Channel 11: Another One Bites the Dust

In his review of markets and macro for the month of April 2023, DoubleLine Portfolio Manager Ken Shinoda on April 4 tells investors and advisers to “respect the data. The data continues to weaken. The Fed hiked again. The banks probably won't be lending as much. We think that long-term bonds can do OK in that environment of slowing growth. I know the T-bill is really cheap, and everyone loves it. I own some, you own some, we all own some: T-bills and chill. But make sure you have some longer-duration exposure to protect your portfolio into more volatility out there.”

Mr. Shinoda titled this episode (0:28) of the Channel 11 podcast “Another One Bites the Dust” in reference to the latest in a series of bank failures in the U.S. He begins with a review of U.S. stock performance in April (0:57), including the breakdown by sectors (1:40). He then reviews the performances of currencies (2:05), commodities (2:30) and fixed income (3:00). “Pretty amazing: The Fed hikes rates, and the two-year Treasury falls in yield,” Mr. Shinoda comments. “The market is basically telling (Fed Chair Jerome H. Powell) Jay that he probably shouldn’t have hiked” on May 3.

On the positive side of the inflation front, U.S. breakevens based on Treasuries and TIPS(6:18) indicate that inflation expectations are anchored. However, in his review of core CPI (7:04), he singles out shelter and services ex-shelter as the remaining drivers of inflation. “The problem is that those two numbers could potentially be sticky. On the shelter side, housing remains robust. Home prices actually just ticked up nationwide. What's happening is buyers are priced out of the purchase market because mortgage rates are so high, and so they're renting. So rental demand remains pretty robust.” Another negative (8:14) is wage growth, running off the highs but still elevated.

On recession watch (9:37), Mr. Shinoda reviews the Leading Economic Index, PMI surveys, the inversion of the 10-year U.S. Treasury relative to the three-month T-bill (a favorite indicator of Fed Chair Powell) and a spiking savings rate. He also notes that the labor market and wage growth (12:48) do not appear to be cooling.

Mr. Shinoda turns to banking, surveying the relationship, or the lack of one, between bank lending standards and inflation (14:11), and the flight of bank deposits to investments offering much greater yields over checking and savings accounts. Commenting on regional bank customers, he warns, “The more and more they open their newspaper, they open their Instagram, they open their Twitter, and they see all these headlines of another bank going under, and another bank goes under. I think that it's only going to intensify this concern and pressure. And you may see more deposit flight.”

Returning to fixed income (20:03), he notes that bank loans look “cheap relative to high yield, but for a reason: We believe a lot of the risks have moved from the high yield market into the bank loan market. On the low-risk end of the spectrum, I think that Agency mortgage-backed securities and AAA commercial mortgage-backed securities (CMBS) are two of the cheaper assets. On the riskier part of the market, you can go into places like bank loans, CMBS and collateralized loan obligations. They have risk, they will be volatile. If you do your credit work, I think you still can find opportunities, especially relative to equities.”
Mr. Shinoda completes this episode with a closer look at (24:26) equities. He reviews the risk of overly optimistic market expectations of earnings, seasonal stock-selling tactics (25:07), contrarian trades against a heavy net short position against stocks (26:14) and the relative cyclically adjusted price-to-earnings ratios by sector of the U.S. and European large-cap stock markets (26:29).