Week of August 29, 2016
Domestic markets, along with many of their international counterparts, were down slightly last week. The Dow Jones Industrial Average, S&P 500 and the NASDAQ Composite all ended the week off less than 1%. The NASDAQ Composite was the out performer, notching a -0.37% return.
Internationally, Europe was the bright spot for global markets while Asian exchanges trended lower for the week. The MSCI Europe index was up 0.61% and Japan's Nikkei 225 Average and China's Shanghai Composite were down 1.46% and 1.47%, respectively. For this week's commentary, we explore the record level of debt that has been racked up by oil companies, Janet Yellen's speech at Jackson Hole and review the European commercial banks that have begun charging some of their customers negative rates. Lastly, we conclude our commentary with an interesting look at the history of the fractional stock quote and its connection to the pirate treasure, "pieces of eight”.
Oil Company Debt
According to the data, the world's largest oil companies are burdened with their highest debt levels all while oil prices remain stubbornly low. For context, Exxon Mobil, Royal Dutch Shell and Chevron have a combined net debt of $184 billion. This is more than double the amount the companies held in 2014. The news has reignited investor concern that the dividends paid by these giants may no longer be safe. Indeed, despite the companies' executive teams reassuring investors that the debt levels are temporary and cash flows will be strong enough in 2017 to cover dividends and investments in their businesses, the companies missed their targets in 2015 by a combined $40 billion. Fortunately, historically low interest rates have somewhat lessened the blow.
The market shifted its focus the end of last week to Jackson Hole, Wyoming, as central bankers converged on the town to attend their annual economic symposium and hear Jane Yellen's speech on the state of the economy as well as her thoughts on the future path of interest rates. There wasn't much new information in her speech, however, she did say in her prepared presentation that there is a stronger case for higher rates due to the improvement in the economy over the last few months. Indeed, this was the most quoted section of her speech. The market reaction was relatively muted, trading narrowly on Friday and moving between positive and negative before finally settling lower for the week.
Source: Wall Street Journal
Banks Charging on Deposits
It finally happened: Commercial banks in Europe have finally started to charge their clients a negative rate on large deposits. Fortunately, the retail client appears to have escaped this sea change unscathed, at least for now. Many analysts recognize that a move to charge the smaller retail client on their bank deposits would be incredibly unpopular so banks are going after more appealing targets: large corporate clients. As of this writing, three banks have instituted negative interest rates on large deposits made by their corporate clients. They are the Royal Bank of Scotland, the Bank of Ireland and Commerzbank, Germany's second largest lender and the first commercial bank to institute the policy.
Fun Story of the Week
Many investors remember the days when stock prices were quoted in fractions, using multiples of 1/8 as the base. This, however, was changed in April of 2001 when the Securities and Exchange Commission officially made sure all exchanges now use the decimal system to price equities. What's interesting about fractional quoting is that the trading system it was based on is nearly 400 years old. Almost four centuries ago, many international traders would use Spanish coins because of their standardized minting process and uniformity. The coins were so large that they were frequently divided into eight pieces, earning them the nickname "pieces of eight" and solidifying their place in pirate lore in the process. Since the Spanish trading system was so well established and used by international traders, the New York Stock Exchange (NYSE) based its own trading system on the Spanish method of using 1/8 fractions. When it was first established more than 200 years ago, the NYSE set the lowest amount a stock could move to 1/8 of a dollar, or 12.5 cents. That turned out to be quite the spread so the exchange eventually moved to a 1/16 denomination and, ultimately, the decimal system we use today.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
Forbes, August 2016. https://www.forbes.com/sites/timworstall/2016/08/20/bank-of-ireland-and-rbs-to-charge-negative-interest-rates-to-depositors-remember-mf-global/#6d1751027a1f
Wall street Journal, November 2014. http://www.wsj.com/articles/commerzbank-to-charge-fees-to-discourage-large-deposits-1416418127
CNBC, August 2016. http://www.cnbc.com/2016/08/26/fed-chair-janet-yellen-chance-for-raising-rates-has-strengthened.html
CNBC, August 2016. http://www.cnbc.com/2016/08/23/the-market-will-be-disappointed-by-janet-yellen-this-week-jpmorgan.html
CNBC, August 2016. http://www.cnbc.com/2016/08/22/janet-yellens-speech-at-jackson-hole-set-to-dominate-mood-on-wall-street.html
CNBC, August 2016. http://www.cnbc.com/2016/08/25/why-yellens-speech-could-cause-a-crash-in-the-currency-market.html
Wikipedia, 2016. https://en.wikipedia.org/wiki/Spanish_dollar
Investopedia, 2016. http://www.investopedia.com/ask/answers/04/073004.asp