Marilyn Cohen, the editor of Bond Smart Investor, says she’s cautious about interest-rate risk in the current environment. She also says investors should use caution with emerging-market debt, and names a few of her top picks among bonds of US-based companies.
Kate Stalter: Today we’re speaking with Marilyn Cohen of Envision Capital in Los Angeles. Thanks very much for joining us today, Marilyn.
Marilyn Cohen: My pleasure.
Kate Stalter: Give us your take on the current market conditions. What do you think individual investors need to know about right now?
Marilyn Cohen: Well, the current market conditions have confounded individual investors, and when I say market I’m talking about my market, which is the bond market.
People were worried sick about the debt-ceiling crisis. They are still unbelievably concerned about the potential for US Treasuries to get downgraded, and I think that they need to be aware that all of these influences have not affected the Treasury market at all.
In fact, Treasury prices are up and yields are down since all of this started, so I think that they need to be aware of the emotionality of the market versus the reality.
Kate Stalter: What are some areas, then, within the bond market, that you believe are showing some particular strength at this time?
Marilyn Cohen: Well, believe it or not, some of the gaming companies are showing strength. Some of the lesser-quality finance companies are showing strength.
I think rather than taking a top-down industry look regarding bonds, we have to look at which companies are paying down debt, which companies are improving their balance sheets, and which companies are executing well in their businesses, rather than looking at it sector by sector.
Kate Stalter: What are some areas that individual investors should really stay away from?
Marilyn Cohen: Oh my, I think some are the areas that everybody else has been running to. Some of the sectors that will eventually blow, like the emerging markets did.
Everybody and their mother is saying, “You’ve got to buy emerging-market bonds, because that’s where the action is.” I mean, those are still small markets. It’s the developed market, like a US market, that are large and deep and have liquidity.
So I think that as individual investors continue to stampede into emerging-market bond funds, they need to have their finger on the trigger, and when things start to go wrong they’ve got to get out. Because those sectors can go down faster than a speeding bullet.
Kate Stalter: What are some of the investment vehicles that you’re using right now, Marilyn, to meet your clients’ objectives?
Marilyn Cohen: Well, you know, there are two ways to make money in the bond market. You either take interest-rate risk or you take credit risk, and I for one do not want to take interest-rate risk at this juncture while it seems every day we see lower yields.
So I’m looking at credit quality that isn’t quite so pristine, companies that may be in the junk-bond pile, but companies who are executing and doing significantly better than they were. Companies like CIT Finance (CIT).
That company has been to hell and back, in the fact that they were in bankruptcy, they’ve come out of bankruptcy, and they’ve paid down over $10 billion of debt since 2010. They are lending to small- and medium-sized companies that the banks don’t want to touch with a ten-foot pole because the banks don’t want to lend. That company is really doing well, so I like their callable bond.
I’m looking at things that I can have upside potential, as far as the company doing better, but be able to capture an outsized yield rather than buying pristine, crème de la crème, 1% three-year AAA bonds.
Kate Stalter: Any other names that you can mention that you believe investors might want to research?
Marilyn Cohen: I think that they need to look at Ford (F) bonds. Ford, even though they continue to be junk bonds, have been upgraded numerous times over the last two years. They’ve turned around the company.
Alan Mulally has turned around the balance sheet, and really the bonds are trading more like investment grade, because that happens to be one of the edicts that the company has come out with.
They want to become investment grade, so I think people can buy Ford bonds with pretty much impunity, even though auto sales are nowhere close to where they used to be in the good old days.
Another company that I like, I really like Macy’s (M). Macy’s was my pound-the-table bond idea a couple years ago, and now they are investment grade.
Another idea is Wynn (WYNN) first mortgage bonds, a split-rated company—meaning Moody’s thinks they’re junk, Standard & Poor’s thinks they’re the low rung of investment grade. I think that their balance sheet in their business has really turned around, plus you have the first mortgage guarantee, the first lien on the Las Vegas facility.
So there are a few gems out there. They’re not as shiny as they were a year ago, meaning they’re not as yieldy, but I still think that they are decent yields for this particular environment.