7 Financial Planning Lessons for Life Following COVID-19

Published on May. 25, 2021

April 2021: American Funeral Director “7 Financial Planning Lessons for Life Following COVID-19” by Tim Hermann

COVID-19 disrupted many aspects of our everyday financial lives, whether in business, personal finance or estate planning. Many of us would prefer to forget the challenges and losses of the last year and just move on. I get that – but before you wipe the slate clean to start the new year, I think it’s useful to consider what lessons we can walk away with. For savers, spenders and investors, I’ve got seven lessons to share.

Read the Full Article Here

Source: Published in American Funeral Director Magazine

April 15, 2021: Update on Financial Markets – 2021: The Year of Reopening

Published on Apr. 16, 2021

April 15, 2021: Update on Financial Markets – 2021: The Year of Reopening

Jason Benowitz, CFA, CMT®, Senior Portfolio Manager and Richard Konrad, CFA, CFP®, Director of Value Strategy, sit down to discuss:

  • Covid-19: the light at the end of the tunnel grows brighter
  • Fiscal Policy: short-term support and long-term debate
  • Interest Rates: you can have too much of a good thing

Jason Benowitz Featured in Reuters “US STOCKS-Wall St ticks lower in choppy trading ahead of Fed minutes”

Published on Apr. 8, 2021

Jason Benowitz Featured in Retuers “US STOCKS-Wall St ticks lower in choppy trading ahead of Fed minutes”

“The Fed leadership has generally not been concerned with the recent rise in interest rates, suggesting it reflects a pickup in growth rather than inflation. Any signs of inflation is … generally expected to be transitory,” said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group in New York.

Read the Full Article Here

February 2021 Memorial Business Journal: “Financial Market Update: What Will 2021 Bring?” by John Roscoe

Published on Feb. 14, 2021

February 2021: John Roscoe Featured in Memorial Business Journal “Financial Market Update: What Will 2021 Bring?”

To paraphrase a famous line by author Charles Dickens: “2020 was the best of times, and it was the worst of times.” In fact, 2020 might end up being recorded as one of the wildest in history for investors.

Read the Full Article Here

Jason Benowitz Featured in TD Ameritrade Network “On the State of the Economic Recovery”

Published on Feb 12, 2021

Jason Benowitz Featured in TD Ameritrade Network “On the State of the Economic Recovery”

Jason Benowitz says that the path of the economy and capital markets will be determined by the path of the virus as the Fed and its global brethren continue to backstop the capital markets.


Watch the full video here
The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

Reddit Mania Overshadows Outstanding Earnings Season for Tech

Published on Feb. 6, 2021

Febuary 2021 Jason Benowitz’s commentary featured in Bloomberg: “Reddit Mania Overshadows Outstanding Earnings Season for Tech”

Anyone distracted by the Reddit-fueled circus in stocks this month may have missed an important fundamental story: A stellar earnings season for technology companies that helped the group’s shares outperform the market once again.

Read the Full Article Here

Update on Financial Markets – A Stand-out Year – What We Think 2021 Will Bring

Published on Jan. 21, 2021

January 21, 2021: Update on Financial Markets – A Stand-out Year – What We Think 2021 Will Bring

John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss:

  • Overview: Looking back at 2020 and an early outlook on the economy and markets in 2021
  • Covid-19: An update on our thoughts
  • U.S. Election: Ramifications for stocks and bonds

December 2020: Jason Benowitz, CFA Appeared on CNBC: Investors will be pleased U.S. stimulus package has passed, strategist says”

Published on Dec. 21, 2020

December 2020: Jason Benowitz, CFA Appeared on CNBC: Investors will be pleased U.S. stimulus package has passed, strategist says”

Jason Benowitz, senior portfolio manager at The Roosevelt Investment Group, discusses the U.S. stimulus package and the possible market reaction.

CNBC main video page here

“Wall Street Braces for 2021 Oddity: Tech Stocks in the Back Seat” Jason Benowitz’s commentary featured in Bloomberg

Published on Dec. 15, 2020

December 2020 Jason Benowitz’s commentary featured in Bloomberg: “Wall Street Braces for 2021 Oddity: Tech Stocks in the Back Seat”

As 2021 approaches, many on Wall Street are bracing for unfamiliar territory: A year when technology companies may not be the biggest stars of the stock market.

Read the Full Article Here

After a Challenging Year, It’s Time to Prepare for 2021

Published on Dec. 8, 2020

After a Challenging Year, It’s Time to Prepare for 2021

2020 has been a difficult year for many families, particularly those directly affected by the pandemic. The U.S. presidential election also weighed heavily on many, no matter the outcome. At the end of the day, just about every American is ready to turn the page and get positioned for a fresh start to the new year.

For investors, that means now is a good time to start making preparations, and Roosevelt Investments has five suggestions for getting ahead.

Read the Full Article Here

“Clash of consoles: New PlayStation and Xbox enter $150 billion games arena – fight!” Jason Benowitz’s commentary featured in Reuters

Published on Nov 30, 2020

November 2020 Jason Benowitz’s commentary featured in Retuers: “Clash of consoles: New PlayStation and Xbox enter $150 billion games arena – fight!”

Think Michelangelo vs Da Vinci. Muhammad Ali and Joe Frazier. Batman v Superman. Another epic rivalry is rejoined this week when Sony and Microsoft go head-to-head with the next generation of their blockbuster video-game consoles.

Read the Full Article Here

Update on Financial Markets – Investing Into Year End and Initial Thoughts on 2021

Published on Oct. 15, 2020

October 15, 2020: Update on Financial Markets – Investing Into Year End and Initial Thoughts on 2021

Jason Benowitz, CFA, Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss Roosevelt Investments’ thoughts on:

  • Update: financial markets
  • COVID-19: lockdown, reopening, and second wave risk
  • U.S. Election: the run up and the aftermath
  • Fed Policy: from crisis management to recovery support

September 2020 | Equity Commentary

Published on Oct. 9, 2020

September 2020 | Equity Commentary

Market Overview

Overall, markets enjoyed a strong third quarter, with the S&P 500 returning close to 9% for the period. While July and August saw robust gains, the index closed out the quarter on a weaker note, falling nearly 4% during September. In our view, this reflects an economy which is transitioning from a strong rebound phase following the pandemic-plagued second quarter, to a slower, more normalized pace. With the election just around the corner, the political environment remains highly uncertain and volatility is elevated. We continue to believe that a balanced, well diversified portfolio is the best way to navigate today’s capital markets.

Recent economic data releases have generally been favorable, in our view. The housing market continues to be robust. The NAHB home builder survey and pending home sales recently hit all-time highs, and existing and new home sales are at their best levels since 2006. We do think that low housing inventories may be a constraining factor going forward, but for the moment the market remains quite strong. Consumer confidence is also strengthening, as both the University of Michigan and The Conference Board indicators for September came in at the best levels since the pandemic hit the U.S. We are also seeing continued improvement in the automotive industry, as vehicle sales have exceeded expectations every month since April.

Other releases have been more mixed. September manufacturing surveys indicate that growth may be moderating as both the ISM and Markit surveys came in below consensus expectations. However, they remained in the mid-50s range, a healthy level, in our view. ISM’s service sector reading for September looked relatively stronger, as it surprised to the upside and came in near its post-pandemic high. The September jobs released is appointed, as job creation slowed to about 661,000 for the month. However ,much of the decline was in government employment, while the private sector fared better.

We believe these indicators collectively suggest that the economy may now be in a transition phase, perhaps regressing back towards the low single digit GDP growth that has been typical in recent years. We expect that GDP growth for the third quarter will be exceptional, but certainly not sustainable, as it will reflect there bound from the historically weak second quarter. Therefore, the recent deceleration in job growth and manufacturing should not be viewed as anything beyond what one would normally expect from an economy which is transitioning from a sharp rebound phase to a more normalized, lower growth environment.

The Federal Reserve held its latest FOMC meeting last month, and our takeaway is that the committee was dovish on interest rates, but perhaps less so with regards to asset purchases. On rates, the Federal Reserve noted its intention to maintain its current stance until maximum employment was reached, and inflation was on track to exceed 2% for a sustained period. Given that the committee doesn’t expect these conditions to be met until the latter part of 2023, the implication is that interest rates are likely to remain near zero for the next couple of years. There was some disappointment, however, that the Federal Reserve did not provide additional guidance

around its pace and scope of asset purchases. We think that it’s possible that committee members refrained from doing so to maintain pressure on Congress to pass another stimulus bill. Inaction may also reflect a view that further monetary stimulus is less impactful while new U.S. cases are elevated, which might push the Federal Reserve to conserve its firepower. Still, we do expect that should the economy weaken, that the Federal Reserve would ultimately ramp up its asset purchases, so as to advance its mandate of promoting maximum employment.

Typically, at this point early in an economic recovery, we would expect small cap, value, and cyclical stocks to be leading the market, but for the most part this has not been the case. We think that the reason is the high degree of uncertainty in the current environment, given the turbulent political landscape as we approach the election, and the persistence of COVID-19. On the former, the uncertainty has only increased with the recent passing of Justice Ruth Bader Ginsburg and the on going attempt to confirm her successor on the Supreme Court, and President Trump’s hospitalization for the coronavirus. Moreover, with COVID-19 case counts again on the rise across much of the country, it remains possible that economic activity will continue to be impacted. In this regard we note that several states are currently in the process of reversing prior re-openings due to worsening coronavirus conditions. On the other hand, we are optimistic that an effective vaccine would give a material boost to economic activity and market sentiment.

We do expect that at some point, should these risks moderate and the expansion prove sustainable, that these aforementioned sectors of the market will begin to out perform. A successful passage of an additional stimulus bill would also likely benefit these types of stocks disproportionately, in our view. However, we believe that the most prudent strategy to navigate these turbulent currents is to take a diversified, balanced approach. We continue to own shares of companies that we expect should perform well as economic growth recovers, but we also maintain positions in companies that we think would be relative out performers should rising COVID-19 cases necessitate further shutdowns, resulting in weaker economic activity.

As of September 30, 2020

Weighing the Impact of a Historic U.S. Presidential Election

Published on Oct. 1, 2020

Weighing the Impact of a Historic U.S. Presidential Election

The 2020 U.S. presidential election is fast approaching. No matter what your political orientation, this election cycle probably feels highly consequential and filled with uncertainties. And as if the election wasn’t enough, there is still a pandemic looming in the backdrop with an economy fighting to regain footing.

As the old saying goes, never a dull moment.

Read the Full Article Here

Thoughts Ahead of the Federal Reserve Meeting

Published on Sep. 9, 2020

Thoughts Ahead of the Federal Reserve Meeting

We believe there may be more uncertainty around the Federal Reserve’s upcoming mid-September Open Market Committee meeting than is typical. It will be the first committee meeting since last month’s virtual Jackson Hole meeting, at which the Federal Reserve announced revisions to its statement on longer-run goals and monetary policy strategy, and it is the last scheduled meeting before the U.S. election in November. We see four main possibilities as to what actions the Federal Reserve may take at this meeting: (a) provide forward guidance on the Federal Reserve Funds rate; (b) provide forward guidance on its asset purchase program; (c) provide both; or, (d) do nothing. We believe any forward guidance provided would be outcomes-based, meaning it would commit the Federal Reserve to an action until an economic target is achieved, rather than until a specified time has elapsed. The purpose of any Federal Reserve action would likely be to pivot from crisis management to a policy that may support and sustain the nascent economic recovery.

Read the Full Article Here

“Not Even Thinking About Raising Rates”

Published on Aug. 27, 2020

“Not Even Thinking About Raising Rates”

Thus said Fed Chair Jay Powell this past June. But what exactly does this mean and why did he say it?

It’s all about inflation. That is, the inflation we don’t have. Missing in action. The Fed actually desires some inflation, at least a little, generally defined as 2%. Those old enough to recall serious thinking about inflation during Paul Volcker’s tenure in Powell’s seat at the Fed remember inflation being described as a catastrophe. Nothing crushes bond holder returns like unexpected inflation. Nothing damages consumer spending like inflation when personal income is constrained. Facing this, Volcker used the interest rate tool to crush it. Further, he broadcast the message that the Fed always stood ready to do so again. Given that, realistically, inflation hasn’t made much of an appearance since that period from the late 1970s to the early 1980s.

Why would the Fed want to rekindle it?

