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

a barrel. We do have Brent crew down four point two percent. Gold up eight seventy to thirteen forty four. Again there of seven tenths of one percent. The tenure up nine thirty seconds had yield one point four seven percent. SMP five hundred Index up a point to fifty three, a gain there of about point one percent. Down Industrials up thirty three points, a gain of two tens of one percent. Nasdaq is down two tenths of one percent.

I'm Charlie Pelle. That's a Bloomberg Business flash. You're listening to Taking stock with Kathleen Hay and Pim Fox on Bloomberg Radio. Taking stock of the stock market continuing to look to higher levels, although today a bit of a

mixed reading. The Fed's Beige Book not giving bond investors too much direction in terms of where the Fed heads next, but bond investors don't seem to need it, as the thirty year bond yield sold today at a record low two point one seven and thirty year German sovereigns selling at a negative yield for the first time ever. Jack Ablin joins this now, chief investment officer at BMO Private Bank. Jack,

welcome back to the show. So Branxit seems to be fading as an impeditive impediment, certainly to the U S stock market, right, and even the pound is rebounded tomorrow. We have the Bank of England maybe cutting rates, but they don't do it tomorrow, maybe in August. Let's start with US stocks, though, what is the focus now? If I'm trying to figure out if it's time to keep buying or if it's time just to keep my powder dry. Boy,

we've got our powder dry. Um. You know, part of it is so mechanical, Cathlete, because it's really not individual investors that are necessarily buying stock. In fact, if you

look at UM. You know, individual investors and mutual mutual funds and institutions, they've been net sellers of stock, and particularly in the first and a lot of the second quarter, at least the way I've seen it, and in fact as buy backs that are making up the difference, uh and then some So really a lot of the demand for these company stocks are coming from the companies themselves, Jack, I want you to follow up on that, because buy backs have also contributed to the number of shares being

pulled out of the market. And just to put a number on individual investors pulling fifty two billion dollars from US stock, mutual funds and exchange traded funds in the first half of the year. Where's all that money going? Yeah, I think it's it's probably UM going into cals ship's it's going into stockpile. You know, keep in mind it maybe going into bonds actually, because you know, one of the things that these negative rates have done is really

UM backfired in many respects. You know, if you consider that if you're a retiree or if you're an insurance company looking to generate a certain amount of income per year, and bond yields go down, you have to buy more bonds. Uh. And so what we found, for for example, in Japan, that more investors are hoarding cash and and and buying more bonds when rates come down. So it's a it seems to be a backward situation. Yeah, it is certainly one that is making life interesting. Do you put any stock?

I mean, Jack, you're you're great at certain kinds of big picture signals that help you make investment decisions. I always think of the time when you know, you looked at you saw commit a signal from the commodity for commodities, you got bullish on commodities, right, and it worked very well because you got on before a lot of other people did. But now the flatter yield curve recession used to be an indicator. But it just seems it's hard to read signals in the bond market is meaning anything

for the economy now, right? I mean, look at look what what investors or or or what's leading the market higher? We hitting all time highs led by telecommon utilities. What's that telling you? I don't see happy days are here again? This to me sounds like investors are buying can goes at the grocery store before the storm. Does that include companies such as Home Depot or even McDonald's and United Health.

I think the theme here, Tim, is investors not able to get the adequate yield out of the bond market thanks to UM, thanks to all of this, uh, you know, the central bank buying. In fact, they are the bond buyer worldwide, And so investors are looking at equities as a income alternative, which is rational. UH. In fact, UM, you know, these companies that you mentioned are ones that have had a pretty good track record of maintaining and growing their dividend over time. So you know, these aren't

necessarily the highest yielding players. Um, these are the ones who at least with the most persistent so I think, and I know I've talked to I've talked to retirees about it. I said, look, you know, if you have UH an income requirement of two and a half percent, let's say, why wouldn't you buy a portfolio of UH two and a half percent dividend yielding stocks that have had a long track record of maintaining and growing that dividend.

