How to Engineer 10%+ Yield When Bonds Are Failing | Jay Hatfield

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Transcript

Welcome And The Day’s Headlines

SPEAKER_01 0:06

Alright, folks, as always, give me uh a few minutes here as we start to go live.

SPEAKER_02 0:12

Um if you are a follower on X, you know that uh I got two and a half hours of sleep and still found a way to get to the gym. Well, it's not exactly an epic workout, but uh gotta stay consistent. You know, it's there's a there's a good line. It's like, don't don't stop when you're tired, stop when you're done. Uh and the thing about infrastructure capital is they're never done. We're gonna be talking about uh a new fun launch that Jay Hatfield and his team have brought uh to market today. Uh for those that are watching this across the various social media platforms, I can see your comments, which means if you want age during this live conversation, and yes, folks, it is live. Don't hesitate. I'll bring it up. Um I think a lot to talk about given uh the headline, which everyone is noting around inflation being, I think, higher than wages uh for the first time in a while. Uh seemingly a surprise there. Uh what that means for markets, what that means for sentiment, what that means maybe for the midterms, and what that means for uh the outlook going forward for equity. So with all that said, my name is Michael Guy. I'm the publisher of the Lead Lag Report, founder of Lead Lag Media. I've got Mr. Jay Hatfield, who's always a pleasure to speak to, uh, not only because I love the way he frames things, but he's very level-headed and uh somebody who I respect a lot in this industry. Um Jay, you just mentioned you came back from a Wall Street Journal uh interview. It was running a little bit late. Um, and I don't want to bury the lead. I want to get right into your new fund launch before we're talking about the headlines

Why QVOL Exists

SPEAKER_02 1:25

here. Uh QVOL. Talk to me about it.

SPEAKER_00 1:28

We're excited about QAM for three reasons, really. The first is that it's a great way to access uh growth stocks in the U.S. And as you many of you know, most of our other funds are quite conservative and don't have significant amount of tech stocks. So um so you know, particularly for younger friends and clients, they sometimes struggle figuring out why they should be in PFFA and not in Marvell. So great asset class, really, for anyone. It's gonna have a 12% yield coming from call writing. But I think actually the greatest thing about the fund is that if you dig into the NASDAQ 100, you know, everybody says what's tech heavy. Yes, it is tech heavy, but it has a whole bunch of companies that have nothing to do with tech and that you probably don't want to invest in. So there's two cable companies, Comcast, Charter. So I don't think when you buy the Nasdaq, you think you're investing in with the notion that cable is going to crush streaming. Um, not that those companies are gonna do terrible, but they're not growth companies. You get CSX, perfectly fine railroad. You get Walmart trading at 45 times earnings, growing less than 10%, so four and a half peg. Um, so it's important to curate the NASDAQ 100. And so you're taking the bet you want, which is on really growth. It's okay if it's not squarely tech growth, but a growth company with good long-term prospects. So you don't need craft hinds that's in the Nasdaq 100 Pepsi. Probably don't need that. You can add that separately if you want. And then we also screen for reasonable peg ratios, so PE to growth. So that's gonna knock out Tesla at 200 times earnings, arguably shrinking earnings, pound tier trading in four over a four peg. Because you can blow up on those stocks in effect, really pound tier has blown up, it was almost 200, and now it's in the 130s. Not because they're doing poorly, but just because it was overvalued. So it's important to not buy overvalued companies because if they do stumble, look out below. So that curation is the second reason we were super excited about it. And then the third element is we are going to rate covered calls, but instead of doing it mechanically or based on what's in effect, technical factors like, oh, well, this ball is cheap to the realized ball or expensive to the realized balls. So write that. But rather on using our research, so we have our own proprietary models, we do deep hedge fund type models with our own earnings estimates, and then we look at their peg ratios. If on our models they're fully valued, we don't necessarily have to dump it right there if we have a gain, so we only do it at a gain. Can write cover calls out only two or three weeks, so we don't cap our exposure to the market. There's a simple rule if you have less exposure to the market, um, then you're gonna underperform the market over long periods of time. So when you write too many calls, which are bought a lot of index funds like Jeppy do, they write the whole portfolio. We're gonna write no more than 50%. And like I said, we're gonna constantly monitor our exposure to the market. So it's gonna be a fully active fund. So we're optimistic, or our goal at least, is that we produce really good income, about 12% growing, but also beat on a total return basis the NASDAQ 100.