Read the Full Article Here

“Crown shareholders express patience amid activist pressure for fiber sale” Jason Benowitz’s commentary featured in DealReporter

Published on Aug 26, 2020

August 2020 Jason Benowitz’s commentary featured in Dealreporter: “Crown shareholders express patience amid activist pressure fiber sale”

Source: Dealreporter, An Acuris company

Read the Full Article Here

July 2020 | Equity Commentary

Published on Aug. 11, 2020

July 2020 | Equity Commentary

Market Overview

Stocks began the 3rd quarter on a strong note, with the S&P 500 returning about 5.6% for July. We believe that economic data continued to stabilize during the month, and 2nd quarter corporate earnings have thus far come in well ahead of investor expectations. Covid-19 remains a key risk factor for stocks and the economy moving forward. While uncertainty remains elevated, we expect that Congress will soon pass another round of fiscal stimulus, and we believe that the Federal Reserve will maintain its accommodative monetary policies for the foreseeable future.

Most key economic data releases have exceeded consensus expectations over the last several weeks. July ISM surveys (both manufacturing and non-manufacturing) made month-over-month gains, continuing the trend of June’s improvement, and moving back to levels we believe to be consistent with economic expansion. This strength looks to have been confirmed by the Federal Reserve’s regional manufacturing surveys for July which came in at robust levels. Moreover, recent readings on industrial production, durable goods orders, and retail sales have all come in ahead of economists’ projections.

In our opinion the housing market also appears quite healthy. While housing typically lags during recessions, the increased time spent at home due to Covid-19 has motivated many consumers to make meaningful investments in their homes. We have also seen that Covid-19 has led to an increase in demand for houses in the suburbs and more rural areas. These factors, along with the significant decline in mortgage rates, appear to be a boon for the industry. This is not only showing up in the economic data, with metrics such as the NAHB homebuilder survey and existing home sales showing strength, but we are also hearing positive indications from housing suppliers. Paint producers, pool companies, and HVAC systems providers are a few examples of housing-related businesses which have noted the robust condition of their end markets on recent industry conference calls.

Not all the economic data has been positive. A headline grabber was the recently released 2nd quarter GDP, which came in at an historically weak approximate 32.9% annualized decline. However, we were not overly concerned by this reading given that it was widely expected and is also a backward-looking indicator. Clearly the 2nd quarter was an ugly one due to Covid-19-related shutdowns, but it also seems evident that the economy has strengthened considerably since then. Perhaps of greater concern are the weekly unemployment claims numbers, which have remained stubbornly high, and have in fact increased in recent weeks after having been steadily declining since late March. We believe the volatility in weekly unemployment data is likely the result of the jump in new Covid-19 cases which began during the latter part of June and continued to increase through July. It seems evident to us, that Covid-19 continues to impact economic activity. Fortunately, the growth in new cases and hospitalizations appear to have declined during the latter part of July, and we are optimistic that the economy can resume its rebound should this favorable trend prove to be sustainable.

With a large majority of S&P 500 companies having reported their 2nd quarter profits, aggregate earnings are coming in well ahead of what were admittedly very weak expectations. Companies appear to be exceeding top line estimates by a couple of percentage points, but the highlight to us, is on the bottom line where average corporate earnings are beating expectations by over 25 percentage points. Many companies have also noted the positive linearity of the quarter, whereby there was sequential improvement in business conditions each month. Still, many companies have not given forward guidance, highlighting the fact that the environment remains quite challenging to predict due to the lingering pandemic.

As we look forward, we note that conditions remain highly uncertain. Clearly Covid-19 is playing a large role in this uncertainty, but other factors are at play as well. As of this writing, Congress has yet to agree on another Covid-19 relief package. We think that it is crucial that another bill is passed to support the consumer as well as state and local governments, and that economic activity is likely to suffer otherwise. While it is unfortunate that the issue remains unresolved, we do expect that there will be a favorable resolution in the near term.

The election represents another source of uncertainty and volatility for investors. The outlook for tax, regulatory, and other policies will vary materially depending on the outcome. Markets tend to weaken prior to and strengthen in the aftermath of elections. In our view this is likely a function of the greater clarity that investors gain once the election is over and leadership is established.

As a result of these uncertainties, we continue to think that a diversified portfolio is the best approach to navigating capital markets. In our view, the two most likely scenarios for markets going forward include one in which economic activity continues to improve, and another characterized by weakness resulting from the continued spread of Covid-19. Under the first scenario, we would expect that cyclical stocks would be among the winners, while we believe that tech stocks with secular tailwinds, and more traditional defensive holdings would outperform under the 2nd, weaker growth scenario. Given the difficulty of predicting the future course of Covid-19, we maintain our barbell approach whereby we are investing for both outcomes, focusing our efforts on ensuring that our portfolios can do well under either scenario, as opposed to making a large macro bet one way or the other.

As of July 31, 2020

Update on the Financial Markets & Economic Impact of COVID-19

Published on Jul. 29, 2020

Update on the Financial Markets & Economic Impact of COVID-19

In our quarterly update, John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager, discussed our thoughts on the financial markets, the evolving impact of the COVID-19 pandemic, and answered questions live.

John Roscoe, CFA, Chief Investment Officer and Senior Portfolio Manager and Sean Sokolowski, Investment Counselor, sit down to discuss:

  • Our thoughts on the financial markets
  • The evolving impact of the COVID-19 pandemic

Second Quarter 2020 | Fixed Income Commentary

Published on Jul. 20, 2020

Second Quarter 2020 | Fixed Income Commentary

Market Overview

Domestic financial markets rallied across the spectrum during the second quarter of 2020. Equity indices had their strongest quarter since 1987. Fixed income credit spreads rallied, recording their second-best quarter since 2005. We believe that the re-opening of state and local economies led to a resurgence in economic activity that beat expectations over May and June. The unemployment rate, after reaching an eighty-year high of about 14.7%, dropped to an estimated 11.1%. Other economic indicators such as consumer confidence, consumer and business spending, housing starts, as well as surveys of manufacturing activity, surprised to the upside over the past two months.

The Current Income Portfolio separately managed account returned 7.30% during the second quarter, as declines in interest rates and credit spreads helped push up the prices of corporate bonds and preferred securities, while having less of an effect on government bonds. We believe that the decline in bond yields came from a reversal in risk sentiment as financial markets digested the monetary and fiscal stimulus programs set up in response to the pandemic.

In March, the Federal Reserve re-emerged as the lender of last resort, introducing $2.3T in monetary stimulus programs to restore liquidity and financial stability to the markets. In doing so, the Federal Reserve expanded its asset purchasing program to include ETFS and corporate bonds, in addition to the approximate $120B of government and agency securities it currently buys each month. The program, known as the Secondary Market Corporate Credit Facility (SMCCF), began buying high quality corporate bond ETF’s on May 16th, at a pace of about $300M per day, and individual high quality corporate bonds on June 17th, albeit at a slightly slower pace. The entire amount of secondary market ETF and corporate bond purchases currently stands at approximately $6.8B as of June30, with the ability to go up to about $750B if needed. This extends an incredible amount of support to the investment grade fixed income market, as corporate bond purchasing has just begun and the Federal Reserve is already the second largest holder of Vanguard’s Short-Term Corporate Bond ETF (VCSH), and third largest holder of the iShares Investment Grade Bond ETF (LQD).

The Federal Reserve, however, has not been alone in buying U.S. corporate bonds this year. Even as companies have issued record amounts of new debt to shore up liquidity on their balance sheets, the issuance has been met with equally strong investor demand. Fixed income buyers have absorbed over $1T in new supply year to date; which, in turn, has helped send credit spreads on intermediate investment grade bonds lower by over 150bps during the second quarter.

With signs of a V-shaped recovery emerging from economic data and subsequently called into question as the number of new COVID-19 infections is rising, we believe the outlook for the economy as a whole for the rest of the year remains uncertain. The outlook for investment grade fixed income markets, however, is much more favorable, in our opinion. The current support from the Federal Reserve should serve as a significant backstop and important distinction between high grade and high yield fixed income markets going forward. High yield markets also happen to be concentrated in segments of the market that we see as more susceptible to an economic downturn, such as the consumer cyclical and energy sectors. Investment grade companies, on the other hand, are generally larger, more diversified, less levered and more concentrated in defensive sectors. This, coupled with the recent message delivered by Federal Reserve Chairman Powell saying, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” could provide for a benign and favorable interest rate environment for high grade fixed income for the foreseeable future.

In our view, the Current Income Portfolio is well positioned to deliver consistent and reliable income regardless of the economic uncertainty that prevails. We believe our risk-conscious approach to portfolio construction ensures a balance between enhancing income without taking on excessive risk to do so. We continue to navigate the financial markets’ ups and downs while attempting to provide investors with high quality risk-adjusted returns.

May 27, 2020: Jason Benowitz, CFA was quoted in the Bloomberg article, “Wall Street Banks Get a Surprise: Investors Like Virtual Events”

Published on May 27, 2020

May 27, 2020: Jason Benowitz, CFA was quoted in the Bloomberg article, “Wall Street Banks Get a Surprise: Investors Like Virtual Events”

Read the Full Article Here

Jason Benowitz, CFA was quoted in the Reuters article, “Stocks Rally, S&P Crosses 3000 Barrier, Oil Gains”

Published on May 25, 2020

May 25, 2020: Jason Benowitz, CFA was quoted in the Reuters article, “Stocks Rally, S&P Crosses 3000 Barrier, Oil Gains”

Read the Full Article Here

Update on the COVID-19 Pandemic & Financial Markets

Published on Apr. 22, 2020

Update on the COVID-19 Pandemic & Financial Markets

On April 22, 2020, Jason Benowitz, CFA, Senior Portfolio Manager, discussed updates on the financial markets, the widespread effects of the COVID-19 pandemic, and answered questions live.

Watch Here

First Quarter 2020 | Fixed Income Commentary

Published on Apr. 21, 2020

First Quarter 2020 | Fixed Income Commentary

Market Overview

The first six weeks of 2020 saw a continuation of the momentum with which the U.S. economy exited 2019, but that hardly seems relevant anymore. The spread of the novel coronavirus from China’s interior in December to a worldwide pandemic in March has upended the global economy and capital markets in unprecedented fashion. Public health efforts to stem transmission have appeared to rapidly suppress economic activity. Weekly unemployment claims have soared past prior recessionary highs. Swift financial market declines across asset classes reflect these realties. We believe the massive fiscal and monetary stimulus packages brought forth by U.S. and global authorities offer some hope of ameliorating the stark economic fallout and supporting a recovery once restrictive social distancing measures are permitted to subside. In our view, this was reflected in price appreciation off the lows in most risk assets beginning in late March.

A second blow to economic growth and financial markets occurred when two groups of nations led by Saudi Arabia and Russia struggled to agree to reduce crude oil production in response to declining demand for fuel. While the OPEC+ parties ultimately agreed to production cuts, the scale of their action appears to us insufficient, and crude prices remain at multi-decade lows, with economic impacts reverberating across the global supply chain.

Turning to the U.S. fixed income markets, quarterly performance across fixed income sub-groups reflected the impact of the pandemic and crude oil shocks. There was a flight to quality, with U.S. Treasuries and the highest quality corporate bonds acting as one of the few safe havens in this crisis period, while spreads to the weakest-rated credits widened the most. Within the U.S. corporate investment grade universe, an index of intermediate-term AA-rated bonds returned about 1.0% while A-rated bonds lost about 1.0% and BBB-rated bonds lost approximately 6.2% in the first quarter. By sector, the decline in U.S. intermediate-term investment grade corporate bonds was concentrated in the energy sector, which declined about 18.6%, and the real estate sector, which declined about 5.8%, as compared to the broader group’s approximate 3.2% decline. Notably, the financial sector held in well, declining just about 1.7%, possibly reflecting the strong capital positions of the banks heading into the crisis, as well as the reduction of claims activity expected in the insurance sector across property, casualty and health. Finally, in terms of capital structure, preferred securities underperformed corporate bonds, as investors in their flight to quality punished holdings with subordinated positions. An index consisting of fixed-rate preferred securities declined about 8.8%, and the most widely held preferred securities exchange-traded fund declined about 14.6%. In addition, fixed-to-float preferred securities generally underperformed their fixed-rate counterparts due to the decline in interest rates in the quarter.

In mid-March, during the period of steepest price declines, amidst what may have been panicked or forced selling by leveraged investors, the fixed income markets appeared to have seized, and failed to properly function. Bid and ask spreads widened, and little volume was available for purchase or sale, even at what seemed like costly quoted prices. Alarmingly, this occurred across U.S. Treasury and agency-backed mortgage securities markets, usually the most liquid markets globally, as well as the intermediate corporate bond and preferred securities markets where we typically trade. The Federal Reserve’s emergency interventions, which included outright purchases of Treasuries and agency MBS in unlimited amounts, and facilities to finance securities held by primary dealers, commercial paper, and corporate and municipal bonds, have steadily restored market function, and with it, we believe, investor confidence. When markets seized, our portfolio managers and traders tread carefully to ensure that purchases and sales on behalf of clients were transacted at or near our best estimates of fair value. Presently the Federal Reserve interventions have largely stabilized the investment grade corporate and exchange-traded preferred markets, and while the institutional, thousand-dollar preferred sector continues to face some challenges, it too appears to be gradually normalizing. In our view, it is not surprising that this market would lag in its return to normalcy, given its specialty nature and relatively short trading history.

