Labor Market Looking More “Healed” Than “Healing”

Observations on the Capital Markets – Week Ended July 18, 2014

Federal Reserve Chairwoman Janet Yellen’s Congressional testimony this week, in my view, was not pointing to bubbles. In her testimony, she suggested that valuations of social media and biotech stocks and lower-rated corporate debt appear “stretched.”  Some observers suggested she was saying we are in a bubble.  But I have a different perspective: I think she was saying, in effect, “yes, prices are high in some niches, but not generally.” In any case, it’s doubtful Yellen is shifting her focus from less-than-full-employment to the question of possible market bubbles. Continue reading

Puerto Rico Bonds Part II: Understanding the Volatility

Follow-up to February’s article Puerto Rico: A Delicate Balancing Act. 

In June of 2014 the Commonwealth of Puerto Rico’s legislature passed the Puerto Public Corporations Debt Enforcement and Recovery Act (the Act) for restructuring the outstanding debt of public corporations. Its passage got a cold reception from the municipal bond market. Continue reading

Market Noise: Lowering the Volume for Summer

Observations on the Capital Markets – Week Ended June 27, 2014

Summer, summer, summertime – time to sit back and unwind. The Fresh Prince and DJ Jazzy Jeff might have been talking about the quiet tone last week in the capital markets.

  • Can you spell Goldilocks? Stocks, bonds, and commodities all rallied in the first half of 2014…for the first time since 1993.
  • Currencies: The Euro and Yen each rose 0.5%-1% against the dollar, extending their gains for the month.
  • Bonds: The 10-year Treasury yield fell 9 basis points (bps) to 2.54%; the 10-year TIP yield fell 8 bps to 0.27%.The Bank of America Merrill Lynch High Yield Index (BoAML HY) widened 1 bp to 3.48%. The Japanese 10-year bond fell to 0.55%, a 2014 low. Eurozone bond markets were generally quiet.
  • Equities: The S&P 500 Index declined almost imperceptibly last week. Within the index, Utilities and Consumer Discretionary (each up 1.0%) led; media companies rallied when the Supreme Court effectively shut down Aereo. Industrials (-1.7%) lagged; Consumer Staples (-1.3%) and Energy (-0.9%) were also weak. MSCI Europe and Japan were each down 1.5-2%. The MSCI Emerging Markets Index was down a bit.
  • Commodities: WTI Oil was down about $1 (1%)…still not really reacting to Iraq. Gold, up 3% last week, gained another $5 (0.5%).

Continue reading

An Accommodative Fed and a Strengthening Economy Outweighed Geopolitical Fears

Observations on the Capital Markets – Week Ended June 20, 2014

Iraq news didn’t spark a flight to safety and it’s not yet clear whose side we’re on (or should be on). Fed policy seems to be on autopilot, which the markets interpret as dovish. As expected from last week’s FOMC meeting, there was no change to the taper pace or rate policy. The statement’s wording and forecasts were tweaked only slightly from the previous. Higher inflation readings and stronger labor market data didn’t lead to a material change in the language.  For the Fed to react so little to the labor and inflation data apparently led “the market” to think the Fed is even more dovish. The market apparently expects the Fed to be even more dovish than the Fed expects to be. December Fed Fund futures are trading around 1.75%‑well below the Fed’s 2.5% projection. Continue reading

Markets are Unfazed as War Risks Escalate

The Capital Markets Were Very Calm Last Week, Considering The Rising War Risks

  • Equities:  After three strong weeks, the S&P 500 ended the week down 0.7%.  Higher oil prices boosted the index’s Energy sector to a 1.7% return; while all other index sectors declined.  MSCI Europe touched six-year highs mid-week but also ended down slightly less than 1%; MSCI Japan and Emerging Markets were up slightly.
  • Bonds:  The 10-year Treasury’s yield ended unchanged at 2.60%; the 10-year TIP yield rose 1 basis point (bp) to 0.41%.  The BoA Merrill Lynch High Yield index touched new cycle lows mid-week, ending 5 bps tighter at 3.47%.  European bond markets were calm.
  • Commodities: WTI was up $4.10 for the week, to $106.87 on war fears (Iraq is OPEC’s second-largest producer).  Gold was up about 2%.
  • Currencies:  The Chinese yuan and Japanese yen each rose about 0.5% against the dollar; the euro was down almost 1%.

