They say that patriotism is the last refuge to which a scoundrel clings.
If you missed it, Moody’s just agreed to a $130 million settlement with a California pension fund. The agreement resolved one of the industry’s last remaining legal migraines attached to the Financial Crisis of 2008. You’ll probably remember that eight years ago Moody’s and its ilk were loyally awarding sweet evaluations to huge piles of the smelly residential mortgage debt that eventually stuck to the bottom of Wall Street’s figurative shoe.
Steal a little, and they put you in jail…
The deal brought the total of fines and settlements for the ratings industry to $1.9 billion – a big number to be sure, but small change compared to the amount paid by U.S. banks for their mellifluous behavior. Truth be known, the ratings firms that played such an essential role in the crisis – Standard & Poor’s, Moody’s, and Fitch – never got any kind of a downgrade of their own. Lawmakers called for a major shake-up of the way the firms made their money, but the industry’s business blueprint remains fully in place.
Steal a lot and they make you king.
It’s bad enough that the three firms still issue more than 95% of global bond ratings, same as 2008. It’s even worse that their profits are nearing all-time highs as they ride a wave of debt sales and new lines of business. Worst of all, though, the firms are now so large that their removal would cause significant damage to the financial markets.
It’s called the land of permanent bliss. What’s a sweetheart like you doing in a dump like this?
– Bob Dylan
What the markets have been doing…
A rebound in oil prices and favorable news out of Europe helped stocks end the period on a strong note, the late rally pushing the bigger benchmarks to their fourth consecutive winning week. When the bell rang Friday, the Dow, the S&P 500, and the NASDAQ had all accumulated more the 3% gains for the stretch. For its part, the S&P, though still about 6% below the highs it established last summer, recorded its highest close of 2016.
Worries over an upcoming European Central Bank meeting and the growing divergence in global monetary policy, not to mention a fair amount of political uncertainty here at home, had weighed on investor sentiment earlier in the period. But traders reacted positively to the ECB’s aggressive moves to stimulate economic growth in the 19 countries that share the euro. U.S. economic data offered just a little help along the way – jobless claims reportedly fell by 18,000 to 259,000, while continuing claims fell substantially.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Treasury prices fell across the period, with yields on the 10-year note rising to just below 2% – their highest level since late January. Beyond the ECB’s announcement of additional easing measures, supply was a factor, as the Treasury auctioned 3-, 10-, and 30-year securities over the two-week stretch. U.S. investment-grade bonds continued their positive momentum with huge demand for active new issuance. High yield bonds also produced positive results, with good support by the metals and mining and energy sectors. Municipals moved little as the market absorbed a heavy new issuance calendar, including two large deals totaling more than $3 billion.
|Fixed Income||Yield||Two-Week Change|
|Bloomberg Corporate Bond Index||3.53%||-(0.06)%|
|30-Year Municipal Bonds||2.80%||+0.04%|
Pedal to the Metal…
Oil gets all the attention, but hard commodities are also on a tear:
Quote of the Week…
“The (U.S. junk bond) market is as attractive as it’s been in four or five years. There are a lot of opportunities there.”
– Mark Kiesel, CIO for Global Credit, PIMCO
Number of the Week…
8.3: The percentage-point decline in Wall Street’s first-quarter earnings estimates for S&P 500 companies during the first two months of 2016, the largest such shift during a reporting quarter since the start of 2009.
What Fund Architects is doing…
The month began on the upswing, and sure enough, went up quite nicely over the two-week stretch. We, of course, are over weighted toward cash and Treasuries, and despite the recent run-up are willing to remain patient.
We did, however, make a change to the core of the portfolios, which represents about 30% of assets. Specifically, we traded into Guggenheim’s BulletShares® ETFs. Here’s why:
The BulletShares, which include a suite of defined-maturity investment-grade and high yield ETFs, are designed to help investors like us build customized portfolios tailored to specific maturity profiles and risk preferences. In practice, they provide a cost-effective (no commission on most the platforms we use) and easy way to build bond ladders and manage interest rate risk. And because they’re ETFs, there’s meaningful opportunity for capital gains if the funds are bought right.
Which is why decided to “pull the trigger”. High yields, of course, have been under pressure for some time, and we were able to build out a position that will yield around 7% annualized for the next several years. We also added an investment-grade position in the more conservative accounts at 2.5% to 3.0% for a slightly longer term.
We’re not entirely confident that the S&P will produce seven-plus percent returns for the next few years. Even if it does, we can get to same place with significantly less risk utilizing the BulletShares. And given the way the shares trade they hold up fairly well in irrational markets, which will help reduce portfolio volatility. As we’ve said before, how far you go up depends a lot on how far you don’t go down.
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.