Outlook

We believe the outlook for the economy and financial markets in the near term is largely dependent on three variables. The first is the path of the virus. We continue to observe daily growth in new case counts slowing in the U.S. and other major markets. This suggests the second key variable, the speed at which public health measures may be lifted, also holds some promise. The end of the lockdown economy in the U.S. is likely to require additional testing capacity and could be further supported by the development of therapeutic interventions such as antivirals or vaccines. The final variable is the depth and breadth of the government response. The Federal Reserve has demonstrated that it will support markets during this time of turmoil. However, there is uncertainty as to the scope, timing and magnitude of additional fiscal stimulus, which may ultimately be required to support risk assets.

The downturn we are experiencing now can be deep but short-lived if public health measures and government stimulus are sufficient. It could be longer-lasting if viral transmissions rebound, political obstacles limit further stimulus, or consumer demand shortfalls push more businesses to shutter. The path forward is uncertain, and we are closely monitoring reports from public health, economic, political and financial domains to inform our evolving outlook for credit. That said, the extraordinary commitment demonstrated by the Federal Reserve to support high grade borrowers provides us with some confidence that the worst-case financial scenarios are unlikely to unfold.

March 2020 | Equity Commentary

Published on Mar. 31, 2020

March 2020 | Equity Commentary

Market Overview

Stocks had a tumultuous start to the year, as coronavirus-driven fears took the S&P 500 down about 20% for the 1stquarter. We are optimistic that fiscal and monetary stimulus programs should help to mitigate financial and economic stress. Still, we think it is likely that financial markets will remain volatile until investors gain comfort that the pandemic has begun to run its course.

Capital markets took their cues from the continuing spread of Covid-19 during the first quarter, as stocks declined and Treasury yields plunged to all-time lows. We believe investors were repricing markets to account for the increasing likelihood of recession, as large parts of the economy remain on pause due to the social distancing and other preventative measures that governments have enacted. Economists are currently forecasting mid-single digit GDP declines for the US for the 1stquarter, and much steeper drops, potentially 20% or greater for the 2ndquarter. Many economist projections are calling for a sharp rebound over the back half of the year, though we believe this will largely depend on the duration and extent to which the virus curtails business activity.

The duration of the pandemic is the key variable in our view. The longer that the virus takes to run its course, the deeper the recession is likely to be, which could start a vicious cycle whereby consumers minimize spending which further weakens businesses, leading to less corporate expenditures and hiring. However, if the social distancing measures currently in place are effective in minimizing the spread of the virus, we think a bull case scenario is possible whereby economic activity is largely back on track over the medium term.

We are encouraged by the fiscal and monetary stimulus programs which have been put in place. We think that the federal government and central bank have learned valuable lessons from the 2008 financial crisis, when in our view they could have acted sooner and more aggressively. In response to the impacts of Covid-19, the Federal Reserve quickly brought interest rates down to near zero, and enacted a litany of programs to improve the flow of credit to the economy and support liquidity in financial markets. The Federal Reserve’s unrestrained quantitative easing program is unprecedented in the history of US monetary policy, as are the newly implemented plans to make direct loans to, and purchase bonds issued by, investment grade corporations. We are already seeing the benefits of these actions as liquidity has improved materially in fixed income markets. With regards to the $2.2 trillion fiscal stimulus plan, we think direct payments and the increase in unemployment benefits will work to quickly deploy funds to consumers in need during this period when so many are at least temporarily unemployed. We also think it is crucial to support small businesses and are therefore encouraged that the fiscal package includes about $350 billion of loan guarantees via the SBA as well as almost $450 billion of funds to support Federal Reserve credit facilities, including an expected Main Street Business Lending Program for small and mid-size companies.

We caution, however, that providing relief for small businesses across the country will be no easy task. The sheer number of companies in dire need will make the logistics of disbursing loans quite challenging. Moreover, we think that the application process needs to be as simple and streamlined as possible so as not to exclude companies that do not have the time or resources to devote to filling out pages of financial questions. It is also conceivable that the amount currently allocated to support these loan guarantees will be insufficient and we would therefore not be surprised if further rounds of stimulus are required. A final note to consider is that while these stimulus programs are intended to buffer the economy, we think it is highly unlikely that they will enable it to avoid a recession. An economic contraction seems largely unavoidable at this point, though we think that its duration and magnitude will be far less severe than what would have been the case without government and central bank intervention. This potential recession could be the first in history which came about not as the result of an economic slowdown but because it was effectively mandated by the government in its efforts to slow the spread of a pandemic.

While these are challenging times to be navigating capital markets, we do not see any reason to be selling indiscriminately. Just as the stock market’s recent decline was sudden and sharp, we believe that as signs of the pandemic abating emerge, the rebound could be similarly rapid. We entered the quarter with a defensive tilt to our portfolios, which we modestly increased in early February, and we continue to believe that is a prudent way to be positioned given the inherent uncertainties in the current environment. However, we have also begun to take new positions, or add exposure to holdings of companies whose stocks have sold off with the market and that we believe are now trading at attractive prices. It is impossible to know exactly to what extent, and for how long, the pandemic will dampen economic activity. We need to be cognizant of this uncertainty while making our investment decisions, but we also believe in the resilience of the American economy, and despite the potential for more short-term volatility, we maintain our optimism on US stocks over the medium term.

Unlimited Quantitative Easing

Published on Mar. 24, 2020

Unlimited Quantitative Easing

The Federal Reserve announced a number of actions Monday morning, several of which appear to be unprecedented. Overall, in our view, these are steps in the right direction.

The Federal Reserve expanded its authority to purchase U.S. Treasury and agency mortgage-backed securities in unlimited amounts. The Federal Reserve also added agency corporate mortgage-backed securities to this program, which are loans against multifamily housing units. It similarly broadened its Money Market Liquidity Facility to include more complex municipal debt structures that were not initially covered.

The Federal Reserve also revived the Term Asset-Backed Securities Loan Facility (TALF), a tool it used in the 2008 financial crisis. This facility lends against consumer debt including credit card, auto and student loans, as well as qualified Small Business Administration loans. This will enable banks to continue to lend to consumers, since it knows it can pledge these loans as collateral to the Federal Reserve.

To support the investment grade corporate bond market, the Federal Reserve created two new facilities: one to lend to investment grade corporate borrowers, and another to purchase investment grade corporate bonds and exchange-traded funds that hold those bonds. This is unprecedented. But we know from our own experience at Roosevelt that these markets are not functioning properly. Earlier steps to improve functioning in related fixed income markets were not enough to restore liquidity.

We believe it was appropriate to include exchange-traded funds in this program, since they are an important conduit for liquidity in this market.

We do have concerns that the TALF, corporate bond and ETF facilities may not be enough to stabilize these large markets, and therefore, we believe it is possible the Federal Reserve will have to expand these programs. As a result, we believe it may be necessary for Congress to appropriate more crisis funds for the Treasury to use as it expands these programs.

In Monday morning’s statement, the Federal Reserve alluded to a Main Street Lending facility for small and midsize businesses. We believe this facility, or something like it, will be crucial to mitigating damage to the U.S. economy during the pandemic disruption. In our opinion, such an action is best implemented via the banking system, such as through a Main Street facility, whereby the Fed accepts these loans as collateral with Treasury absorbing the losses. Congress is currently negotiating the size and form of such a package, as one of many items in its $1+ trillion stimulus bill.

The size of any stimulus bill is critical in softening the blow to the economy. We therefore expect additional Federal Reserve actions in the coming days and weeks, some in conjunction with Treasury, and others possibly by Congress.

Current Income Portfolio Update

Published on Mar. 20, 2020

Current Income Portfolio Update

A key economic impact of the Covid-19 pandemic is the heightened near-term probability of U.S. and global recession. Investors appear to be pricing this new reality into financial markets. It is most visible for us in the unusually volatile equity market selloff. In the fixed income markets, which primarily trade over-the-counter rather than on exchanges, the ongoing repricing of credit risk has been accompanied by a significant decline in liquidity.

In order to fulfill its mandate of promoting maximum employment, stable pricing and moderate long-term interest rates, the Federal Reserve needs U.S. fixed income markets to fully function with sufficient liquidity to act as a transmission mechanism for monetary policy. For this reason, in recent days the U.S. central bank directly intervened to attempt to restore proper market functioning. It began by offering secured lending against Treasury bills, and it then escalated into $700 billion of direct purchases of Treasury and agency mortgage-backed securities, and most recently it also purchased three-month commercial paper from highly-rated issuers, with up to $10 billion of credit losses to be covered by the U.S. Treasury. We believe these efforts will likely continue, with additional expansions if necessary, until liquidity returns to the fixed income markets.

Our management of the Current Income Portfolio (“CIP”) is affected by the present lack of liquidity in the investment-grade corporate fixed income market. We believe bid-ask levels are not reliable at this time of historical dislocation. As the Federal Reserve’s actions propagate across fixed income markets, we expect liquidity will return, with corporate bonds repricing to incorporate a higher level of credit risk, consistent with a heightened probability of a recession in the wake of the pandemic.

Our approach to purchasing and selling investment grade corporate bonds within CIP is to evaluate transactions individually. We will generally seek to trade only when the price reflects option-adjusted spreads that are consistent with historical levels and in our view appropriate for the individual corporate credit profile and security structure.

Historically there have been other episodes of credit market dislocations following rapid changes in the economic outlook, with market liquidity returning once investors gain comfort that the environment is properly incorporated into security prices. We expect this time will prove no different.

Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy warns of profit, sales hit on coronavirus fallout”

Published on Feb. 27, 2020

February 27, 2020: Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy warns of profit, sales hit on coronavirus fallout”

Read the Full Article Here

Fourth Quarter 2019 | Fixed Income Commentary

Published on Jan. 28, 2020

Fourth Quarter 2019 | Fixed Income Commentary

During the fourth quarter of 2019, the investment grade intermediate term corporate bond market continued its positive momentum and returned about 1.1% to close out the year up approximately 10.2%. Similarly, the investment grade preferred stock market returned about 2% in the fourth quarter and approximately 17% for the full year. We believe that performance across fixed income markets was mostly driven by a decline in investment grade credit spreads and US Treasury yields as well as continued support from the persistent global demand for positive yield.

In our opinion, the Federal Reserve’s decision to reverse course earlier this year and take more accommodative monetary policy actions was responsible for the narrowing in credit spreads and decline in bond yields during 2019. After cutting its benchmark interest rate by 50 bps in the third quarter, the Federal Reserve made the decision to cut rates another 25 bps in October as well as restart asset purchases for balance sheet expansion. We believe that helping guide market participates into believing there would be no further interest rate hikes was Federal Reserve Chairman Powell’s comments in the latest Federal Reserve Minutes regarding no hikes until inflation was “persistently” and “significantly” above currentlevels and closer to its 2% target. The policy shift came after we saw synchronized global growth deceleration which we believe was caused by trade war headlines, uncertainties around Brexit, and global manufacturing sector weakness. In effect, the Federal Reserve curbed recessionary fears by re-igniting stimulus in order to sustain the U.S. economy’s tenth consecutive year of economic expansion.

The impact of the Fed’s actions is apparent to us through various reports of economic data that came in above expectations at the end of the year. Namely, the unemployment rate reached its lowest level in the past 50 years, housing data surprised to the upside, and consumer sentiment, as reported by the University of Michigan Surveys of Consumers, remains healthy. Moreover, as the U.S. is a consumer-driven economy it has thus far been resilient to the global manufacturing weakness happening elsewhere. We believe that these factors are all supportive for credit spreads, US Treasury yields, and thus bond prices in the near future.

While we do not expect a repeat of the double-digit returns experienced in 2019, our general view remains constructive for fixed income markets to continue to perform well going forward. We are less concerned about a magnified economic deceleration occurring in the U.S. in 2020 and believe current investment grade corporate fundamentals remain quite robust. Therefore, our positive outlook for 2020 is derived from the strength of investment grade corporate fundamentals, the Federal Reserve’s commitment to accommodative monetary policy for as long as necessary to sustain the current economic expansion, and the continued demand for positive yield from both international and domestic markets.

