In a turbulent period for the markets, Calamos is hosting a CIO Conference Call Series for financial advisors. Below are notes from a call Wednesday, March 25, with Michael Grant, Co-CIO, Senior Co-Portfolio Manager of the Calamos Phineus Long/Short Fund (CPLIX). To listen to the call in its entirety, go to www.calamos.com/CIOlongshort-3-25
The comments made by Michael build on what he had to say on a call last Thursday, March 19. He comments on that call below and see this post for the full commentary. To listen to the March 19 call, go to www.calamos.com/CIOlongshort
For the first time in years, the math for equity investors makes sense, as equities have returned to attractive valuation levels not seen in years. Michael Grant is preparing for a rebound in equities and his team has increased the Calamos Phineus Long/Short Fund net equity exposures to reflect this shifting risk/reward. Specifically, they are reducing shorts and adding to long positions where the valuation reset appears overdone. Below he provides “one fat pitch” for long-term investors.
Michael provided the following guidance for moving beyond the shock of COVID-19:
The remainder of his comments addressed these three questions:
“For the first time in years, the math for equity investors makes sense…Investors stand to be paid to engage equity risk once again.”
The team expects the U.S. recession to be sharp but short. This implies that equities have largely discounted this outcome to around 2500 on the S&P 500. The resilience of the Western consumer combined with substantial policy support will minimize financial stress so that by mid-year, the global output cycle should regain its pre-virus capacity. Investors should see some sense of normalcy returning in the coming months and possibly weeks.
A “typical” recession argues for an S&P 500 low between 2100 and 2400, although a sharp and short shock points to the less extreme level of about 2500. Of course, “fair value” for equities is a moving target, but we can make assumptions about the depth of the earnings recession and the trajectory of recovery. For 2020, the team assumes 0% revenue growth and a decline of 10%–20% in earnings for corporate America.
The team anticipates a six-month U.S. recession that began in February. Historically, the S&P 500 leads a recovery by four months, which implies we may be close to the bottom. While the Fed can do little to offset the first order impacts of social distancing, it can mitigate the second order effects of financial stress. The S&P at 2400 has probably already discounted much of the fallout from social distancing.
Michael sees the U.S. recession in 2020 as marking the end of the cyclical bear, not the beginning of one. To put the current destruction in perspective, the average stock, particularly the average cyclical stock, entered a bear pattern back in 2018. For the S&P 500, the average stock has now declined 42% from its 52-week high versus declines of 57% and 41% in the bear markets of 2009 and 2002, respectively.
This interpretation argues for seeing further equity declines as opportunity and the team has acted on that premise. The initial wave of forced selling and price discovery is likely complete, Michael believes. Between April and early May, he thinks equities will have fully discounted the distress across the transatlantic economies.
This forecast includes some back and forth testing of the lows over the next six weeks. Some relapse in April brought on by discouraging fundamental news is possible, but he encourages investors not to be overly cautious.
Between April and mid-May, anxieties around the virus will dissipate. Investors will start to discount a recovery in the global economy from mid-year. For the S&P 500, 2800 is the team’s minimum upside target for the remainder of 2020.
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Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
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Past performance is no guarantee of future results. As with other investments, market price will fluctuate with the market and upon sale, your shares may have a market price that is above or below net asset value and may be worth more or less than your original investment. Returns at NAV reflect the deduction of the Fund’s management fee, debt leverage costs and other expenses. You can purchase or sell common shares daily. Like any other stock, market price will fluctuate with the market. Upon sale, your shares may have a market price that is above or below net asset value and may be worth more or less than your original investment. Shares of closed-end funds frequently trade at a discount which is a market price that is below their net asset value. You can purchase or sell common shares daily. Like any other stock, market price will fluctuate with the market. Upon sale, your shares may have a market price that is above or below net asset value and may be worth more or less than your original investment. Shares of closed-end funds frequently trade at a market price that is below their net asset value.
The principal risks of investing in the Calamos Phineus Long/Short Fund include: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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Short Selling Risk. The Fund will engage in short sales for investment and risk management purposes, including when the Adviser believes an investment will underperform due to a greater sensitivity to earnings growth of the issuer, default risk or interest rates. In times of unusual or adverse market, economic, regulatory or political conditions, the Fund may not be able, fully or partially, to implement its short selling strategy. Periods of unusual or adverse market, economic, regulatory or political conditions may exist for extended periods of time. Short sales are transactions in which the Fund sells a security or other instrument that it does not own but can borrow in the market. Short selling allows the Fund to profit from a decline in market price to the extent such decline exceeds the transaction costs and the costs of borrowing the securities and to obtain a low cost means of financing long investments that the Adviser believes are attractive. If a security sold short increases in price, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. The Fund will have substantial short positions and must borrow those securities to make delivery to the buyer under the short sale transaction. The Fund may not be able to borrow a security that it needs to deliver or it may not be able to close out a short position at an acceptable price and may have to sell related long positions earlier than it had expected. Thus, the Fund may not be able to successfully implement its short sale strategy due to limited availability of desired securities or for other reasons.
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