HYBRID VIGOR: VOL 3 ISSUE 46 "Season or Reason?"

Last week we published a white paper detailing the rationale behind our thesis that a Trump Administration is likely to revive convertible issuance and the overall importance of the asset class. Virtually every early market indicator points in that direction: interest rates, volatility, infrastructure capital requirements. 

One area where we may, or may not, have jumped the gun is pharmaceuticals and biotech. The markets got shaken up last week on a quote from the president-elect’s Time Magazine Person of the Year interview. Mr. Trump said he didn’t like what was happening with drug prices and wanted to make them lower. That was enough to continue the undoing of the post-election sector spike, which in turn followed a hard pre-election selloff presumably inspired by an expected Clinton win and greater efforts at drug price regulation.

We don’t consider ourselves political experts, but our take is that Mr. Trump’s interview comment was standard populist fare amidst many issues. We don’t necessarily think it should be ignored, but it needs to be considered in the context not only of a Republican congress but also of a Health and Human Services nominee, Tom Price, whose legislative history and professional affiliations would make him a most unlikely sponsor of significant new drug-price regulations.  You could do worse things, it seems, than to position yourself for a 2017 turnaround in the group.

All that aside, last week’s new issuance (detailed Friday in Kathy Schick’s The Week That Was) seemed to corroborate our thesis, though the calendar may also have been a factor.  Bankers have a longstanding tradition of getting deals through the pipeline at year-end. Cynics would call it the bonus push. We’ll put that aside and say only that we were heartened to see the handful of deals that came last week and even more heartened to hear that more were in the pipeline.

(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).

HYBRID VIGOR: VOL 3 ISSUE 45 "Go Small or Go Home"

Hillside’s fundamental research into the many small and midcap companies that have convertible bonds outstanding has helped us discover turnaround situations with significant upside.  In fact, we found enough of these opportunities to use them as the cornerstone for a special situations fund that we began incubating in-house last year.  Think of it as sort of a convertible bond portfolio with a delta of 1.  (well, less the coupon.)

The returns have exceeded our expectations, with the fund up well over 30% so far in 2016 alone.  The fund has benefited from our research in convertible security issuers such as EZCORP (EZPW) and Oclaro (OCLR).  We had the advantage of following these companies since they issued their convertible bonds and through the crises that surrounded both of these companies.  Since buying EZPW, the stock is up 165% and OCLR is up over 70% (and that is the second time we have owned it).  While we have expanded the portfolio beyond names that include convertible bond issuers, we think we come from a unique perspective.  A few more examples of what we find interesting are included in this week’s fundamental section.  We think the new world order lends itself well to both convertibles and smaller stocks, and that the payoff for independent research in these situations can be substantial. Last week’s pullback in small caps may set the stage for a new, vigorous period in the group. Please feel free to contact us with any requests for information.

(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).


I promised my colleagues that today’s cover would be Trump-free, especially because I am completing a piece for broad circulation about the convertible market in the coming administration.  Thoughts of a “no Trump” commentary naturally took me to contract bridge, a great game that I learned as a child and sadly have let slip over the years.  But since we often try to compare convertibles to seemingly unrelated worlds, let’s run with it.

Bridge is a four-person card game, two teams, two players per team. Each player sits in a primary direction of the compass: North and South are partners, as are East and West. Each player tries to communicate as much as possible to her or his partner via an auction with a remarkably limited menu of allowable bids. One side reaches a contract stipulating how many four-card “tricks” (one card per player) it thinks it can win. Most contracts involve the designation of one of the four suits as, you know, trump, though contracts can also be played in “no trump”.  Each trick (other than the first) begins with a card played by the player who won the preceding trick, and a player holding no cards in the suit led in a trick can win the trick by playing a card from the trump suit.  Otherwise the highest card of the suit led wins the trick.

Bridge is all about communication, both in finding the best contract in the auction and in connecting with your partner’s cards in the play of the hand.  It also requires a good memory and a talent for logical deduction.  How are these things relevant to convertibles?

When it comes to the issuance of new convertibles, communication is everything. Investors tell bankers the kinds of deals they want to buy, often by bidding up existing deals to prices suggestive of a hunger for similar product.   Bankers try to convey this information to issuers:  the greater the demand suggested by the market, the more aggressively bankers will bid to win deals.

