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The Federal Reserve appears poised to ease off the monetary brake by cutting the policy rate later this year. This potential shift is supported by several indicators, primarily signs of cooling inflation. For over a year, short-term interest rates have been maintained well above the inflation rate, reflecting a stringent monetary policy stance (Chart A, below). Given the inherent lag in the effects of monetary policy, there is a compelling argument for the Fed to start reducing rates to prevent economic deceleration and to support continued growth. Chart A Already Priced In However, there are significant concerns about the current…
Many managers use textbook financial ratios such as return on equity, debt to equity, and earnings per share variability to evaluate the quality and value of a company. However, these metrics can be easily manipulated by a company’s management and misused by index providers and rating agencies. For example, the return on equity ratio can be increased overnight by issuing debt and using it to buy back stock rather than investing in the business to promote growth. This can create an illusion of higher profitability without actually improving the company’s business operations. Distortions Caused by Share Buybacks To better understand…
In 2018-2019, real estate company Zillow showed “for sale” inventory of U.S. homes between 1.2 and 1.4 million units. After the pandemic in 2020, that “for sale” inventory began a sharp decline to 440 thousand units in March 2022. In other words, in March, the supply of homes was about 1 million units short of, or 60-70% below, pre-pandemic levels based on Zillow’s data. At the same time supply was falling, demand was surging. Existing home sales surged by 1 million units above normal in 2020-2021, and new mortgages for purchases surged 40%. Remote work trends, federal stimulus, and record-low,…
Have you noticed more crowded roads and airports lately? The benefits of reopening are now seen across many sectors, and the municipal bond market is paying attention. This report explores how the process of reopening the economy is impacting municipal bond issuers and investors. Highlights The Muni curve steepened in the third quarter, slightly underperforming U.S. Treasuries, in very quiet trading activity. Flows into Muni Mutual Funds continued their torrid pace as increased taxes become more certain. The reopening economy has benefited Munis, too. Part 1 of our Muni Market Education Series: Why the High Coupon?
Discusses outlook amid the current COVID-19 and zero-interest-rate environment. Kevin describes WCA’s rationale for emphasizing flexibility in portfolio companies. Quality, durability, and flexibility remain “watchwords” for investing as debt rises and the credit cycle ages. The interview starts at 27:41
After remaining unchanged for much of June, Municipals rallied in July, with yields falling to new record lows across most of the curve. Munis outperformed Treasuries and Corporates and the Muni to Treasury ratio, a common valuation metric that has been essentially meaningless since the market dislocation in March, has returned to more normal levels. Muni Mutual Fund inflows have continued for 11 consecutive weeks and cash from coupon and maturity payments led to strong demand, as we have expected. While rates are at historic lows, the curve remains steep, which offers an opportunity in the longer end of the…
This is a second part of a series on China and trade. To read part one, click here. CONQUEST update: Last week we raised gold to overweight and high yield to underweight in the core portion of portfolios on rising geopolitical and trade concerns. We’ve pointed out that China owes much of its growth to investment (not trade). As discussed last week, much investment is being subsidized by Chinese households. These subsidies have allowed China to grow well over 7% for many years. From the early 1980s, when China had very low levels of investment, to today, as investment rates…
A Year of Churn In the past year, forecast earnings for S&P 500 companies are up just about 9%, slightly above the S&P 500’s 5% year-on-year advance. The S&P 500 earnings yield, or inverse of the price-earnings-ratio, now stands near 6.25%, up from 5.9% a year ago. By comparison, the S&P 500 earnings yield is 385 basis points (or 3.85%) higher than the 2.4% yield on the 10-year U.S. Treasury bond. A year ago, the S&P 500 earnings yield spread over Treasuries was about 290 basis points (2.9%), so today’s 385 basis point spread points to somewhat better valuations for…
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