Somewhat disappointingly, the little nugget about how the hemispheres affect which way water rotates in a toilet is a myth. Fact is, the configuration of drains is responsible for the direction of spin to a degree that overwhelms the slight influence of the earth’s rotation. What is true is that all things flow downhill. Witness, for example, the swirling motion that is Puerto Rico, which we understand can be translated to “Port-O-Let” in any hemisphere.
Puerto Rico, which was ceded to the U.S. in 1898 after a war with Spain, has a special tax status that dates to 1917
Seems the curiously called “Commonwealth” announced last week that it would miss a $367 million principal payment on a widely held municipal bond obligation. Worse, what passes for the U.S. territory’s administrators called on Congress to help restore the ability of San Juan, which we’re told translates to “Port-O-John”, to restructure its malodorous debt.
Puerto Rico, with the population of Oklahoma and an economy smaller than Kansas, has more debt than any U.S. state except California and New York
According to Puerto Rican Gov. Alejandro García Padilla, which we think translates to “Alex’s outside latrine,” the Caribbean chamber pot is already struggling to pay for such basic goods as fuel for police cars and Drano for its balance sheet. While we’ve little interest in sanitizing financial cesspools like Greece or Illinois, it’s hard to casually pull the handle on Puerto Rico’s debt crisis — its $70 billion in debt truly is an out-sized presence in the U.S. municipal bond market. As a result, the rotten port’s spin down the pipes will eventually affect most people with a mutual fund invested in the tax-free bond market, and not in a pleasant way.
What the markets have been doing…
For no outstanding reason, save maybe for gravity, stocks sold off across the two-week period, with big-cap indexes like the Dow and S&P giving up one to two percent. The more important moves, however, were in the smaller-cap arenas, especially if they featured tech or bio-tech stocks. The Russell 2000 Index, for example, was also especially weak.
The slowing stream of first-quarter earnings reports occasionally moved individual stocks but did little to improve the overall sluggish corporate profit outlook. Neither did news on the economic front. Data indicated growth in manufacturing activity had slowed a bit, but factory and durable goods orders surprised on the upside. The Labor Department, meanwhile, reported payroll growth in April coming in well short of estimates. Yawn.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Treasury prices rose on the softer labor data and a decline in oil prices. Yields did not fall as much for investment-grade corporates, but they managed to produce positive results amid a pickup in new deals following earnings announcements. The high yield market, for its part, advanced slightly.
Municipal bonds, meanwhile, generated positive performance despite Puerto Rico’s rather important default. Seems the island’s non-payment had been widely anticipated, and traders shrugged off the news once it became official.
|Fixed Income||Yield||Two-Week Change|
|Bloomberg Corporate Bond Index||3.03%||-(0.09)%|
|30-Year Municipal Bonds||2.47%||-(0.12)%|
Pay attention to the man behind the curtain…
The five biggest ETF and/or option positions at the top of Forbes’ billionaire investor and hedge fund list:
- David Tepper of Appaloosa Management has more than $1.3 billion in call options on the S&P 500 ETF (SPY) and the NASDAQ 100 ETF (QQQ)
- Stephen Mandel of Lone Pine Capital has a $2 billion put option position on the euro ETF (FXE).
- Louis Bacon of Moore Capital Management reported a $1 billion-plus call option on the S&P 500 ETF (SPY).
- John Paulson of Paulson & Co. reported a $1.1 billion call option on gold through the SPDR Gold Shares ETF (GLD).
- Michael Masters of The Marlin Fund has nearly $600 million in call options on Citi (C), a $193 million call option on UPS (UPS), and a $105 million call option on the NASDAQ 100 ETF (QQQ).
Quote of the Week…
“It all started as a joke…Nobody believed it was going to work.”
– Xavier Vanneste, heir to a dynasty of beer brewers in Bruges, Belgium, on his brewery’s beer pipeline that is just weeks away from completion
Number of the Week…
46%: The percentage increase in iron-ore futures prices since the start of the year.
What Fund Architects is doing…
The markets were fairly quiet this period, but the Fund Architect Portfolios were not. You’ll recall we liquidated our successful Treasury position around Mid-April, leaving us a good-sized cash position heading into May, a position we put to work.
Specifically, we committed capital on the equity side to iShares Global Infrastructure (IGF) and the SPDR Dow Jones International Real Estate ETF (RWX). We are, at this hour, fully invested for the first time in a while.
On the fixed income side, our two top-ranked sectors are emerging market sovereign debt, for which we use iShares JPMorgan USD Emerging Markets Bond (EMB) and bank loans, where we just added PowerShares Senior Loan ETF (BKLN).
As we’ve suggested before, big benchmarks like the S&P and the Barclay’s Aggregate (not to mention trading strategies that seek to replicate them) don’t appear to have too much left in them this year. But we think there are very real opportunities to add value in selected sectors. Stay tuned.
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.