April 2020 – Monthly Commentary

May 18, 2020  |   Monthly Commentary   |     |   0 Comment

April 2020

We open this monthly commentary with a discussion of the year-to-date performance of our Reserve Cash Management composite.  We manage the underlying portfolios of that composite in a highly conservative fashion and that’s reflected in the performance.  Through April, the total return has been 0.45%, net of fees.  That compares favorably to PIMCO’s MINT, and Blackrock’s NEAR, which are the largest short maturity fixed income ETF’s in the sector.  In total return, net of fees, MINT was down -0.49% and NEAR was down -1.41% for the period.

We have used the recent market dislocation as an opportunity to adjust the underlying portfolios of the composite.  Specifically, we have extended the duration from 58 days to 98 days and the yield to maturity has risen to approximately 1.61%.  In addition, we’ve added several municipal bonds of high credit quality as that sector offered particularly attractive value during the dislocation.  The weighted average credit rating of the composite is “A”. 

We continue to maintain an overweight exposure to floating rate notes, but have reduced the exposure in that structure to less than 70% and raised the fixed rate exposure to 30%. 

As expected the April jobs report was abysmal, showing 20.5 million people out of work which amounted to an unemployment rate of 14.7%, the worst rate since the Great Depression.  That measure was actually not as bad as the consensus opinion that 22 million jobs would be lost in the month.  As with every jobs report it’s imperative to dig into the details of the report to capture any nuance that may present itself.  The silver lining in the April report was that nearly all of the respondents listed their unemployed status as temporary.  While that measure is encouraging, it’s almost certainly overstating the job growth rebound we can expect when the country is allowed to return to work.  The reason is two-fold. First, it is impossible for many of those respondents to understand the financial health of their employer.  For a small business without any form of disruption insurance, losing six weeks of revenue will most certainly eat into earnings and may force the employer to cut back on staff needs when business resumes.  Even worse, an employer forced into bankruptcy, is unlikely to rehire any of the pre-crisis staff.

It’s somewhat surprising that the general population doesn’t understand the interdependence of the American economy.  There have been rent strike protests insisting that landlords forgive rent while renters are unemployed and many left-leaning politicians portray the landlords as bad guys.  However, in reality, the landlords are on the hook for the mortgage of that property and can’t simply “eat” a month or two of rent.

That logic extends across the entire economy, from airlines, cruise ships, hotels, and every industry in which people come together at anything but a safe social distance.  With that in mind, there exists the risk that many of these large corporations would be unable to fund their existing debt absent any cash flow.  That’s precisely why the Federal Reserve has taken the steps that they have, so far, to ensure that the nation can borrow the cash it needs continue to operate.  The various programs they have enacted are designed to take their role of lender of last resort to the entire country, not just the largest banks, as it was intended. 

That support has come at a cost though.  The Treasury Department will borrow $2.9 trillion in the second quarter to fund the myriad lifeline programs.  That compares unfavorably to the $1.28 borrowed for the entirety of last year.  So far, the appetite for U.S. Government debt has been nearly insatiable, but that’s not to say that it will remain so forever.  Prior to the crisis, we cautioned that the government was running an unsustainable annual spending deficit of $1 trillion.  With floodgates of liquidity now open we wonder when the money printing will end and what will the markets look like when it does.

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