Week of July 11, 2016
Domestic markets ended last week's shortened trading session up again, continuing the positive momentum. The Dow Jones Industrial Average, S&P 500 and NASDAQ Composite were all up over 1% with the NASDAQ Composite leading the way at 1.94%.
International markets, however, were mixed last week with European stocks, especially those in the UK, falling over 2% as a whole.
Italian bank stocks have fallen nearly 50% over the course of the last six months. Driving the massive sell off is Italy's rocky financial situation. Public debt is well over 130% of gross domestic product (GDP), unemployment is the highest in Eurozone, sans Greece, and Italian banks are facing nearly 360 billion euro in underperforming loans, representing 20% of the country's GDP. What's more, Italy is Europe's fourth largest economy and by far one of its weakest. What the banking system in the country needs desperately is an infusion of government capital to ease market fears and create stability. However, new European Union rules stipulate that public banks cannot be bailed out by the state until bondholders take losses first. Typically, large institutions are the primary holders of bank bonds and can weather the loss but a nuance in the Italian tax code means that 200 billion euro are held by retail investors who likely don't have the same capacity. We will be keeping a very close eye on the situation and update our readers as it evolves.
10 Year Rates
Yields on the 10-year US Treasury note fell below 1.4% for the first time in history amid further concerns over global market uncertainty following the Brexit vote the end of June. The close at 1.367% last Tuesday broke through the previous low of 1.404% set in 2012 when markets flooded into less risky Treasuries during the middle of the Eurozone's sovereign debt crisis. All else being equal, as investors purchase bonds, their prices rise and the yields fall. The historically low yields are further evidence that investors are hesitant to enter into riskier equities given the current environment. Furthermore, the buying pressure on these bonds also reflects the market's expectation of further central bank actions meant to stimulate inflation and growth.
Source: Morningstar Direct
Puerto Rican Debt Problems
Puerto Rico made history the beginning of July by defaulting on nearly $800 million in state-level municipal debt payments. Somewhat tempering the impact of the default is the fact that the three largest bond insurers in Puerto Rico are expected to reimburse investors as much as $360 million. In addition, the US Congress has stepped in to deliver a restructuring legislation that establishes a federally appointed fiscal control board to ensure an orderly debt workout. Perhaps more importantly, the legislation also prevents bondholders from requesting a court to force Puerto Rico to pay bond payments ahead of essential services. Investors had largely anticipated the default so bond prices were relatively unchanged in response to the headlines. We would note that state-level municipal bond defaults have been extremely rare with the last state having done so being Arkansas in 1933.
Fun Story of the Week
What3words, a UK-based company, has come up with a rather novel way to easily map the estimated 70% of the world that doesn't have a standard address. Numbers can be difficult to remember so What3words put together a computer algorithm that assigns three words for any specific 10-by-10 foot plot. For example, plug in "prices.slippery.traps" and you'll notice that it puts you squarely under the Eiffel Tower. Of course, the Eiffel Tower already has an address but for places that don't, the uses of such a system are wide and varied. Search and rescue is a prime example. Say you're hiking around "meteoric.elapses.blight" and you twist your ankle. Simply send those three words to the search and rescue team and they'll know what 100 square foot plot to look for on the southern tip of Madagascar in the Cape St. Marie Special Reserve Park. What3words was careful to remove homonyms such as "hear" and "here". The inclusion of such words could be problematic when you realize you sent the search party to the other side of the world.
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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.
The Economist, July 2016. https://www.economist.com/news/leaders/21701756-italys-teetering-banks-will-be-europes-next-crisis-italian-job?fsrc=scn/tw/te/pe/ed/theitalianjob
Investing, July 2016. http://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-historical-data
Wall Street Journal, July 2016. http://www.wsj.com/articles/government-bond-yields-in-u-s-europe-hit-historic-lows-1467731411
Wall Street Journal, July 2016. http://www.wsj.com/articles/puerto-rico-to-default-on-constitutionally-guaranteed-debt-1467378242
What3words, 2016. https://map.what3words.com/
Wired, June 2016. http://www.wired.com/2016/06/startup-wants-replace-address-three-word-phrase/