On Friday, the FTC announced it had reached a settlement with Herbalife Ltd. that will allow the “nutritional-products” company to avoid being classified as a pyramid scheme. In return, the Los Angeles-based outfit will have to make significant changes to its business practices and pay a $200 million fine for its deceptively promissory behavior.

A pyramid scheme is an illegal business model that recruits members via a promise of payments for enrolling others into the scheme, rather than supplying investments or sale of products or services

While nothing says “We’re a fraud and pyramid scheme” like saying “We are NOT a fraud and pyramid scheme!” shares of the company’s stock jumped more than 20 percent on the announcement. The development furthers a stunningly ugly stretch for activist investor Bill Ackman and his Pershing Square Capital Management LP, which has maintained a billion-dollar bet against Herbalife since 2012.

Multi-level marketing is a legal marketing strategy in which the sales force is compensated not only for sales they generate, but also for the sales of the other salespeople that they recruit

Ackman’s campaign against Herbalife, the “overwhelming majority” of whose distributors make little or no money, has been one of Wall Street’s most dramatic spectacles. The ongoing circus has included bitter accusations, investigations, and a screaming match between Ackman and investor Carl Icahn on live television.

A Ponzi scheme is a fraudulent investment operation where the operator pays returns to its investors from new capital paid to the operators by new investors

The newly-empowered Herbalife board has cleared the way for Icahn to boost his stake in the company to as much as 35 percent. Ackman, meanwhile, is proclaiming that the company’s fundamental structural changes will cause the pyramid to collapse. We wouldn’t bet on either.

What the markets have been doing…

Boosted by encouraging developments overseas and a positive start to the earnings season, both the Dow and the S&P 500 touched new highs during the period. Big gains in the technology-heavy NASDAQ put the benchmark back in positive territory for the year but it remains below the records established in 2015.

A good kickoff to the second-quarter earnings reporting season improved sentiment from the get-go. Alcoa, which is typically the first major company to release quarterly earnings, surprised investors by reporting a smaller-than-expected decline in quarterly profits. Overall, expectations are for 2Q earnings to decline on a year-over-year basis, the fifth quarterly drop in a row.

Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 18516.55 +567.18 + 6.26%
S&P 500 2161.74 +58.79 +5.76%
NASDAQ 5029.59 +229.25 +0.44%

Treasury yields came off record lows as equity markets marched higher and positive economic data spurred bond selling. Even in the face of a risk asset rally, the Treasury’s 30-year bond auction saw robust demand, highlighting the continued demand for long-term security, Investment-grade corporates generated strong demand across the spectrum as the search for yield continued.

High yields, meanwhile, advanced amid strong demand and limited new supply. Of note, high yield ETFs saw the largest daily inflows on record. Municipal bonds followed Treasury yields higher.

Fixed Income Yield Two-Week Yield Change
2-Year Treasury
0.68%
+0.13%
10-Year Treasury 1.58% +0.22%
30-Year Treasury 2.30% -+0.16%
Bloomberg Corporate Bond Index 2.85% -(0.01)%
30-Year Municipal Bonds 2.19% +0.07%

You go high, I’ll go low…

The S&P is setting record highs, while the long bond yield is touching record low yields.

Quote of the Week…

“Brexit should be a wake-up call for pension plans because it means interest rates are going to stay low or go lower and it makes it even less likely they are going to achieve the 7.5% rate of return that most of them are assuming.”

            Chuck Reed, former mayor of San Jose, Calif

Number of the Week…

$568 billion

The combined pension deficit for S&P 1500 companies at the end of June, a $164 billion increase in the deficit from the end of 2015.

What Fund Architects has been doing…

Pleasantly enough, the investment skies have cleared a bit over the past couple of weeks. Earnings season is well underway now and, so far, reporting companies are beating estimates. In the end, unless there’s a case that a geopolitical event will have long-term impact, it’s corporate earnings that move stock prices. From where we sit, things to that end aren’t so bad.

Here at mid-July we’re standing pat with the trades we made first of the month. We recognize there are questions about the Portfolios’ holdings in global utilities, which is nearing a long-term high. Our position is this: As long as interest rates are low, and still showing signs of going lower, utilities will keep showing strength. Our position is yielding around five and a half percent and trading at 10 times earnings. Since our strategy doesn’t get caught up in emotional concerns, as long as the sector keeps showing strength, we’re not at all afraid to hold on to it.


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.

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