Overbidding, though, is always a danger.  It’s no good to bid seven no trump (winning all thirteen tricks:  the first six are known as “book”) when your cards and skill are only good enough to make six.  Similarly, it’s all well and good to know that there’s plenty of demand for convertible bonds. There certainly is now—we see it in a historically low HOCS of just 65 and change in this week’s top 20.  But knowing there’s plenty of demand doesn’t mean you can pay any price and still make money, just as you shouldn’t bid a grand slam when your cards only justify a small slam.  Knowing the right bid to make means knowing what your partner holds, even though your partner can only use a few words to tell you.  Investors are saying they want convertibles. Dealers just need to bid appropriately.

(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).

HYBRID VIGOR: VOL 3 ISSUE 43 "Rebuilding"

How does a carny barker, son of a Scot and a landlord, dropped in the middle of Celebrity Apprentice by Hollywood, enriched while massively in debt, turn out to be our nation’s president?

Just when I thought I was ready to move on to focusing exclusively on the rebirth of convertible issuance—a rebirth I expect will kick in over the next few years—two of my main cover themes came together.  To borrow from the last president who had issues with self-control and ethnic groups, let me make one thing perfectly clear:  while Hybrid Vigor is a team effort, the opinions expressed in the cover are entirely my own.

As tempted as I am to discuss Donald Trump’s demand that the cast of Hamilton apologize for its public entreaty that Mike Pence govern on behalf of all Americans, I’ll focus instead on what matters more to readers of this publication: how the president-elect’s policies may affect the economy and the markets.  I don’t like what Trump is doing to our country’s social fabric, but I do think his economic policies deserve a chance, and I think, if implemented, they’ll be great for the convertible-bond market.  Infrastructure spending should not only lift interest rates but also give rise to issuance by all manner of small and mid-size domestic manufacturers and service providers—especially in conjunction with the president-elect’s anti-globalization views.  Those views, put into practice, will almost surely have at least some inflationary effect, helping domestic businesses at the expense of consumers and thus reversing the trends of the last several decades.

It will be interesting to see how the Republican majority handles his Keynesian vision for rebuilding the nation’s economy through infrastructure spending, spending I think America has been craving for years with the world’s encouragement.  Paul Ryan couldn’t bring himself to be seen with Trump during the campaign. Now he’s talking about a unified Republican party, even a party whose leader and public face used to be a Democrat and is promoting a new New Deal. What do Ryan and his acolytes do now? Volatility, anyone?

(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).


Readers of this space already know that I am deeply concerned about the implications of last week’s election. As an American who’s spent most of his life in our country’s two most progressive urban regions, I worry for the ground we will lose and for the people most at risk. As a feminist and father of two daughters, I worry about the misogynistic hints in the campaign and the vote.  I pray that our better angels will dictate our actions.

But as an outspoken advocate of the convertible-bond market, I am heartened. Indeed, I believe the President-elect may be its savior.

Consider the following:

The 10-year Treasury yield has backed up about 40 basis points since the election thanks to the President-elect’s stated infrastructure-spending plans (plans I have been endorsing for years), getting prospective capital raisers to give a new look to the interest-cost savings from convertibles

A resurgence in infrastructure spending could bring that sector to the capital markets, likely involving a significant allocation to convertibles especially by small and mid-size companies

Given the importance of the specialty pharmaceutical and biotech sectors to convertible issuance, the dramatic change in regulatory prospects (or lack thereof) has already restored health to those markets, making healthy issuance far more likely

Volatility, it would seem, will be higher, given the unpredictability of the new administration—but probably the healthier kind of volatility, not that associated with broad credit implosions

Last week’s performance, with Treasury bonds, traditional corporate and high-yield bonds all down, convertibles up, suggesting a major turn.  While there has been no shortage of demand for convertibles in recent years, the asset class may become more attractive for larger shares of capital in this new world, as allocators redouble their efforts to minimize duration risk within fixed income.

It makes sense to me. If nothing else, it reflects the audacity of my hope.

(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).

HYBRID VIGOR: VOL 3 ISSUE 41 "The Moment of Truth"

An election unlike any we have known—and hopefully unlike any we will ever know again—is finally upon us.

Readers of this space know in no uncertain terms where I stand. I recognize Hillary Clinton’s flaws but I think she is cut out to be an excellent president. I recognize Donald Trump’s flaws and I think he is not.

