The Arbor Outlook: Buying Bonds and Cars in Bulk

“They’re gonna put me in the poor house … And throw away the key.”
—from “Poor House,” as performed by The Traveling Wilburys

Let’s talk cars and securities and the prices you pay for both. The share price of stocks won’t vary from brokerage to brokerage regardless of how many shares you buy. Similarly, there isn’t going to be much of a variance in different dealerships on what you’ll pay for a new vehicle. Factory rebates and special offers are often uniform.

Bonds, however, are analogous to used cars. Depending on how large your purchase is and where you buy from, the price can vary significantly. Recently I came across a huge price difference for the same bond from different dealers that amounted to one buyer getting 1.5 percent more yield per year on a short term bond than the buyer who paid the dearer dollar. With used cars, the price that you’ll pay at various dealerships may also vary greatly, depending on inventory, trade-in, and other factors.

Imagine that you step onto a used car lot and tell the dealer that you want to buy 20 cars today. Will you get a better price than if you purchase just one vehicle? Almost assuredly. This is essentially what investment advisors do for their clients that individual investors can rarely accomplish on their own.

Advisors enjoy several advantages in bond purchases. First, they have professional access to the marketplace and deep bond dealer relationships. Advisors can price bonds with multiple brokers and procure the best pricing arrangement for their clients.

Secondly, advisors can buy in bulk for clients, thus driving down the price that is paid for all the clients’ bonds. This is exactly what happened in the previously mentioned purchase. By purchasing the larger, cheaper lot of bonds for my clients, they’ll earn 1.5 percent more in annual yield than an investor who had bought a fraction of the bonds for themselves. With bonds, buying in bulk matters.

Lastly, advisors know the bond market. They study it every day. The quality of the debt; the amount of debt outstanding; whether a bond is callable and its call features and the ability to judge the likelihood of it being called; the fairness of the price being charged; all of these factors are considerations for a buyer.

Again, let’s talk cars. You walk into a dealership having never purchased a car. And you buy from a salesperson who sells cars every day. Which party enjoys the advantage? Same for those who buy bonds frequently and in bulk: that person enjoys an inherent advantage over the first-time or infrequent buyer. Bond buyers are normally at a decided disadvantage when purchasing only occasionally and just for themselves.

Now what color did you want that car in?

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Classroom Laptops, Notetaking and Laguna Beach

“I was so broke I couldn’t pay attention.”
— Southern Colloquialism

Innovative communication devices are wonderful. Until they aren’t. While searching for a restaurant in Laguna Beach, California, last summer, my husband and I pulled over in a parking lot and asked a lady if she knew the whereabouts of the eatery. She assured us that she had lived in Laguna her whole life and knew the town well. Then she pulled out her phone, punched at it for five minutes, and provided difficult, lengthy instructions.

We said thanks and left. Ultimately, we drove about a hundred yards, took one turn, went up a hill, and found the restaurant sitting in plain view of the parking lot.

You could actually see the eating establishment from the very spot where we had inquired about its location. All that was required of our guide was for her to turn and gesture and say, “There it is. Turn right and drive up the hill.”

It’s as if folks have forgotten how to point without assistance from a smartphone. So I was not surprised to read recently that college professors all over the country are banning laptops as note-taking devices. The digital age is fascinating, and there’s no denying that technology has revolutionized many businesses, including my own. On a personal level, I love texting with relatives and friends. But I am not joined at the hip with my phone. It’s disconcerting and rude when people can’t converse, watch a movie or outdoor event or engage in a business discussion without staring at a tablet or screen. We need human linkups in addition to technical ones.

Professors are weary of staring at the back of laptops in lieu of actually connecting visually with their classroom compatriots. The students hidden behind those screens may be focused on the lecture or they may be surfing the internet, but the teacher can’t know without seeing those faces.

Early returns are in from the students. They’re complaining that taking notes by hand is tiring and that afterwards, sometimes they can’t read their own writing. News flash — no one ever died from a hand cramp. Advice for the students with unreadable hieroglyphics instead of notes? Write more neatly. Develop your own shorthand. And organize your notes in outline form. They can serve as an effective study guide. Many students are recording their classes with cellphones instead of taking notes. What ever happened to paying attention?

One thing that classes without laptops may inspire is actual interaction and discussion among and between students and teachers. Listening to my classmates express themselves was part of our college education. I cannot imagine a more isolating and boring experience than sitting silently in a group where every individual is hidden behind a small computer screen.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Cautious Growth, Corporate Debt and Rodney Crowell

“You can’t let down your guard... when there’s so much at stake.”
—from “Still Learnin’ How to Fly,” as performed by Rodney Crowell

Recently I read an economic piece comparing investors to people who study outdoor conditions. The gist? There are weather people and there are climatologists, and when it comes to markets, we should strive to be the latter.

This means that how markets perform daily (weather) should largely be discounted. Our main focus should be on longer term (climatology) market trends.

So what is this late stage bull market, now over nine years old, likely to do by the end of this year?

We think markets are entering what we’ll call a “cautionary growth stage.” The recent correction returned a sense of balance to share prices that may have grown, during the last calendar year, at an exaggerated pace in relation to their actual worth.

Markets can get temporarily overheated. But in addition to the fact that the tax cuts may have been “priced in twice” by investors, there are other reasons to be cautious. One is a potential slowdown in share buybacks. Simply stated, buybacks mean that companies have used profits and in many cases, borrowed cash (thanks to low interest rates) to purchase more of their own shares. Essentially, it has not only been the action of individual investors that have caused share values to soar; instead, markets have often been influenced by the companies themselves buying their own stock.

