You Want to Buy More Junk Equities?

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At a meeting of our family office last fall, random thoughts about Charles Dickens’ Tale of Two Cities were part of the members’ discussion about investments. Seven months ago, it was both the best of times and the worst of times.

In terms of yield, cash had truly become trash; the market’s offers of yields to maturity on two and three-year Treasury notes were half what the coupons were on the same maturities we had bought in 2017 and 2018. At the same time, the shares of the common stocks of sound American companies were promising 12-month expected dividend yields higher than the current annual interest payouts on all but the worst-rated junk bonds. We found ourselves looking at a potential portfolio of companies with a Piotroski F-score of 6 offering a 4.24% annual yield. At our meeting last Friday, we all agreed that our literary references to Dickens had been hopelessly wrong. Given how wonderfully successful our “junk equity” purchases had turned out to be, we clearly should have been discussing Great Expectations instead.

On Monday April 12, Chris Whalen of Institutional Risk Analyst offered his assessment of the current situation for American banking companies: “US banks are twice as expensive as they were a year ago looking at earnings and assets but have less transparency and greater volatility in terms of (likely) future costs and income”. In his article Whalen goes on to discuss in detail his reservations about the current financial market.

One of his observations was particularly striking. For the fourth quarter of 2020, the interest expense for U.S. banks’ holdings of their $21 trillion in assets was only $12 billion.