“The point is, ladies and gentlemen, that greed — for lack of a better word — is good.”
We got to thinking about the mythical Gordon Gecko last month when real-life Goldman Sachs bullied a good deal of bonds from Venezuela, perhaps the world’s most easily out-negotiated counter-party. As the trade goes, the Wall Street shark paid about $865 million for $2.8 billion worth of Petróleos de Venezuela bonds due to mature in 2022 — a rather ruthless 31 cents on the dollar. Stick around pal, I’ve still got a lot to teach you.
“Greed is right. Greed works.”
Story goes that the so-called PdVSA bonds had until recently been in the possession of what passes for Venezuela’s central bank. Smooth-talking Goldman reps say the firm bought the securities from a London-based broker inexplicably named the Dinosaur Group and did not interact with the desperate Venezuelan government. Right. And Blue Horseshoe doesn’t like a 40% yield.
“Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”
Whoever the seller, folks lacking a certain kind of killer instinct have crucified Goldman for even thinking about “making a quick buck off the suffering Venezuelan people.” But blood runs cold on the Street, and the firm has already sold off a small slice of its unpalatable investment for 32.5 cents on the dollar. Why the relatively meager profit? Cuz’ Goldman’s playing the predator’s game. This early trading will only facilitate more trading in the bonds and ultimately increase prices on the rest of its position. Hey, we make the rules, pal.
“Greed, in all of its forms, has marked the upward surge of mankind.”
Then again, maybe investors will avoid holding foul-smelling debt issued by a nation in dreadful crisis altogether. Maybe Gordon was wrong. Maybe Goldman’s just one trade away from humility.
What the markets have been doing…
Lots of action across the period but little real movement. Big benchmarks like the Dow and the S&P 500 ended up pretty much where they started, while the technology-heavy NASDAQ swung a little more to the downside. (Chart watchers will note that the Composite broke below its 50-day moving average for the first time in seven months.) The tech sector’s weakness was due in large part to news that the European Union was fining Google a cool $2.7 billion for antitrust violations.
Financial stocks, meanwhile, provided a bit of a cushion to the falling tech sector. Prospects for higher interest rates boosted banks as did the Fed’s Comprehensive Capital Analysis and Review, which cleared nearly all major banks to return more capital to shareholders. As a result, several banks announced higher dividends and share repurchases.
|INDEX||Friday’s Close||One-Week Point Change||Year-to-Date Change|
Not unlike their equity counterparts, bonds made a lot of noise but didn’t wander too far from where they started. Yields on U.S. Treasuries moved little in reaction to the tightening comments from global central bank officials, while the investment-grade space moved sideways despite a nice boost from energy-related issues. The high yield market was unusually quiet as traders appeared to be somewhat cautious toward the higher-risk arena. Municipal bonds essentially tracked Treasuries as investors awaited Illinois’ budget deadline and the state’s potential downgrade to junk status.
|FIXED INCOME||Period||YTD||12 Months||Yield|
|U.S. Investment Grade||NC||4.4%||4.2%||3.1%|
|U.S. High Yield||+0.2%||4.6%||12.0%||5.7%|
What Fund Architects has been doing…
Reminding us once again that investing’s not easy (never let anybody tell you otherwise), our trade last month into Global Utilities ETF (JXI) was a bit of a flop. Not a big one, to be sure, but enough to cost the Fund Architects Global ETF Portfolio a bit of relative and absolute performance. That said, the Portfolio is still nicely ahead of its benchmark and the S&P 500 for the year.
Not too surprisingly, Utilities have slipped in the rankings for our the first-of-the-month positioning. So, too, has the Portfolio’s other overweight, Global Consumer Staples (KXI). As a result, we will be swapping out of both positions and according to our Multi-Factor Ranking System moving into Global Healthcare (IXJ) and Global Infrastructure (IGF), an investment we’ve had good success with in the past. Both sectors have been on a mostly upward slope for 2017, but both are essentially where they stood in mid-2015.
On the fixed-income side, our overweights in the Conservative Global ETF Portfolio performed well for June, particularly the Convertibles (CWB), which we’ll continue to hold for July. We’ll be swapping our other overweight — Emerging Market Sovereign Debt (EMB/PCY) – for U.S. Preferreds (PFF), which moved back to the top of the list, again according to our Multi-Factor Ranking System.
All in, both Fund Architects Portfolios – the Global ETF for capital appreciation and the Global Conservative ETF for capital preservation – are performing at or better than our expectations so far YTD.
What the pundits have been saying…
“More dispersion between winners and losers creates a better environment for stock pickers. Since mid-2016, stock correlations have fallen, plummeting to their lowest level in 10 years. We expect correlations to remain relatively low, which should provide solid opportunities for active equity managers.”
- Bob Doll, Chief Equity Strategist, Nuveen Asset Management
What the numbers are saying…
The amount that the European Union’s antitrust regulator fined Google for favoring its own comparison-shopping service in search results.
What people have been saying…
“There’s a lot of anxiety about where to put money to work. We know the VIX won’t stay low forever.”
— Erik Knutzen, chief investment officer for multi-asset-class portfolios at Neuberger Berman, on recently trimming his exposure to assets that have soared in price.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.