Apartment building activity since 1984Shifting Liability Needs: Pension Funds And Catastrophe Bonds

“Major U.S. companies including Clorox and Kraft are favoring more bonds in the mix for their employees’ defined benefit pension plans, even amid signs the three-decade bull run in bonds is on its last legs.”  Moreover, thanks to the booming stock market in 2013, “the average corporate pension was funded at about 95 percent at the end of 2013, compared with 75 percent at the end of 2012.”  Furthermore, “by shifting to bonds, pension funds help preserve their funding levels even if stocks plunge.  The move is a product of increased reliance on liability-driven investing (LDI), which focuses on matching investments with liability needs rather than beating an index.”  Speaking of liability needs, “insurance companies are taking advantage of the appetite for high-yielding debt by selling bonds that can force investors to help pay for the cost of natural disasters(alt)…Cat (for “Catastrophe”) bonds historically have appealed to large pension funds but now are attracting a wider array of buyers, yield-hungry investors who otherwise might purchase corporate junk bonds, according to brokers, bankers and investors…While losses on so-called cat bonds have been rare over the years, investors can forfeit both interest payments and their principal if disaster costs exceed designated levels, which give insurers the right to tap the funds…some say the increased demand for cat bonds reflects dangerous complacency on the part of investors who have driven the bonds’ prices to unreasonable heights.”  Meanwhile, Fitch Ratings ain’t worried about no bond market bubble: “Fitch recognizes the currently high issuance volumes and historically low yields in the leveraged finance space.  However, in the view of Fitch’s Corporates team, we do not see a great deal of breakdown in credit discipline despite diminishing returns.”  But they are predicting some turbulence: “Demand for high yield bonds will likely be volatile in 2014, impacting issuance as future demand largely reflects investors’ expectations in defaults, economic growth, and interest rate risks.”

Mom And Pop Run With The Bulls, Bulls Look For A Nice Hedge

Mohamed El-Erian sees two opposing forces at work in the equities market: 1) better-than-expected earnings, high M&A activity and loose monetary policy pushing stocks up, and 2) geopolitical instability (e.g. Ukraine), valuations and the unknown risks/consequences of the Fed’s monetary policy.  “Looking forward, an increasing number of professional investors are likely to gradually pivot away from targeting general equity market returns (the ‘beta of the market) to one or more of three strategies: portfolios that are driven by more concentrated individual stock selection; reducing overall equity beta of portfolios by putting on general market hedges against specific long positions; and gradually accumulating higher cash balances to partially insulate their portfolios.  As this process continues, the equity markets may well lose some of the support that has proven so critical in blunting the scope and scale of price pullbacks in recent months.  If this indeed occurs, investors may find out that they are underwriting a lot more price volatility than they currently realize.”  Meanwhile, discount brokers are reporting higher trading volumes in Q1 2014 (alt): “Average daily trading volumes at E*Trade, TD Ameritrade and Schwab rose by an average of 18.9% in the quarter from the final three months of 2013, more than the 8.7% rise in overall stock-market volume.”  Furthermore, “margin balances increased 22% at E*Trade, 16% at Schwab and 15% at TD Ameritrade.”  Here’s an amazing quote: “If you have the right positioning and you know the stock is going in your favor, you can add more [leverage], and it means a bigger profit margin.” – Warren Buffett Derrick Leon

Vicious Cycle: Housing Activity Concentrated On Wealthy And “Hand-To-Mouth” Renters

The United States economy has been stuck in a vicious cycle: A moribund housing market saps the economy of strength, and the ensuing weakness — high unemployment, slow wage growth — means that fewer people are leaving the nest for a home of their own.  Those who do are choosing smaller rental apartments that generate less spillover benefits for the broader economy.”  Meanwhile, not only has the “limited supply of properties and higher building costs played a role in the increase [in house prices], but so has the mix of homes.  They’re getting bigger and fancier — and therefore pricier — as builders chase after wealthier buyers…when a home’s size and other characteristics are factored in, prices climbed at only [9 percent between 2010 and 2013].”  Also, here’s a closer look at the Department of Housing and Urban Development’s “fair market rent” and how much you would need to make per hour (based on a 40hr workweek) to afford “modest housing” in each county of America.  Meanwhile, “about one-third of American households live ‘hand-to-mouth,’ meaning that they spend all their paychecks.”  Furthermore, “66% of these families are middle class, with a median income of $41,000.  While they don’t have liquid assets, such as savings accounts or mutual fund holdings, they do have homes and retirement accounts, with a median net worth of $41,000.”

EU: Inflatium Leviosa!

“Nowadays, our societies expect too much of central banks.  They cannot do everything…we don’t have a magic wand to cure these problems, otherwise all countries would be rich because monetary policy would cure everything.” – ECB Vice President Vitor Constancio


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