SPEAKER_02 5:13

Okay. Talking about um how you're selecting the stocks you're gonna write the calls on, and we don't do it on the index, right? You do it on an individual stock basis.

SPEAKER_00 5:21

Correct. So if we have a big winner, so like we do have a few tech stocks in ICAP, for instance. So we recommended uh Marvell on national television about 85% ago. We didn't write any calls down mayor because it was trading at a half peg. Now it's at a 1.2 peg. We're pretty cautious on the market right now because it's through earnings season. So we'll write calls on Marvell um like we have an ICAP. You know, uh of course we'll wait until we have a gain because we don't have the game because we just started the fund now, but Marvell runs up at some point, and then we could do it now because so would be a gain if we write it up 10 or 15 percent. And then um based on the fact it's closer to full valuation. Marvell, we have a 210 target, but to be fair, that's the end of the year, so target somewhat cheap, but it's not massively cheap, so that's okay to write calls on. So we use our valued validation, I'm sorry, valuation methodology to come up with companies that are probably not overvalued because we wouldn't have owned them if they're overvalued, but they're getting closer to fully valued. We've had a big run. So it's risk reductive. It gets called away, we're taking profits, we can recycle in another company. So it takes a tremendous amount of work, and oh, you do have to have your own earnings estimates to do it properly. Uh, but it's proven to be highly effective in ICAP, and we're confident it will work well in QVOL

Curation, PEG, And Valuation Discipline

SPEAKER_00 7:00

as well.

SPEAKER_02 7:00

Let's talk about um your point about excessive valuation because valuation is uh uh different than gram and odd when you look at growth stocks, especially in this kind of cycle. Um, what are some of the uh key valuation metrics you're looking at to figure out what to avoid?

SPEAKER_00 7:15

So we use use peg ratios, PU to growth. It's important to note that the reason that works is it's a approximation of a discounted cash flow. If you're the there's one fundamental to investing, which is you should do a discounted cash flow on all investments, whether it be an apartment or Bitcoin. If you do it on Bitcoin, you're gonna be cautious about Bitcoin and realize it's more gambling. Um stock, be a private company with no earnings, but you look farther out. So it's a short end for a DCF. We do run our own DCS, but the problem with a DCF is that you can't really, you know, ultimately, it's just a little bit of a greater fool theory. You want to have other investors look at Marvell and figure out it's cheap. So if you have a discounted cash flow that goes out 20 years, like nobody else is going to be able to see that. So you need to look at shorter-term metrics, and you know, the multiple is just really um a way of calculating a discounted cash flow. Like in so if in um Marbell's trading at 30 times earnings in then there's an implied growth rate in that number, an implied um cost of capital. So it's really just a short-term shorthand for a discounted cash flow.

Why List On Nasdaq

SPEAKER_02 8:45

Yeah, this is your uh QVOL of the first of your ETFs that's being listed on the Nasdaq. Any particular reason why you chose the Nasdaq? What's what's special best sort of this uh relationship with them?

SPEAKER_00 8:55

Well, we've really partnered up with them. We do license the NASDAQ name, so it is in the fund, so we pay them for that. And um of course we're trading NASDAQ stocks. There's just some more appropriate, like we did an uh interview with them on the Nasdaq. So makes all the sense in the world. New York Stock Exchange, good, you know, what it communicates is conservative, high quality, so high-quality bonds and preferreds and high-quality dividend stocks. But Nasdaq is for growth, and that's why um we listed on the NASDAQ, licensed their name, and curated the portfolio to be growth-oriented and not have some of these deep value companies that only get included because they're large companies and they're listed on the NASDAQ. They're not, you know, there's some advertising that implies they're all curated innovative companies. I guess they're innovative, but they're like pretty old school and innovative, like a CSX of Railroad. I don't know how that was innovative in 1850, but um so I think particularly dot index, it's great to curate it because most people that buy the QQQs, they're expecting to get pure growth stocks.

SPEAKER_02 10:17

All right, so you you've got a number of funds, Jay.

How QVOL Fits Portfolios

SPEAKER_02 10:20

Um, yeah, a lot of them have long histories, you know, BNTS, SCAP, ICAP. Um when you think about QVOL in the mix, right, relative to all these other great funds you've got, uh, how would you say somebody should look at uh that fund relative to your other funds?

