The March jobs report showed that 196K new jobs were created. Last month's tepid report was revised up marginally. The three-month average is now 180K, in line with most of the last 18 months. The unemployment rate held steady at 3.8%. Wages slowed their rise.
Long-term interest rates rose a bit over the last week helping the yield curve move back to positive territory. The inversion of the 10yr note - 3-month t-bill has been a cause for investor anxiety the last 10 days or so.
JP Morgan US Equity Macro Update – at the risk of sounding like a broken record, not much has changed for the SPX. The upcoming CQ1 earnings season should be mixed w/soft Jan-Mar numbers but positive linearity and encouraging qualitative guidance (this has been the message from preannouncements over the last few weeks) – to the extent mgmt. teams speak of improving trends, investors will forgive messy CQ1 results. The question is what happens to ’19 and ’20 consensus EPS estimates – they’ve been drifting lower for months but that process should abate given improving global growth (while the elimination of tariffs could provide a minor boost). However, even though an upward growth inflection is occurring (as was evidenced in the Mar PMI/ISM data), this may only stabilize EPS estimates (at ~$168-170 for ’19 and ~$180-181 for ’20) rather than push them higher. Fed policy is a wildcard – in order for investors to begin adding turns to the PE on account of monetary accommodation, the Fed will need to become “irrationally dovish” but right now it seems quite responsible (if global growth does inflect higher and financial conditions continue to ease w/o the Fed re-pivoting back to a neutral or hawkish policy stance, this would place upward pressure on the PE but for now it isn’t clear whether this will happen). Bottom Line: being as generous as possible on EPS (using the 2020 consensus of ~$181) and assuming a healthy PE of 16x suggests the SPX will face a ceiling around ~2900. An “irresponsibly dovish” Fed could justify ~17x in which case the SPX would surpass 3K but even under that scenario (which is pretty best-case) the upside from here is only ~3.5%.
Overall, the markets and the economy appear to be recovering from the soft patch it had in the late fourth/early first quarters of this year. While GDP is likely to come in below 2% for the first quarter, the data suggests a re-acceleration this summer and/or back half of this year. Even to the point where the market- and thus the Fed- may believe another interest rate hike could be in the cards.
Closed-End Fund Analysis
EV Senior Income (EVF): +3% to $0.034 from $0.033.
EV Floating Rate Income (EFT): +2.7% to $0.076 from $0.074.
EV Sr Floating Rate (EFR): +2.7% to $0.077 from $0.075.
Delaware Div & Income (DDF): +2.1% to $0.0905 from $0.0886
Delaware Enhanced Global Div & Income (DEX): +2.03% to $0.0904 from $0.086.
EV Floating Rate Income+ (EFF): +1.2% to $0.084 from $0.083.
PIMCO High Income (PHK): -24% to $0.061331 from $0.080699.
PIMCO GlobalStkPLUS and Income (PGP): -23% to $0.09394 from $0.122.
Allianz Convertible and Income (NCZ): -21.7% to $0.045 from $0.0575.
PIMCO NY Muni Income (PNI): -21% to $0.040045 from $0.05069.
AllianzGlobal Convert and Income (NCV): -19.2% to $0.0525 from $0.065.
Templeton Global Income (GIM): -18.1% to 0.0336 from $0.041.
PIMCO NY Muni Income III (PYN): -16% to $0.03549 from $0.04225.
PIMCO Strategic Income (RCS): -15% to $0.0612 from $0.072.
PIMCO Muni Income III (PMX): -9% to $0.050733 from $0.05575.
PIMCO CA Muni Income III (PZC): -7% to $0.04185 from $0.045.
PIMCO NY Muni Income (NYSE:PNF): -7% to $0.05301 from $0.0703
Managed Distribution Policy
The fund adopted a managed distribution plan where they will shift the payout to a monthly payment at an annual rate of 6% (or 0.5% per month) of NAV for the remainder of this year. Starting in January of 2020, the fund is proposing to make monthly distributions at an annual rate of 6% based on the NAV on the close of business on the last business day of the previous year.
Our team wrote on this just a few weeks ago anticipating the change.
SabaBuying: MNE, EFF, VVR
SIT AssociatesBuying: JHSSelling: EGF, FMY
Just a reminder, DSU's tender offer expires in a little over a week. We recommend voting "YES". It's a small 5% tender that we don't expect to result in too much in the way of alpha. Still, the ability to get between 5% and 12% of your shares lifted at 98% of NAV giving you an almost 10% instantaneous gain is a good thing. On their prior 10% tender offer last year, the proration got you 22% of your shares lifted because so many people didn't vote "yes".
The discount at -11.26% is attractive given the portfolio. We are still constructive on floating rate despite the negative flows and the dovish pivot of the Fed. Yields are still at or near where high yield bonds trade and you get the upside if rates meander higher from here. 71% of the portfolio are term loans (floaters) with another 25% in high yield (fixed coupon) bonds.
One of the best aspects of this fund is the sector breakdown with technology and consumer non-cyclicals being the top industry types. Often we see funds that have 'communications' and 'energy' as the top industries which tends to give us pause.