Coca-Cola, Procter & Gamble and Junk Bonds: Doug Kass' Views

Doug Kass shares his views on why he's shorting consumer non-durables and favors junk bonds.
By Doug Kass ,

NEW YORK (Real Money Pro) -- Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.

Consumer-Oriented Companies May Prove Tough to Consume

Originally published at 3:49 PM EST on November 6, 2015

As noted earlier today, I am of the view that the U.S. dollar will continue to rise and jeopardize multinational corporate profits.

At the epicenter of the U.S. dollar pressure are consumer nondurable companies. Consumer staples also face damaged moats of more generics and cheaper non-branded products to their formerly impenetrable lines of businesses.

Look at the shares of Procter & Gamble (PG) - Get Report , Colgate-Palmolive (CL) - Get Report , PepsiCo (PEP) - Get Report and Coca-Cola (KO) - Get Report today; this could be the tip of the iceberg of poor absolute and relative performance.

I have shorted Consumer Staples Select Sector SPDR ETF  (XLP) - Get Report to get representation in this short theme.

Here is the six-month chart.

Position: None

My High-Quality Take on Junk Bonds

Originally published at 8:58 AM EDT on November 6, 2015

We spend a lot of time at RealMoneyPro talking about the equity market, but not much on the important high-yield market -- so let's do a quick dive into "junk" bonds this morning.

I have a long position in the Blackstone/GSO Strategic Creditclosed-end fund (BGB) - Get Report , which consists primarily of secured bank loans and higher-yielding bonds (i.e., below investment grade).

It's a relatively large fund ($745 million in assets) that offers a diversified portfolio and yields approximately 8.6% (monthly distributions are $0.105/share). The portfolio has an average maturity of less than 18 months, and the fund currently trades at around $14.50 a share -- about a 13% discount to BGB's $16.65 net asset value.

While much of high-yielding distressed and energy debt have been making new lows recently, there's been a solid rally in generic higher-quality junk bonds.

Loans have bounced a bit, but not much. And the market remains bifurcated between higher-quality, sought-after bonds and lower-quality ones that are illiquid and vulnerable to further losses on any hint of a weaker quarter or negative headline.

Let's look at some charts.

First, check out the Deutsche Bank high-yield yield-to-worst and high-yield spreads over the last four months:


Source: Bloomberg

Next, let's look at how the S&P Leveraged Loan 100 Index and high-yield ETFs performed over the last four months:


Source: Bloomberg

And here's Deutsche Bank's rundown of the cash price for cash conversion cycle (CCC) and "BB" bonds during the last four months:


Source: Bloomberg

And here's a chart showing the Deutsche Bank CCC spreads and "BB" spreads over the past four months:


Source: Bloomberg

Finally, let's look at inflows into the sector:


Source: Bloomberg

Higher-quality high-yield bonds have benefited from a surge of inflows over the past five weeks, whereas leveraged loans haven't. This probably accounts for a fair amount of leveraged loans' underperformance.

Additionally, $5.7 billion -- or roughly 60% of the past five weeks' inflows into the high-yield market -- have gone into ETFs. It's "easy come/easy go" with ETF flows; we'll see if this demand dries up after October's risk-on move.

Position: Long BGB

At the time of publication, Kass and/or his funds were long BGB and short XLP, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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