Jason Benowitz, CFA was quoted in the Wall Street Transcript’s article, “5G Stock is One of Many Top Picks from this Veteran Portfolio Manager”

Published on Dec. 16, 2019

December 16, 2019: Jason Benowitz, CFA was quoted in the Wall Street Transcript’s article, “5G Stock is One of Many Top Picks from this Veteran Portfolio Manager”

Read the Full Article Here

Equity Commentary | October 2019

Published on Nov. 12, 2019

Equity Commentary | October 2019

Stocks hit record highs during October, as optimism grew that the US and China were progressing towards the first phase of a trade agreement, and economic data firmed. Investors were also encouraged by the Federal Reserve, which cut interest rates and signaled that monetary policy will likely remain stimulative for the foreseeable future.

There was some progress on the trade front during October. The Trump administration held off on a planned tariff hike on Chinese imports as the two countries moved closer to reaching an agreement in principle on a phase I trade deal. In exchange for tariff relief, China is expected to significantly increase its purchases of US agricultural products and will also accelerate the opening of its finance sector. While the deal still needs to be signed and formalized, we view this preliminary agreement as a positive indication, and it was likely a key factor in boosting stocks during October. However, we think that this is only a first step, and that much work needs to be done in order to resolve thornier issues such as intellectual property protections. Moreover, we think it is unlikely that any substantial progress will be made beyond this phase I of the trade agreement until after the US elections next November.

Following a lackluster 3rd quarter for economic growth, there are reasons to believe that fundamentals may be improving. The Institute for Supply Management’s (ISM) October non-manufacturing survey came in ahead of expectations and marked an improvement from September’s reading. Consumer confidence remains at healthy levels and the housing market continues to strengthen. The latest reading on the labor market was also encouraging, as the 128,000 jobs created during October exceeded investor expectations despite being dragged down by the GM strike. Further confirming these green shoots are market indicators such as the yield curve which has steepened meaningfully of late. Perhaps as a result of these positive trends, many of the economic forecasts that we track have lowered their near-term recession probabilities from approximately 50% just a couple of months ago, to 25% today.

We think that corporate earnings have also given investors reasons for optimism. Profits were expected to fall sequentially for the 3rd quarter, but aggregate earnings have exceeded forecasts to the extent that it now appears they will show positive growth on a quarter-over-quarter basis. Perhaps even more importantly, forward earnings estimates for the S&P 500 have been moving higher. While certain sectors, such as energy and manufacturing remain challenged, we believe that these issues have been contained and do not appear to be dragging down the broader economy.

As was widely expected, the Federal Reserve cut interest rates by 25 basis points at its October meeting. The FOMC (Federal Open Market Committee) signaled in its prepared statement that it expects to be on hold with regards to further interest rate moves for the foreseeable future. This marked a notable change, as prior to this the Fed had been preparing investors for further rate reductions. The central bank suggested its policy stance is appropriate for as long as its baseline views about growth and inflation remain intact, which we believe creates a high bar for the next policy shift. What is most significant in our view is that the Fed funds rate is currently below the inflation rate, or put another way, real interest rates are negative. Negative real rates tend to be a stimulative factor for the economy, so while the Fed may be on hold for the time being, monetary policy remains quite accommodative and will likely continue to be so for an extended period. The central bank has also resumed its balance sheet expansion, which on the margin should provide additional stimulus. We think that it was this confluence of improving economic data, thawing trade tensions with China, and a supportive Federal Reserve which has buoyed investor spirits and helped propel stocks to record highs during October.

Jason Benowitz, CFA was quoted in the article, “Software Stocks in Free Fall With ServiceNow Results on Deck”

Published on Oct. 22, 2019

October 22, 2019: Jason Benowitz, CFA was quoted in the article, “Software Stocks in Free Fall With ServiceNow Results on Deck”

Read the Full Article Here

Third Quarter 2019 Fixed Income Commentary

Published on Oct. 16, 2019

Third Quarter 2019 Fixed Income Commentary

Thoughts from our Domestic Fixed Income Team

U.S. fixed Income markets rose for the third consecutive quarter; with the ICE BofA U.S. 1-10 YR Intermediate Corporate Index up 1.81%, the ICE BofA U.S. 1-10 YR Treasury and Agency Index up 1.15%, and the ICE BofA U.S. Fixed Rate Preferred Securities Index up 3.05% as a result of a decline in overall US Treasury yields, the yield curve flattening and investment grade credit spreads ending the quarter in line with where they started.

We believe that the majority of the third quarter’s performance was driven by the decline of U.S. Treasury rates, with yields on intermediate and long-term maturity securities experiencing a greater decline than the yield on respective shorter-term securities, effectively causing the yield curve to flatten. This phenomenon, called a bull flattener, drove the prices of longer duration assets significantly higher. Moreover, investment grade credit spreads ended the quarter in line with where they started, only temporarily widening by as much as 15bps during the mid-August market volatility, and signaling to the market that the brief inversion in the 2-10 year segment of the curve was not signaling a recession.

Macro drivers which are closely monitored by the team include the Federal Reserve’s monetary policy actions as well as early signals of potential recession; among the latter we are constantly measuring deflationary versus inflationary risks as well as where to find incremental spread/yield in an environment that continues to decline towards lower and lower nominal and real yields.

Outlook

In general, we are sanguine that the US offers a “Goldilocks Environment” for fixed income investors, in that the economy is neither too hot nor too cold, and that the nominally higher yield environment in the US versus the rest of the world should continue to support stable if not rising fixed income prices.

Apparent signs of global manufacturing deceleration (predominantly in China and Germany) led the U.S. Federal Reserve to join other central banks around the world in adopting an accommodative monetary policy, as the committee voted to reduce the Federal Funds interest rate by 25bps at each of the July and September FOMC meetings this year. This contributed to the brief yield curve inversion in the 2-10 year maturities, leading to widespread concerns that the U.S. economy was decelerating meaningfully.

While manufacturing statistics are a widely watched set of leading economic barometers, the manufacturing segment of the US economy is getting smaller every year relative to the services segment of the economy (manufacturing is now less than 15% of GDP). The services side of the economy, where consumer spending resides, has not slowed to levels which in our view would pose a problem.

Other signs of economic vitality were evidenced by recent data indicating that building permits, housing starts, and home sales began to improve. This was likely driven by lower rates leading to lower refinancing and mortgage rates, coupled by strong employment conditions in areas of the US economy outside of the manufacturing sector. Also helping to support the expansion are the elevated levels of consumer sentiment that we believe are needed if consumers are going to continue to spend.

Lastly, the Fed is set to resume balance sheet expansion later this month and may reduce its benchmark rate at least one more time before year end. In this environment, the path of least resistance is up and therein lies the goldilocks situation for fixed income investors; meaning the economy is not too hot and not too cold and that the nominally higher yield environment in the U.S. versus the rest of the world (with predominantly negative yields) should continue to support stable if not rising fixed income prices.

Roosevelt’s CIP portfolio is constructed to attempt to balance the exposure to interest rate and credit risk while maintaining high coupon income and principal preservation. The portfolio’s duration is managed to be intermediate in length, so as not to leverage exposure to a particular segment of the curve. As a result, our portfolio may experience less price volatility from moves in interest rates both up or down, since our laddered approach typically spreads out interest rate sensitivities for our corporate bond sleeve.

We believe that the CIP preferred sleeve becomes increasingly important in a low nominal interest rate environment. Preferred securities of investment grade companies can significantly enhance yield without taking on significant credit risk in order to do so. This helps provide a balanced approach to producing attractive amounts of current income in a world where, in many countries, negative interest rates have become the new normal.

Jason Benowitz, CFA appeared on CNBC

Published on Oct 11, 2019

October 11, 2019: Jason Benowitz, CFA appeared on CNBC

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The Fed Restocks the Punchbowl

Published on Jul. 30, 2019

The Fed Restocks the Punchbowl

If increasing interest rates is an action the Federal Open Market Committee (FOMC) undergoes seeking to reduce economic enthusiasm, especially to prevent the economy from overheating, then a rate cut is about keeping the party going.

And that’s what we have. Never mind that first half real GDP exceeded 2.5% (above the Fed’s forecast of 2.1% for the entire year) and that the health of the consumer and related spending impact upon the economy in recent months has been sound. Some recent data point to the potential for a solid second half as well. We’ll be interested in the Fed’s forward-looking language when they make their announcement. We doubt the Fed would explicitly set up the markets for continued easing, but their view on this is what we want to hear about.

It appears the Fed is looking out for the risks to the economy in making this insurance rate reduction. In our view, there are basically three risks.

First, the rest of the world is slowing or simply has no traction. While the U.S. consumer appears to be in good shape based upon consumer confidence, very low unemployment, and solid wage growth, other areas of our economy relating to manufacturing, exports, and housing have been weaker, and related data have been softer. Second, inflation remains stubbornly below the Fed’s 2% target. Last, trade policy is in flux, with significant risks of its own. These first two concerns are important markers for the Fed. The Fed does not want US policy to drift too far from the policies in the rest of the world, where central banks are also easing policy. The inflation story remains the Fed’s conundrum, they want to avoid disinflationary spirals. The Fed’s favorite inflation gauge, the core personal consumption expenditures measure (PCE), was 1.5% for the first half of the year. If inflation stays muted and if the economy falters, the Fed doesn’t have too much room to maneuver, but given four interest rate increases last year, the Fed has some.

For the Fed, the thinking is probably that any downside risks connected to uncertainty over global trade and a soft world-wide economic outlook could drag down US growth. At this point, the cost of easing policy is limited because inflation remains below target. It could be the case that an “insurance” cut is in order, after which the Fed will wait and see what the future holds with respect to the U.S. economy. This appears to be the market’s current expectation.

August 20, 2018 Press Release: Steven Wasserman and Nicki Price Adams Join Roosevelt Investments

Published on Jul. 22, 2019

August 20, 2018 Press Release: Steven Wasserman and Nicki Price Adams Join Roosevelt Investments

Read the Press Release Here

Second Quarter 2019 Fixed Income Commentary

Published on Jul. 22, 2019

Second Quarter 2019 Fixed Income Commentary

Fixed income markets in the U.S. posted a second consecutive quarter of gains to close out the first half of 2019 with positive performance. During the second quarter the ICE BofA U.S. 1-10 YR Intermediate Corporate Index was up 3.13%. The ICE BofA U.S. 1-10 YR Treasury and Agency Index and the ICE BofA U.S. Fixed Rate Preferred Securities Index were up 2.30% and 3.02%, respectively for the quarter.

April kicked off the quarter with relatively sanguine market conditions, as concerns over U. S. and China trade tensions and an economic slowdown remained subdued as the S&P hit new all-time highs. Moreover, Fed Chairman Powell in early May said that the Fed remained less concerned with downside risks from a slowdown in global economic activity and more confident in meeting their near-term inflation targets. This was supported by March retail sales and light auto vehicle sales data which came in better than expectations.

During the month of May, however, U.S. trade tensions heated up; this time not only with China but with Mexico as well. Uncertainties regarding a global manufacturing slowdown induced recessionary fears which we believe drove equity markets down and investment grade spreads wider. Almost immediately upon seeing the weaker economic data, the Fed reacted and hinted its intent to support the US economy as it has done for many years. The “Fed Put”, the need to provide accommodative policy, was once again pulled out of the Fed’s toolbox and markets rallied in relief.

The larger global issue that is likely to keep U.S. rates low is the fact that an increasing percentage of global bonds have negative yields. What this means is that if an investor buys a Swiss bond or a German bond for example, if they expect to hold it until maturity, they will lock in certain capital losses. This global dearth of bonds with real positive yield will in our opinion, lead to continued demand for U.S. dollar-denominated fixed income assets, despite the fact that the U.S. deficit is expanding. It boils down to the simple argument that the U.S. is the best house in an increasingly bad yield neighborhood. This is not a new issue in international fixed income markets but it is getting to the point where global consultants and major international pension funds are being forced to reconsider their local bond allocations and are increasingly looking for alternatives away from home.

Roosevelt’s CIP portfolio is designed to protect capital while delivering more attractive yield than cash. Importantly, we remain committed to our capital preservation objective in a manner designed to maintain liquidity and relatively attractive yields in an environment where yield is becoming increasingly rare.

The duration of the portfolio has been structured to be intermediate in nature, and we seek to enhance the yield of the overall portfolio through the addition of investments in companies that have issued preferred securities with attractive yields. We maintain that this market segment remains a beneficial portfolio diversifier for income-oriented investors to own in addition to bonds. In addition, aggregate portfolio yield characteristics may be improved over time through adjusting the preferred security allocation and by alternating the mix of security structures within the investor’s portfolio mix.

