%)


The pandemic slashed the stock from last month’s $191, an all-time high, down to $135 earlier this month, a 30% fall. Happily, this week was a different story, with the company rising 9%. Obviously, we feel better when prices go up even though our faith in Microsoft never wavered.


To see why, it is necessary to delve into the firm. Everyone knows about the company’s Windows operating system and Office Products. There’s also LinkedIn, the leading professional social network, and Games (Xbox hardware and software).


We expect Bill Gates’s resignation as chairman of the board to have zero impact on the business. He started walking away from day-to-day responsibilities 12 years ago and will still serve as Technology Advisor. His ownership stake in the company will continue to give him a vested interest in major decisions. Besides, CEO Satya Nadella has done a fantastic job driving revenue and profit growth.


It is useful to analyze fiscal 2Q20 (ended December 31, 2019) results even if the world changed dramatically since the end of the period. Revenue grew 14% versus the year-ago period, from $32.5 billion to $37.0 billion, and income jumped 38%, from $8.4 billion to $11.6 billion.


The company’s More Personal Computing business, which includes Windows, Devices, Gaming, and Search (35% of 1H20 revenue) is the one feeling the coronavirus’ effects most keenly. A month ago, management withdrew its $11 billion fiscal 3Q20 guidance for the segment while maintaining the outlook for the other two businesses.


Even if the other businesses get impacted, we ultimately expect all of Microsoft’s segments to rebound. The company makes products that consumers and businesses need to have to work and play.


BMR Take: Microsoft pays a $0.51 quarterly dividend (1.3% yield). This is secure, which is more important than ever with companies suspending payouts. In 1H20, the company generated free cash flow of $17.6 billion, easily covering the $8.4 billion in cash dividends. Is it any wonder why we couldn’t see selling this stock?  Our Sell Price…we don’t’ have one. We have a $200 Target Price.





A Word From Gary Jefferson

Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.


Only a few short weeks ago it was the beginning of February and the American economy was the envy of the world. We had the best unemployment numbers in decades, along with the greatest consumer confidence and entrepreneurial spirit in, perhaps, the baby boomers’ adult lifetimes. Interest rates were low, corporate earnings growth was solid and most investors were expecting not only a somewhat bumpy (due to rotten politics/media) ride, but also a good to maybe even above average year in the market.


Then, in a blink of the eye, literally everything was turned upside down. It was a disease not unlike any of the hundreds of others that have swept across the globe for thousands of years, but this time it had the digital power to instill instant fear into all humans almost simultaneously through 24/7 media. It didn’t take but a few days of nonstop media doom and gloom to plunge the markets into chaos and despair. And, even today, no one knows for sure whether this is going to be the first great pandemic since the 1918 Spanish flu, or just another kind of swine flu, bird flu, MERS, SARs, Zika or any of the rest that were one-and-done market episodes.


At this moment, the bottom line appears to be:  It’s murky out there, and likely will be for days and weeks, but hopefully not much longer. We have just experienced painful selloffs compounded by downward velocity never before seen by investors at any time in history. This happened because of panic which was in turn caused by instantaneous communication to every investor at the same time, multiplied by millions of trades made by nano-second, flash-trading algo/hedge quants. It has reached the point of “pure uncertainty” that the markets hate so much, because coronavirus blindsided everyone, including the best and most seasoned investors.


Yet – unless this is truly the end of the world, and we certainly don’t believe that it is – investors who “stay the course” and who remain “long-term”, still have the best chance of achieving their long term financial goals and objectives.  We don’t say this simply based on history, although all of history is clearly on the side of the investor, but also because there is plenty of “good news” that is still being overwhelmed by all the negative headlines. Recently President Trump declared a National Emergency, thus throwing the full weight of the US government behind fighting and winning the battle against this virus.


As much as $1 trillion is being considered to stimulate and help the economy recover from the shut-downs and quarantines that are affecting businesses today. It’s nearly impossible to overstate the enormous amount of liquidity the Fed has provided already, and they basically have said that the number of tools remaining at their disposal is even bigger. Chairman Powell is committed to ensuring that all financial markets continue to function – from overnight Repos to long-term bonds and everything in between. China has already closed down its last temporary hospital. Apple has already reopened all 42 stores in China.