Whatever happens, let us all find a way to take a deep breath and do our best to accept each other as we are, to debate in civil terms, and to push forward with our lives, setting good examples for our children.

I find the words of John Donne particularly apt today, and I share his most famous poem in its brief entirety with you here.

“No man is an island, entire of itself; every man is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as if a manor of thy friend’s or of thine own were: any man’s death diminishes me, because I am involved in mankind, and therefore never send to know for whom the bells tolls; it tolls for thee.”

As for last week, we saw some convertible action that was a strange mix of surprising, scary, and encouraging. Read on for the details.


(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).

HYBRID VIGOR: VOL 3 ISSUE 40 "Best and Worst"

If alien life forms ever thought about spending a week or so in our United States of America, hoping to see the best and worst of our country, they could not have picked a better time than the present.

Our national pastime could not be doing better. Two long-suffering franchises and their fans are reaping the rewards of patience and loyalty. This is one of those World Series where nobody loses—sure, one side will be disappointed, but history has its eyes on both.  The national desire was almost palpable for the Cubs to win last night and force at least one more game. I bet a lot of Indians fans secretly wanted that too, to prolong this great series and perhaps see their players win at home.  Hardly anyone is ready for the season to end. Bring on November baseball.  The aliens would see the best in the world at their craft, sportsmanship (one of Cleveland’s players applauded his rival after an outstanding catch), competitive energy dedicated to positive ends, and, let’s not ignore, outstanding managers.

Thankfully, November also means that this terrible, horrible, no good, very bad presidential election is almost upon us.  Just when you think it can’t get uglier, it does.  Let’s start with the contrast:  the Cubs and Indians are putting the best in the world out there on the playing field, while the Democratic and Republican parties have done anything but. I support Hillary Clinton and agree that she’s as qualified to be president as anyone who’s sought the office.  But I can understand why people don’t like and don’t trust her.  As for Donald Trump, well, the less said, the better.  Suffice it to say that with at most one or two exceptions, anyone in the field running against him in the primaries (let alone at least one excellent Republican who did not run) would have been a better choice, more qualified, more thoughtful, and more temperamentally fit.  The country is probably strong enough to survive a Trump presidency—probably.  The aliens watching would be justifiably disgusted.

Where would the aliens be advised to invest the interplanetary currency they converted into dollars?  They’ve been told about these things called stocks and bonds.  They’re nervous about stocks—they’re hearing that a Trump victory could bring all manner of orange uncertainty, undermining the market’s confidence, and these aliens understand that stocks are worth nothing more than what somebody else is confident enough to pay for them. But they can’t help noticing how little they can earn with bonds, even though they’ve noticed these bond prices coming down during their brief stay here.  They like the idea of not losing principal, but only up to a point.  They don’t want to just hold cash, after all, because they plan to return to Earth and the United States again. They want to see a lot more World Series—and they know that World Series tickets have gotten a lot more expensive over time.

If those aliens happen to be reading Hybrid Vigor, I hope they’ll take my advice and consider buying some convertible bonds.  They’re seeing the best and worst of American culture, but they can get, within reason, the best of both core investment classes we offer.  They hear that convertibles are dying, that people are leaving the market.   To this I ask them:  hasn’t your species been around for millions of years? This is just a blip.  Even lower-for-longer in the rate world is still a relative blip. Get to know convertibles, my alien friends.  They’ll help you pay for a lot more Series tickets.

(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).

HYBRID VIGOR: VOL 3 ISSUE 39 "Building a Winner"

The Cubs haven’t won a World Series since 1908, the Indians since 1948. It only seems like the last solid year of convertible issuance fell somewhere in between.

What did it take for these two venerable franchises, long associated with losing, to get to baseball’s final countdown?  

The answer seems simple:  willingness to take some short-term pain to get big, longer-term benefits.

Look at the cores of both teams—developed internally, either by drafting players or acquiring them as prospects.  Yes, the Cubs are a rich team and have spent lavishly on several free agents, and apparently unwisely on at least one.  But their core is homegrown, either drafted (arguably their two best players, Javier Baez and Kris Bryant, were obtained this way) or traded for when young and relatively cheap.  While those players were developing, the Cubs lost a lot of games.  Fortunately, their fans were used to it—they’d developed a taste for it, you might say.

