Wedbush Securities

Black Swan Investing………What to do in a pandemicCACTTC EDUCATION CONFERENCE

10‐8‐2020DON COLLINS

WEDBUSH SECURITIES

Was this a black swan event?

• Black Swan is a term  coined for the disproportionate role of high‐profile, hard‐to‐predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.

• It has become a cliché for any bad thing that surprises us

• White Swan 

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SUMMARY• What has changed in society, economically, and financially

– Monetary Stimulus– Fiscal Stimulus– Virus – Infections, deaths, rumors, misinformation– Election – greed, power, fear– Geo‐Political risks

• Where are we today– Lesson learned

• Liquidity• Performance of Assets

– Policy• Action Plan – Investing in a Pandemic

– Assess cyclical cash flow– Assess draw down in economic business cycle ‐ peak to trough, time period (use GFC for 

guidance)– Asset allocation– Investment policy  ‐ Negative rates?

• Predict the future?– Fed projections– Economic projections

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Rate Shift – What has changed

• SOURCE BLOOMBERG Wedbush Securities

2018

2019

2020

• SOURCE: HEDGEYE B. RICH Wedbush Securities

Monetary Response• Supporting Financial Market Functioning

– ZIRP– Forward Guidance– Securities Purchases (QE)– Primary Dealer Credit Facility (PDCF) Collateralized– Money Market Mutual Fund Liquidity Facility (MMLF)

– Repo Operations– Direct Lending to Banks– Temporarily Relaxing Regulatory Requirements of Banks to Stimulate Lending

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Monetary Response• Supporting Corporations and Small Businesses– Direct Lending to Major Corporate Employers

• Primary Market Corporate Credit Facility (PMCCF)• Secondary Market Corporate Credit Facility (SMCCF)

– Commercial Paper Funding Facility (CPFF)–Main Street Lending Program, Paycheck Protection Program, New Loans Facility

– Supporting Loans to Non‐Profit Institutions

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Monetary Response• Supporting Households and Consumers

– Term Asset‐Backed Securities Loan Facility (TALF)• Supporting State and Municipal Borrowing

– Direct Lending to State and Municipal Governments (Municipal Lending Facility)

– Supporting Municipal Bond Liquidity• Cushioning U.S. Money Markets from International 

Pressures– Make U.S. Dollars Available to other Central Banks– New Repo Facility for Foreign and International Monetary Authorities

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SOURCE: DAVE GRANLUND Wedbush Securities

Fiscal Response

• Coronavirus Aid, Relief, and Economic Security Act (CARES) $2.4 trillion– Direct Payments to Taxpayers– Expansion of Unemployment Benefits– Federal aid to Hospital and Healthcare Providers– Various Tax Incentives– Economic Support for Small Businesses– 11th Hour Negotiations before the Election –Pelosi, Mnuchin ($1.6t to $2.2t)

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Virus Statistics as of 9‐30‐2020

• Cases – 34.14mm Worldwide, 7.4mm U.S.

• Deaths – 1.02mm Worldwide, 211K U.S.• Active Cases – 7.72mm

Mild – 7.65mmCritical – 66kPresident Trump and FLOTUS contract covid10‐1‐2020

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Election• Policy Shift

– Taxes– Fiscal Stimulus– Supreme Court– Monetary Policy

– Geopolitical Policy

SOURCE: COUNTERPOINT ART

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Lesson Learned in a pandemic

• Liquidity– Drawdown history ( GFC)– What Typically Happens in a Crisis?

• Asset performance– Optionality – Callable Securities– Duration of Portfolio– Cash Flow– Credit risk

• LGIP/Short Term Investment Pool• Cash Flow Impact, Stated and Perceived

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GFC Drawdown

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$900.0

Sep‐00 Sep‐01 Sep‐02 Sep‐03 Sep‐04 Sep‐05 Sep‐06 Sep‐07 Sep‐08 Sep‐09 Sep‐10 Sep‐11 Sep‐12 Sep‐13 Sep‐14 Sep‐15 Sep‐16 Sep‐17 Sep‐18 Sep‐19 Sep‐20

In M

illions

Wedbush Securities

Cyclical Cash Flows

‐$30.0

‐$20.0

‐$10.0

$0.0

$10.0

$20.0

$30.0

JULY AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE

In M

illions

2010‐2020 1998‐2020 Current Fiscal Year

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Hold Your Nose and Stay Engaged –Forget Chasing the Holy Grail

• Assess Macro Environment, Economic, Political, Local, FED, etc.• Assess Potential Portfolio Draw Down• Asset Allocation

– Treasury, GSE’s– CP – Municipals – Taxable GO’s –high grade– Callable Bonds – assess break evens, state value add– Liquidity Pool – LAIF, CAMP, CALTRUST, ETC.– Credit Options – downgrade potential?– Asset Backed Securities– Bank Options – Overnight rates that are very competitive… Ask– Delays, Deferrals, recall the triple flip?

