Did You Know...
The Comprehensive Capital Analysis and Review (CCAR) results will be released on Thursday, June 28th. As part of the Dodd-Frank Act, the Federal Reserve Board performs an annual review of the capital adequacy and capital planning practices of the largest domestic and foreign bank holding companies. It is a process in which the banks are seeking approval to return capital to shareholders under the plans submitted. Banks then typically disclose their dividends, share repurchase plans, and issuance for the next four quarters. As a result, holders of bank bonds and preferred equity are in a favorable position to benefit from the regulatory system of checks and balances which the Fed provides.
The financial industry is one of the only industries that may be restricted as to the amount of dividends paid to common shareholders on the basis of passing severe stress test scenarios chosen by the Federal Reserve. Very few industries have this type of regulation. So, why does this matter? This matters because stress testing ensures that these companies have sufficient capital not only to survive the most adverse of market environments, but also to retain a portion of their earnings for the future, thus providing more protection for bondholders.
This year’s Severely Adverse Scenario stress test includes a US real GDP decline of 7.3% below the pre-recession peak, an unemployment rate of 10%, headline CPI falling below 1%, equity prices falling by 65%, the VIX moving above 60%, housing prices falling 30% and commercial real estate prices falling 40%. This scenario also includes an international component of a sharp global downturn with a number of countries experiencing severe recessions.
What are we thinking?
When investing in fixed income, all facets of the sector should be analyzed. CIP’s financial exposure, about 21% of the portfolio, incorporates both investment grade corporate bonds and investment grade preferred securities.
From CCAR results to the ECB buyback program, trade disputes, and thoughts of the US economy entering a late-cycle boom, there are plenty of concerns plaguing the fixed income world. As active managers we monitor these events and seek to provide value by filtering out the noise, and making reasonable and informed decisions.
Barclays, June 2018, CCAR 2018 Preview: Expect Sound Results under More Severe Scenarios
Barclays, June 2018, CCAR Preview 2.0: Meaningful capital return despite tougher scenario
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.
Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.
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