The Indians drafted their best position player, Francisco Lindor. They acquired their best starting pitcher, Corey Kluber, in a trade when he was a minor-league prospect. They then filled a big need by getting perhaps the best relief pitcher in all of baseball, Andrew Miller, in a trade with the Yankees, who didn’t seem good enough at the time of the trade to make sufficient use of his talents.

If you have been reading this space over the last couple of years, you probably know what’s coming. Yes, a convertible analogy. Convertible investing means building around a solid core—buying bonds with superior risk/reward profiles.  Then you can trade around your portfolio, filling in with certain underrepresented industry groups here, certain more aggressive or defensive profiles there, and so forth. If you’re a hedge fund, you try to tinker with your exposures, selling a little extra when you think the market’s overheated, buying it back when everyone wants to sell.  The Cubs got first baseman Anthony Rizzo in a trade with the notoriously incompetent San Diego Padres.  As CBS sportswriter Mike Axisa noted, “the Padres did not trade this Anthony Rizzo…he overhauled his mechanics (after the trade) …the Cubs bought low on Rizzo and have been rewarded with an MVP caliber player.”

Stock investing, sadly, is often ruled by momentum—buying high in hopes of selling even higher. Yes, it sometimes works. Bond investing, well, who knows these days? But convertible investing will always involve, and ultimately favor, a disciplined approach—buy when the risk/reward is good, sell when the edge is gone.  Be willing to go through a stretch of losses when you know you’re on the right side of value.  The idea of needing to win every year is like the idea of never being allowed to have a down month or quarter or even year. It’s not the way it works.  Do you hear me, box checkers of the world? Think about it when you’re watching the Series.

(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).


The more things change, it is said, the more they stay the same. Rarely have those seemingly wise words been called so into doubt.

We have a major-party presidential candidate with seemingly no respect for norms or decency, one willing to disrupt and endanger the country in order to satisfy his own apparent insecurity. We have a decent likelihood of a World Series between two franchises that have collectively won zero such series in the past 176 years. We have negative interest rates. We have negative swap spreads.

It’s a jungle out there, Grandmaster Flash told us, and it makes me wonder how I keep from going under. Don’t push me ‘cause I’m close to the edge. I’m trying not to lose my head.

We created HOCS to try to get a grip on this scared new world even before a lot of this stuff happened.  To one extent or another, it’s all coming from the same source—except for maybe the Cubs and the Indians.  It’s coming from an economy whose overseers won’t accept the help that the markets seem to be begging to give in the form of more capital for infrastructure.

What would a change in Washington in favor of more aggressive fiscal policy do?

It would drive demand for capital, getting rates and spreads to more “normal” states of being.

It would create more employment in the parts of the country crying loudest for help, and finding, frighteningly, that the most sympathetic ear is a whiter shade of orange.

It would lead to more convertible-bond issuance, helping increase supply of an asset class sorely needed to help investors get through these times in which allocation decisions seem likelier than ever to be misguided.

And it might even help rebuild the roads between Chicago and Cleveland, in case the series happens.

(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).

HYBRID VIGOR: VOL 3 ISSUE 37 "Hitting Bottom"

We’ve been publishing a list of ugly convertible bonds since the middle of 2014. So we know from ugly. But we haven’t seen many spectacles uglier than the presidential debate on Sunday night.

Usually it takes two to make something so awful. But while we try to keep Hybrid Vigor at least somewhat unbiased, consider that one of the participants was a seasoned politician, someone accustomed to running for and holding office, someone accustomed to debating. That individual had been party to plenty of contentious events but never anything so universally agreed to be sickening.

The other individual had never run for office.

You make the call.

Sadly, there are no winners. The only positive is that perhaps, just as falling stocks have to get washed out in order to recover, perhaps our political system needed to get all the sick out. Maybe that’s what’s happening now. Let’s hope.

Speaking of hope, it continues to percolate, however haltingly, for a return to active issuance in the convertible market. Market hints seem favorable—volatility trending upward since midsummer, Treasury yields hitting a multi-month high, and the Russell 2000 well ahead of the S&P 500 on the year. But we’ll see. One interesting spark could be the ongoing Salesforce-Twitter drama. If salesforce.com does indeed buy Twitter—and we know its leader wants to—it seems likely that a major convertible financing could be part of the picture, given the putative buyer’s past success with the asset class.  One could envision a part-cash, part-stock package, with a significant amount of the cash being raised through one or more new convertible bonds.  Either way, it will be interesting.

(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).