When share buybacks slow, the bull market will inevitably lose some of its steam. Several factors could cause companies to slow the buyback process.

Corporate profits may decline as wage growth accelerates. When companies are forced to pay higher employee salaries, they have less cash available to purchase shares. Rising interest rates may also be problematic. We may see as many as four rate hikes this year. When it becomes more expensive for a company to go into debt, they tend to borrow less. Fewer stock buybacks are executed, leaving individual investors to drive the market.

Spiraling corporate debt, much of it actually accumulated to execute these aforementioned buybacks, may also slow market growth, as corporations use their cash to pay down debt. Corporate debt is at its highest level since 2009. If a significant economic downturn does occur, a huge number of U.S. businesses will be loaded with debt and strapped for cash. Some will fail, causing further economic distress.

We don’t necessarily see a recession looming, but instead a slowdown in the trend of growth that characterized 2017. The bottom line is that markets have experienced so much expansion since 2009, there isn’t that much room left for share values to grow. At least not at an S&P trailing price to earnings multiple of 25.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Bannister, Disney and Economic Visions

"If you can dream it, you can do it."
— from Walt Disney

May 6, 1954, dawned cool and breezy at Oxford's Iffley Road Sports Ground, less than ideal conditions for a runner to attempt a world record. But a local medical student knew that two other international athletes were capable of covering a mile in less than four minutes, and soon might, and he wanted the record held by his native England.

His accomplishment was stunning, almost like Chuck Yeager shattering the sound barrier, or Neal Armstrong's moon walk. Many experts thought, that like the sound barrier, the four-minute mile was a mark that couldn't be broken by a human being. But the barrier was simply psychological.

In the 64 years since young Roger Bannister ran the first sub-four-minute mile, his record has been bettered thousands of times. The current mark is 17 seconds faster than Bannister’s. My husband loves track and field, and I will occasionally watch a televised event with him and marvel at the power and grace of my fellow humans. The son of a college friend competed in the Olympic trials in the 400 meter run a while back, and watching him compete was especially exciting. That Bannister, who died recently of Parkinson's disease at 88, became a respected neurological consultant and admired and eventually knighted citizen of Great Britain, adds luster to his accomplishment.

Finance imposes psychological barriers as well. The Dow Jones Industrial Average hit 1,000 in 1972. The average investor could not have predicted a DJIA ticking along at 25,000. I stumbled across an article recently about the important psychological barrier that existed when the DJIA was at 10,000. This occurred in March of 1999, 19 years ago.

The advent of the IRA in 1974, which allowed Americans to shelter income annually in a tax-deferred investment account, was a Roger Bannister moment. Who could have envisioned that our investments could grow untaxed for decades? Another barrier was broken when 401(k) plans were introduced four years later, permitting employees to avoid immediate taxation on a portion of their income. Roth IRA's, profit sharing plans, defined benefit plans and other individual and corporate investment vehicles all represent watershed thinking on the part of economists.

Business innovation is also commensurate with benchmark achievements. If you're reading this on a personal computer or iPhone, you are utilizing technology that was once considered impossible and impractical, like the four-minute mile. Who could have conceived 30 years ago that a small Seattle coffee company would eventually own 27,000 stores worldwide? Investors, entrepreneurs and start-up founders in our ever-evolving economy are dreaming, like Roger Bannister, of breaking barriers that the current business climate assures them cannot be bettered.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Bond Hedges, Correlations and Ray Charles

"I sat there with two tens ... I thought I'd have some fun; The dealer hit 16 with a five... Just enough to make 21."
— from "Blackjack" as performed by Ray Charles

Astute retiree investors may want to reconsider the time-honored, classic 60/40 portfolio investment strategy. Since 2000, bonds have been anti-correlated with stocks, meaning that bonds went up when stocks went down. Investors owned bonds for income and also because they hedged a stock-laden portfolio.

But now, bond yields appear to be moving higher and the anti-correlation relationship has been skewed. In fact, bonds may be becoming non-correlated (meaning they’ve lost any relationship with stock movements) and in many cases have become positively correlated with stocks. This means that stocks and bonds can go up and down together. That’s not a problem when stock prices are rising, but should markets take a downturn, stocks and bonds that are positively correlated can fall simultaneously. In this environment, bonds may no longer serve as a hedge against portfolio loss.

If you were completely invested in stocks from late 2007 to early 2009, you lost more than half your money (the S&P 500 lost over 56 percent peak-to-trough), so holding bonds (which gained value over that time frame) would have mitigated losses. In a 60 percent S&P 500 index/40 percent aggregate bond index portfolio, an investor would have lost one-third instead of over one-half of his assets from October 2007 until the end of the downturn in March 2009. However painful, losing a third beats losing over half, so bonds served as an effective portfolio hedge at the height of the Great Recession.

Bonds can still be a serviceable portfolio component, especially if investors own individual bonds and keep the duration on them extremely short. Buying the best quality, high yield corporate bonds available, ones that mature within two to three years, allows you to enjoy some yield while maintaining maximum portfolio flexibility.

Investors may consider buying the short term bonds of companies whose stocks they might own in a risk-on environment and where the investor is first in line to get paid on the maturity ladder. It’s unlikely there will be major credit losses with a diversified basket of highly rated high yield bonds in the next two to 24 months. If an investor is getting over 4 percent on average on these bonds, he's probably doing well. If he steps up the yield to the 5-6 percent range for that under-24 month maturity range, he's likely taking a large degree of credit risk and the risk-adjusted marginal return may be unwise.

Preferred stocks are also one of the few places to get significant, predictable yield in today's market. Some can generate enough meaningful income to balance the interest rate risk that an investor may be assuming.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.