Buy it clipped here dividend and don't care about what happens to the price as long as those dividends are intact, you're set. So I think a lot of that um brasionale is driving. What's what's going on in the market today, Jack, Uh? Corporate bonds UM. We just saw the largest daily inflow ever to a corporate bond ETF. That was a story two days ago on the Bloomberg. I believe there about a billion dollars worth of inflows into corporate bonds frond in a day. Negative yields creeping in a new issue

corporate bonds in Europe? What's an investor to think? Here? Do corporate bonds lease? US corporates offer value as if corpse? Some corporates are even going so lower in the negative territory? What do you What do you see there? I don't see much value there Kethley. And then you know McDonald's last December did a ten year bond deal in the US UM for about three point five percent. McDonald's just completed a bond deal in Europe ten years for zero

point seven five UM. So you know, clearly, UM, they're finding great value there. Uh. And as long as the the bond yields they're paying are lower than the free cash flow yield they're generating. I guess it makes makes sense. So you know, I can't blame the treasures for issuing bonds. I'm not sure who's buying. I don't think individuals are buying. I think it's the ECB. In fact, that McDonald's issue was did qualify for ECB purchase? Jack? What's the worst

investment right now? Oh? Boy, me look through my portfolio here, bunch um. In otherways, what's the most unloved investment? I would say unloved investment that I think has legs is you know, Kathleen mentioned it at the beginning of the show, commodities. You know, commodities are now offered at a probably seven sixty sixty to seventy percent discount to where they were, and they're starting to show signs of life. We started purchasing commodities back in May after they kind of broke

out a little bit. Uh. And interestingly, you know, we know we we have oil trading uh roughly below production costs here at home, but we also have agricultural products trading at fifteen to sixteen percent below production costs. So that's you know, if you uh, you know, believe that eventually that's got to right itself, either the price has to go up or the production has to come down.

Gold gold, of course, has been a favorite flavor for people watching Brexit, betting on the fed nut race, seeing race, maybe even betting that there are some disinflationary forces gathering strength around the world. What do you see for gold and a continued rally? Yeah, I mean I think that gold, you know, certainly serves a purpose. Um. You know, historically gold has always been uh that that opportunity cost of carrying gold, Um, given that you've had to forego income

and you know, pay some sort of storage fee. But you know, that incremental disadvantage has pretty much gone. So it does serve an interesting diversification. And you know, probably you know, if if you do want to venture your way into the stock market and buy at these levels, maybe an equal measure of gold could be a decent offset. Do you recommend looking at emerging markets at all? We do? Um, you know this is um, this is this is one where put it put it this way. We got it

very early in emerging markets. UM. We were enticed by the valuations and they've been going nowhere for three years. We've maintained our position there and I think, you know, I haven't looked lately, but last time I checked, emerging markets were the best performing equity market category this year. And you know that's if that has its nice little

stealth rally behind those scenes, so be it. But um, yeah, I think that that's probably a place where, um, you know, out of the way of Brexit to some degree, out of the way of some of the other challenges certainly here at home with the election. Uh. And you know when you get for example, China that now is approaching ten thousand dollars per capita gdp UM, you know, domestic demand will start to flourish there. So I think that's you know, at least a longer term signal for emerging markets.

So central banks said, you've got the Bank of England, maybe they're going to cut race tomorrow. They don't, They'll do it in three weeks. Mark Kearney, who's the head of the d O, he certainly seems to signal that how big of a deal are any of these moves now for equity markets and bond markets for that matter. Yeah, it's you know, I would have I would have said three or four months ago that investors were annured with the the actions of the central banks, knowing that they're

really not doing very much anymore. But you know the fact is they've captured the imagination and have driven you know, a lot of things higher. Um. My sense is what I'm I'm really waiting for is that next leg and that what I'm looking for as fiscal stimulus. You know, the fact is that the British um pretty much voted

against the political elite in in in Brussels. Um. You know, Trump supporters are looking to do that here at home, and I think at some point, you know, Brussels, looking at the E and the EU, have to throw their constituents of bone um and so perhaps it comes in the form of fiscal policy. Thank you very much for

for enlightening us. Jack Ablin always a pleasure. He's the chief investment officer for b MO Private Bank, helping it's a manage approximately six see eight billion dollars of customer assets. Based in Chicago. You can follow him on Twitter at jack Abley. You're listening to taking Stock, we take you through to the clothes and this is Bloomberg