This is how you can take a leap from a 9-to-5 job to a full-time trader. It doesn’t have to be a painful experience. However, you need to know some things and apply techniques that will help you make that transition as smooth as possible. #9to5 #boringjob #trading #fulltimetrader #professionaltrader #tradestocks #learntrading Posted at: https://tradersfly.com/blog/ep-144-taking-a-leap-from-a-job-to-full-time-trader/
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MU and ZAGG are profiled as aggressive growth stock picks. Micron: https://www.zacks.com/stock/quote/MU?cid=CS-YOUTUBE-FT-VID Zagg: https://www.zacks.com/stock/quote/ZAGG?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: stocktwits.com/ZacksResearch Follow us on Twitter: twitter.com/ZacksResearch Like us on Facebook: www.facebook.com/ZacksInvestmentResearch
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Learn more about ETFs that own Tesla. Tesla: https://www.zacks.com/stock/quote/TSLA?cid=CS-YOUTUBE-FT-VID First Trust NASDAQ Global Auto ETF: https://www.zacks.com/funds/etf/CARZ/profile?cid=CS-YOUTUBE-FT-VID ARK Autonomous Technology & Robotics ETF: https://www.zacks.com/funds/etf/ARKQ/profile?cid=CS-YOUTUBE-FT-VID First Trust NASDAQ Clean Edge Green Energy ETF: https://www.zacks.com/funds/etf/QCLN/profile?cid=CS-YOUTUBE-FT-VID VanEck Vectors Low Carbon Energy ETF: https://www.zacks.com/funds/etf/SMOG/profile?cid=CS-YOUTUBE-FT-VID Global X Lithium & Battery Tech ETF: https://www.zacks.com/funds/etf/LIT/profile?cid=CS-YOUTUBE-FT-VID Ford: https://www.zacks.com/stock/quote/F?cid=CS-YOUTUBE-FT-VID General Motors: https://www.zacks.com/stock/quote/GM?cid=CS-YOUTUBE-FT-VID Follow us on
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Kevin Matras looks at the ‘short ratio’ as a market sentiment indicator, and shows how to use it for finding winners. Highlighted stocks include ECHO, GLT, LIZ, SBH and SQNM.
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Traders on the floor of the New York Stock Exchange. Source: The New York Stock Exchange The market is expanding to new highs on the back of a magical phrase that is being sprinkled like pixie dust among the conference calls this earnings season: "operating leverage." "The market is set to see a substantial acceleration in earnings growth on better than expected operating leverage," Mike Wilson from Morgan Stanley wrote in a recent note to clients. "Operating leverage" is an accounting term that measures how a company can increase profit by decreasing costs and increasing revenue. Simply put, Wilson and other strategists are expecting that the cost-cutting efforts of corporate America in 2020 — reducing rent, cutting travel, and especially eliminating jobs — will dramatically improve the bottom line and accelerate profits even more when revenues are expected to increase in 2021. More revenues + lower expenses = more profit. How Covid helped companies restructure Corporations try hard to control costs, and the Covid epidemic has forced companies to aggressively reduce those costs. Costs fall into two broad buckets: fixed, such as insurance, rent and interest payments, and variable, like energy, materials, and labor. Fixed costs don't change, but variable costs do. If you can control variable costs, or turn them into fixed costs, you can usually take in more on the bottom line. Labor is the largest single cost a company has. Labor is variable. There's many pay grades, people come and go, the workforce fluctuates depending on demand. If you can replace your workers using technology — robots, or better software — you can substitute a variable cost (labor) for a fixed cost (technology). Voila. Higher profits, particularly once revenues pick up. That's operating leverage. Of course, there are other way to reduce costs, including cutting real estate and travel costs, or reducing debt. If you're looking for an example of how reducing expenses can help a company's bottom line, look at the energy companies, which have been aggressively reducing staff and cutting costs. Kinder Morgan, for example, operates oil and natural gas pipelines and terminals. The company saw year-over-year revenues decline by 7.1%, but earnings per share increased by 3.8%. How did they do that? They cut operating expenses by 44.8%. Companies are anticipating higher profits in 2021 due to cost cutting Kinder Morgan isn't alone. Many companies hit hard by Covid have restructured — cutting jobs and other expenses — and are now anticipating higher profits and higher margins in 