New cases have already dropped precipitously in South Korea. Doctors have already successfully treated many cases using a combination of an anti-malaria drug with common antibiotics such as the Z-pack. Like the fastest market  plunge in history, the ‘recovery’ is “happening” and it’s happening faster than anyone could imagine.  Yes, we will have to work through the layoffs and jobless claims, but the Fed policy for the foreseeable future is going to be focused on shoring up capital markets. We will get through this mess and the markets, the economy, jobs, schools and life in general will get back to normal. We believe the markets will, as they always have in the past, react sooner than the headlines do.


But, most importantly, consider these facts: If you had invested $100,000 in the S&P 500 index on January 1, 2000, it would have hypothetically grown to $324,019 by December 31, 2019. This $100,000 investment would have endured the tech bubble bursting and the devastating 2008 financial crisis, and you would have still come out way ahead.


But if you decided during the tech bubble and 2008 financial crisis that you wanted to trade in and out of the markets to try and evade downside, chances are you would have missed some of the best rallies the market had to offer. Missing the 10 best days means your $100,000 would have only grown to $161,706. Missing the best 25 days would have meant losing money, with your investment shrinking to $82,256.70.


Don’t try to time the market! Staying invested even in dismal-seeming times is the correct approach.




The High Yield Investor
By Larry Rothman
VP High Yield Investments
The Bull Market Report 


After a rough period, the equity markets roared back last week, even after a rough start on Monday. This has had implications for fixed-income yields, too. After some back-and-forth negotiating, Congress came to an agreement on a $2 trillion stimulus package that President Trump signed. This includes direct payments to people, extended unemployment benefits, and assistance to Healthcare as well as hard-hit industries. There were some tense moments, but it is remarkable how quickly such a broad and unprecedented spending bill was passed.


On other fronts, the Federal Reserve announced a host of actions designed to keep liquidity flowing and markets functioning. These steps included a commitment to keep buying assets, which the central bank extended to corporate bonds. There is also a lending program aimed at businesses.


We feel better about the state of things even though we caution that we are not out of the woods yet. The big news on the economic front was the historic jump in jobless claims to 3.3 billion from 280,000 the prior week. The other readings, like Personal Income and Consumer Spending, which increased by 0.6% and 0.2%, were good but outdated since these measured activities in February, before businesses started shutting down.


Treasury yields fell last week, with the two-year yield at 0.25% compared to 0.37% the week before. Meanwhile, the 10-year yield settled at 0.72%, down 20 basis points. The 2/10 spread is still quite steep compared to recent months, but narrowed slightly to 47 basis points compared to 55 bp.


We press on at The Bull Market Report! Out of the three investments that we analyze this week, Ares Capital, which invests in Middle Market companies, has the highest risk/reward profile. For more conservative investors, we present BlackRock Income Trust and Invesco Municipal Trust.


Ares Capital (ARCC: $11.29, up 9%, yield = 14.2%)


Organized as a Business Development Company (BDC), management has previously guided the company through rough times. Founded in 2004, it experienced the good times that ended a few years later when the housing bubble burst and the economy blew up. The company made it through those times, and it will survive this downturn, too.


There are three investment groupings: Ares Credit Group, Ares Private Equity Group, and Ares Real Estate Group. Its objective is to earn income and capital appreciation through its debt and equity investments. Its investments are on the riskier side since it puts money mostly in U.S. middle-market (smaller) companies, which the company defines as those with annual EBITDA of $10 to $250 million. Although these securities are unrated, management expects that their debt investments are below investment grade if the rating agencies were to provide one.


The BDC seeks to limit risk by mostly investing in first-and-second lien loans, and to a lesser degree, mezzanine debt. First-lien loans are the most secure since they have the highest claim on assets. While this gets complex, you can think about it in terms of your mortgage. The bank has a first lien claim, and, if you take out a second mortgage, that lender’s claim is lower on the totem pole. Generally, it invests in debt, which is more secure than equity. Sometimes mezzanine debt includes an equity kicker and it might make some preferred and common equity investments.