SPEAKER_00 10:36

Well, you know, there's there is like a debate, and we, you know, if we go to conferences, you know, some investors will say, well, even if they're older, which I don't agree with if you're you know in retirement, they'll just say, well, you know, why shouldn't I just be all in the Nasdaq? Because, you know, like if as long as I don't have to liquidate my portfolio at the wrong time, I'll just be better in the long run because of better growth. And the problem with that is if you have a sustained downturn and your portfolio is not that big relative to your required cash, you have to liquidate at the bottom. But here you could have, you should, if you are retired and you don't have an infinite amount of money, you should have some B NDS, PFFA, senior to common, low volatility stocks that produce good income. Because they won't go down as much if there is a prolonged downturn, plus you get the cash. But you might want to have also QVOL where you're getting really good total returns. It could be you know 15-20%, so that not only do you get income, but you get appreciation in your capital. So we think it's a great addition to an income uh portfolio because it is very comforting not just to get the income but get good total return. Now we try to do that with all of our funds, but it's of course more challenging when the underlying asset class, like preferreds, don't fundamentally grow. I mean, we can sell them above par and buy them below par, but they're fixed incomes, so they don't fundamentally grow unless we're optimizing it, which we are, but but these are fundamentally high growth companies retaining a lot of earnings, besting and promising technology. So it's reasonable to expect during normal market conditions, or even not that normal in the long run, that you're gonna have pretty high capital appreciation and good income.

ETF Liquidity And Why New Doesn’t Matter

SPEAKER_02 12:32

Of course, people always get nervous about a new fund launch. They want to see some operating history, right? And they see a fund that may not be trading active, they think it's illiquid. Um, let's talk about the ETF structure, uh how it applies to QVOL, and why the fact that it's new really should be irrelevant.

SPEAKER_00 12:50

Well, we have some fantastic market makers. Um, in fact, they were I was watching it because you know, obviously we buy our own ETFs and support our our um we have other people are bottom today too, thankfully. But and I was noticing that the market makers are making this phenomenal market. Well, it's not wasn't really open. There's usually a half-hour period where you can't trade ETFs when they first open. But then meanwhile, they're making these phenomenal markets. Of course, these electronics, but they're making their algorithms are spectacular. So they're making like two, three cent markets, and particularly with Q Ball, those are very deep markets, and they're ARBing it. So it really makes no difference whether it's 50 billion or right now it's 7 million. And I can tell you, like we traded some of the baskets yesterday, and it was like trading water water out of a waterfall, Niagara Falls or something. So that gets reflected in the way the market makers make markets. So it doesn't matter, you know, we will grow all of our funds like we have in the past, we'll support them ourselves, um, and spend marketing dollars. So this is gonna be you know a large fund in a couple years. Not that it matters, but because it still will be liquid. But we support all of our funds like our children, so they're gonna be around essentially forever.

SPEAKER_02 14:19

All right, so targeting that 12% on QVOL, which uh uh thankfully inflation is not that high, at least not yet, uh, to

Inflation Drivers, Oil, And The Strait

SPEAKER_02 14:26

root that. But uh let's let's pivot a little bit towards the the headline of the day around uh inflation being what I think 3.8% was the was the headline number. Mark is surprised. I'm not terribly surprised, and I'm sure there's gonna be some other nuances, but I want to get your reaction to that print and that changes your outlook on markets.

SPEAKER_00 14:43

Well, we've been bullish about inflation for a while, and I've been accused of being always bullish, which is not true, but a reasonable uh comment because it's been we've been bullish most of the time, but correctly bullish. But when it comes to inflation, there's two and only two leading indicators of inflation, which is the money supply, M zero, monetary base, which is negative, so that's bullish, and oil prices. Well, you don't have to be a genius or a uh follow markets very closely to realize well that's horrible for inflation. So those are up 50 percent 50 percent. They bleed through the core. Um, so for instance, the worst component was airline fares up 3% for the month, not annualized at 36%. The BLS is not good at calculating inflation, just they're not good at the employment report either. So they reported that shelter inflation was up 6% annualized, 0.5% for the month. That was because the government shut down have this horrible methodology, and they're continued to lag. So if oil prices went back down, which we don't think is super likely in the short run, we don't think there's going to be a negotiated settlement with Iran. We've had they've been in a cold war with Iran for 47 years, not sure why would end suddenly after we killed all their leaders and most of their relatives. So we're not expecting that. But if that does happen, most likely by force and the street gets reopened, then oil would come down, tariffs are rolling off, money supply is low. So we're bullish post-street reopening, but pretty bearish. Like core could print as high as four, headline as high as six. Once these energy prices start rolling through the indices, it's bad. Just look in the 70s, it was horrible. Hit 1200%. It's also important to note the strait is not just close to oil, it's close to aluminum manufacturing in the Middle East, fertilizer. They manufacture a number of commodity and I'm sorry, energy-intensive commodities. So you're gonna see it bleed through in autos and used car prices. So we're not we're bearish about inflation until street reopens.