2021. These include casinos, railroads, oil services, restaurants, and retail. "These business have reorganized substantially in 2020 so investors will probably see surprises to the upside," Nick Mazing, head of research at Sentieo, told me. Take railroad firm Kansas City Southern. They consolidated trains, had fewer crew starts, reduced work hours, and had fewer locomotives and freight cars out. "For 2021, we expect our headcount growth to remain well below volume increases as we continue to lengthen trains, creating further operating leverage," Michael W. Upchurch, Kansas City Southern CFO said on a recent conference call. Mark R. George, Norfolk Southern's CFO, expressed similar sentiments: "So another quarter of expense reductions, far in excess of the volume decline, leaving us well primed to deliver strong operating leverage as 2021 unfolds." Fastenal's CFO Holden Lewis attributed his company's improved operating margins to reducing headcount: "Nearly half this leverage came over labor costs as our record fourth quarter sales were achieved with headcount that was down mid-single digits versus last year." Understandably, many companies avoid using words like "layoffs" or "headcount reductions." Instead, we hear about "structural changes" or "cost actions" or even "structural cost reductions" to describe cost cutting and layoffs, as in this comment from Jeffrey Allen Miller, CEO of Halliburton, on its recent conference call: "We completed the most aggressive set of structural cost reductions in our history, giving us meaningful operating leverage in a recovering market." Another often-used term to describe cost cutting and layoffs is "efficiencies," as in this comment from Dale Francescon, Co-CEO of home builder Century Communities: "In 2021, we expect to see continued margin and leverage improvement as we realize further operational efficiencies across our organization." Harley-Davidson's CFO, Gina Goetter, uses similar language: "We also expect the motorcycle segment operating margin to show steady improvement from 2019, our most recent comparable year, driven by increased efficiencies across our operations, and leverage within SG&A as we maintain a lean cost structure." "SG&A" refers to "Selling, General & Administrative Expenses" and refers to the corporate costs that are not directly related to manufacturing the product. It includes salaries of corporate staff, as well as rent, utilities, and supplies. Wall Street vs. Main Street Lost in the corporate swoon of higher profits and higher stock prices is that operating leverage is increasingly being viewed as a whitewashed term to describe corporate layoffs, and for many illustrate the disconnect between Wall Street and Main Street. An analysis by the Washington Post in December found that 45 of the 50 biggest U.S. companies had turned a profit since March. The majority of firms had cut staff. A particularly sensitive issue is corporate buybacks resuming, even in the face of layoffs. "This is a global crisis but the big companies are not treating it as one — they haven't skipped a beat," William Lazonick, an emeritus economics professor at the University of Massachusetts at Lowell, told the Post. "Apple gave back tens of billions of dollars to shareholders. It's sick." The issue now is, will Main Street catch up? Peter Tchir from Academy Securities thinks it will. Forty percent of his firm are veterans, and he has been hiring. He freely admits that corporate America has been seeking to cut jobs: "Part of the layoffs are companies realizing they can do more with less employees using technology." He believes that the several rounds of stimulus, combined with the reopening of the economy, will be a big benefit for Main Street: "We are due for some catchup on the employee side of things. I think 2021 is going to be a year where it's going to be great for the economy and OK for markets. The economy is going to lead the markets, which is the opposite of what has happened in the last decade." He is particularly optimistic for those with modest skill levels. "I think by the end of the year we can have a job market that is very good for those who have been laid off. It's easy to hire a barista, but it's hard to find someone to run a good coffee shop." Transcripts provided by Sentieo
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Tracey Ryniec, Zacks value stock strategist, discusses how to add a little growth to your value stock search. Southwest Airlines: http://www.zacks.com/stock/quote/LUV?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: http://stocktwits.com/ZacksResearch Follow us on Twitter: https://twitter.com/ZacksResearch Like us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