After starting 2019 with a lighter than usual preferred security allocation, during the quarter we took advantage of depressed market prices and raised our allocation to, for us, a more traditional 25%. At the same time, the distribution of preferred security structures in the CIP portfolio steadily increased to about 50% invested in fixed-to-float structures. We believe these types of securities work well in our style because they add to the portfolio’s overall yield characteristic, but do not add to interest rate risks beyond a traditional intermediate-term bond portfolio.

July 16, 2019: Jason Benowitz, CFA appeared on CNBC

Published on Jul. 16, 2019

July 16, 2019: Jason Benowitz, CFA appeared on CNBC

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July 16, 2019: Jason Benowitz, CFA was quoted in the article, “US STOCKS-Wall Street muted after mixed bank earnings”

Published on Jul. 16, 2019

July 16, 2019: Jason Benowitz, CFA was quoted in the article, “US STOCKS-Wall Street muted after mixed bank earnings”

Read the Full Article Here

Pivots and Puts

Published on Jul. 15, 2019

Pivots and Puts

Market lore has it that former Federal Reserve Chairpersons Greenspan, Bernanke, and Yellen all provided the markets with what was effectively a put option. Hence the term, the “Greenspan Put”. If the economic signals started to get tough, the Fed would provide accommodative policy. This course of action would then presumably lead to a rally in bonds and stocks. Bonds would increase in price with the lower interest rates and the equity markets would rise on the prospect of continued economic growth. Former chair Yellen even suggested in a recent speech that the Fed should buy stocks and corporate bonds during recessions to help support the economy.

We believe that this policy has been easy for the Fed to carry out because of the lack of inflation. There’s vigilance for inflation, it is feared, but it hasn’t shown up. The Fed has not yet been caught in the dreaded place where they are behind in a fight against inflation. Since monetary policy acts with a lag, a Fed caught late in snuffing inflation has historically been a disaster.

Inflation has been kept at bay by the confluence of technology, global competition, and demographics, in our opinion. Technology has reduced costs, spurred competition, made pricing more competitive, and generally empowered consumers rather than producers. All this happens on a global scale. Demographics have been impactful too. As the developed world has grown older, there is less demand for goods and more demand for fixed income assets. Apparently, any reasonable instrument with yield is in demand. Pricing power in goods and services has seemingly been constrained by these forces.

Federal Reserve Chair Powell in Congressional testimony this week indicated that the door is open for the Fed to lower rates later this month. Powell served on the Fed uneventfully for six years before he was named Chair in early 2018. Perhaps only after he became Chair did he fully understand the import of his every utterance. Charitably, his October 2018 off-the-cuff comments about rates being low and “far” from normal may have added to the equity and credit spread woes of Q4 2018. By January 2019, Powell was inclined to read prepared comments and he gave us the term “patient”. Specifically, the Fed would be patient before raising rates. For Powell, being patient was a pivot and – in the end – it is a put too. This is the same accommodative stance that we have had from his predecessors. With inflation MIA, raising rates is not an imperative.

In our opinion, equities have responded positively and bond yields have returned to lower levels. The bond market now seems to have priced in several reductions in the Fed funds rate; the implied consensus of the CME FedWatch Tool is that by year-end, there will be two reductions of 25 basis points each. But bonds are also indicating an all clear signal on inflation. Because there are several narratives at play here, the story gets interesting.

Loud noises abound predicting an imminent recession. These voices could be rewarded with an expected Q2 manufacturing output data report likely to show a second straight quarter of declines, among a backdrop of weaker conditions overseas. The Fed is anxious about trade tensions and the waning strength of the global economy. But will there be a recession? US retail sales and housing activity are more robust, employment continues to be strong, and corporate profitability is not plummeting. In Powell’s mind though, even with the strong June jobs report, the economic outlook is not improving. Perhaps given the heightened trade-related uncertainties from the on again/off again status of increased tariffs on Chinese goods, a so-called ‘insurance’ cut is in order.

Roosevelt Investments Donates $60,000 to the ICCFA Educational Foundation

Published on Jul. 9, 2019

Roosevelt Investments Donates $60,000 to the ICCFA Educational Foundation

Source: July 2019 ICCFA Magazine

Read the Full Article Here

Six Market Thoughts on Trade, Tariffs, China, and Choppy Markets

Published on Jun. 5, 2019

Six Market Thoughts on Trade, Tariffs, China, and Choppy Markets

– Politics don’t seem to matter much to markets until they matter

– The S&P 500 is down about 7% from its late-April high

– The yield curve inversion seems to be giving investors jitters of recession

As usual, there is a lot to digest and this is only a partial list, but it incorporates the essentials. The larger anxieties are being generated in the geopolitical realm, and yet cooler heads recognize that all sides in trade disputes need deals. It is at least true that everybody could be better off.

But this doesn’t guarantee that the necessary accommodations and arrangements will happen. At a minimum, we believe that continued tensions could lead to lower economic growth, perhaps a recession. The market’s view on this, it seems, is that the Federal Reserve stands ready to ease.

As of this writing, the yield on the active US Treasury notes, out to the ten-year maturity, all trade lower than the Federal funds rate. This is understood to reflect the bond market having already “priced in” the next interest rate moves by the Fed’s rate-setting body to be a reduction in the Fed funds rate. Explicitly, the CME’s Fed Watch Tool records over a 50% chance of a lower Fed funds rate being priced in at the FOMC’s July 31st meeting.1

Remember that the Fed has two important objective functions: full employment and stable price levels, and it attempts to implement policy targeting these two objectives with essentially one tool, adjusting the level of short-term interest rates. The geopolitical threat, through trade tensions, is a threat to employment. Specifically, the forward concern is whether a rise in the cost of goods (the result of tariffs and restraint of trade) would cause reduced consumer spending, job losses, and a drop-off in economic growth. This is the case for the Fed to take proactive steps and lower rates.

There is, however, an additional reason for the Fed to lower rates. With regard to the Fed’s 2% inflation target, inflation has stubbornly refused to cooperate and has remained consistently below that target. Recent comments by Fed Chair Powell, Vice Chair Clarida, Former Fed Chair Yellen, Boston Fed President Rosengren, Chicago Fed President Evans, and New York Fed President Williams have all addressed the Fed’s efforts – and lack of success – in pushing inflation towards that 2% target. The number is important because the Fed sees it as consistent with healthy economic growth. If markets, households, and businesses expect inflation to remain below 2%, the Fed’s concern is that lower growth expectations become ingrained.

Fed funds currently are targeted at 2.25-2.50% and inflation readings are closer to 1.5%. Given this, the expectation of a rate cut seems justified by the shape of the yield curve and the CME’s Fed Watch Tool. What’s missing from this analysis is that the GDP trackers, which are compilers of economic data providing running totals in real-time, are not indicating that the economy is moving into recession at all for the second quarter. It might be useful therefore to view the yield curve’s protest as one of too low inflation, rather that of negative economic growth.

1-https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

May 23, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy keeps full-year view, warns of higher prices from more tariffs”

Published on May 23, 2019

May 23, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy keeps full-year view, warns of higher prices from more tariffs”

Read the Full Article Here

Recession?

Published on May 23, 2019

Recession?

If one were prone to worry, there are lots of things to be uneasy about. Ongoing tensions in the international political situation might be a good place to start, with trade disputes front and center. It appears that the markets have spent the last few weeks digesting the likelihood of continued trade disruptions. Reasonable people likely have their own list of other concerns. One we seem to keep hearing about is whether a recession is imminent.

Business cycles wax and wane; that’s been the general story. Since the ‘08 financial crisis, we have experienced a lengthy, but never frothy, recovery. Most market wags anticipate that, at some point, the economy would be expected to turn lower, if only because that has been what history shows. Given that it has been about ten years since the last downturn, it’s almost logical to hear warnings of recession ahead. However, past Fed chair Janet Yellen once said that economic expansions don’t die of old age. It’s reasonable to ask, “What would be the trigger?” and “Can I know in time?”

Preceding the last several recessions, there were some recurring mileposts which may serve as warning flags for the arrival of the next recession. These included a pickup in unemployment claims, an inverted yield curve, average hourly earnings growing by an annual rate of roughly about 4%, a surge in commodity prices, and a Federal reserve that had been hiking rates for between 3-7 years. Let’s examine these data sets and see if they’re giving us any signals we should be concerned about.

Maybe first on the list would be employment. Recent job gains appear to be substantial and the unemployment rate has moved lower. The April 2019 unemployment rate was 3.6%. This is the lowest rate of unemployment in about 50 years.

Graph of Civilian Unemployment Rate

Weekly unemployment claims also show a healthy economy. When an economy is weakening, evidence often shows up in unemployment claims. But claims remain near historic lows. Nothing to see here, folks.

Graph of 4 week moving average of initial claims

Next on our list is the Treasury yield curve. Here the reader can make his or her own “call”; the three-month Treasury bill and the ten-year Treasury note are in the same yield neighborhood. Inverted, no, but worth watching.

Graph of 10 year treasury constant maturity minus 3 month treasury constant maturity

The next milepost to watch is average hourly earnings. In the chart below, the annual growth in average hourly earnings has been increasing in recent years but remains below 3.5%. So again, it bears watching but nothing to be too concerned with here.

Graph of Average Hourly Earnings

Next on our list is a surge in commodity prices. One of the best barometers to check here is the Commodity Research Bureau (CRB) raw industrials spot price index. We are looking for a surge, or meaningful move upward. While it could be said that there was a surge in 2015 following the decline of 2014-15, it seems pretty clear that nothing in the 2018-19 timeframe in the chart below could be called a surge.

Graph of Commodity research Bureau raw industrials spot price index

Federal Reserve and rate hikes. We can see in the chart below that the Fed embarked upon its current rate hiking cycle in late 2015 and after waiting a year, conducted a number of subsequent hikes in the Fed Funds Rate. For now the Fed appears to be on pause, reversing course in January after making comments late last year implying there were more rate hikes to come. Nonetheless, this data set tells us that the Fed has indeed been hiking for several years now. So with respect to this particular milestone, we can check the box.

Graph of Effective Federal Funds Rate

So to recap, of the five milestones we reviewed which are likely to help provide a heads’ up of the next recession, whenever it may arrive, we have one check mark (Fed rate hikes), two to keep an eye on (inverted yield curve and average hourly earnings), and two which are showing no signs for concern (weekly unemployment claims and commodity prices). What this tells us is that if our current cycle is typical, we shouldn’t be concerned about an imminent recession at the present time.

The trade war with China is still a developing story, and it’s possible that future developments which we cannot predict may negatively impact our economy and help bring on a recession. But it’s also possible, if not probable, that well before such a scenario came to fruition, a deal will be reached between the two sides that could reduce or eliminate the negative impact to our economy. Such a deal would go a long way to improving confidence among businesses globally which are trying to navigate the choppy waters created by the wake of the trade war between the U.S. and China.

Given that this economic cycle is different in some ways from the last cycle, even though it may rhyme, what brings on the next recession might well be something completely different than what brought on the end of the last cycle (implosion of massive housing bubble, Fed rate hikes, financial crisis).

At Roosevelt, part of our investment process includes monitoring the economic data and discussing its implications on the portfolio and on the cycle. We’ll continue to be vigilant on this front since our cycle is indeed long in the tooth, but for now we do not believe a recession is likely in the next 12 months.

Opinion on the U.S. and China Trade War

Published on May 17, 2019

Opinion on the U.S. and China Trade War

The following is the opinion of Richard Kilbride, Managing Director and Fixed Income Specialist at Roosevelt Investments.

When we all said that a US-China trade deal was priced into the market, we were right. Now that that tension is front and center, it has stirred significant angst. Even if this is just a negotiation process, it isn’t transitory. The process to a fairer, but still free, trade system is a long way from a firm foundation.

The path of least resistance is to lower bond yields. Already underperforming global growth and absent inflation drive that too; inflation has been below 2% for a decade. That trade disputes will raise the cost of goods is not the immediate concern. Older folks remember a bi-polar world, two spheres of influence, one headed by the USA and the other by the Soviet Union. Separate, rarely cooperating on anything, and missiles at the ready, that world saw other countries pick sides as the two superpowers vied for influence. If you are an economist, and not a political scientist, the West won because they had better access to financing. Yes, the West also had better laws, standards of living, and better human rights, among other advantages. But it also took almost 50 years for the West’s advantages to play out and maybe it was nip and tuck there for a while.