SPEAKER_02 17:18

You think is it gonna haunt Trump as far as the midterms?

SPEAKER_00 17:21

We're assuming that the midterms are gonna be a wipeout for the Republicans. It normally is, number one. Number two, I don't actually I'm a moderate, so I'm not this isn't meant to be political commentary, but I actually am in favor of Trump's most of Trump's unpopular policies. Like I do think that we need to take nuclear capabilities away from Iran. And you know, I'm not asking anybody to agree with me, that's just my personal opinion. But the what matters is not my opinion, but nobody agrees with me, or most Americans don't agree with me. They don't care about Israel. I think they care about paying for their bills. So that's wildly unpopular. Tariffs are good for the the deficit and arguably overdue. So we're I think that's a pretty good policy. Wildly unpopular. Closing the borders okay, but aggressive deportations of non-criminals, and particularly when it's done publicly and there's public clashes with Americans and they get killed, that's wildly unpopular. So I don't get the bull case for, and then there's random noise like fighting with the Pope and other own goals coming from the administration. So I don't know what the bull case is. Uh what I do believe is it's largely irrelevant. Well, the only thing we don't want is a democratic socialist to take over all three parts of the government, because then we get a big corporate tax increase, and our stocks, stock portfolios would get absolutely hammered. And we don't think that's gonna happen. The Senate's we're projecting the Senate stays Republican, probably 52, 48. Um, we're hopeful Rubio will run in 28, and the Senate math also looks pretty good for 28. So uh we just went divided government and no big, gigantic corporate tax increase, and no gigantic increase in government spending like the Democrats tried to do under Biden, but two moderate senators blocked that, Cinema and uh Manchin. But we don't have those moderates anymore, so it's important to at least hold the Senate. Um, you know, we don't need there doesn't need to be any f incremental federal policy. We don't I mean it'd be nice, but we don't need lower corporate taxes. We're competitive. You know, it would be nice to cut income taxes on middle class people, but it's not absolutely required. Maybe beef or if you're middle class, it may be absolutely required, but it's not gonna happen. So the status quo was perfectly great for stocks, and that's all we need to continue. So we'll wipe out in the in the midterms, hopefully not in the Senate, but in the House, might be a good wake-up call to at least some of the senators and and Congresspeople to be a little bit more moderate and try to cut back on these unpopular policies.

SPEAKER_02 20:35

Since we're

Bonds, Market Targets, And Staying Invested

SPEAKER_02 20:36

talking about inflation, we've got to talk about um bonds, you know, in that, you know, especially BNDS. Um is there still a case then for bonds here, given that inflation pressures are very much real?

SPEAKER_00 20:49

Well, you know, the fortunate thing is we're really good at stealing tickers. So um if you accidentally got into BND instead of BNDS, and the answer would be no, that's unambiguously terrible. So that's Vanguard's investment grade bond. Only has $150 billion in it. Um, but because you have low yields, you have a ton of interest rate risk. But BND, it's a great mixture. You have very low interest rate risk, about 10% correlation, about 20% correlation to the market. And so basically, and this is the bad news, is why you might want to mix it in with Q-Ball because it's like watching paint dry, so it's not exciting. But you know, the b bond market, excuse me, pardon me. Sorry. Um, but I'm just I like to always check like day to day because to test out the theory. So B and D is down all of 25 basis points. I think it's up. I mean, check your do your own analysis, but last I looked up two or 3% total return on the year. So it's just a total snoozer. And if that can be bad if you're trying to get rich quick, but if you're trying to preserve capital, get good income, have low sensitivity to particularly in the long run to interest rates, low sensitivity to stock market, and you're willing to tolerate boredom, then that's a great outcome for you. So that high interest protects you from both interest rates and in the long run at least, market volatility.

SPEAKER_02 22:38

Let's talk about sort of the uh the rest of the year outlook. Um it sounds to me like you're more neutral in general. Um, but uh are you still are you still expecting the markets to be higher? And if they are gonna be higher meaningfully or kind of marginal here.

