Unprecedented Volatility; Unprecedented Opportunity

Despite a heavy emphasis on higher quality names, massive redemptions through the second half of March led funds to sell positions they would have rather held. That, in turn, created a number of attractive relative valuations for investors with sufficient liquidity. The list of the most impacted sectors continues to grow, led by energy, retail, gaming, hospitality, and travel. Defensive industries such as cable and satellite and telecom under-performed the least for the quarter. As lending covenants are tripped, defaults are likely to increase, and a number of companies may be forced into restructuring.

Bursting Bubbles, Economic Shutdowns, Fed Bazookas, and Historic Changes

We think it's fair to say there will be a very deep recession. Some analysts estimate the second quarter could contract at a 30-50% annualized rate. Our own analysis suggests that it very easily could be a 50% contraction in Q2, and a very broad one at that. It's hitting virtually all industries in all geographies both here and abroad. It's pretty obvious to us that it will not be a V-shaped recovery, given the amount of demand destruction, especially among small businesses, and probably not a U-shaped recovery. If it's an L-shaped recovery, the question is: how long do we stay along the bottom? Much depends on whether there will be changes in behavior – both on the part of consumers and corporations.