The US and China have been seeking to play nice together in the global sandbox for some time. China’s joining the World Trade Organization (WTO) in 2001 was perhaps the biggest step. But quite quickly, by as soon as 2007, China’s wealth had grown such that many market prognosticators viewed the Chinese funding of both the US trade and budget deficits, effectively in exchange for their export goods, as unsustainable. Together it all balanced of course, as significant Chinese savings were deployed to buy and hold US securities. We bought their goods, and lived beyond our means, in exchange for them holding our paper. For the Chinese, producing export goods created employment in the great eastern cities as their population moved away from agricultural pursuits.

Enter the financial crisis in the West, which has been blamed on derivatives, or that housing prices had been too high, or on flawed mortgage lending practices, or on liar loans and people borrowing too much, or on inept regulation, or on government policies that over-supported housing and homeownership, or that rates had been held too low leading up to the crisis and investors had been forced to stretch for yield, or that Wall Street firms had too much leverage, or the accounting rules that forced mark-to-market practices creating effective margin calls, or maybe even that Lehman never built enough capital after Bear folded. We’re still working out this narrative. But China’s role and influence got lost in there, and all along containership after containership landed goods here. After the WTO negotiation, China was to open its market. It became the world’s biggest exporter (13% of the total), home of 12 of the world’s 100 most valuable listed companies, and they created enormous prosperity. And if it was simply a matter of Chinese buying US bonds and the US buying Chinese goods, all would be well.

The tensions go beyond that. There are strong views that China didn’t follow the plan. Instead of being a responsible participant in the international order, Beijing has used its new economic might to launch a drive against Western power and primacy that appears as if it could define world politics for decades. In the West, this has stirred up forces hostile to foreign competition and suspicious of free trade. At the same time, markets have been clearly signaling that many of the S&P 500 constituents might be a lot more closely interconnected with China than previously believed. Further, a wealth of academic and policy research over the past generation has shown that globalization tends to raise, not lower, productivity and average incomes. Incomes tend to increase the more that companies and countries are connected to the global economy via international trade, investment, and immigration. This clearly reflects that the forces of globalization should be a very positive thing. Globally, billions of people have been lifted out of poverty in the last generation. Life spans have risen, hunger is down, illiteracy is down, and child mortality is down. Critically then the economic policies that boost growth in productivity and thus in average incomes look to be global policies. This is as old as Ricardo, and still true.

In some countries, some dimensions of globalization—for example, China’s growth in exports related to its membership in the WTO—have put downward pressure on the wages of some workers. Many Americans lost jobs, and though that isn’t the problem as much today, memories and tensions linger, and victims need a scapegoat. Of course, worker productivity is shaped by many forces other than globalization, such as education and technology. But policies related to trade can often be shifted much more quickly and less expensively compared with longer-run, productivity-shaping policies, such as schools or worker training. So, we arrive at the globalization paradox. We know the clear merits to globalization and yet global policy is drifting away from support. Even though all the dynamism that globalization fosters raises average incomes, anxiety about who plays fair is pushing many countries away from rather than toward the policies of more globalization. By turning countries inward, disaffected labor-market performance – part of what drives the anxiety – may even be accelerated.

The western relationship with China seems to be the bet that failed. The expectation was that putting China in the WTO, and other such institutions, would bind China into the rules-based systems set up after WWII. Instead the rules for global trade have been upended as China wishes to play by its own rules. Further, it was hoped that economic integration would encourage China to evolve towards democracy; as they grew wealthier, its people would yearn for democratic freedoms, rights, and the rule of law. Instead, any hopes of movement towards constitutional law has been replaced by politics and economics being steered towards repression, state control, and confrontation. The West was wrong when it expected China to tilt towards a more market-based economy.

This leaves the West and China as ideological and economic rivals. This strain is about the direction, speed, and end game for the relationship, and for our focus, the markets. At a minimum, Beijing is encouraging the spread of authoritarianism. Chinese businesses are arms of state power, including industrial espionage and state-sponsored raids on intellectual property. The Chinese Communist Party’s powerful departments that control personnel and policy don’t exactly list their phone numbers or display signs outside their offices. All the operations are silent. What can resolve this? We know globalization works, but US policy cannot be offering people more globalization only. When people say they are worried about the ability to compete and have their intellectual property protected in the global economy, they tend not to like being told that more globalization and competition is the answer. We also need an array of related policies to allay the unfairness that firms and people experience. Are there still rules? Can we negotiate rules when counterparties renege on previously agreed-to items? How much should we look the other way on IP, forced technology transfer, and subsidies to secure a deal? How do we make progress on these critical items while still allowing the Chinese side to save face, a very important and overarching factor in their culture. These are difficult matters to resolve.

This may be a muddle, a long muddle. The US-China negotiations have been thwarted by miscalculations and unfulfilled expectations. We are interconnected, but we are in competition too. While the longer the impasse, the greater the economic fallout for all, we also need to know if everybody is playing by the same rules, rules which will benefit the greatest number of people. At its heart, the squabbles are over things like 5G, artificial intelligence, and other data-driven services. These are things that we have not yet even figured out much less do we understand their long-run impacts. And as these bridge the cyber line between military and commerce, economic considerations overlap with national security issues. It’s hard to expect anything but a long impasse; perhaps some cease fire pacts along the way, but a very difficult risk for global economies, central banks, and markets. We can hope this all eases, but there are no illusions here, and hope is never a good trading strategy.

The opinion of Richard Kilbride does not necessarily reflect the views of Roosevelt Investments.

Mispricing Between Issues

Published on May 13, 2019

Mispricing Between Issues

Did You Know…

Roosevelt Investment’s Current Income Portfolio includes $25 and $1000 par value preferred securities. We believe that preferred securities offer the potential for higher income generation compared to other fixed income sectors, and they help balance our portfolio construction. We also believe that pricing discrepancies can occur as between these two types of preferred securities. While one company may issue both $25 and $1000 par value preferred securities with the same credit and structural risk, in some cases the difference in valuations between the two can be significant.

The example below from Nuveen Investments includes two nearly identical preferred securities with varied par values. The more popular preferred security issue for retail investors is the $25 par value. In searching for enhanced income, the coupon rates deemed attractive by retail investors can drive $25 par preferred securities to rich valuation levels. On the other hand, institutional investors tend to value preferred securities based on their yield spreads. This difference in evaluating the two types of preferred securities can create surprising opportunities for astute investors. In this example, an investor could have paid 3% less for the institutional $1000 par value preferred security and have gained 65 basis points in yield to call (YTC) versus the same structure in a $25 par value preferred security.

Retail and institutional investor’s value preferred securities from the same company differently

Retail and institutional investor’s value preferred securities from the same company differently

What are we thinking?

Packaged with our intermediate investment grade corporate bond allocation, our opportunistic preferred security sleeve is designed to pick up extra yield that income investors seek, in a conservative, diversified and balanced manner. Our Current Income Portfolio also uses fixed-to-floating rate and pure floating rate preferred securities, which provide coupon payments that should increase in line with rates. We believe we are offering an attractive solution for income investors who are looking for conservative allocations and additional yield. And as active managers, we monitor the reference rates, credit, and call risks. In our view, investment decisions should be based on long term plans and risk tolerance levels, and we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for volatility. Let us show you how.

Speed Bump

Published on May 13, 2019

Speed Bump

After enjoying the stock market’s advance in each consecutive month so far in 2019, over the past week investors hit a speed bump, as U.S.-China trade issues have returned to weigh on sentiment. Headlines and signals emanating from both sides in recent weeks suggested an agreement was near. But according to Reuters, as discussions reached the final stages, the Chinese side stripped out legal language it had previously committed to throughout the draft document.

It appears that these commitments were in areas deemed critical by the U.S., including intellectual property protection, forced technology transfer, and verification of compliance. In response, on Friday the U.S. imposed additional tariffs on Chinese imports to begin at roughly month end, leaving a modest hope that in the coming weeks the two sides might reach an agreement that would avert them. The Chinese retaliated with incremental tariffs on U.S. imports, but their ability to respond in this fashion is somewhat limited, since they do not import as much from the U.S. as we import from China.

We believe it is likely that China has more to lose in this battle. The Chinese economy, while growing at about 6%, has been slowing for many years, and Beijing has engaged in a variety of measures to prop up growth, including lowering interest rates and setting ambitious targets for bank lending. The Chinese banking system appears to be highly leveraged, and may be susceptible to a slowdown in growth. Moreover, the Chinese economy is dependent on exports for a majority of its growth. In our opinion the U.S. economy grew strongly in the first quarter despite a government shutdown and severe weather that may have negatively impacted economic activity, and in general is not export-dependent for growth. The U.S. is not immune to higher tariffs imposed in this trade war with China, as many of the tariffs will be borne by consumers and/or companies. But tariffs are not likely to put a big dent in the economy’s overall growth, though some companies may be negatively impacted more than others.

Many companies that sell goods in the U.S. are re-working their supply chains so that they are not dependent upon China. Once such changes have been made, perhaps by shifting production to Southeast Asia or Mexico, they are unlikely to be reversed. In this regard, the longer the U.S.-China trade dispute persists, the more permanent the rerouting of supply chains will be, which has negative implications for China.

The U.S.-China trade dispute began over a year ago with targeted U.S. actions in sectors including solar panels, steel and aluminum, followed by broader tariffs. Against this backdrop, we have over the past year endeavored to bolster the resilience of our equity portfolios against the risk of escalation. In general we reduced our exposure to companies that we believe are vulnerable, while adding investments in areas that we thought would outperform a market pullback sparked by the trade dispute.

Nevertheless, we have retained some holdings which experience elevated volatility when trade-related issues hit the market. In general these are well-managed quality companies that we believe have a bright future. We expect they will provide attractive returns in the long run. In most cases, when the market is trending higher, as it has so far this year, these stocks benefit from an additional tailwind because of their exposure to cyclical economic growth. And should the U.S. and China again move closer to a trade agreement, these companies would likely return to market leadership. Our clients should know that we have taken limited action in response to the headlines of the last week, largely because we have factored the risk of trade escalation into our thinking over the preceding twelve months.

May 3, 2019: Jason Benowitz, CFA was quoted in the Bloomberg article, “If This Is a Tech Bubble in Stocks, It’s the Expansionary Phase”

Published on May 3, 2019

May 3, 2019: Jason Benowitz, CFA was quoted in the Bloomberg article, “If This Is a Tech Bubble in Stocks, It’s the Expansionary Phase”

Read the Full Article Here

Current Income Portfolio – First Quarter Commentary

Published on Apr. 26, 2019

Current Income Portfolio – First Quarter Commentary

Market Overview

The beginning of 2019 saw a reversal of the credit market themes that dominated the closing months of 2018. With the exceptions of U. S. Government and very high-grade corporate issues, most of the domestic credit markets suffered pricing declines in response to what we believe was widespread anxiety over continuing monetary policy tightening, possible credit quality deterioration, investment grade yield spread widening and geopolitical uncertainties. These factors appear to have combined and led to a classic ‘flight-to-quality’ environment of uneasiness, particularly in December.

In January, however, and continuing on over the rest of the first quarter, these concerns seem to have abated and both bond and equity market conditions improved, helped in part we believe by a newfound dovishness on the part of the Fed, as well as some evidence of macroeconomic improvement and hints that perhaps a resolution to the China trade was might be possible.

While the ten-year U.S. Treasury was relatively stable, trading around a twenty basis point range, other investment grade credit markets were more volatile. Specifically, the spread widening observed in the corporate bond market, which had occupied much of the business press late last year, fell back comfortably into historically tight ranges. The yield spread of investment grade corporate issues rated single A fell about 21%, from 1.20% at the close of 2019 to about 0.95% at quarter end. Likewise the yield spread of investment grade corporate issues rated BBB fell about 19%, from around 1.90% at the close of last year to about 1.58% at quarter end. Spreads for both types of issuers are now approximately in line with where their historic averages since 2014.

Similarly, the preferred securities market which in the fourth quarter suffered through one of the most disappointing performance quarters in terms of total rate of return in our recent memory, reversed and rallied back sharply in the first quarter. The ICE BofAML Fixed Rate Preferred Index posted an 8.71% total return for the first quarter of 2019, following the previous quarter’s 4.56% negative total return. And the ICE BofAML Capital Securities Index, which specifically tracks the $1000 par preferred security issues, posted a 6.43% total return for the first calendar quarter, following the previous quarter’s 2.55% negative total return. In both cases, the combined two-quarter total returns averaged about 4.0%, historically slightly higher than recent experience would suggest.

