NEAM Insights

Potential tax changes appear aggressive for both individuals and corporations, yet tax-exempt municipal bond valuations are unlikely to change substantially relative to taxable alternatives. Market segmentation, specifically with respect to individual investors, should help keep municipal valuations in check. Regardless, corporate tax cuts would result in less favorable tax-adjusted muni yields for institutional investors though still competitive relative to taxable bond alternatives. Read More

A Global Problem It’s no secret that developed nations around the world are collectively wrestling with the unenviable dilemma of aging populations, rising entitlement costs, and paltry economic growth. Amidst this, government pensions have come under increased focus as central banks around the world suppress interest rates. Read More

In revisiting our previous analysis of declining P&C industry book yields, we have been interested to observe how closely actual figures have followed forecast. In addition, the future trajectory is more concerning than last year’s trajectory, as a flattening of the yield curve in 2016 has created a greater likelihood of continued degradation for years to come. Insurance companies continue to struggle with a low interest rate environment, forcing them to look for creative ways to stem the decline in book yields. Read More

Background On September 16, 2008 the investment industry saw the first retail money market fund “break the buck.” The Reserve Primary Fund held $785 million of Lehman Brothers Commercial Paper that was rendered worthless when Lehman filed for bankruptcy. Even though the holdings represented less than 1.5% of the fund, investors worried that other commercial paper issuers held within the fund might suffer the same fate. Read More

At the beginning of this year, we wrote a piece called “The Song Remains the Same.” The basic message of the article was that we should expect the current environment of slow economic growth and low interest rates to persist. Given that developed world economies continue to struggle with structural issues such as large debt burdens and aging populations, we believed, at the time, that global monetary authorities would continue with their extraordinarily accommodative programs and that interest rates would likely stay at (or near) their historically low levels. In short, we did not see a lot to get excited about. Our return expectations for the year were modest and our general view of the risk/reward tradeoff in capital markets was uninspiring. Read More

Earnings for U.S. corporations have been sluggish for the past six quarters. This has been largely influenced by the collapse in crude oil prices and the strong U.S. dollar which has negatively impacted foreign exchange translation for companies generating business overseas. Additionally, earnings reflect the low nominal growth backdrop and the aging business and credit cycle. Read More

In a word association game, what comes to mind in response to the word “hybrid”? Your first thought might be a new breed, species or perhaps a Toyota Prius. The connotation is likely positive, as the concept suggests a combination of desirable characteristics from its contributors. Would your impression change if the term was a hybrid of two financial instruments? Before you answer, consider the following. Read More

Cable television operators’ main source of revenue is under attack from several disruptive factors, including new providers of program content, more convenient and faster means to deliver that content as well as mobile devices that can deliver high quality video. These disruptors have had a double-edged effect on both the profitability and credit quality of bonds issued by the larger cable players. Below we examine the implications of these new technologies. Read More

UK Prime Minister David Cameron announced that the UK will hold a referendum on continued EU membership on June 23, 2016. Voters will be asked a straightforward question – Should the UK remain a member of the European Union or leave the European Union? It may be a straightforward question but the implications of the vote for the UK, Europe and the rest of the world are enormous – economically and politically. The prospect for Brexit – British exit from the EU – is an issue all investors and corporations need to be aware of this year. The UK currency, the British Pound, has recently weakened against the US Dollar and the Euro. UK credit has underperformed and foreign demand for UK Government bonds has been weaker. This weaker pricing of UK assets is likely to continue until the referendum takes place. Read More

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