WEBVTT - BMO's Ablin on Corporate Bonds: I Don't See Much Value (Audio)

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<v Speaker 1>Global business news twenty four hours a day, if Bloomberg

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<v Speaker 1>dot Com, the Radio plus mobile act and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Charlie how A, thirteen minutes to go ahead of

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<v Speaker 1>the clothes. On a Wednesday, stocks are fluctuating near a record.

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<v Speaker 1>Crude oil is plunging. It is down three point nine percent,

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<v Speaker 1>dropping a dollar eighty three of barrel ninety seven right

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<v Speaker 1>now on West Texas Intermediate back below forty five dollars

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<v Speaker 1>a barrel. We do have Brent crew down four point

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<v Speaker 1>two percent. Gold up eight seventy to thirteen forty four.

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<v Speaker 1>Again there of seven tenths of one percent. The tenure

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<v Speaker 1>up nine thirty seconds had yield one point four seven percent.

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<v Speaker 1>SMP five hundred Index up a point to fifty three,

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<v Speaker 1>a gain there of about point one percent. Down Industrials

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<v Speaker 1>up thirty three points, a gain of two tens of

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<v Speaker 1>one percent. Nasdaq is down two tenths of one percent.

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<v Speaker 1>I'm Charlie Pelle. That's a Bloomberg Business flash. You're listening

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<v Speaker 1>to Taking stock with Kathleen Hay and Pim Fox on

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<v Speaker 1>Bloomberg Radio. Taking stock of the stock market continuing to

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<v Speaker 1>look to higher levels, although today a bit of a

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<v Speaker 1>mixed reading. The Fed's Beige Book not giving bond investors

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<v Speaker 1>too much direction in terms of where the Fed heads next,

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<v Speaker 1>but bond investors don't seem to need it, as the

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<v Speaker 1>thirty year bond yield sold today at a record low

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<v Speaker 1>two point one seven and thirty year German sovereigns selling

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<v Speaker 1>at a negative yield for the first time ever. Jack

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<v Speaker 1>Ablin joins this now, chief investment officer at BMO Private Bank. Jack,

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<v Speaker 1>welcome back to the show. So Branxit seems to be

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<v Speaker 1>fading as an impeditive impediment, certainly to the U S

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<v Speaker 1>stock market, right, and even the pound is rebounded tomorrow.

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<v Speaker 1>We have the Bank of England maybe cutting rates, but

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<v Speaker 1>they don't do it tomorrow, maybe in August. Let's start

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<v Speaker 1>with US stocks, though, what is the focus now? If

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<v Speaker 1>I'm trying to figure out if it's time to keep

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<v Speaker 1>buying or if it's time just to keep my powder dry. Boy,

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<v Speaker 1>we've got our powder dry. Um. You know, part of

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<v Speaker 1>it is so mechanical, Cathlete, because it's really not individual

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<v Speaker 1>investors that are necessarily buying stock. In fact, if you

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<v Speaker 1>look at UM. You know, individual investors and mutual mutual

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<v Speaker 1>funds and institutions, they've been net sellers of stock, and

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<v Speaker 1>particularly in the first and a lot of the second quarter,

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<v Speaker 1>at least the way I've seen it, and in fact

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<v Speaker 1>as buy backs that are making up the difference, uh

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<v Speaker 1>and then some So really a lot of the demand

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<v Speaker 1>for these company stocks are coming from the companies themselves, Jack,

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<v Speaker 1>I want you to follow up on that, because buy

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<v Speaker 1>backs have also contributed to the number of shares being

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<v Speaker 1>pulled out of the market. And just to put a

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<v Speaker 1>number on individual investors pulling fifty two billion dollars from

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<v Speaker 1>US stock, mutual funds and exchange traded funds in the

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<v Speaker 1>first half of the year. Where's all that money going? Yeah,

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<v Speaker 1>I think it's it's probably UM going into cals ship's

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<v Speaker 1>it's going into stockpile. You know, keep in mind it

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<v Speaker 1>maybe going into bonds actually, because you know, one of

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<v Speaker 1>the things that these negative rates have done is really

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<v Speaker 1>UM backfired in many respects. You know, if you consider

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<v Speaker 1>that if you're a retiree or if you're an insurance

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<v Speaker 1>company looking to generate a certain amount of income per year,

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<v Speaker 1>and bond yields go down, you have to buy more bonds. Uh.

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<v Speaker 1>And so what we found, for for example, in Japan,

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<v Speaker 1>that more investors are hoarding cash and and and buying

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<v Speaker 1>more bonds when rates come down. So it's a it

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<v Speaker 1>seems to be a backward situation. Yeah, it is certainly

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<v Speaker 1>one that is making life interesting. Do you put any stock?