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Ryan McQueeney discusses why he is playing it safe in the Income Investor portfolio with his two latest additions: MPLX LP (MPLX) and Dominion Energy (D). On top of their strong dividends, what makes these stocks a smart play right now Dominion Energy: https://www.zacks.com/stock/quote/D?cid=CS-YOUTUBE-FT-VID MPLX: https://www.zacks.com/stock/quote/MPLX?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: http://stocktwits.com/ZacksResearch Follow us on Twitter:
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The top ranked altcoin, Ethereum, has broken its all-time high and like Bitcoin’s big breakout, it has attracted more and more participants to the cryptocurrency market. Valuations are rising everywhere, and the total altcoin market cap is on the verge of a life-changing breakout, if history repeats. And given the current momentum and FOMO across […]
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Traders work on the floor of the New York Stock Exchange. NYSE Blowout earnings are forcing analysts to up estimates for 2021. With a little more than half of companies reporting, earnings are proving to be a pleasant surprise for the trading community. The GameStop/Robinhood fiasco is turning out to be a minor blip in the markets in the first months of 2021. The main theme that ended 2020 — the belief in the effectiveness of a vaccine —remains intact. "The markets are advancing to new highs as Covid cases are dropping, stimulus is coming in at the higher end of expectations, and we are continuing to see very positive earnings surprises," Nick Raich at Earnings Scout told me. Surprises and raised earnings Stocks are expensive. The S&P 500 is trading at 22 times 2021 earnings, historically high. For stocks to keep advancing, two things had to happen: very large earnings beats for the fourth quarter, and corporate guidance needed to be sufficiently clear that earnings estimates for Q1, 2, and 3 would keep rising.  Both of these conditions have been met. First, earnings are beating estimates by more than 17%, about five times the normal average and on a par with the third quarter. The reason: analysts have underestimated the strength of the economic recovery. Q4 earnings:  halfway point (53% reporting) Beating:  83% Earnings beat:  17.3% EPS growth: up 1.6% Second, earnings surprises are now translating into higher estimates for the first and second quarters. S&P 500:  Q1 2020 earnings estimates Jan. 1:    up 16.0% Today:    up 20.5%  S&P 500:  Q2 2020 earnings estimates Jan. 1:    up 45.7% Today:    up 49.9% Source:  Refinitiv Analysts typically are overly optimistic and start cutting estimates as the quarter wears on, but in the second quarter the opposite has happened. "That's an unusual occurrence; the Street is usually cutting numbers by this point in the current quarter," Nicholas Colas from DataTrek said in a recent note. Technology, materials and real estate earnings have been particularly strong. Sell the news? With stocks this high, it's little wonder that even strong earnings reports don't move individual stocks much. Christopher Harvey, head of equity strategy at Wells Fargo, has noted that in the 24-hour period companies reported positive earnings beats, the average stock traded down 0.8%. Ann Larson, senior analyst at Bernstein, noted that the S&P 500 had run up about 18% in the previous two and a half months, "perhaps discounting much of the good earnings results in advance." Low rates + strong earnings = stocks at new highs Another factor pushing stocks to new highs: low interest rates. "The U.S. has never begun an expansion with yields as low as today," Jim Paulsen, chief investment strategist at The Leuthold Group, said in a recent note. "A combination of extremely low yields and strong EPS gains has historically proved to be a uniquely positive opportunity for stock investors." What could derail the earnings lollapalooza? Barring another out-of-left-field event like Gamestop, it's still all about the stimulus (go big is going to succeed, it appears) and the vaccine: "Covid is still a huge X-factor," Nick Raich told me. "Will there be mutuations and will the vaccines still be as effective as advertised?  Barring that, stocks should continue to climb higher." Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.
