It’s been quite a run since the stunning election of four months ago. Four long months ago. It may have peaked with the President's address to Congress last week, which gave rise to a yuge relief rally based on the low, fearful expectations going in.
But that was almost a week ago. Ancient history in the calendar by which we live today. What do we do now?
For whatever it's worth, this observer is more short-term cautious—directionally bearish, if you will--than at any time in recent years. Bullish on new convertible issuance, which is perhaps the biggest thing. Issuers are getting the hint at last. But concerned otherwise that a lot of good expectations may not play out. We'll try to go as politics-light as possible here, which, as readers know, is not in our nature. But you get what we're saying.
We can't help noticing a pretty wide dispersion in the convertible-related mutual funds we track, given how early in the year it is. The best performers are up nearly 6% so far (most funds seem clustered in the 3.5-4.5% range)--quite impressive since that's in line with the major stock indices. Both CWB and the HOCS 100 are doing somewhat better, as we discuss inside. But some laggards are struggling to get beyond the 1-2% area. We suspect their interest-rate exposures may be nipping at their heels.
What should one do now? Playing cautious, on the surface, often means taking on rate exposure, a scary thing with a lot of action items and not a lot of talk about paying for them. Not sure if that's exactly the right move. We have made no secret of our love for the biotech sector, a staple of convertible issuance that's been gradually righting itself after an awful stretch that began in late 2015. It seems like a good place to be--even the President has expressed a favorable view toward new-product approvals, if not toward large-cap drug pricing.
Infrastructure is tricky. It should be one of the things everyone can root for. You don't have to drive very far to see how badly we need a big overhaul. The explosive move in Dycom last week may be a harbinger of things to come. But Rome wasn't built in a day, nor will America be rebuilt in a year.
Whatever happens, there should be plenty of opportunities to express opinions, be it sector, name or direction. With rates and volatility rising, the long-hated strategy of convertible arbitrage looks ready for a big comeback. That may be one of the best choices anyone can make.
A Hillside principal has a position in Dycom securities.
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).