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Predict the Future?

• FED Projections• Economic Projections• State Guidance• Local, Look No Further Than Your Cash‐flows. I.E. TOT, Sales‐Tax, etc.

• Bottom Line…. Don’t Attempt to Time the Markets

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FED DOTS

• SOURCE BLOOMBERG Wedbush Securities

GOLD/COPPER ‐ TEN YEAR TREASURY RATIO

• SOURCE BLOOMBERG Wedbush Securities

Conclusion

• Keep it simple• Stay as Long as Possible Within Your Cash‐flow Constraints. Bottom line: Duration Wins

• Reduce Optionality Over the Long Term• Revisit Your Credit Strategy. The Current Recession Has Been Mild For Investment Grade Credit Failures to Date

• The Deflationary Gap

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BLOOMBERG RECESSION INDEX/S&P

• SOURCE BLOOMBERG Wedbush Securities

5 YEARS  Average of the average (1.26% 1.31% 1.37% 1.40% 1.58%   )

0.000

0.500

1.000

1.500

2.000

2.500

3.000

10/1/201

5

12/1/201

5

2/1/20

16

4/1/20

16

6/1/20

16

8/1/20

16

10/1/201

6

12/1/201

6

2/1/20

17

4/1/20

17

6/1/20

17

8/1/20

17

10/1/201

7

12/1/201

7

2/1/20

18

4/1/20

18

6/1/20

18

8/1/20

18

10/1/201

8

12/1/201

8

2/1/20

19

4/1/20

19

6/1/20

19

8/1/20

19

10/1/201

9

12/1/201

9

2/1/20

20

4/1/20

20

6/1/20

20

8/1/20

20

6 MO BILL

12 MO BILL

2 YEAR

3 YEAR

5 YEAR

Wedbush Securities

10 YEARS  Average of the average (0.68%, 0.74%, 0.91%, 1.13%, 1.78%) 

0

0.5

1

1.5

2

2.5

3

3.5

9/1/20

10

1/1/20

11

5/1/20

11

9/1/20

11

1/1/20

12

5/1/20

12

9/1/20

12

1/1/20

13

5/1/20

13

9/1/20

13

1/1/20

14

5/1/20

14

9/1/20

14

1/1/20

15

5/1/20

15

9/1/20

15

1/1/20

16

5/1/20

16

9/1/20

16

1/1/20

17

5/1/20

17

9/1/20

17

1/1/20

18

5/1/20

18

9/1/20

18

1/1/20

19

5/1/20

19

9/1/20

19

1/1/20

20

5/1/20

20

9/1/20

20

6 MO BILL

12 MO BILL

2 YEAR

3 YEAR

5 YEAR

Wedbush Securities

20 YEARS (1.78%, 1.90%, 2.24%, 2.56%, 3.14%)  

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

1/1/20

00

9/1/20

00

5/1/20

01

1/1/20

02

9/1/20

02

5/1/20

03

1/1/20

04

9/1/20

04

5/1/20

05

1/1/20

06

9/1/20

06

5/1/20

07

1/1/20

08

9/1/20

08

5/1/20

09

1/1/20

10

9/1/20

10

5/1/20

11

1/1/20

12

9/1/20

12

5/1/20

13

1/1/20

14

9/1/20

14

5/1/20

15

1/1/20

16

9/1/20

16

5/1/20

17

1/1/20

18

9/1/20

18

5/1/20

19

1/1/20

20

9/1/20

20

6 MO BILL

12 MO BILL

2 YEAR

3 YEAR

5 YEAR

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Disclosure• The material contained herein is not a product of any research 

department of Wedbush Securities,  or any of its affiliates. Nothing herein constitutes a recommendation of any security or regarding any issuer; nor is it intended to provide information sufficient to make an investment decision. The information provided is herein not intended to be and should not be construed as a recommendation or "advice" within the meaning of Section 15B of the Securities Exchange Act of 1934. The information contained in this communication has been compiled by Wedbush Securities from sources believed to be reliable, but no representation or warranty, express or implied, is made WedbushSecurities, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this communication constitute Wedbush Securities judgment as of the date of this communication, are subject to change without notice and are provided in good faith but without legal responsibility. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

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