Category Archives: Finance

A Word: Hertz Bankruptcy

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A word on the Hertz Bankruptcy.

One of the most leveraged companies in one of the most impacted industries, managed to limp along and delay the inevitable for almost a full quarter. The Hertz filing is likely just the tip of iceberg…

I wrote previously that the velocity of change is much more difficult for companies to handle than the magnitude.  Hertz had to deal with both.  The travel industry has been one of the most impacted (velocity & magnitude) sectors during the COVID pandemic and response.

Hertz’s fleet of 700,000 vehicles, which are mostly rented from airports, has largely been idled due to the slow down in travel caused by the pandemic.  Complicating the matter is the value of these assets are falling as vehicle sales slow and used car prices fall.

Hertz also has $21 billion in long term debt. 

All of these factors combined into this bankruptcy filing came with lightning speed – relative to filings – adding Hertz to the short list of companies in the “no coupon club.”

Bankruptcy filings are going to be a lagging indicator. And there’s going to be more to come.

The Recession No One Believes In

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The recession no one believes in is here to stay.

My vantage point for the COVID pandemic and response has been somewhat unique – sitting here in Lower Deer Valley Utah since mid-March.  I am fortunate to fall into a line of work that transitioned to work from home seamlessly.  However, that’s not the case for many, especially around here.  No tourists, no work.

The same concept applies to many parts of the economy.  No shoppers, no store sales.  No diners, no restaurant sales.  No vacations, no travelers.  No sporting events, no ticket sales, etc. 

The likely outcome appears to be a fairly broad, deep, and lengthy economic recession (80% probability).  But that expectation looks to be in the minority using the S&P 500 as a proxy of the consensus view.

Source: MarketWatch

There seems to be a disconnect between the reality on the ground and expectations.  I think there are few things going on:

  • Velocity of the pandemic & response
  • Lag in economic data & company reporting
  • Demographics of those impacted by initial shutdowns
  • No single source of issues
  • Hope for a rapid return to normalcy

Velocity: I wrote earlier about the absolute stunning velocity of the global shutdown due to the COVID pandemic.  It’s almost incomprehensible.  It’s like nothing anyone alive today has ever experienced.

Lag: Given the speed of the fallout and the fact that impacts to U.S. companies did not truly start until mid-March, barely any of the financial impact is being reported in Q1 financial reporting.  Q2 results will be telling.  Those won’t be available until July; still two months away.  Same issue with most economic data; it’s a lagging indicator and barely incorporating the impacts yet.

These next two charts are not helpful – folks have barely had time to miss one mortgage payment and it’s not in the data yet.

Demographics: The initial stay at home orders have had a disproportionate impact on certain cohorts.  Many white collar workers (like me) simply picked up our laptops and started working from home.  No fear of lost income.  No major life setbacks – other than Mrs. SFTE zoom-bombing my meetings.  Not the case for many lower wage, retail and service jobs.  

Guess which of these cohorts is more invested in the market?  Hint: The groups not being impacted (yet). So be careful about using their views to assess the current state.

Source:  During the Great Financial Crisis, the source of the issues was concentrated in the financial system.  I’m not sure if the breadth makes the current situation better or worse over the longterm, but it does make it harder to understand.  

Headlines like this are more tangible than hand-made cardboard signs in windows of thousands of small businesses.

“A single death is a tragedy; a million deaths is a statistic.”  ― Joseph Stalin 

Return to Normalcy: There’s also quite a bit of hope for a rapid return to normalcy.  I’m all for hope, but let me quash that notion.  I would love to get back to normal, but that doesn’t exist anymore.  This is like 9/11 in terms of resetting normal.  I will never touch an ATM or gas pump handle with the same innocence again.  There is no f-ing way I am getting on an airplane any time soon. “Any environment that is enclosed, with poor air circulation and high density of people, spells trouble.”  

Mrs. SFTE would fight you tooth and nail if you tried to take her into a restaurant.  Those dentist appointments for mid-Summer, cancelled.  Check with me in six months (and no, I will not have two cleanings back to back so no pent up demand here).  Summer sports camps, ha.  Summer vacation plans, cancelled.  This is all lost income to someone, somewhere.

Yes, we’re a bit weird, but I bet not that weird.  If you haven’t noticed, this virus can kill you.  I’m 101% against being killed.  My guess is so are most people. That is why the data shows trends like this:


So if people did not wait for stay at home orders to alter their behavior, how much will changing those orders affect their behavior? Not enough to make the recession go away.

Here is some economic data we do have:

The Initial Claims graph just broke the y-axis:

Lots of jobs have been lost (stunning velocity):

Unemployment rate is currently worse than at the peak of the Great Financial Crisis:

Approximately 70% of the economy is based on consumer spending, so no good news in this chart:

The handicap to the magnitude and duration of the recession is the amount of fiscal and monetary intervention being deployed.  This also falls into the incomprehensible and unprecedented category. 

However, by and large, these measures do not seem to be creating jobs, simply offsetting the financial impact of the shut downs.  At the end of the day though, it is jobs that matter.  Jobs will drive spending, and spending drives over two thirds of the U.S. economy.