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These new ETNs provide triple leveraged, upside and downside exposure to the hottest tech stocks. BMO-RM FG I3XL: https://www.zacks.com/funds/etf/FNGU/profile?cid=CS-YOUTUBE-FT-VID BMO-RM FG I3XIL: https://www.zacks.com/funds/etf/FNGD/profile?cid=CS-YOUTUBE-FT-VID Facebook: https://www.zacks.com/stock/quote/FB?cid=CS-YOUTUBE-FT-VID Apple: https://www.zacks.com/stock/quote/AAPL?cid=CS-YOUTUBE-FT-VID Netflix: https://www.zacks.com/stock/quote/NFLX?cid=CS-YOUTUBE-FT-VID Google: https://www.zacks.com/stock/quote/GOOGL?cid=CS-YOUTUBE-FT-VID Amazon: https://www.zacks.com/stock/quote/AMZN?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: stocktwits.com/ZacksResearch Follow us on Twitter: twitter.com/ZacksResearch Like us on Facebook: www.facebook.com/ZacksInvestmentResearch
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A look at two stocks for your aggressive growth radar screen. Harmonic: https://www.zacks.com/stock/quote/HLIT?cid=CS-YOUTUBE-FT-VID Enphase Energy: https://www.zacks.com/stock/quote/ENPH?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: http://stocktwits.com/ZacksResearch Follow us on Twitter: https://twitter.com/ZacksResearch Like us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
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Synopsys is the driving force behind the tech of future and will fit nicely in your portfolio of the future. Synopsys: https://www.zacks.com/stock/quote/SNPS?cid=CS-YOUTUBE-FT-VID Follow us on StockTwits: http://stocktwits.com/ZacksResearch Follow us on Twitter: https://twitter.com/ZacksResearch Like us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
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Jakub Porzycki | NurPhoto | Getty Images GameStop stock has defied gravity in the past and it could again, but there are some signs its stock may be topping out, some strategists say. GameStop was down sharply Monday, off more than 30% at $225. It has been the poster child of a group of stocks shorted by hedge funds but snapped up by small investors who helped drive share prices higher. The price rises even more when hedge funds are forced to buy the stock to cover short positions. GameStop has had a wild ride. It surged to an all time high of $483 last week but appeared to run out of steam Monday, falling well below its Friday close of $325. The stock closed at $17.25 on Jan. 4, the first trading day of 2021. Arrows pointing outwards 1. Call options cost trends When viewing a stock that's had a long speculative run, it's important to look at the call options on the stock when it stops moving higher, said Julian Emanuel, chief equity and derivatives strategist at BTIG. Call options, which allow but don't require investors to buy at a certain price, are basically bets the stock will continue to rise. Aggressive buying in those options can help speculative stocks go even higher until the options themselves become too expensive. "The high price of the options themselves are likely to cause the stock to top and then sell-off or at least go sideways and ultimately sell off as the speculative mania moves on to different areas," said Emanuel. "We're seeing this today in silver." Silver has been the target of aggressive buying and has also caught the interest of traders in the Reddit forum WallStreetBets. iShares Silver Trust ETF jumped 7.1% Monday and call buying continued to surge at record levels in the ETF. Retail investors have been very active in options, opening and closing positions in the same day in many speculative stocks. As for GameStop, Emanuel said the calls appear to have become too expensive to remain a source of further upside for the stock. For instance, the at-the-money Feb. 19 call options — that is, an option with a strike price that's identical to the company's current share price — in GameStop at Friday's close cost about 50% of the company's actual share price, Emanuel said. To give that perspective, the S&P 500 Feb. 19 at-the-money options cost just 2.5% of the S&P's value. "It's difficult to maintain a level of speculative interest when it becomes too expensive to buy call options," said Emanuel. 