At year end, the largest portion of its $14.4 billion portfolio was invested in First Lien loans, representing 44% of the assets, followed by Second Lien loans, at 30%.


It has good sector diversification, which should buffet the portfolio to a degree. Healthcare, accounting for 20% of its portfolio, represented the largest sector. This was followed by Software & Services (13%), Commercial & Professional Services (9%), Utilities (7%) and Investment Funds (7%). Other major areas are Consumer/Retail, Autos, Energy, and Financials/Insurance.


Naturally, the Middle Market sector provides a good return opportunity since there are typically fewer companies willing to provide these companies with financing. This is particularly true in challenging times like we are in now.


We fully recognize that, while management seeks to mitigate the risk, Middle Market companies are riskier. The stock is below our $15 Sell Price, so if you realize this is too much risk and are ready to get out, that’s OK. For us, the higher risk also means higher reward, and the market’s dislocation means more money-making opportunities. Ares Capital (Target Price: $21) now has a 14.2% dividend yield, although future payouts may get cut. The latest dividend was $0.40 compared to $0.42. Importantly, note that the company continued paying dividends through the Great Recession, albeit at a lower rate. For two years, from 2009 until 2011, it paid a $0.35 quarterly dividend, down from $0.42 in 2007-2008.



BlackRock Income Trust (BKT: $5.83, up 4%, yield = 7.1%)


This is one of the less risky closed-end funds. It seeks to both preserve capital and generate high monthly income, which seems at cross purposes. In actuality, it does an excellent job balancing the two. The fund’s managers invest at least 65% of the assets in mortgage-backed securities (MBS) and a minimum of 80% in securities either issued or guaranteed by the U.S. government or an agency, or rated AAA by one of the credit rating agencies. In other words, the fund minimizes credit risk.


The fund buys a pool of residential mortgages that have been packaged together. When homeowners make their monthly payments, these are passed through to the MBS holders. Since people may get into financial trouble and miss payments, especially in the difficult times we are in now, most of the fund’s assets are invested in mortgages that are guaranteed by the U.S. government or one of its agencies (Ginnie Mae, Fannie Mae, and Freddie Mac).


At the end of February, these high-quality securities comprised the entire fund. Conservative investments obviously have done well lately with people fleeing riskier investments.


BlackRock Income Trust (Target Price: $6.50) is for conservative income investors, obviously. If the market has you spooked and you are looking to reduce your risk exposure, or perhaps you are risk-averse by nature, the 7.1% dividend yield is compelling. While it invests in high-quality credits, you can still receive about a 640-basis point yield advantage over the 10-year Treasury yield.



Invesco Municipal Trust (VKQ: $11.35, up 9%, yield = 5.2%)


This is another closed-end fund that appeals to more conservative investors, particularly those with a higher income. Its objective is to generate federally tax-exempt income. The largest category of its investments is in AA-rated bonds, at 30% as of January, and 63% is allocated to the A through AAA-rated bonds. Broadening this further, 83% of the assets are invested in investment-grade securities.


Illinois accounted for 12% of the fund’s assets, followed by Texas (11%), New York (9%), New Jersey (7%), and California (7%). No doubt, while some of these states’ economies will get hard hit by the coronavirus and will start to stretch borrowings, we don’t expect major defaults. It is in the federal government’s interest to keep states from reaching financial distress.


It is important to keep in mind that, while the fund manages credit risk by investing in highly rated bonds, it is not the same as investing in U.S. government bonds, which are considered risk free (if the U.S. defaults, we have huge problems).


Invesco Municipal Trust (Target Price: $15) has a 5.2% yield. Since the income is exempt from federal income tax, you need to make an apples-to-apples comparison with taxable investments. To do that, you calculate the tax-equivalent yield. The higher your federal income tax bracket, the more beneficial the tax-free income. There are seven federal income tax rates, which range from 10% to 37%. The formula to figure out your tax-equivalent yield is simple. You take the yield and divide it by 1 minus your tax bracket. So, if you are in the highest tax bracket, your tax-equivalent yield is 5.2% divided by 1 minus 37%, or 8.3%. This is a strong yield from a conservative fund invested in such highly rated US Government bonds.



Good Investing,
Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998