How to Tweak the 60/40 Portfolio to Boost Yield: Ritholtz

pal lower for longer. That calls into a question a lot of folks about the traditional sixty forty portfolio stocks and bonds. Is that dead? Is that a thing of the past. I'm gonna put that to Barry Ridholt's Bloomberg opinion columnists and host of Masters in Business on Bloomberg Radio, also founder in chief investment officer of Riddholt's Wealth Management. Barry, thanks so much for joining us here. So the sixty

forty portfolio is that kind of a thing in the past. Yeah, you know, I always feel like a doctor who's telling people they need to exercise and watch what they eat when we discuss these traditional portfolios. Um no, these portfolios

are are not dead. And look no further than the folks who had an all equity portfolio heading in to March of this year, all that panic selling we saw after a thirty percent drop, I'm pretty confident that most of those people did not have the sort of diversified portfolio where thirty or forty of your holdings are fixed income that operate as a volatility dampener. And and it's

not just about yield. Well exactly, it wouldn't want to be these days, what barries So you're saying it's it's purely for the volatility dampening of of bonds that you'd have a bonds right now. Well, you know, consider it at a fairly conservative portfolio. Depending on your age, your risk tolerance, that could be seventy thirty six if you're young and you could tolerate the swings that we've seen

in the market. Something like eight is certainly viable if you have a forty fifty year even a thirty year time horizon. You know, the problem that we always seem to encounter is that people look at low yields and what is it. A decade ago people were complaining that's the ten year had fallen to a four percent yield,

people would people would kill for four percent. Now, uh, that you cannot get blood from a stone, you cannot create something out of nothing, and you have to accept that your options are limited and there's only so much

you can do. Now, there are things you can do UM, and there are are different structural changes you can make in different holdings you can have, but you have to be real realistic that if you're looking for higher rates in a low rate environment, you are taking on more risk and and that's the key to remember, and risk means potential loss. Hey, Barry, I think since the last time we all sat down a chat chatted, we've had at least a couple of pharmaceutical companies come out with

a vaccine. Data seems very very promising. Yet at the same time we're seeing metrics on the pandemic just go the absolute wrong way and certain cities and countries shutting down. Is he stepped back here any What are your thoughts on that as it relates to the markets. Sure? So, there are there are two approaches that you take when

you're dealing with a pandemic. One is a vaccine that will stop UM the spread of this, and and the other is the various non pharmaceutical approaches that will allow you to to tamp down on the spread of the epidemic while you're waiting for the pharmaceutical solution. And it pretty much appears like this administration made a bet on the former and while ignoring the latter, they went all

in on vaccines. And listen, these vaccines are going to be fantastic when they finally are manufactured in number and are widely distributed and of the U S population has taken them so that we have full herd immunity. But that's you know, six months at the earliest off in the future, maybe even more, maybe eight or ten months off in the future. And so the idea that we could ignore things like social distancing and working from home

and wearing masks whenever we go outside is folly. And you see that in these you know, insane infection rates were coming up on two hundred thousand new infections a day. It's is horrible. And so on the one hand, you see the equity markets looking past that valley, but on the other hand, the broader economy is bracing for for quite the difficult couple of months. If not quarters, and

that gets reflected in the bond market. Right But I do wonder if you wouldn't be better at all replacing some of that allocation with, for example, gold right now, Well, it depends on what your purpose. If you're if you're looking for a volatility dampen or go back to O eight oh nine, go back to other periods of high volatility two thousand and of course, and you'll see, you know, gold didn't quite fall as much as stocks, but it's

certainly um got hit when when the market fell. Bonds, on the other hand, not only did they not fall, but they attracted capital. It's a it's a you know, it's it's a safe harbor in a storm on a temporary basis. Um, what we've been telling people who were looking for yield and are willing to take a little bit more risk, there are a couple of options they have. Certainly shortening your duration and and not owning a ten year taking less yield today, Um, you could you can

