NEAM Insights

BACKGROUND Amid the sprawling Puerto Rico debt restructuring, the Commonwealth diverted revenues pledged to bondholders on debt owed by the Puerto Rico Highway and Transportation Authority. A District court dismissed a challenge to the redirected payments in 2018, and the First Circuit Court of Appeals affirmed in March. The court ruled that prepetition liens on pledged revenues are to remain in place during the pendency of municipal bankruptcy (a good thing). However, the court went on to rule that while a lien may still exist, the continued payment of pledged special revenues to bondholders through bankruptcy is permitted, but not required. Read More

As we approach autumn in the Northern Hemisphere, the trade standoff between the U.S. and China drags on with no immediate resolution in sight. As tariffs take hold, we are reminded that the negotiation process is complex and that there are decades of history to overcome. Read More

Policy dominated the recent quarter due to the second dovish pivot this year by Chairman Powell. The first occurred in January with the Fed’s pledge for patience regarding further interest rate increases, effectively curtailing a three-year process of policy tightening. The dovish tone accelerated after May’s downside volatility, and the central bank posture quickly hinted at potential rate cuts. Weakening economic data provided an important catalyst as the escalation in trade tension clipped both U.S. and global growth. Benign inflation, now termed “persistent” versus “transitory,” further enabled an easing stance in conjunction with global uncertainty. As the 2nd quarter closed, the Fed appeared willing to act preemptively to elongate the economic expansion, suggesting a broader scope underlying its mandate. Equities rallied over 7% in June, the strongest in over 50 years, as the Fed once again indemnified risk. This appreciation enabled the S&P 500 index to finish the quarter up over 4% and extended year-to-date gains to north of 18%, the strongest in twenty years. Read More

Considerations for Life Insurers’ Investments Insurance may seem pretty straight forward: insurers collect premiums or payments from customers and then pay out benefits to policyholders and beneficiaries as claims become due. What makes this process more complicated is the timing and severity of these claims. Read More

1Q 2019 Review After a tumultuous final quarter of 2018, the tenth birthday of the current bull market culminated in the best quarter since 2009. The Federal Reserve pivoted to a more dovish stance in early January sparking the powerful risk rally which spurred the S&P 500 to return over 13% for the quarter. The easing of financial conditions undoubtedly benefited risk assets. Progress on trade negotiations also buoyed market sentiment as trade war risk diminished. Stocks marched higher despite the lower rate of estimated earnings growth for the 1Q, as investors deemed this slower pace of growth transitory. Overall, the first 90 days of the year were the mirror image of the preceding quarter. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX”) fell by over two-thirds relative to its recent late December peak. The S&P 500 finished its roller coaster ride just 3% shy of its all-time high in a nearly straight line retracement from year-end. Read More

Unusual... Pacific Gas & Electric Company’s swift fall into bankruptcy was certainly unusual. Bank of America’s analysts compiled some statistics on what they termed “investment grade defaults” after Pacific Gas & Electric Company (PCG) management announced that the utility and its parent company (PG&E Corporation) intended to file for bankruptcy protection. PCG’s January 2019 bankruptcy filing is just the 26th instance over the past 20 years in which a company has defaulted within a year of being included in the ICE BofAML investment grade corporate bond index, with PCG’s 2001 bankruptcy filing also on the list. Moreover, PCG’s bankruptcy filing marks just the 4th instance over the past 20 years in which a company has defaulted while still included in the investment grade index. Read More

For over a decade now, we have had significant outside influences acting on our economy and capital markets. The most notable has been the actions of the Federal Reserve. In response to the global financial crisis the Fed used its entire arsenal of conventional and extraordinary policy tools to provide liquidity to markets, support economic growth and contain the spread of financial instability. Read More

Background The sanguine, steady march higher enjoyed by the equity markets in 2017 and for the better part of the first three quarters of 2018, came to an abrupt end in October. Market sentiment is remarkably fickle and can turn on a dime. With three quarters “in the books,” the S&P 500 was having a more than respectable year, posting returns that were in the low double digits. Then it happened – volatility returned suddenly and with a vengeance. Read More

4Q 2018 Review Turmoil characterized the equity market in the final quarter of 2018 with the S&P 500 index price falling almost 14%. Shortly after being heralded as the longest bull market ever, with Apple and Amazon eclipsing $1 trillion market capitalizations, the U.S. market fell swiftly over the next three months. More hawkish Federal Reserve policy and tighter financial conditions propelled the market lower with liquidity slowly exiting the global financial system. Likewise, the trade war remained front and center given its determinant role for corporate earnings growth. Fears of recession ensued, and volatility reached a frenetic crescendo with December’s 9% price slide ranking second only to the early 1930s.1 The back-end loaded nature of the weakness felt even more unnerving with the S&P stopping just shy of a bear market, defined as a 20% peak-to-trough decline, by Christmas Eve. Read More

Background There are times when investors need to look in unfamiliar and perhaps riskier places to see which way the winds of fortune might be shifting. For example, what can conditions in leveraged markets tell us about high grade corporate bonds? Leveraged capital structures are more sensitive and vulnerable to changes in the overall financial market and as conditions change, these securities often signal danger lying ahead for investment grade bonds. Read More