“A better measure for how real people experience the business cycle: the ebb and flow of jobs creation. Losing your job is a recession; finding employment represents recovery. Looking at the business cycle through this lens paints a more complicated picture.

Perception on Main Street is always important for recoveries, and that will be true in the extreme this time. Given the sharp, dramatic jobs losses, which will probably get worse, sentiment in the broad population will be highly relevant for charting the path of the post-recession trend. On that front, jobs will arguably be the most relevant stat.

With that in mind, consider how private employment has fared on a rolling one-year basis in the past. As the next chart below reminds, the labor market often contracts through a recession and for a number of months after the downturn officially ends, based on NBER dates. In some cases, a positive one-year gain in private employment doesn’t arrive until several years after the recession’s official end.” Source:

Based on history, jobs do not recovery quickly from recessions:

And the jobs picture is likely to continue to deteriorate.  My sense is that there are also a lot of tough decisions going on in corporate boardrooms all across the nation.  You don’t know what Q2 is going to look like for most companies, but by now the current reality is fairly clear for most managers.

This chart is through March:

My investors are encouraging all their portfolio companies to renegotiate leases, defer 401k payments, stretch payments to vendor, and renegotiate contracts.  There is someone on the other side of each of those decisions who is going to be missing some income.

Somewhat obscured by the COVID pandemic is an oil crisis and simmering trade war, each with their own economic fallout. The oil crisis is threatening a major source of high paying jobs in many parts of the U.S.  The opposite was true during the Great Financial Crisis, when the budding shale boom was counteracting that recession

So, as you assess the likelihood of a deep and prolonged recession, keep in mind that the velocity and disproportionate initial impact is creating distortions in the data and news cycle. 

Broader impacts are coming.

Extrapolate This

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You don’t see trends like this every day.


I’m not sure what it going on, but something isn’t right: 41% discount to NAV; 120% yield.



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Patience is not a virtue I possess in great quantities.  However, I’m working on it.

It’s hard.  Things are happening fast.  And look like big moves.

But are they big moves?

Right.  Patience.  Working on it.

Chart Source:

The market went down…

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The market went down…

  1. That’s total bullshit.  I didn’t event know that could happen.
  2. It dropped so much that it’s back to where it was (checks notes)…four months ago.


Four months of paper gains…gone just like that.  Oh the humanity!

Maybe the bigger story is that the market went up 13% [insert gain of your choosing] in four months [insert time period of your choosing] with no real catalyst?

And please stop comparing this to 2007 / 2008.  People were losing their life savings (this happens when you save more than you spend, strange I know) and their homes (yes, home prices can go down toobut don’t start calling me to Nostradamus yet).

Darts Are Fun

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Darts are fun. Especially when virtually every spot on the board is a bullseye.

[Insert basically any chart for any asset class.]

What’s going to happen when that isn’t the case?

I don’t know, but I’m thinking it’s less fun than today.

Also see Reflexivity.

The Bubble In Indexing?

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Seems like there are lot of opinions on the increased popularity of indexing, so I will add one more to the mix.

I think indexing will continue to increase in popularity until it stops working.  What does stop working mean? It means when the average market performance is down (for a period of time longer than two weeks).

Sure, everyone likes indexing when the average performance is up.  Or significantly up. Folks don’t feel bad about being average, because of their low cost, low effort strategy. Plus there are news stories about how their strategy is beating some smart hedge funder to make them feel good.

I’m guessing that they’re not going to care about how low cost their strategy is if the average market performance is a loss.  Average will become unacceptable. They won’t feel smart.

And then there will be news stories about investors who aren’t average, who didn’t lose money. At that point, investors will be start looking for other strategies.

To be clear, I am not predicting market losses. I’m just saying that it’s going to take sustained market losses across broad asset classes to create an inflection point in the current index investing trends.

Also, this is not a referendum on the effectiveness of indexing investing. In all likelihood, it’s the the most optimal strategy over the long run for the vast majority of investors out there. Is your thesis really based on most investors doing what’s optimal at all times? Since when has that happened?

That’s my two cents…

It’s felt pretty good, on average, to invest in *anything* the last three years….

Current Sentiment

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“Predicting the future is harder than misremembering the past.” – Cliff Asness

I learned a long time ago (the hard way), not to give people investment advice.  However, I will share what I am thinking and doing. Before I discuss any specific thoughts or observations, let me provide some background for context.

First Do No Harm. Conservative.  Arguably overly conservative.  I sort of take the Hippocratic Oath of Investing: first lose no money.  And please don’t risk money you need, for money you don’t.

Boring Is Fine.  I’m ok with boring.  There are no style points in my book. I’m not looking to impress anyone.  I don’t plan to get rich quick through my saving and investing.  Short term opportunities may come my way, but I am certainly not looking for them.

Patience.  This might be my only advantage in investing.  I have no annual reporting requirements. I do not earn a year end bonus based on my investing performance.  I do not have fund life issues or investor withdrawals to worry about.