The intermediate-term investment grade corporate bond market, benefitting from the return of yield spreads to historical norms, also posted relatively strong quarterly total returns. The ICE BofAML 1-10 Year US Corporate Index had a first quarter total return of about 3.80%, following a Q4 2018 total return of about 0.61%. This performance was significantly stronger than the ICE BofAML 1-10 YEAR US Treasury Index which posted a 1.57% first quarter return, following the previous quarter’s 2.20% total return. Over the last two quarters, we believe that the intermediate corporate market has benefitted significantly from slightly lower U. S. nominal interest rates and tighter investment grade yield spreads.

To cap things off, the Federal Reserve Board policymakers announced delays in future monetary policy adjustments. In combination with reversals of credit spreads and a beneficial re-pricing of the risks of holding preferred securities, the slightly negative returns for Current Income Portfolio accounts in 2018 were more than clawed back with a nearly 4.4% total return in the first quarter. This compares favorably with the 1–10 year investment grade corporate market which posted a return of 3.8% as well as the broad Intermediate Government/Credit benchmark total rate of return of 2.32% over the same period.

Outlook

We believe the advantages of the building our Current Income Portfolio accounts around a balance of intermediate-term investment grade bonds and preferred securities is demonstrated by the style’s performance over the ups and downs of the rather volatile past six months. We believe that underlying these accounts is a steady income characteristic that has remained undisturbed through periods of market volatility, both higher and lower.

New accounts are presently funded at about 4.52% current yield, which is above the level of the product’s stated benchmark as well as the intermediate-term corporate market. Moreover, our incorporation of investment grade preferred securities tends to elevate the style’s overall current income and yield characteristics, but does so in a limited and identifiable manner. To this point, while the portfolio’s yield matrices are higher than alternative investment grade fixed income offerings, especially mass market alternatives such as full market mutual funds and ETFs, interest rate risk assumed by the Current Income Portfolio is currently lower (as measured by modified duration). New accounts presently feature a corporate bond duration of about 4.08 compared to the intermediate benchmark’s approximate 4.16, and this duration may be allowed to decline over the remainder of 2019 as portfolio holdings get closer to maturity and thus shorten in term.

By remaining loyal to our objectives of seeking to provide the highest possible returns while assuming the least possible risks, we have sought to take advantage of the market’s recent pricing volatility. Discounted prices in the preferred securities markets offer the opportunity to slightly increase our allocation in this sector. While we would have preferred higher nominal rates, most long-standing accounts are able to benefit from the Current Income Portfolio’s design which provides for regular reinvestment of bond holdings in the corporate sleeve as they mature or are called. The use of perpetual, fixed rate preferred securities, which remain potentially price sensitive to general interest rate rises, does not, at this point, dramatically increase the portfolio’s overall interest sensitivity. Higher coupon fixed rate issues and positions in fixed-to-floating rate preferred issues tend to reduce the overall portfolio duration. While we believe that the option for issuers to call their preferred securities at par after a designated date adds an element of risk to these holdings, we believe it is a risk that investors are compensated for through the higher yields on these securities. This structural characteristic may at times also provide an anchor to keep prices trending toward par values as cycles progress, therefore perhaps helping to both dampen the volatility of and enhance the attractiveness of investing in, these issues.

To us, guessing the future direction of interest rates remains a fool’s errand. Our expectations of when monetary policy may next effect nominal interest rates, either by resuming tightening credit conditions (raising short-term interest rates), or by beginning to ease credit market conditions (lowering nominal interest rates) are just an educated guess—and we and the markets at-large have been wrong as often as not. We believe therefore that the most productive approach to safely generating higher income is to identify and execute the sector allocations and positions that we believe currently will produce the highest levels of current income available while assuming the lowest levels of risks to achieve our underlying goals of principal preservation, without expressing a strong view on the future direction of rates.

April 25, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “UK regulator blocks Sainsbury’s $9.4 billion takeover of Walmart’s ASDA”

Published on Apr. 25, 2019

April 25, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “UK regulator blocks Sainsbury’s $9.4 billion takeover of Walmart’s ASDA”

Read the Full Article Here

April 22, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “Kraft Heinz hires global brand expert Patricio as CEO”

Published on Apr. 22 , 2019

April 22, 2019: Jason Benowitz, CFA was quoted in the Reuters article, “Kraft Heinz hires global brand expert Patricio as CEO”

Read the Full Article Here

Don’t Fear the Curve

Published on Apr. 10, 2019

Don’t Fear the Curve

Within the community of market analysts, it is well understood that an economic slowdown (and even a recession) can be signaled by an inverted yield curve, with about a year’s lead time, because the inversion in the curve can signal that interest rates in the future may be expected to be lower than rates today. “Inversion” refers to the fact that the yield on short-term notes exceeds that on longer notes.

At this writing, the yield on three-month Treasury Bills exceeds the yield on three-year Treasuries, which have the lowest yield on the U. S. Treasury curve. Do we freak out?

Probably not! We believe that the future isn’t always like the past and, after a decade of near-zero rate monetary policy, perhaps the recession-signaling value of the inverted yield curve needs further examination.

Our working hypothesis is that lower long-term rates have less to do with an economic slowdown and more to do with low inflation expectations and limited economic volatility. Yes, in the past four years the Fed implemented nine rate increases in the Federal funds target rate of 25 basis points each. It did this initially to lift the rate out of the post-’08 extreme accommodation approach, because monetary policy generally operates with a lag, to dampen an economy as employment started to soar. The expectation was that wage pressures would not be far behind employment growth. The Fed may have hoped to be able to ease inflation expectations in an attempt to control inflationary pressures. We think that the acceleration in employment is a big story. We believe that the labor market is solid, which should continue to provide for contributions to consumption, an important driver of economic activity.

The accelerating inflation story hasn’t played out, or hasn’t played out yet, as inflation has been lower than expected. We chalk this up to technology, demographics, and globalization because together they have held down costs and pricing power. We believe that for the Fed, the dilemma is that the economy is growing and unemployment has dropped, yet inflation hasn’t accelerated. It’s a good problem to have if you fear inflation, but the Fed may have expected more inflation at this point in time. Because of this it appears that on the surface, we have restrictive monetary policy and that is why we think calls are now being made by pundits for the Fed to lower rates.

We believe that the bond market is signaling a healthy economic environment. Credit markets had a strong first quarter, and to us the tightening of credit spreads is indicative of healthy balance sheets and firms meeting their financial goals. For us, this translates into what we believe may be a continued period of steady economic growth and returns for investment grade credit securities. If credit spreads were to widen, that would be a concern for us.

March 22 2019: Adam Sheer’s Interview on Funeral Nation TV

Published on Mar. 22, 2019

March 22 2019: Adam Sheer’s Interview on Funeral Nation TV

Check out Adam’s interview regarding our collaboration with The Foresight Companies, LLC. serving the funeral services and cemetery professions. The interview on Foresight Roosevelt Wealth Management takes place between timestamp 7:30 and 18.

Watch Here

March 19, 2019 Press Release: Roosevelt Investments Announces Dynamic New Collaboration with The Foresight Companies

Published on Mar. 19, 2019

March 19, 2019 Press Release: Roosevelt Investments Announces Dynamic New Collaboration with The Foresight Companies

Read the Press Release Here

Time to Revisit

Published on Mar. 13, 2019

Time to Revisit

What’s in the news

An interesting article from CNBC earlier this month suggests that now may be the time to revisit bonds in your portfolio. The article cites growing fears of a recession and factors like the Fed’s decision to take a patient approach to interest rates, slowing global economic expansion, increased U.S. stock market volatility and political uncertainty as reasons to seek what may be safer investments. Douglas Kobak, CEO of Main Line Group Wealth Management believes that the “right portfolio can add more safety, since individual bonds have a stated maturity date when compared to mutual funds.” Kobak states that “Investment-grade and government bonds also have a low correlation to the stock markets, which can lower the volatility within a portfolio.” He also points out that yields from a short-term bond portfolio can currently beat the rate of inflation.

Searching for yield in the low interest rate environment we have experienced over the past years has forced traditionally conservative investors into riskier assets. The end of 2018 may have been volatile in fixed income markets but Erika Safran, the founder of Safran Wealth Advisors, says that “it’s always time for bonds.” She added, “There should be no fear of the bond market”, “unless, of course, you’re investing on the long end or on low credit.” She believes that there should be no fear if you buy bonds for diversification and income, also stating that “Naturally, there is undue risk if you invest for capital appreciation.”

Figure 2 stock-bond correlation in returns in the first half of recessions

What are we thinking?

We do not believe that a recession is likely in the near term, but we do agree that “it’s always time for bonds.” To produce high levels of income, many portfolios assume a variety of different types of risks. Our approach is to seek to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible. Investment decisions should be based on long term plans and risk tolerance levels. We seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for volatility. Our Current Income Portfolio is an attractive solution for investors looking for conservative allocations and additional yields in any interest rate environment. Let us show you how.

Source: https://www.cnbc.com/2019/03/04/now-may-be-the-time-to-use-bonds-in-portfolios.html

Road to Normal

Published on Feb. 26, 2019

Road to Normal

In the news

Following a number of speeches by Federal Reserve members last week, Bloomberg news highlighted that policy makers could be looking to shorten the average maturity of their treasury holdings. The Fed currently does not actively manage the duration of its reinvestments. Shifts in what types of securities the Feds hold on its balance sheet could have big implications for individual investors. A move away from longer-dated treasuries could put downward pressure on short term rates, but a shorter-duration portfolio could give the Fed ammunition should a financially stressful economic event occur. Recall that the Fed was forced to sell its short term treasuries in order to purchase longer term debt during the financial crisis. We believe the resultant downward pressure on treasury bond yields helped support the economy by lowering borrowing costs.

By opting not to reinvest proceeds of securities as they mature, the Fed is trying to normalize its balance sheet, currently at about $3.9 trillion, by reducing its bond holdings by about $50B per month. In late January Fed Chairman Powell stated that “The question of the ultimate composition of our balance sheet in the longer run is a very important one. “ While the financial markets seem to us to have overlooked the economic reports that caused the December 2018 stock market decline, the Fed did not, communicating the adoption of a more dovish stance in interest rate policy as well as hinting that its balance sheet reduction efforts may come to an end sooner than previously believed. We believe it is not far-fetched to think that the Federal Reserve is practicing good policy by trying to reload some of its lost ammunition.

Graph Treasury Duration Strategy

What are we thinking?

The road to normal should be monitored closely. Last year we saw 10 year treasury yields reach highs not seen in years, but yields finished the year very close to where they began. Just as the Fed is taking a more cautious approach, we also believe a risk-managed approach in fixed income is warranted. We feel we have a unique perspective when it comes to fixed income and the generation of income. At Roosevelt, we believe in not taking excessive risks to generate income today that may jeopardize the ability of the portfolio to provide income in the future. To produce high levels of income, many portfolios assume a variety of different types of risks. We take a different approach. The Current Income Portfolio (CIP) seeks to benefit investors who desire high and reliable levels of income from an investment grade portfolio. CIP seeks to provide a substantial income stream by maximizing annual cash flows while preserving capital. Let us show you how.

Source: https://www.bloomberg.com/news/articles/2019-02-22/fed-leans-toward-shortening-maturity-of-its-treasury-holdings

Feeling unwelcome, Amazon ditches plans for New York hub

Published on Feb. 14, 2019

Feeling unwelcome, Amazon ditches plans for New York hub

Read the Full Article Here

Release of the Doves

Published on Jan. 31, 2019

Release of the Doves

There were four 25 basis point increases in the Fed funds rate in 2018 and three in 2017. At the January 2019 meeting, the FOMC left the Fed funds rate unchanged at a target range of 2.25 – 2.50%. While the pause was expected, the language around it was significant. No longer are we being guided that there may be “some further gradual increases”. Instead the text of the FOMC statement is that the committee is “patient” as it decides what further adjustments might be appropriate.

This shift in sentiment comes after the markets had a tantrum in December and after a government shutdown (which may or may not resume). There are further uncertainties, particularly around our relationship with China, and the outlook definitely includes some gloominess. Perhaps there is some dust that needs to settle.

But if “patient” leaves any sense of ambiguity, Federal Reserve Board Chairman Jay Powell left little doubt at the press conference. This is not about being “patient” with regards to any further Fed funds increase. Rather “patient” is now a fork in the road, where the next change could be higher or lower. Welcome to neutral. The famous “dot plot”, Fed participant’s views of the path of rates, indicating that rates go higher is cast aside. In fairness it is not to be updated until March, at the next meeting. Look for substantial revisions. The hawks have flown off. We have the doves.