2. Reduced demand Two other factors depressing the stock are the reduction in short interest as investors were forced to cover shorts, and that brokers have restricted buying in GameStop, Emanuel added. That takes away an important source of demand, and speculative investors become less interested, he said. "It seems the Reddit army is moving into a different area," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. "The stock is going down and the volatility goes down." "Usually when a stock goes down, volatility goes up," he said. "In this instance, as people leave and move into other areas, you're going to see the stock price and volatility go down." The 30-day implied volatility in GameStop options on Friday was 430% but it declined to 375% and continues to fall, Murphy said. Implied volatility measures the expected swing in a stock's price. That means investors are now expecting a move as big as 23% in the stock in one day in either direction, down from 27% on Friday. Of course, GameStop has also been affected by trading restrictions. Robinhood and other online brokers last week limited buying in GameStop, but allowed investors to sell. Brokers raised margin requirements on GameStop and some other stocks. It's very hard to tell whether GameStop was near a top because of restrictions on the stock, said Steve Massocca, managing director with Wedbush Securities. "When you tell people they can't buy but can only sell, of course it usually goes in one direction," he said. Robinhood on Monday continued to prohibit clients who own more than 20 shares of GameStop from buying any new shares.
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The chief executive of Warner Music has called into question the financial sense of some of the high-priced back catalogue acquisitions of recent months, after a string of deals for songs by the likes of Fleetwood Mac and Barry Manilow signalled a modern-day gold rush in music rights.  “Both in 1849 and later in the Yukon, more people went broke than they did make money,” said Steve Cooper, chief executive of Warner, the world’s third-largest music company.  “When you . . . pay north of a certain multiple, you’re beginning to move into the world of finance that lacks a certain amount of discipline,” he told the Financial Times. “I praise the people that can figure out how to make money when they pay 25 times [a song’s historic annual royalties]. God bless.”  A combination of low interest rates and the rise of streaming has spawned a scramble for music rights. London-listed Hipgnosis has raised and spent £1.2bn on the rights to hit songs since it floated in 2018 and has been on a buying spree, having struck deals with Neil Young, Jimmy Iovine and Lindsey Buckingham already this year.  Hipgnosis has on average paid 14.76 times songs’ historic annual income to acquire some of the rights to hits by artists such as Barry Manilow, Fleetwood Mac and Bon Jovi. But founder Merck Mercuriadis has said that for some catalogues he had paid a multiple as high as 22, prompting scorn from some music executives and industry analysts.  “At the moment it’s a very favourable rate environment, and what we see is a lot of people moving money from traditional fixed income to . . . what they believe is fixed-income structure,” said Mr Cooper, referring to the predictable royalty payments that songwriting catalogues generate.  Bidders including private equity groups, specialist buyers and music labels have battled for the catalogues of older established artists, whose music has enjoyed a new lease on life thanks to streaming — effectively doubling the value of music rights over the past decade.  Warner Music itself has benefited from an industry-wide revival in music revenues as people shifted listening to paid subscriptions on Spotify and other audio streamers, generating a new source of income for music owners in a digital era. Mr Cooper’s comments came as Warner Music reported its highest quarterly revenue since the company was spun out of Time Warner in 2004.  The record label behind artists including Lizzo and Ed Sheeran reported that total revenue grew to $1.3bn in the three months to the end of December, up 6 per cent from a year ago. The company posted adjusted net income of $114m, down about 10 per cent, which Warner attributed to unfavourable changes in exchange rates on euro-denominated debt.  Digital revenue in the quarter, which includes streaming on Spotify as well as royalty fees from social media companies, grew 17 per cent from a year ago to $825m.  As streaming on Spotify matures, social media has been cast as the next frontier in how music labels can extract money from their songs. Warner Music in December signed a new licensing deal with TikTok, setting royalty payments when songs from Warner artists are played on the Chinese-owned social media app.
