Hurricane Brings Focus on CAT Bonds

Bond investors (not just insurers) may be on the hook for damage from Hurricane Michael. The reason for this is so-called catastrophe (or CAT) bonds. Under this arrangement, insurance companies sell bonds to investors, with the stipulation that bond payments cease if a prearranged event (such as a hurricane) occurs in a particular location and above a particular intensity. This obviously helps insurers during times of significant payouts, but why would an investor take such risk? The answer is a higher interest rate. See article here, WSJ.

Active Managers Struggle Again

Once again, active managers have struggled to outperform market indexes. In fact, over the past year, only 36% of actively managed funds have beaten the index. This result provides additional support for the inflow of investment into passively managed funds. See article here, WSJ.

Tesla Shorts Hit Hard

Excluding ETFs, Tesla is the most heavily shorted stock in the US, suggesting that many investors don't believe in the business. However, recent positive statements surrounding earnings caused the stock price to jump 16% in one day. As a result, short sellers lost $1.7 Billion. See article here, WSJ.

Apple Value Hits $1 Trillion

Following strong earnings, Apple's market value increased to $1 Trillion, making it the first company to ever hit this mark. Next on the list are Amazon and Google, both around $775 Billion. To put this in context, only 16 countries in the world have nominal GDPs about $1 Trillion.

Saving for Retirement

For most investors, saving for retirement is a key goal of the investment process, and most are using company sponsored plans (i.e., 401(k) plans) to accomplish this goal. Unfortunately, the average balance in these accounts is quite low, indicating that many investors may have a lower standard of living than they had hoped. See article here, Fox Business.

Is a Recession Coming?

The yield curve identifies yields across varying maturities of debt instruments. The typical shape is upward sloping, with longer term rates generally being higher than shorter term rates. When the yield curve inverts, economists often point to an impending recession. The reason is that lower long term rates indicate expectations of lower interest rates in the future, either from lower inflation or a more loose monetary policy, both of which generally accompany slower growth. See article here, MarketWatch.  See historical article here, NY Times.

Goodbye GE

Until recently, General Electric (GE) was the only stock in the Dow Jones Industrial Index that was one of the original companies included when the index was created in 1896. However, following business problems and a massive loss in value over the past two years, GE will be replaced by Walgreens on June 26. Recall, the Dow is price weighted, so GE's currently low price of $13 means it has little impact on the index anyway. See article here, CNN Money.

Sector Rotation

While tech stops dropped significantly during the week of March 26, 2018, other sectors such as consumer staples saw gains. Thus, the overall market return is a reflection of different trading directions. This movement may be a good example of sector rotation. See article here, Reuters.

Zero-Fee ETFs?

The management fees on most mutual funds and ETFs have fallen significantly due to competition in the space. With some as low as .03%, can it go any lower? The answer is yes, as some are predicting a fee of 0% (or even a negative fee, with investors being paid to use certain products). How is this possible? With more assets, economies of scale allow for a lower fee. Further, asset managers can generate revenue on the underlying securities, primarily through lending to short sellers. So, who will win the "race to zero?" See article here, WSJ.

Long-Short (Equity-Bond) Investment

Given the historically low interest rate, some investors with long time horizons (philanthropies as an example) are issuing long-dated bonds (i.e., going short) and using the funds to invest (i.e., going long) in the equity markets. As long as equity markets outperform bonds over the time period, the trade creates a positive return. See article here, WSJ.

Inflation Picking Up

The Fed has targeted a 2% inflation rate, but, even with an expanding economy, inflation has remained below this level. Recently, however, the spread on traditional Treasury bonds versus TIPS (Treasury Inflation Protected Securities) has exceeded 2%, suggesting that investors expect inflation to hit this level in the near future. See article here, WSJ.

Cost Matters

Research continues to show that low fees are the most important driver of a fund's future alpha. Vanguard has a nice piece describing their findings. Click here to see the article.