NEAM Insights

We believe that many factors that contributed to the precipitous decline in oil prices over the last several quarters will likely constrain any upside over the coming quarters as well. Most importantly, Saudi Arabia has abdicated its traditional role as the swing producer, in an attempt to defend market share and support longer term oil prices; having come this far, we would not expect Saudi Arabia to relent now. Other countries would like to see higher oil prices, but are unwilling (or unable) to give up market share and revenue by cutting production. With sanctions lifted, Iranian supply is increasing. U.S. oil companies have substantially reduced costs and increased efficiencies, maintaining production in 2015 despite lower capital spending and operating costs. Demand has increased, but not as quickly as supply, with modest global GDP growth (and a warm winter in the U.S.) slowing the pace of demand growth. With supply outpacing demand, inventories of crude oil in storage have built. Read More

As we enter 2016, credit investors have much with which to be concerned. A significant decline in commodity prices, softer global economic growth, heightened event risk and thin dealer liquidity have all pressured credit spreads. While these risks remain, we turn our focus to the following question: “Where are we in the credit cycle?” The answer to this question is a key component in determining whether a rise in credit spreads is an opportunity or a warning signal of the arrival of the next credit cycle. In fact, it may be both. Read More

Financial theory has drawn from various scientific concepts including statistical and probability analysis, general equilibrium theory and, unfortunately, the Law of Gravity. Indeed, one might strike an analogy between securitization and Darwinism, considering the expansive application of structured technology since Lewis Ranieri created the first collateralized mortgage obligation in 1983. The evolution has been fitful, and securitization continues to suffer a bad reputation for its role (causation) in the 2008 financial crisis. Nonetheless, past experience has refocused attention on asset quality, bolstered credit support and other structural protections which, together with their currently attractive yield, diversification benefit, and shelter from corporate event risk, render structured products an appealing alternative in today’s market. Read More

The Legacy of Financial Engineering The S&P 500 finished the year trading at virtually the same level where it began. This might lead one to conclude that 2015 was an uneventful year. It was just the contrary as volatility inducing events abounded. The market had to contend with Greece nearly exiting the euro, China accomplishing a shock devaluation of its currency, U.S. corporate earnings contracting, severe compression in the price of oil and other parts of the commodity complex, and the Federal Reserve raising interest rates for the first time in nearly a decade. Read More

There’s a popular adage on Wall Street: “Don’t Fight the Fed.” Investors have followed that advice religiously since 2009, when the Fed initiated the first round of quantitative easing (QE). This injection of liquidity along with a zero interest rate policy has served to support risk assets, driving both bond and equity prices higher for the last several years. By suppressing volatility and fostering an upward bias in financial assets, the Fed, playing the part of the shepherd, has encouraged investors to herd like sheep. Read More

The Millennials Demographics have long shaped the consumption curve in the economy, which in turn impacts the capital markets. Today, the most relevant demographic trend in the United States is the millennial cohort, a large and influential group who stand to reshape the consumer economy. They are a unique generation of digital natives who have embraced technology in almost every aspect of life which has pricing, branding and market share implications for consumer companies. As Millennials increasingly exert their influence, it is imperative for companies to develop successful strategies as traditional competitive advantages will be challenged. Likewise, by understanding the Millennial mindset, investors can better understand both the risks and opportunities for consumer based business models, the durability of cash flows and the resulting asset valuation. Read More

A number of prominent members of the investment industry have recently highlighted the decline in market liquidity, observations with which we generally agree. Many have focused on the more limited ability of banks and brokers to provide liquidity under revamped regulatory regimes. Some have also noted the potential challenges that might arise should we see a reversal of the flows into fixed income funds that promise daily liquidity while holding portfolios of less liquid assets. When insurance companies are mentioned in these discussions at all, they are generally cited as a more stable source of demand for fixed income investments. We expect this to be the case and believe that, in aggregate, insurance companies should be uniquely positioned to take advantage of any dislocations that develop. Read More

Fear or Greed? For much of 2012 through 2014, investors clearly chose greed as the S&P 500 Index rallied 16%, 32%, and 14% interspersed with the occasional mini-bout of caution. In September of last year, fear made an appearance, pounding on the door like the wolf in the proverbial fable and threatened to blow the house down. The combination of a spiking dollar, a slowing global economy, especially in emerging markets, and sharply declining crude oil prices sent the markets into turmoil. Since then, U.S. equity markets have oscillated between fear and greed, with heavy selling followed by buying strength, only to retrace downward with more selling. Clearly, the equity markets are experiencing crosscurrents and investors are vacillating with the tidal change of news headlines. Read More

Interest rates are low, equity markets are volatile and both are likely to remain so. Purveyors offering favorable, even “superior,” returns from alternative investments are energized. However, their motivations may not align with the best interests of their customers. Read More

The Detroit municipal bankruptcy in 2013 was the largest in U.S. history, by far. Eighteen months and $170 million in legal fees later, the beleaguered city exited bankruptcy. Monetary losses were spread across creditors, including deep cuts for certain classes of bondholders. This landmark case offers a very public and large glimpse into the murky world of municipal bankruptcy. Read More