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Weekly Market Comment: June 23, 2020

Corporate America looks in the mirror

It’s encouraging to see the stock market up strongly this week after last week’s resurgence of coronavirus fears and recent protests and violent clashes on TV. Maybe it is because Mr. Market sees corporate America at least trying to make some improvements, some more material than others.

For example, this week PepsiCo said it would retire the Aunt Jemima product line because, as the Wall Street Journal put it, of its origins in racist imagery. Mars Inc. followed their lead, saying it would change its Uncle Ben’s brand, as did other brands as companies rethink their products and marketing.

We also saw companies including Nike, Target, and Spotify are recognizing a holiday commemorating the end of slavery while Nascar banned the Confederate battle flag at its events. How material these efforts are is debatable but they are gestures that stand to cool some of the civil unrest in American streets.

Earnings ugly enough to crack a mirror

Needless to say, many corporations are reporting some of the worst numbers in their history. Carnival Cruises lost more than $4 billion in the past quarter, putting it in a very tight spot in terms of its credit obligations. Fortunately for them, they have the Saudi government backstopping their shares, having bought almost 10% of the company during the market selloff.

Of course, cruise ship business is an extreme example of a coronavirus-hit industry. The recovery in autos and services continues while U.S. initial jobless claims continue to get less worse:

initial jobless claims chart

But, as the lawyer/journalist/podcaster Josh Barro put it, “we may be done with the coronavirus but that doesn’t mean that the coronavirus is done with us.” (note: his weekly political podcasts are Left, Right and Center” and “All the President’s Lawyers, head and shoulders above most political banter out there). For example, Apple closed 11 stores in four states where coronavirus case trends have turned for the worst: Florida, North Carolina, South Carolina and Arizona.

Can they? Can-so!

We received an update from the folks managing Canso/Lysander Corporate Value, which we hold widely for clients. For a few years now, Canso has been disillusioned with how expensive corporate bond prices have been so they elected to sit in safer but lower yielding A, AA, and AAA investments as they waited for “a sale”.

As everyone now knows, COVID-19 brought on that sales event and Canso did what it did in 2009: it went shopping for deeply discounted bonds when other investors were running scared. In the panic, Canso calmly but enthusiastically tripled its corporate bond allocation from under 20% ending December to just over 64% today. They saw pricing at levels they could only have dreamed about.

They’ve already captured some solid gains on those bonds, as the portfolio now sits up about 6% on the year with an internal yield-to-maturity of 7.1% (the highest we recall ever seeing it).

Canso, which manages $28 billion in client assets, is a deeply contrarian shop. So much so that their office is set up outside of Toronto’s city center because they didn’t want their 55 employees, including 27 on the research and portfolio management side, following what the rest of Bay Street was thinking. Canso does all of its own credit analysis and wants to have the conviction to buy when Bay Street is running scared.

We are very pleased with how Canso conducted themselves during the recent market dislocation and we think investors should be, too. Their patience has finally paid off.

Noteworthy links:

Musings

The Pulitzer-Prize winning historian and Cold War expert Anne Applebaum recently penned a cover story in The Atlantic titled History Will Judge the Complicit, citing many fascinating examples from the 20th Century. Here is an excerpt:

In August 1947, the two men met up at Wolf’s “luxurious five-roomed apartment,” not far from what was then the headquarters of the radio station. They drove out to Wolf’s house, “a fine villa in the neighborhood of Lake Glienicke.” They took a walk around the lake, and Wolf warned Leonhard that changes were coming. He told him to give up hoping that German Communism would be allowed to develop differently from the Soviet version: That idea, long the goal of many German party members, was about to be dropped. When Leonhard argued that this could not be true—he was personally in charge of ideology, and no one had told him anything about a change in direction—Wolf laughed at him. “There are higher authorities than your Central Secretariat,” he said. Wolf made clear that he had better contacts, more important friends. At the age of 24, he was an insider. And Leonhard understood, finally, that he was a functionary in an occupied country where the Soviet Communist Party, not the German Communist Party, had the last word.

Famously, or perhaps infamously, Markus Wolf’s career continued to flourish after that. Not only did he stay in East Germany, he rose through the ranks of its nomenklatura to become the country’s top spy. He was the second-ranked official at the Ministry of State Security, better known as the Stasi; he was often described as the model for the Karla character in John le Carré ’s spy novels. In the course of his career, his Directorate for Reconnaissance recruited agents in the offices of the West German chancellor and just about every other department of the government, as well as at NATO.

Leonhard, meanwhile, became a prominent critic of the regime. He wrote and lectured in West Berlin, at Oxford, at Columbia. Eventually he wound up at Yale, where his lecture course left an impression on several generations of students. Among them was a future U.S. president, George W. Bush, who described Leonhard’s course as “an introduction to the struggle between tyranny and freedom.” When I was at Yale in the 1980s, Leonhard’s course on Soviet history was the most popular on campus.

Separately, each man’s story makes sense. But when examined together, they require some deeper explanation. Until March 1949, Leonhard’s and Wolf’s biographies were strikingly similar. Both grew up inside the Soviet system. Both were educated in Communist ideology, and both had the same values. Both knew that the party was undermining those values. Both knew that the system, allegedly built to promote equality, was deeply unequal, profoundly unfair, and very cruel. Like their counterparts in so many other times and places, both men could plainly see the gap between propaganda and reality. Yet one remained an enthusiastic collaborator, while the other could not bear the betrayal of his ideals. Why?

Word of the Week

propaganda (n.) - is communication that is used primarily to influence an audience and further an agenda, which may not be objective and may be presenting facts selectively to encourage a particular synthesis or perception, or using loaded language to produce an emotional rather than a rational response to the information. “Why is propaganda so much more successful when it stirs up hatred than when it tries to stir up friendly feeling?” – Bertrand Russell

The TSX Composite gained 1.4% as the S&P 500 rose 1.9%.