Source of Income.  My main source of income is my job.  That’s not going to change any time soon.  I count on consistently adding more money to my savings by saving current income than by growing my savings through investing returns.  So I plan to earn my way to retirement. I am not a professional investor. That’s not how I make my money. Important distinction.

Bubbles.  Much of my experiences have been heavily influenced by bubbles. I worked for a software company from 1999 – 2003.  I moved to San Francisco in 2000. After business school, I joined an investment bank in 2005 and worked there through 2010.  I bought a house in 2005 in Baltimore – which thankfully I was forced to sell in 2006 due to a corporate move. Now I work for a private equity-backed business…uh oh. (more on that later).

Fixed Income Guy.  This is a chicken and egg problem.  Not sure if fixed income appeals to me because of my personality, or my personality is a good fit for fixed income.  Let’s just say my weightings toward fixed income would not align with the allocations of any Target Date funds for my age bracket.  

Trend Watching

There’s been a pretty dramatic shift in interest rate expectations in the last 90 days.

There were some pretty large movements in a few areas I was watching at the end of 2018.  And I totally failed to pull the trigger on any of them. We will see if that was a short-term miss or something I’m going to regret at the end of the year.  To be fair, I did add a small position of NTG into one account.

When you look up “v shaped recovery”, these pictures show up.

Nuveen Pref & Income Opps Fund:JPC


Tortoise MLP Fund:NTG

U.S. equity markets have produced much better returns than markets outside the U.S. for a fairly prolonged period.  I’m just not that eager to put a lot of money to work in U.S. equity markets at the moment given how far they have come, the duration of the economic cycle, and with so much geo-political uncertainty.  

Source: MarketWatch

Rate expectations are impacting currency trends.  This is probably a blinding glimpse of the obvious.

Source: MarketWatch

Current Thoughts:

Certificates of Deposit (CDs).  Yep, boring.  But patiently conservative.  Principal protection. FDIC insured presuming you stay under the limits of any one institution.  Rates ( on par or better than comparable treasuries.

Before you stop reading, go ahead and take a look at this chart:


I’ve made purchases of CDs through my brokerage account as well as directly at a couple online banking institutions.  We sold my prior business in May 2017 and a good portion of those funds went into CDs and money market funds. Then, we sold our house in Sept 2018 when we moved, and much of those funds went into CDs as well.

Source: Fidelity

Historically, Treasuries would be considered to have an advantage over CDs as a diversifier to equities.  Bonds historically have moved inversely to equities. With correlation so strong across markets these days, some of that argument seems to be losing its basis.

Side note: Looking at this chart, someone would have to explain to me why any investor would want to take on the credit risk associated with the corporate market at the moment for very similar yields?  I always keep an eye on senior loans. They have a special place in my heart. Some of what I am seeing in the market as well as direct experience in my business has similar hallmarks of the 2005 – 2007 period. For those of you who may not remember, that period was followed by some slight under performance.

I-Bonds.  Yep, boring. There is really no one with any incentive to sell these to you, so they fly under the radar.  These are purchased through the Treasury, offer competitive rates, are inflation protected (with a floor), and interest is deferred and potentially exempt. Note, annual purchases are limited and there is a small early withdrawal penalty.


I need to make my annual purchases for me and Mrs. SFTE.

Taxable Munis.  Exciting, no sorry, boring.  Probably a lesser known world of the municipal market.  I like traditional municipals as well, but take a look at this space.  This space got more attention several years ago with the Build America Bond (BABs) program that expired in 2010.  It’s still can be an attractive space, when paired with a tax efficient strategy (i.e., holding in a tax advantaged retirement account).

Given that the supply of BABs was shrinking, some BAB-specific fund have altered their mandates recently.

Nuveen Taxable Muni Income:NBB


Side note: I have an affinity for Closed End Funds (CEFs).  Must be another personality quirk.

International.  Oh my, getting crazy.   Focused here on reducing home country bias, investing in sectors with lower valuation multiples than U.S. markets, and potentially getting some tailwinds from currency movements now that rate hike expectations for the U.S. are declining.  Good article here. Since my tendencies are to be (overly) conservative, I use my automated 401k contributions to ensure that I am going to put some dollars to work here.

Value Portfolio.  In full disclosure, I also manage an account focused on individual equity positions.  Generally, I hold 8 – 10 positions that are focused on what I call “value”. I use an ROIC screen plus business and financial analysis.  Interesting ideas have been hard to find here. I’ve been working on sizing positions better. Reviewing the returns on this portfolio is a good reminder of how hard investing really is.  But I enjoy the process and it keeps me engaged. I’m also not 100% bought into passive investing.

“As sure as night follows day, passive is going out of favor.” – Jeffrey Gundlach


It’s certainly an environment that makes me shade even more conservative than usual.  Go read some Howard Marks and be patient.


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“Conversely, I maintain an equity position as a hedge against something going right. Hey, you never know.” – Randall Forsyth

Everytime I look at an equity chart longer than a couple of quarters, it causes me to pause.

Even the recent draw down here at the end of December doesn’t seem to change that picture a whole lot for me.

Notes & Credits: