Alger in 5: Market Update


Treasuries, the Fed purchased a lot at the beginning of this week. I think it was $40 billion, and that helped earlier on in the week. And then when the fiscal stimulus proposal was announced, I think, we saw the largest increase in interest rates in decades. I would look for the central bank to continue to print money and purchase until those gyrations in the bond market decline. But you were probably focused more on corporate bond market in that question. Corporate spreads have risen by well over a 100 basis points and they’re under significant duress there. In the high yield market the weighting to energy stocks where there's going to be significant amount of bankruptcies if oil stays anywhere close to where it is now, that weighting is over 10% for the energy sector in the high- yield market, whereas in equities, it's only a low-single digit number, 2% or 3% in the U.S. So there's no doubt that there will be significant corporate losses and bankruptcies. In fact, if you looked at what corporate spreads imply for the P/E multiple, they would still imply the P/E multiple to go lower. So that's something that we're watching carefully. And at the end of the day, this is why at Alger we're so focused on good balance sheets, because if you have leverage, you have two problems. You have to service your debt, which means that as your cash flows go down, you have to redirect cash flows from investments that are good for your business to investments that are simply keeping your business alive. And two, you are dependent on the capital markets to roll over your debt. Obviously, debt has – matures and not everybody's maturities are all many years from now. Some of them – there's a lot of maturities this year and next. And so you're relying on the capital markets to stay open. And while we're very confident in our growth companies growing through these types of recessions, because we've seen it time and time again, in fact, I've written a paper on it called The Enduring Force of Innovation, where we've looked back 150 years and seen areas of growth in any type of economy. The fact is, is that the company has to survive and it can't be restructured,

because then equity holders lose out no matter how strong the company is. So that's why we're very focused on good balance sheets. Speaker Question : I know you are a traditionally fundamental buyer from the perspective of looking at individual equities. I'm wondering how much attention do you pay to market technicals? It looks like we're getting a bit of a relief rally from a deeply oversold condition. Do you look at that? Do you consider that we may roll over and we'll test the low or do you not think we'll do that? Brad Neuman : You're right. We are fundamentally based and we try not to trade based on stock charts and momentum, but we certainly look at technicals and where support is and we are kind of near a support line at 2,400. But that's not something that guides us in terms of how we invest. We really invest bottom-up, one company at a time. It’s something that I look at from a macro perspective, but it's not something that our portfolio managers use when they invest in individual companies and construct the portfolios. I wouldn't say that we rely on it or have anything too meaningful to say about the technicals right now. The things that I'm more focused on in terms of technicals are kind of the sentiment technicals. I think sentiment is very important. So not only do we watch VIX, like I mentioned to you, and as a firm, we're very aware of insider buying as I mentioned, and flows into money markets. But there are even other technicals that we look at, the put-to-call ratio for instance, how many puts are being bought for every call. We watch that as a measure of contrarian kind of technical indicator. And that is very high, and, again, indicative of extreme pessimism, which oftentimes can mean a bottom, although it also oftentimes can be early. It was early in the Global Financial Crisis. So those are the technicals that I'm more focused on rather than the actual stock charts.

If you have any further follow-up questions that come up in the course of the next week, please contact your local Alger representative. Thanks very much for your time.

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