A Black Swan Emerges In Iraq

A week ago, ISIS (Islamic State in Iraq and Syria) in Iraq was off the radar of the news media and market strategists.  It has suddenly emerged from the northwest of Iraq, which borders Syria, as a significant threat to the global economy (higher risk of a recession-causing an oil price spike). ISIS, a non-state Sunni militia and major player in the Syrian civil war, turned east (from Damascus to Baghdad), capturing several key Iraqi cities including Mosul, the nation’s second-largest. The Iraqi army apparently collapsed; Baghdad itself is perceived as threatened.  Continue reading

Russia Update: Despite Conflict, Opportunities Remain

Despite an uptick in volatility and spreads, Russia remains an important market for investors. For fixed income, the recent widening of spreads that followed the country’s intervention in Ukraine may represent an opportunity. For equity investors, these events highlight an increasingly complex outlook that may or may not offer opportunity at current levels. Continue reading

Economy Still in the Goldilocks Zone

Observations on the Capital Markets – Week Ended May 30, 2014

The U.S. economy shrank in the first quarter, but every indication is that weather, rather than a cyclical downturn, was the driver.  While 3% GDP growth for the full-year may be difficult to achieve after the slow start, it’s not out of reach.  Employment trends continue to be positive.  Inflation has stabilized comfortably below 2%.  Bond yields are low, making it easy for the Fed to continue to taper QE while keeping short-term rates exceptionally low.  With corporate profits at all-time highs, it’s no surprise that The Dow Jones Industrial Average (16,717) and S&P 500 Index (1,923) ended the week and month at new all-time highs.

 The Q1 GDP revision was not bad news—if anything, it was good news!

  • Real GDP growth was revised down from 0.1% to – 1.0% (annualized), worse than the revision to -0.5% that was expected.
  • A negative revision to inventories accounted for essentially all the downward revision in GDP.  Final demand was essentially unchanged.
  • This is very bullish.  Inventories are intermediate goods, not final demand.  Lower inventories now mean more need for future production; higher inventories would signal a need to slow production.
  • Seasonals may have also played a role: we also got a negative Q1 GDP in 2011, when Easter was also in April, not March.

Continue reading

Russia Smiles . . . Or Maybe Bares Its Teeth

 Observations on the Capital Markets – Week Ended May 9, 2014

On Thursday, Putin suggested the separatists postpone their vote (a suggestion they appear to have ignored). He also said Russia had pulled troops back from the Ukrainian order (NATO said no such pullback had occurred). Finally, Putin also called for a ceasefire and talks between the new government and separatists on equal terms . . . a move which would effectively confer recognition on the separatists. Markets—notably the Russian stock market—rallied on this hint of peaceful behavior.

Nevertheless, the separatists have said they intend to push forward with a May 11 “independence referendum.” Independent polls suggest that the majority of the local populations do not favor secession but, inasmuch as the separatists are likely to collect ballots only in areas they control, that they are likely to present at the polling booths, and that no impartial authority will be counting the ballots, a small actual turnout, a high reported turnout, and a pro-secession vote are likely outcomes.

On Friday, Russia commemorated Victory (over Hitler) Day . . . it’s a very big holiday in Russia—think July 4. On Friday, Russia apparently also conducted military drills—not on the Ukrainian border, but across Russia—simulating (with ICBMs and strategic bombers) the ramp-up to global nuclear war. Was it routine and pre-planned, as they say, or a threat of escalation? You decide. Continue reading

Yellen More Dovish? Don’t be Fooled.

Observations on the Capital Markets – Week Ended April 4, 2014

Fed Chair Yellen sounded very dovish in Monday’s speech, emphasizing that markets should expect extraordinary policy accommodation for some time, given the slack in the labor market. She broke with precedent by citing anecdotes (this from a person who has perhaps overused the words “data dependent”). She did not repeat the “six-month” guesstimate of how soon after QE ended Fed funds would start rising, but she didn’t “walk it back” either, or give any guidance suggesting anything more dovish than the Fed statement.

My take: she demonstrated empathy without making any promises or commitments. She’s a very good politician (as well as a very good Fed Governor). Continue reading

Slow Growth for the Economy but Weather Effects Fading

Do you believe Putin’s words or actions? Putin continued to say he wanted a diplomatic solution to Ukraine while continuing to mass troops along the Ukrainian border. Meanwhile the International Monetary Fund (IMF) approved a line of credit of up to $18 billion to Ukraine and the Ukrainian parliament passed a law to implement IMF-demanded austerity measures. The “West” cancelled a G8 meeting scheduled for Sochi, and so the G8 reverts to the G7 with the expulsion of Russia. Continue reading


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