own a three month treasury note. It's not that far less paying than what the tenure pays. And if eventually, if and when rates go up, you can start rolling out of that into higher yields down the road. Um, we we suggest that for people who have montized portfolios, if if you have a larger portfolio, well, you could obviously construct a bond ladder, so you have three and maturity dates and so on. You ladder that out for

a decade or longer. And then when each of the legs of vote that ladder, each of the rungs of that ladder come, do you replace them with ten year out paper that is hopefully yielding higher levels. So you're you're getting the benefit of edit duration now and if yield goes up over time, well as each of these wrongs mature, you have the opportunity to swap out higher yielding treasury. Yeah, for sure, we're out of time. But who is your next Master's Business candidate? UM? So I

have I have two really interesting people coming up. One is Greg Fleming Um who who I'm sure you're familiar with from from all of his um all of his investment banking work. But the UH this weekend is Dennis Lynch who is Morgan Stanley Counterport Global and has put together an incredible track record this year. A lot of his funds are up nearly double, so that that's a

fascinating conversation. Yeah, alright, Dennis Lynch, and then Gregory's timing, who is now the president CEO of Rockefeller Capital Management, coming up on Masters in Business with our guests. I remember when Dennis Lynch was my client. He was a young, young, young by side analyst at Morgan Stanley. Now he's a very successful portfolio manager. They're running that large cap group.

Putting up just great numbers is very well. I think you need to call Barry offline and give him a few anecdotes so we can spin them into in business always makes for a good introduction if you have a little dirt on somebody. We got some economic data this morning from the Conference Board. It's leading Economic Index for the US increased zero point seven percent in October, following a zero point seven percent increase in September and at

one point six percent increase in August. To help us break it down, we welcome again ottoman Azzo Drum, Senior Director Economics and Global Research Chair at the Conference Board. Automan, thanks for joining us again. A good month. Uh what's the takeaways here? Hi? Good morning, Thanks for having me on the program. Um. Yes, so the U S l Ai Rose again in October. The improvements were widespread among leading indicators, despite the weakness from housing permits and the

consumer's outlook on economic conditions. So the takeaway is that there is a recovery and leading indicators which bodes well for the economic recovery. Um. But the leading index itself has been decelerating in recent months. So that suggests that growth will moderate going into the final months of twenty and that will slow down from the the very unusual

rapid pace that we saw in the third quarter. And certain things like stock prices helped boy its a little bit this month, So you have to wonder if that's a good thing for the entire economy, is just for a certain portion of the economy. Well, when when you look at the leading indicators, uh, you know, over several months, especially stock prices, the yield spread components have been supporting

the improvements in the leading index UM. So you know, that is a positive for the economy, But that's not the whole of the sort of economic activity, right, so there are other weaknesses that we've been seeing in other parts of economic activity, and um, you know, you kind of have to look at it as a glass full, glass half full, half empty situation. It's entering autumn. It's you know, the numbers are decent, the economy is recovering,

but then you know, every Thursday we get these jobs claims. Uh, and it just kind of is a you know, shows you that there are some serious headwinds still out there in the marketplace, perhaps exacerbated by some of these metrics for seeing from the virus and closing down. UM, how do you think about the labor market as it relates

to the overall economic outlook. Yeah, the labor market obviously is a very important element, especially in this recession, as with every recession, but more so this time, I think because the impact has been so disruptive for labor markets. UM. I went back over several months and looked at so the UI claims contributions in the ALII and the improvement that we're seeing in the ALI over six months, half

of that comes from UI claims. UM. But again, UM, we are seeing a deceleration in the improvements in labor markets and that's going to be concerning, I think looking ahead at the recovery, so we had what five six months of positive personal income X transfers and it's still positive, but it's very very anemic, Aloman. What what is that telling us? Yeah? Again, you know, it is really a reflection of all these disruptions that we're seeing, uh in