SPEAKER_00 22:52

Well, what's interesting, and we do often do this, so we should get more credit for not being permables. Um but I was talking to the journal, and they were saying, well, what the heck is happening? And I was just saying, well, we had expected this actually, we thought it might even happen a little bit earlier in this, but when earnings season is over, there's no positive catalyst, and then we have this war that doesn't seem like it's gonna go away anytime soon. So it's perfectly reasonable for the market to be flattish. I don't think it's gonna unhinge really good support around 7,000. But it's not like we were predicting a power rally in April since the beginning of March, and that was just an easy, easy call. Going into earnings season, earnings are gonna be great. And now you have a lot of low stocks. If the low rolls over, it's just gonna capitulate down. Uh, semiconductor index is down like 5% today. So without catalyst of earnings, like AMD was blowing out late last week. So we made this call like a week and a half ago that after earnings season ends, you're likely to get a choppy market. It's gonna be harder to make money. Uh but we would but what's the flip side of that? So we actually raised our target, our upside target on the market to 8,700. So earnings estimates have risen 9% since the beginning of the year. So we have an 8,000 target. We're highly confident about our 8,000 target. It actually looks too low, even if rates don't drop. But if rates drop below four, that would justify a 23 multiple, which is what our multiple was at the beginning of the year, because we were optimistic about rates before the war started. So the upside targets 8,700, and that's why we would more counsel investors to. I mean, you can trim a if you have like a huge gain in micron or something, or A and D, you could trim that a little bit, but and look for a lower entry point or some other stock that's not as high flyer. It's perfectly good time to be conservative, but no, we don't think it's good to just get out of the market normally. And when I say normal, like 90% of the time, at least what I observe, other people, retail investors who get out of the market, they fail to get back in. They blow out all their money, their investments during the pandemic, and then I call them back, and a year and a half later, they're still out of all their investments. And so they miss like a you know 75% rally. So the best strategy is to do nothing. It's usually superior. Most retail investors beat most hedge funds for that reason, because in the long run, stocks go up. But we're not surprised by this. It's not that big a sell-off, like a 1% sell-off. Just indicative, like it may rally tomorrow. We're not like super bearish about the market, but it's just gonna be harder to make money. It's not like early April, you just buy calls and get super long market, mint money, and um, you know, you feel like a genius, it's it's gonna be a little bit more dicey.

SPEAKER_02 26:06

It's funny. I was on Yahoo Finance uh yesterday in the studio, and I was asked, uh, you know, are you bullish or bearish on stocks? And my answer is yes. I'd be because it's about the path behavior, and I think also historically, generally, uh in in uh the second year of a presidential uh term, you tend to have more volatility anyway, right? So presumably that's gonna be also beneficial for QVAL and cover call strategies.

SPEAKER_00 26:32

True. Yeah, we don't really we're not super big on those kind of longer term uh indicators. I mean, it's good people like you point them out because maybe they're operative, but you know, I think the betting markets are 80% that the uh House goes to the Democrats, and it might be that that puts some brakes on the president, makes him a little more moderate. So we don't think the election is that big a deal, but we'd never ignore these earnings cycles. That's what the big edge funds do, by the way. They play these cycles brutally, so they press their edges. I know because I worked at a big edge fund, and there's like a call that goes out to all portfolio managers because the owner of the hedge fund, you know, the the biggest trader in hedge fund wants short ideas to cover their exposure. So they're doing this, and so it's pretty unusual when it doesn't happen, when that doesn't affect the market, particularly in these moat trades, because they're in those moat trades. If they start hedging them, taking them off, then everybody else is gonna do it. So uh I would focus more on the earnings cycle, fundamental economics, and not get too wrapped up then in like the sunspot theory of you know who wins the Super Bowl or whatever.

Where To Learn More

SPEAKER_02 27:53

Uh we will not be talking about the Super Bowl uh for the next episode of uh Lead Lego. All right, Jay, for those who want to learn more about QVOL and in general get more access to infrastructure capital's insights, we're important too.

SPEAKER_00 28:02

Uh InfracapFunds.com.

SPEAKER_02 28:05

Everybody, uh again, I am a I'm not just saying this because Jay's here. I'm a big fan of what Infrastructure Capital does. Uh, I think they are one of the more distinctive and unique issuers that are out there. Uh take a look at Qval. I think this is actually probably interestingly timed uh given where we are in the market cycle this year. And you have a real team and real knowledge behind these active funds. So learn more about their funds. And Jay, as always, I appreciate you and the relationship.

SPEAKER_01 28:29

Thanks, Michael. Great taking on. Cheers. Okay, give it a second.