Return of Subprime?

While it represents a small segment of the overall mortgage market, so-called "nonprime" mortgages are once again gaining popularity. Although they now have a different name (i.e., no longer subprime), the fundamentals (or lack thereof) are similar to those of prior cycles. The extent of their impact will be determined by the broadness of their reach and whether changed regulations will control their risk profile. See article here, Financial Times.

Illinois = Junk bonds?

The state of Illinois just had its bonds downgraded by two credit rating agencies, bringing it close to junk bond status. The downgrade further worsens a bad situation, as the lower rating will increase the interest rate the state has to pay on its widening debt. See article here, WSJ.

Puerto Rico Municipal Bond Bankruptcy

After entering court protection, Puerto Rico now represents the largest municipal bankruptcy ever -- $73 billion. This is much larger than the city of Detroit, which previously held the record at $9 billion. While municipal bonds generally carry lower interest rates due to tax advantages, high levels of default risk will offset this benefit and result in higher required yields. See article here, WSJ.

An Update on Levered ETFs

Levered ETFs are designed to track a particular benchmark, but in an exaggerated fashion. For example, the Pro Shares Ultra S&P500 (SS0) is a 2X fund, meaning its performance should be twice the level of the index. However, this performance only matches short term. In particular, since volatility reduces compounded returns, levered funds "lose" performance through time. In fact, some funds may actually produce a negative buy-and-hold return during even if the underlying benchmark was positive. Unfortunately, many retail investors are flocking to these funds without understanding their risks. (See article here, Reuters.) In recent events, the SEC just announced approval of a quadruple-leveraged ETF, which will further exaggerate the issues described above. (See article here, Reuters.)

Record Margin Levels

Margin debt rose to a record $528 billion in February. This is likely a sign of growing investor confidence, but some warn that it signals a market peak, as such high levels have often preceded steep market declines. See article here (WSJ).

Ban Dual-Class Shares?

Company founders have used dual-class share structures to retain voting control, even without a majority of the share ownership. Many tech companies have adopted such systems, with some being quite extreme. For example, Groupon founders own shares that provide them the equivalent of 150 votes per share, and Snap (parent of Snapchat) plans to go public and give common shareholders no voting rights. Money managers are beginning to band together in hopes of eliminating such structures. See article here, WSJ.

Dow 20,000

Following a post-election rally, the Dow has recently crossed 20,000. But, what does this really mean? Check out a recent article in the WSJ.