in the labor markets. People are concerned about their employment status, uh ability to you know, keep their jobs. Uh. And that has a reflection directly on their income levels. So that does create some risk aversion um. And a lot of the gains in personal income that we were seeing is coming from uh, you know, a component called transfer payments, right, so government stimulus programs, unemployment insurance programs have been supporting

those income levels UM. And you know, without that artificial support, I think there is a lot of concern on people's minds about again employment and income looking ahead a lot about One part of the economy that continues to really impress me. Surprised me actually is the housing market. We had the existing home sales today, very strong numbers. Uh. News starts yesterday, very strong numbers. Um. How does that

factor into your economic work and your outlook? Yeah? They Uh there has been uh you know, more positive news coming from the construction housing construction uh factor over the last several months. That's good news for the economy because it is a leading sector for overall economic activity UM. In the leading index UM, we use a related component

which is building permits. Uh. That's highly correlated with starts, but it tends to be a little bit smoother, So it gives us a better view on a smoother view on the business cycle and building permits UH contribution in October war zero UM, So that could be a little

bit concerning. And I'd been watching that very carefully. Yeah, we were looking at yesterday a month of a month, it's flat and economist we're looking for it to be up one point four and you have to wonder if this isn't going to be a blip in the future of housing starts. I mean, yes, how's the stars themselves are still really strong at four point present in October, but the permits aren't going in there, are they? Rights? Right? Uh?

So you know the weakness and permits of course is related to the future activity and uh you know whether you actually will start construction and whether the the good news will continue or not. And uh, I think that just highlights some, uh, some of the risks in economic recovery. AM. We had the president of the Cleveland Fed on this morning, UH, and one of the things she spoke about was the

continued need for fiscal stimulus. Uh, we haven't gotten that fourth round that a lot of people in the market were looking for a How do you think that's going to play out with our the new uh newly elected officials and and be what is it in your base case at all? Um? You know, in our base case, we haven't allowed for a lot more stimul us coming in. But you know, as we know, at the end of the year, a lot of these unemployment support programs are going to expire. UM, So that does have an impact

on our projections. You know, over the next couple of quarters. UH, without a large degree of government government stimulus, we're projecting around two point two percent growth for the final quarter UM and slowing growth in the first quarter of the next year. I think just about all points seven percent for GDP growth, Ottoman, you know, explain why all this

is happening. And at the same time, consumers seem to be spending because we saw that in the retail learnings, we saw in some other data, you know, in the last few weeks. UM. Yeah again, Um, you know, personal income has been doing well, it's deported by unemployment support um so that partly explains uh, the good retail spending figures.

Um but I would be concerned about whether those trends are going to be sustainable, especially now we have this deceleration and the improvement in labor markets, and we're also being faced by a second wave of the COVID nineteen outbreaks. Um So that is likely to I think constrain a consumer spending and that's probably the biggest factor in our projections for the slowing growth in the last quarter. Ottoman, thank you so much for joining us. As always, we

appreciate your thoughts. Ottoman also Drum, director of Economic research and a global research there at the conference board, and we appreciate his thoughts. So now let's get to our guests and continue to talk markets. Brian Fairbanks is CEO of Tricks, and Brian was listening to some of that. Brian, they're just wondering what your takeaway is on coronavirus and where we're at as an economy and where corporate America is at. Oh, that's an absolute tough cup panel to follow.

We see great opportunity as we move forward. We're very encouraged by the progress being made with the vaccines, as well as the actions being taken in various states to try to stem the continued spread of the virus. There really tres company. We see continued opportunity for people to improve their living spaces by buying our eco friendly outdoor decking.

