We've Waited 20 Years for This Moment

On Wall Street, equity analysts are the Jets and bond analysts are the Sharks...

In elevators, cafeterias, and hallways, when members of the equity and bond teams walk past each other... they might as well start snapping their fingers and preparing for a dance-off.

They just flat out don't like each other. Call them the Capulets and Montagues... Hatfields and McCoys... you get the picture. They're like clean-cut, Patagonia-clad rival gang members.

It happens all across Wall Street, from Credit Suisse to Goldman Sachs and Morgan Stanley. The bond and equity analysts cover the same company – and their recommendations are polar opposites.

The equity analysts will say a company's stock is a strong buy. And the credit analysts will warn that the same company's bonds are about to get downgraded.

Mind you, it's rare that both of those opinions can be right at the same time. But both teams feel like the other just doesn't understand what they're analyzing.

They certainly have no interest in talking to each other, let alone admitting when they're wrong.

This stubbornness created a lot of inefficiency. But as I learned nearly 20 years ago, you can use it to your advantage.

If you understand both credit and equities, you'll be in a far better position than the vast majority of investors...

In 2005, I was deep in 'enemy territory'...

I had been working as an equity analyst at Credit Suisse for months when I was put on a project in the world of corporate bonds. We were essentially exploring Uniform Accounting-style analysis for bond research.

On the equity team, my boss's boss was none other than Joel Litman – and though neither of us knew it at the time, our findings would be one of the cornerstones on which we founded Altimetry.

The task at hand was to help the bond research side get smarter about recovery rates... identifying how much different bonds would pay investors if they went bankrupt.

Uniform Accounting helped us understand the likelihood that a company would default on its bond. We found a better way to calculate cash flows, rather than relying on faulty metrics like net income or earnings before interest, taxes, depreciation, and amortization ("EBITDA").

And once we understood default risk, we had to consider balance sheet quality. In other words, we looked at how much a company's assets were really worth... and what they'd be worth if they were marked down in a liquidation bankruptcy.

As-reported accounting forces arbitrary values on assets like research and patents... factories and offices... and working capital. These figures rarely match economic reality, let alone what a company can actually expect to get in a sale.

Our goal was to recalculate recovery rates to make them more useful. But in the process, the bond analysts could better identify where the market was totally wrong.

Sometimes, the market was pricing in too much risk for bonds. Other times, it wasn't worried enough.

Our analysis was helpful for equity, too. We could better understand when stocks were too cheap because investors thought credit risk was higher than it actually was.

This was a huge revelation for Joel and me. Our research was useful for both equity and credit investors.

Unfortunately, the project didn't get far before politics got in the way...

Soon after it started, the age-old question reared its head... Who was going to pay for all of this research?

Good luck getting the Jets and the Sharks to agree about who was on the hook – or who got to take credit for our success.

So we had to shelve the research we were doing. It sat for years, collecting dust.

But fortunately, we didn't have to throw it out entirely...

When Joel and I started our institutional business 15 years ago, we dusted off that research and got to work. We knew that equity and bond analysis aren't independent things. They're joined at the hip.

For most of the past 15 years, we've used our credit research to help our equity clients. It wasn't a great market to buy bonds. With such low interest rates, it just made more sense to own stocks.

But understanding a company's credit risk is still vital for modelling equity.

Any good equity analyst needs to know how to analyze bonds. And any bond analyst worth his salt will have the same research chops and knowledge as an equity analyst.

We still monitored bonds and made recommendations for our hedge fund, mutual fund, and wealth-management clients.

In fact, those recommendations have doubled the bond market's performance – as measured by the SPDR Bloomberg High Yield Bond Fund (JNK) – for the past seven years...

That's a solid performance in a less-than-ideal bond market... even as our main focus remained on equities throughout that time.

But now, we're beyond excited...

We finally have an epic opportunity to use the research we've been building on for almost 20 years... for its original purpose.

If you've been following our coverage for the past few weeks, you'll know chances like this don't come around often. With interest rates and corporate defaults high, and a recession on the way, it will get a lot harder for companies to borrow.

Investors will panic about the credit environment, abandoning perfectly safe bonds along with the risky ones. I'm talking about opportunities that offer equity-like returns and far higher yields than we should be able to get at this level of safety.

And best of all, they come with legal backing you can't find in stocks.

I've been "pounding the table" on this setup for a while now... and it's because I have two decades of tools and ironclad research to back it up.

Now is not the time to fall victim to Wall Street's polarization. If you have any money in equities – and you want to do more than survive the coming recession – you need to have a firm grasp on credit.

And if you've never considered making the jump from stocks to bonds, this is the time to get started.

This type of opportunity only comes around once or twice a decade. Don't miss it.

Regards,

Rob Spivey
October 6, 2023

Editor's note: Rob and Joel spent the past 20 years perfecting their approach to the credit market... just in time for what they say is one of the best bond-investment moments since the Great Recession.

According to them, a coming wave of bankruptcies will send investors into a panic – dragging perfectly safe bonds down alongside the risky ones. If you know what you're looking for, you could lock in legally protected, equity-like gains when the crisis hits.

Until midnight tonight, Rob and Joel are still offering 50% off their brand-new credit market research... including their handbook for getting started and five recommendations to act on immediately.

Plus, you'll receive more than $8,500 in free research and bonuses, like a bonus bond trade from our corporate affiliate Stansberry Research. Click here for the full details.