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The municipal high-yield sector is outperforming all others as rates globally are at historic lows, municipal ratios to U.S. Treasuries dip to near 20-year lows and investors clamor for any incremental yield. High-yield — despite its inherent risk — is returning above 1.75% so far in 2021, following a strong end to 2020 at a 6% return. Record high inflows into high-yield municipal bond funds over the past 11 weeks as of Jan. 25 demonstrates the overwhelming appetite for yield paper on the buyside, according to Refinitiv/Municipal Market Data. Most recent deals “fit right into the buyer wheelhouse offering some size and varied credits, most of which will offer wider spreads than what is available today,” Refinitiv analyst P. Franks said in a Jan. 25 report. Municipal performance compared to U.S. Treasuries posted the best outperformance for tax-exempts in the 30-year slope, according to Eric Kazatsky, senior strategist at Bloomberg Intelligence. Though Kazatsky said investment-grade returns pale in comparison to those for municipal high-yield. The Bloomberg Barclays Municipal Index, with a double-A credit quality, has year-to-date returns of just 0.25%, which trails longer-dated municipals, with returns of 0.40%. Triple-B municipals are returning at 1.09%. The Bloomberg Barclays Municipal High Yield Index has posted historic returns of 1.77% so far in 2021, a record. “Prices for municipal high-yield bonds continue to hit new highs, despite the havoc COVID-19 has caused in the muni market and unknown risks over the next year,” he said in a report. The low default rate and high performance of municipal high-yield paper in 2020 translates into potential value and opportunity ahead in 2021, said Phil Toews, chief executive officer at Toews Asset Management, in a recent interview. “Because high-yield bonds typically move lower along with equities, we haven't suffered a lot of default risk for high-yield muni bonds,” he said. Toews manages $2.2 billion of total assets under management, including $800 million of high-yield bond assets in its funds. The firm offers high conviction tactical models, most of which have some exposure to high-yield bond instruments. When in a bullish posture, they attempt to track market indices and may gain some exposure through high-yield bond exchange-traded funds. He is optimistic on the sector, especially since investment-grade bonds “are a very poor source of returns because we are in a negative real return environment with interest-rate risk.” Toews referenced the 3% to 4% spread between the high-yield and investment-grade sectors. His expectations for returns are much higher on a 12- to 24-month forecast, especially since municipals are outperforming taxable bonds so far in 2021. High-yield has been trading with attractive spreads in the secondary market of late, according to the Refinitiv data. A $5 million block of New Jersey general obligation emergency COVID-19 bonds traded recently with a 4% coupon due in 2032 at a 1.50% yield. New Jersey is rated A3/BBB+/A-/A, one of the lowest-rated states. That spread was 64 basis points over the generic, benchmark, triple-A GO scale at the time, even though it was slightly tighter than where it traded at 68 basis points a week earlier, the data showed. In addition, a $5 million block of New York State Metropolitan Transportation Authority revenue bonds were sold at a 2.31% yield. The spread was 93 basis points higher than the generic triple-A scale, which was on top of recent levels, though more than 50 basis points tighter than where it traded in December 2020, Refinitiv data showed. The MTA, rated A3/BBB+/A-/AA-, is facing severe budgetary pressures from knock-on effects on ridership from COVID-19. Phil Toews, CEO of Toews Asset Management Yields are attractive when compared to the low absolute yields in the high-grade market and performance continues even after the volatility last spring, analysts noted. “For an outsider looking at risk pricing in our market, it appears the pandemic never happened,” Kazatsky said. “While some of this is based on the resiliency of the muni market, much of the price improvement has been technical in nature as strong inflows and little yield have dictated the direction and strength, especially when it comes to more bespoke trading credits with low or no ratings." Others agreed that the high-yield sector offers value for yield-starved investors in the current market. “We remain constructive on high-yield municipals for their diversification benefits, high levels of income, and the potential to be rewarded for superior security selection,” Peter Hayes and Sean Carney of BlackRock Inc. wrote in a Jan. 19 municipal market 2021 outlook