So Brian, it's you know, we've seen this a lot during the pandemic, a lot of folks obviously spending a lot more time at home, uh, spending a lot of time at Low's getting stuff to improve their home. Talked us about how your business evolved, you know, starting that

February March time frame through today. Sure, we had a lot of questions February March time frame of where the economy was going to go, how the consumer would behave Very quickly by really May, we found that the consumer was very resilient and looking to improve their own living space. One of the tail winds that we saw is that people are interested in having work done outside their house, whether they were doing it themselves and buying it one of our d I Y partners or having a contractor

come in and do that. We've continued to see that through the entire summer and now into the fall months. Brian, where are your biggest areas of demand. I'm assuming that in cities where people don't have balconies on us, they can afford a balcony, and that you know that that wouldn't be where your customer bases. It's more in the rural areas. What wouldn't say necessarily rural areas supports so

in the suburban areas. So outside of your major cities we are, our volume tends to dominate in those areas where there are large populations. So your suburbs outside of New York through Pennsylvania, down into the south, really across the country where you see the larger population centers, you will see high volume of trecks, decking and railing sales. One of the things we've seen from a commodity standpoint during this um it has been um the price of

wood and lumber. Talked to us about that as a raw material for you guys, and kind of how you're managing it. One of the unique things about Tres Company is that our raw materials are recycled content. We are buying poly ethylene from distribution centers, grocery stores all over the country and then reclaimed wood out of furniture flooring manufacturers, so we're not reliant upon the input price of wood along the way because we are using those those leftover

scraps from the other parts of the business. And it's a very unique business model that has helped with the financial success of trucks over the years. So apparently compressed landfill is another um I guess for people to use to of there to have some compressed landfill used as decking. How does that work and how do you make sure

that you know it's clean and so on. Our primary sources for polyethylene are going to be out of industrial protective wraps, grocery bags, other sort of films coming through. There are opportunities in using landfill and generally require some cleaning and oose are things that we look for opportunities in the future. We hope also with some support of local, state, and federal basis to help us use some of those materials as we move forward. Talk to us about the

competitive landscape here. I know I'm guessing that with all the people out there trying to either replace or build new decking, it's not just you guys talked about the competitive landscape for your business. There are three major companies that make up a relatively consolidated industry. Trucks holds about fifty of the share within the industry, and then the other two companies the next so I mentioned consolidated. The most important opportunity that Tres Company has is conversion of

market share against the wood industry. Wood accounts for approximately of the volume of material sold, and that's our primary focus. What are your growth plans? Presumably now be the time where you would take advantage of people flying houses and suburban and rural areas, and the house prices going up and so on. Where do you see yourself scaling too over the next few months. Over the past five years,

we've been growing at about a thirteen percent rate. This year, with the midpoint of our fourth quarter guidance, our growth would be and as we look to the forward years with the wood conversion opportunity, we see no reason why that would flow. Our product lines are highly desirable or making low maintenance building products and improving the value of people's hamet and we continue to see people looking for repairing or model especially as the turnover of homes continues

to increase. So I see your stock is up six this year. I'm looking at your balance sheet, not much debt. What do you do here with your stock up here yet? Any interest in selling stock or are you comfortable with your capital structure is right here? Yeah, this is a great time to have a conservative capital structure. That's something that the Tres company has always prided itself on and we received a lot of credit for that as we moved through the pandemic phase. As we look forward, our

key key priorities will be first, organic growth. We're in the midst of a two million dollar capacity improvement program seventy capacity increase and most of that capacity will start coming online in early Additional priorities are share BUYBA accident. Lastly, it would be acquisitions that fit are strategic growth acquisitions.

Just briefly, can you tell us if you have your eye on anything, Nothing in particular that we'd be discussing, but we're always having discussions out in the marketplace and uh, interesting things from time to time. Yeah, sure, Brian, thank you, very very interesting and to come back on when you get a little more serious about a particular acquisition. We would love to hear about a buying. Fairbanks is CEO

of Tricks the Outdoor Decking Company. Stock is a heck of a run again up six, because I guess that makes sense. It's one of those um you just stay at home place, right, Bunny. Yeah? And I mean, what are you going to do if if the only exercise you're you're getting is a d I y, Well, there's that deck area that you kept meaning to build when I building Now. Thanks for listening to the Boomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts

or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio