May 22
What would eventually come to be called preferred securities have been around since at least the early 1800s. Known then as preference shares, they were issued to help finance capital-intensive projects such as railways and other infrastructure. Investors wanted a preferential structure that assured they were compensated before any payments were made to common stock holders.
There’s a lot of money flowing into bank loans. As of May 17th, bank loan funds have had 48 consecutive weeks of inflows; year-to-date inflows have totaled a record US$24 billion. Compare that with year-to-date inflows of US$2.6 billion for high yield bonds. In fact, over the past 16 weeks, bank loan funds have averaged over US$800 million per week, and six of those weeks have represented the highest flows ever. A recent Wall Street Journal article covered the topic (paywall). Bank loans are a high yield asset class, which draws a natural comparison to high yield bonds. Consider this – despite the overwhelming positive demand for bank loans, year to date, high yield bonds have outperformed bank loans by over 2% (5.51% for the JP Morgan US High Yield Index vs. 3.26% JP Morgan Leveraged Loan Index). To me, this represents both caution and opportunity. Don’t assume that bank loans, as an asset class will outperform high yield bonds. That said, bank loans can still be a positive contributor if you understand what makes the asset class unique and if you understand what makes one issuer better than another. Read more
If you’ve attended a Little League baseball game recently, you’ve probably experienced the frustration of watching a young batter watch a perfectly good strike go by and then take a wild swing at a pitch that hits the dirt before it hits the plate. You may find yourself saying under your breath, “Coulda hit that one, or shoulda let that one go by…..”
Maybe plan participants are watching the same type of opportunities go by with their retirement accounts. Read more
Britain’s reigning monarch, Queen Elizabeth II, has graced the obverse (that’s coin-and-currency aficionado jargon for “front”) of the Canadian $20 banknote since 1954. Now, 59 years later, a Canadian is getting the opportunity to influence British money…well, monetary policy, at least.
On July 1, Mark Carney, a Canadian and the outgoing head of Canada’s central bank, will cross the pond to take over as the governor of the Bank of England. When he does so, Carney looks to be inheriting an economy that will likely be somewhat improved from the depths of its double-dip recession. The UK is, in fact, enjoying an upturn in activity. First-quarter GDP growth was a positive surprise, and the most recent purchasing manager index readings are suggesting that the recovery has stretched into the second quarter. Read more
Growth is good. So, even at a revised 0.1%, German GDP growth could still be considered good. Sure, it wasn’t as much as economists had forecasted, but growth still beats recession – especially, after several months where the economic malaise in the Eurozone threatened to turn into a Teutonic Plague as well. The actual German output data has been much better than the dreary business surveys. Manufacturing orders (up more than twice what was forecast), industrial production (up 1.2% versus expectations of -0.1%), trade (surplus of€18.8 billion), and consumption all looked strong as the first quarter ended. Read more
For a while now, I’ve helped advisors and financial professionals develop their “story,” or their value proposition, and then helped them incorporate it into a marketing plan and their everyday practice. It’s a privilege listening to someone’s story and I really enjoy doing it – absorbing a heap of information, understanding the challenges, and then creating a plan that addresses their challenges and takes their story to the next level. But as much as I enjoy the process, a couple of years ago I learned an important lesson about getting too comfortable.
I know what I’m doing – listen, learn, create, repeat.
I had gotten to the point that I felt like I’d done so many advisor and financial professional consultations, that I was in a groove – listen, learn, create, repeat. I assumed I could simply listen for a few key words, review some of their existing material and slap a plan together.
One day, I dialed into a call with an advisor and shared what I considered a great plan. His response? “This isn’t what I was looking for at all.”
But you know what they say about assuming… Read more
Equities are at an all-time high and the demand for protection of downside risk has collapsed.
The Credit Suisse Fear Barometer (CSFB) is a measure of the protection that can be purchased through 3-month put options by selling 10% out-of-the-money (OTM) 3-month call options. For example, if put options and call options were equally priced for equivalent levels of money-ness, then the proceeds from selling a 10% OTM call could be used to purchase a 10% OTM put. As the demand for hedging downside risk increases, the cost of the puts will increase relative to the calls. When this happens, the proceeds from selling a 10% OTM call may only be able to purchase further OTM put options (e.g. 20% OTM).
What we have seen with the CSFB index for most of this year has been a relatively extreme demand for downside protection. As a case-in-point, the CSFB hit an all-time high of 35.24on March 26, 2013. What this meant is that – at that date – selling a 10% OTM would only be able to finance a put that was 35.24% below the current SPX level! In fact, during 2013, this index has averaged 31.05 when its long-term historical average has been 17.47.
But we have witnessed a notable break during the past two weeks. Read more
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