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<v Speaker 1>I mean, Jack, you're you're great at certain kinds of

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<v Speaker 1>big picture signals that help you make investment decisions. I

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<v Speaker 1>always think of the time when you know, you looked

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<v Speaker 1>at you saw commit a signal from the commodity for commodities,

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<v Speaker 1>you got bullish on commodities, right, and it worked very

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<v Speaker 1>well because you got on before a lot of other

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<v Speaker 1>people did. But now the flatter yield curve recession used

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<v Speaker 1>to be an indicator. But it just seems it's hard

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<v Speaker 1>to read signals in the bond market is meaning anything

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<v Speaker 1>for the economy now, right? I mean, look at look

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<v Speaker 1>what what investors or or or what's leading the market higher?

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<v Speaker 1>We hitting all time highs led by telecommon utilities. What's

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<v Speaker 1>that telling you? I don't see happy days are here again?

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<v Speaker 1>This to me sounds like investors are buying can goes

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<v Speaker 1>at the grocery store before the storm. Does that include

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<v Speaker 1>companies such as Home Depot or even McDonald's and United Health.

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<v Speaker 1>I think the theme here, Tim, is investors not able

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<v Speaker 1>to get the adequate yield out of the bond market

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<v Speaker 1>thanks to UM, thanks to all of this, uh, you know,

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<v Speaker 1>the central bank buying. In fact, they are the bond

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<v Speaker 1>buyer worldwide, And so investors are looking at equities as

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<v Speaker 1>a income alternative, which is rational. UH. In fact, UM,

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<v Speaker 1>you know, these companies that you mentioned are ones that

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<v Speaker 1>have had a pretty good track record of maintaining and

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<v Speaker 1>growing their dividend over time. So you know, these aren't

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<v Speaker 1>necessarily the highest yielding players. Um, these are the ones

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<v Speaker 1>who at least with the most persistent so I think,

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<v Speaker 1>and I know I've talked to I've talked to retirees

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<v Speaker 1>about it. I said, look, you know, if you have

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<v Speaker 1>UH an income requirement of two and a half percent,

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<v Speaker 1>let's say, why wouldn't you buy a portfolio of UH

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<v Speaker 1>two and a half percent dividend yielding stocks that have

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<v Speaker 1>had a long track record of maintaining and growing that dividend.

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<v Speaker 1>Buy it clipped here dividend and don't care about what

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<v Speaker 1>happens to the price as long as those dividends are intact,

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<v Speaker 1>you're set. So I think a lot of that um

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<v Speaker 1>brasionale is driving. What's what's going on in the market today, Jack, Uh?

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<v Speaker 1>Corporate bonds UM. We just saw the largest daily inflow

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<v Speaker 1>ever to a corporate bond ETF. That was a story

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<v Speaker 1>two days ago on the Bloomberg. I believe there about

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<v Speaker 1>a billion dollars worth of inflows into corporate bonds frond

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<v Speaker 1>in a day. Negative yields creeping in a new issue

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<v Speaker 1>corporate bonds in Europe? What's an investor to think? Here?

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<v Speaker 1>Do corporate bonds lease? US corporates offer value as if corpse?

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<v Speaker 1>Some corporates are even going so lower in the negative territory?

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<v Speaker 1>What do you What do you see there? I don't

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<v Speaker 1>see much value there Kethley. And then you know McDonald's

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<v Speaker 1>last December did a ten year bond deal in the

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<v Speaker 1>US UM for about three point five percent. McDonald's just

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<v Speaker 1>completed a bond deal in Europe ten years for zero

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<v Speaker 1>point seven five UM. So you know, clearly, UM, they're

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<v Speaker 1>finding great value there. Uh. And as long as the

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<v Speaker 1>the bond yields they're paying are lower than the free

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<v Speaker 1>cash flow yield they're generating. I guess it makes makes sense.

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<v Speaker 1>So you know, I can't blame the treasures for issuing bonds.

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<v Speaker 1>I'm not sure who's buying. I don't think individuals are buying.

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<v Speaker 1>I think it's the ECB. In fact, that McDonald's issue

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<v Speaker 1>was did qualify for ECB purchase? Jack? What's the worst

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<v Speaker 1>investment right now? Oh? Boy, me look through my portfolio here,

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<v Speaker 1>bunch um. In otherways, what's the most unloved investment? I

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<v Speaker 1>would say unloved investment that I think has legs is

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<v Speaker 1>you know, Kathleen mentioned it at the beginning of the show, commodities.