report. The high-yield sector finished 2020 with a strong gain of 6% and outpaced the broader S&P Municipal Bond Index by 1.05%, even though that performance came on the heels of a dramatic drop of 11.2% last March and April by the S&P Municipal High Yield Index, the analysts pointed out. “We anticipate that high-yield will outperform again in 2021 with the tailwinds of low rates, limited supply, improving fundamentals, attractive credit spreads, and the reversal of flows alongside investors’ increased risk appetite,” Hayes and Carney wrote. Looking at the potential value in the sector, the pair recommend credits with measurable cash flows, such as tobacco, Puerto Rico Sales Tax Financing Corporation [COFINA], corporate bonds, and established retirement community bonds. "We remain constructive on high-yield municipals for their diversification benefits, high levels of income, and the potential to be rewarded for superior security selection,” Peter Hayes and Sean Carney of BlackRock Inc. wrote in a 2021 outlook report. “We believe there is significant value in the Puerto Rico general obligation and Puerto Rico Electric Power Authority [PREPA] bonds, which are expected to be restructured this year,” they said. But, the sector is not without risk, analysts warned. “There is a very good reason to look to high-yield muni bonds for additional yields, but you need to approach that marketplace with reasonable agility,” Toews said. He said the proxy risk in the high-yield municipal sector can be gauged by looking at the valuation of stocks because they are similar to corporate high-yield. “When stocks are falling, the proxy risk is relatively high, and when spreads are low and equity valuations are higher, the risk is higher in municipal high-yield bonds,” Toews said. Since high-yield corporate and municipal bonds move similarly during risk events, investors need to be selective when searching for opportunities in the high-yield municipal sector, he noted. “With the forward valuation on the S&P 500 over the next year near 23, we feel there is a significant possibility of an equity deflation risk event and, therefore, the risk to principal on high-yield bonds, including high-yield muni bonds, is high as well,” he said. Looking back at the fourth quarter, Toews said high-yield spreads were around 7% to 8% above investment-grade bonds. “What that tells you is the return potential is higher historically when spreads have been 8% or more,” Toews said. “That has led to strong returns for high-yield bonds, but at the same time, high-yield spreads are under duress.” Meanwhile, the pandemic’s impact on the municipal high-yield sector should also be considered a potential risk, according to Hayes and Carney of BlackRock. Extra due diligence is needed on credits affected by COVID-19, such as long-term care facilities, small universities, and highly speculative start-up projects, the BlackRock analysts warned. Both stock and economic risk could creep up over the next 12 months and impact municipal high yield, Toews added. “If the momentum ebbs for the equities market and we see a bear market play out in 2021, then high-yield munis will be directly affected by that,” Toews said. “They will realize the equity proxy risk and move lower along with stocks.” “If the economy continues to grow and the vaccine continues and there is no risk event that affects equities over the next 12 to 24 months, we will see spreads continue to narrow and a mild appreciation in high-yield municipal bonds and decent yield relative to the investment-grade marketplace,” he said. Toews’ advice to high-yield municipal investors going forward? Be agile. “Understand that while yields are at an acceptable level, you’re accepting economic risk and with that having the ability to de-risk and change allocations is highly desirable,” he said. “Now is a good time to think unconventionally,” he suggested, adding that investors should include “loss avoidance strategies that help address falling markets.” “We believe we are 95 basis points away from a range where we would move to a more defensive posture,” such as Treasuries or short duration investment-grade bonds or cash instruments, he said. If, for instance, high-yield bonds move lower by 50 basis points that would be an exit signal for de-risking municipal high-yield positions, Toews said. But, for now, he doesn’t see an immediate or short-term impact from negative interest rates in municipals or corporate bonds. For the remainder of the quarter, Toews expects to continue his existing strategy of staying fully invested with a bullish posture in all of his high-yield municipal allocations, barring any change or loss in momentum or trend in the sector.
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