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<v Speaker 1>You know, commodities are now offered at a probably seven

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<v Speaker 1>sixty sixty to seventy percent discount to where they were,

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<v Speaker 1>and they're starting to show signs of life. We started

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<v Speaker 1>purchasing commodities back in May after they kind of broke

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<v Speaker 1>out a little bit. Uh. And interestingly, you know, we

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<v Speaker 1>know we we have oil trading uh roughly below production

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<v Speaker 1>costs here at home, but we also have agricultural products

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<v Speaker 1>trading at fifteen to sixteen percent below production costs. So

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<v Speaker 1>that's you know, if you uh, you know, believe that

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<v Speaker 1>eventually that's got to right itself, either the price has

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<v Speaker 1>to go up or the production has to come down.

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<v Speaker 1>Gold gold, of course, has been a favorite flavor for

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<v Speaker 1>people watching Brexit, betting on the fed nut race, seeing race,

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<v Speaker 1>maybe even betting that there are some disinflationary forces gathering

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<v Speaker 1>strength around the world. What do you see for gold

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<v Speaker 1>and a continued rally? Yeah, I mean I think that gold,

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<v Speaker 1>you know, certainly serves a purpose. Um. You know, historically

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<v Speaker 1>gold has always been uh that that opportunity cost of

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<v Speaker 1>carrying gold, Um, given that you've had to forego income

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<v Speaker 1>and you know, pay some sort of storage fee. But

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<v Speaker 1>you know, that incremental disadvantage has pretty much gone. So

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<v Speaker 1>it does serve an interesting diversification. And you know, probably

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<v Speaker 1>you know, if if you do want to venture your

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<v Speaker 1>way into the stock market and buy at these levels,

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<v Speaker 1>maybe an equal measure of gold could be a decent offset.

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<v Speaker 1>Do you recommend looking at emerging markets at all? We do? Um,

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<v Speaker 1>you know this is um, this is this is one

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<v Speaker 1>where put it put it this way. We got it

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<v Speaker 1>very early in emerging markets. UM. We were enticed by

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<v Speaker 1>the valuations and they've been going nowhere for three years.

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<v Speaker 1>We've maintained our position there and I think, you know,

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<v Speaker 1>I haven't looked lately, but last time I checked, emerging

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<v Speaker 1>markets were the best performing equity market category this year.

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<v Speaker 1>And you know that's if that has its nice little

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<v Speaker 1>stealth rally behind those scenes, so be it. But um, yeah,

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<v Speaker 1>I think that that's probably a place where, um, you know,

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<v Speaker 1>out of the way of Brexit to some degree, out

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<v Speaker 1>of the way of some of the other challenges certainly

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<v Speaker 1>here at home with the election. Uh. And you know

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<v Speaker 1>when you get for example, China that now is approaching

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<v Speaker 1>ten thousand dollars per capita gdp UM, you know, domestic

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<v Speaker 1>demand will start to flourish there. So I think that's

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<v Speaker 1>you know, at least a longer term signal for emerging markets.

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<v Speaker 1>So central banks said, you've got the Bank of England,

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<v Speaker 1>maybe they're going to cut race tomorrow. They don't, They'll

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<v Speaker 1>do it in three weeks. Mark Kearney, who's the head

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<v Speaker 1>of the d O, he certainly seems to signal that

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<v Speaker 1>how big of a deal are any of these moves

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<v Speaker 1>now for equity markets and bond markets for that matter. Yeah,

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<v Speaker 1>it's you know, I would have I would have said

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<v Speaker 1>three or four months ago that investors were annured with

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<v Speaker 1>the the actions of the central banks, knowing that they're

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<v Speaker 1>really not doing very much anymore. But you know the

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<v Speaker 1>fact is they've captured the imagination and have driven you know,

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<v Speaker 1>a lot of things higher. Um. My sense is what

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<v Speaker 1>I'm I'm really waiting for is that next leg and

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<v Speaker 1>that what I'm looking for as fiscal stimulus. You know,

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<v Speaker 1>the fact is that the British um pretty much voted

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<v Speaker 1>against the political elite in in in Brussels. Um. You know,

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<v Speaker 1>Trump supporters are looking to do that here at home,

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<v Speaker 1>and I think at some point, you know, Brussels, looking

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<v Speaker 1>at the E and the EU, have to throw their

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<v Speaker 1>constituents of bone um and so perhaps it comes in

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<v Speaker 1>the form of fiscal policy. Thank you very much for

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<v Speaker 1>for enlightening us. Jack Ablin always a pleasure. He's the

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<v Speaker 1>chief investment officer for b MO Private Bank, helping it's

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<v Speaker 1>a manage approximately six see eight billion dollars of customer assets.

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<v Speaker 1>Based in Chicago. You can follow him on Twitter at

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<v Speaker 1>jack Abley. You're listening to taking Stock, we take you

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<v Speaker 1>through to the clothes and this is Bloomberg