Rumblings of all this were apparent in the fourth quarter of 2018, with a noted sell off in leveraged loans as the markets sensed that economic conditions didn’t warrant higher rates. At times looking like a broad credit sell off, where everything that isn’t a government bond was for sale, in hindsight it now looks more like a liquidity event. Investors were dumping floating rate exposure, desirable holdings if rates were to move higher, but unattractive if not. They sold. What traded in the illiquid days of December was whatever could be sold. Credit spreads gapped wider. In January, gravity brought most of it back. Going forward, the economy is expected to grow, but less robustly. Growth outside the US is clearly weaker, especially in China and Europe. This creates drag to the US. Further, government policies remain a source of uncertainty. Brexit is the poster child of this, but governments globally are struggling with myriad but significant issues. This impacts confidence. Financial conditions are tighter, not only because of wider credit spreads, but simply because previous Fed engineered tightening impacts the economy with a lag. Inflation has become what looks like permanently benign. Finally, the outlook for corporate earnings is becoming more mixed. Single digit growth expectations are more common than double, as the positive effect of the tax cut legislation is anniversaried and companies face difficult comparisons. Our view remains that while growth will slow this year compared to last year’s robust numbers, the U.S. economy will still see a reasonable amount of growth.

During the fourth quarter preferred shares experienced one of their worst returns in a decade, but in January a broadly used preferred stock index has already recouped that drawdown as the market bounced back. This sort of price action shows the importance of not trying to time the market, good investment advice which spans both equities and fixed income securities. Roosevelt’s Current Income portfolio remains positioned with a mix of investment grade corporate bonds and preferred shares, the latter a mix of fixed rate and fixed-to-floating rate issues. As always, the investment team remains vigilant about the outlook and monitors the macroeconomic data on a daily basis.

Is Apple too big to fail? Let’s hope so as failure would be catastrophic.

Published on Jan. 29, 2019

Is Apple too big to fail? Let’s hope so as failure would be catastrophic.

Read the Full Article Here

Properly Diversified

Published on Jan. 29, 2019

Properly Diversified

In the news:

After analyzing almost 10,000 financial advisor models with their proprietary risk management platform, BlackRock discovered that even after trimming U.S. Stocks in 2018, financial advisors were still overweight equities. BlackRock’s advice after the discovery was to “get properly diversified.” According to the latest Advisor Insights Guide by Blackrock’s Portfolio Solutions group, “Advisors have been consistently overweight U.S. equities (and U.S. Dollar), underweight U.S. Treasuries and shorter-duration in fixed income for many years.” It also found that “advisor portfolios weren’t well positioned” coming into 2019. We believe Blackrock’s free advice should be heeded.

While the last few months of volatility in the capital markets can be unsettling, such concerns should not come at the expense of preparing for a comfortable retirement. Making informed decisions on what retirement savings route is best for your clients should be addressed sooner rather than later to help reduce the impact of market dips in the long term.

Graph Advisors have trimmed US stocks

Our Thoughts:

According to a recent Nuveen survey, investors indicated that in the next six months they would like to discuss with their financial advisors a portfolio that can generate income while seeking to preserve capital. We feel we have a unique perspective when it comes to fixed income and the generation of income. At Roosevelt, we believe in not taking excessive risks to generate income today that may jeopardize the ability of the portfolio to provide income in the future. To produce high levels of income, many investors may be unwittingly assuming a variety of different types of risks. We take a different approach. The Current Income Portfolio (CIP) seeks to benefit investors who desire high and reliable levels of income from an investment grade portfolio. CIP seeks to provide a substantial income stream by maximizing annual cash flows while preserving capital.

Source: https://www.wealthmanagement.com/equities/blackrock-advisors-are-overweight-equities-and-ill-prepared-2019. https://www.nuveen.com/investors-focus-on-avoiding-losses-not-guarding-gains

Fourth Quarter 2018 | Fixed Income Commentary

Published on Jan. 24, 2019

Fourth Quarter 2018 | Fixed Income Commentary

Market Overview

The final months of 2018 will likely be remembered across U. S. capital markets for extreme levels of daily price volatility. In fixed income, final year-to-date performance was for most bondholders generally lackluster and uninspired. What slight differences there were between the various market sectors can generally be explained by a simple and straightforward metric-credit quality. Counterintuitively, high returns were achieved in instruments thought to be safer, and low total returns (indeed negative for the year) were provided by investments thought to be more risky. One-to-ten year U. S. Treasury and agency bonds saw annual total returns of about 1.44%; one-to-ten year AA-rated corporate bonds gained around 1.23%; one-to-ten year A-rated corporate bonds gained about 0.14%; and one-to-ten year BBB-rated corporate bonds put in a slightly negative (0.68%) total return. Below investment-grade returns were even more negative.

Caught in the malaise, preferred stocks suffered through one of that group’s worst quarterly performances since the Credit Crisis of 2007-09, most notably with the final three months dragging the sector down to its first negative annual return since 2013. Specifically, the ICE Bank of America Merrill Lynch Fixed Rate Preferred Securities index, after posting a respectable first half, ended the year down around -4.34%, as a result of the dismal fourth quarter’s -4.56% total return. This abrupt shift in performance was tied to a near-perfect storm of short-lived technical factors which were eventually overwhelmed by quickly changing fundamental realities. Technical forces of supply and demand were felt most acutely by the largest exchange-traded funds, but prices were hit across the entire preferred stock universe.

Over the first half of 2018, prices of $25 par preferred stocks benefitted from two key positive supply and demand factors. Inflows into the sector’s ETFs ran noticeably higher than usual mid-year as investors continued a long-term hunt for yield. This prolonged demand coincided with an abundance of higher fixed rate coupon issues being redeemed by corporate treasurers. Preferred stock prices were therefore generally supported by growing demand and dwindling supply—and just as significantly, this took place even as most investors were expecting the Fed to continue to steadily raise short-term U. S. interest rates.

In early October 2018 after Fed Chair Powell said that the Fed was far from done with rate hikes, capital markets responded and investors began adopting a more cautious stance with respect to both stocks and bonds. This took place in the backdrop of increasing trade tensions with China and some signs of weakness in overseas economies. Prices of both stocks and bonds immediately began to discount further interest rate hikes and the ten-year Treasury yield jumped from about 2.81% to almost 3.23% from late August to early October. Prices of fixed rate credit instruments, especially perpetual maturity issues like traditional $25 preferred stocks, are sensitive to this kind of rising interest rate environment and bearish price outlook. A host of additional negative economic events, including falling oil prices, geopolitical uncertainties, and domestic political upheaval, culminating with the Democratic Party’s gains and control of the House of Representatives after the midterm elections, quickly compounded the long-standing complacency which had characterized the fixed income market.

The result appeared to be a significant “flight to quality” by investors, causing the stock market to decline, a widening of investment and non-investment grade credit spreads, and significant preferred stock ETF outflows. All of these factors combined pushed the ten-year Treasury yield back to 2.62% as investors sought out the safe haven of government bonds, while simultaneously depressing the market prices of most fixed and fixed-to-floating rate preferred stocks and reversing the favorable technical trends of earlier in the year.

Performance and Outlook

The Current Income Portfolio remained fully invested throughout 2018 in the investment grade U. S. credit markets, generating current yields generally between 4.50-5.0%. While the fourth quarter brought higher volatility than we expected, our allocation to good quality intermediate-term corporate bonds, $25 par preferred stocks and $1000 fixed-to-floating rate preferred stocks helped stabilize the portfolio and mitigate price declines relative to the intermediate-term bond index. The corporate bond component of the portfolio was constructed to provide price sensitivity (as measured by duration) considerably less than intermediate corporate bond indices. This strategic decision also helped to buffer the portfolio from the fourth quarter’s volatility.

Our decision to incrementally upgrade some of the portfolio’s corporate bonds to A-rated from BBB-rated bonds during the year also helped minimize the fourth quarter price volatility. In addition, our decision to shift the preferred allocation of the portfolio to both higher coupon issues as well as fixed-to-floating rate issues also helped performance of the portfolio. Lastly, incrementally shifting the portfolio’s preferred allocation toward $1000 par preferred stock issues also generally helped stabilize the portfolio while at the same time providing significantly enhanced levels of current income compared to what is typically offered in the investment grade credit space.

By mid-January 2019 as we conclude this letter, market prices in the preferred stock market have already recovered much of their exaggerated year-end decline. The underlying question we are left with as fixed income investors after the closing months of 2018: does credit quality deterioration, investment grade credit spread widening, anxiety over monetary policy, and a flight-to-quality revival continue, or were the final weeks of the year instead an opportunity for productive portfolio repositioning? Holding true to our investment objectives, we believe that enhancing current income as opportunities present themselves remains the most reliable way to maximize longer-term wealth creation. Rather than speculate on the credit market nuances ahead, we prefer to conserve as much principal as possible while maximizing the current income improvements available for the clear and present taking. Our approach is to remain focused on annual expected cash flows, and so we tend to welcome (not fear) wider credit spreads as we welcome (not fear) higher ( “normal” if you prefer) nominal interest rates.

Patient Minutes

Published on Jan. 15, 2019

Patient Minutes

In the News:

On Wednesday the Federal Reserve released the minutes from their December FOMC meeting. Many analysts agree that the Fed is showing a willingness to delay further interest rate hikes given the recent volatility in financial markets caused by increasing uncertainty in the overall global economic outlook. Michelle Meyer, head of U.S economics at Bank of America Merrill Lynch stated that “the minutes suggest a cautious approach to future monetary policy”. Inflation appears to be a concern as well. Last week Fed Chairman Powell stated, “We will be patient as we watch to see how the economy evolves, given the low inflation outlook.” He also stressed that monetary policy was not on a preset course. The FOMC “Dot-Plot” suggests that little change is on the horizon, but it does seem to indicate future additional tightening.

FOMC participants assessment of appropriate monetary policy

Our Thoughts:

We do not think that the Fed is done raising rates but more importantly the effects of those rate hikes need to be monitored more closely. Last year we saw 10 year treasury yields reach highs not seen in years but finished the year very close to how the year began. As with Fed Chairman Powell’s comments last week as per taking a “risk managed approach to policy decisions in coming months” we also believe a risk managed approach is warranted. We feel we have a unique perspective when it comes to fixed income and the generation of income. At Roosevelt, we believe in not taking excessive risks to generate income today that may jeopardize the ability of the portfolio to provide income in the future. To produce high levels of income, many portfolios assume a variety of different types of risks. We take a different approach. The Current Income Portfolio (CIP) seeks to benefit investors who desire high and reliable levels of income from an investment grade portfolio. CIP seeks to provide a substantial income stream by maximizing annual cash flows while preserving capital.

Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate

Brighter Horizon

Published on Dec. 18, 2018

Brighter Horizon

In the News:

Overall financial market volatility has been elevated over the past two months. Fixed income returns have been bogged down by the Fed hiking cycle. Investors have become increasingly concerned that Santa will not give them a year end rally. In the latter stages of a bull market, as the Federal Reserve raises interest rates and the yield curve flattens, investor sensitivity to the risk of recession grows markedly. Better news seems to be on the horizon. Last week Barclays released their Global Credit Outlook for 2019 and U.S. investment grade fixed income was their top investment choice of 2019 due to its high “risk-adjusted return.”

The Barclays team states, “Our economic outlook, thus, appears more bond-friendly than it has for many years. Moreover, we find it substantially easier to identify negative risks to our base case than positive ones. A world of single-digit earnings growth, without a recession in sight but with mostly downside risks, naturally brings to mind fixed income assets at the upper end of the quality spectrum. From a total return standpoint, European credit does not fit the bill; total yields are simply too low. That is not true of high-quality US credit products; for the first time in several quarters, we now feel that the risk-reward favors higher credit US fixed income over global equities.” They go on to explain that the U.S. economic backdrop remains stable and most leading indicators still point to robust growth in 2019. “Corporate fundamentals in aggregate also look strong, with net leverage only slightly above its long-term median level, EBITDA margins are at 15-year highs, and interest coverage ratios remain elevated. Further, following the recent spread widening valuations are not especially rich.”

Our Thoughts:

Our approach is to seek to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible. Investment decisions should be based on long term plans and risk tolerance levels. We seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for volatility. Our Current Income Portfolio is an attractive solution for investors looking for conservative allocations and additional yields in any interest rate environment that also can provide a sustainable and substantial income stream during your clients’ retirement. The foundation of our Current Income Portfolio remains U.S. investment grade fixed income.

Sources: Barclays Global Outlook, Macro Research December 6, 2018

BBB’s: Quantity vs. Quality

Published on Dec. 4, 2018

BBB’s: Quantity vs. Quality

In the News:

A common misconception of the BBB rated investment grade bond universe today is that quantity affects quality. While the U.S. corporate bond investment grade universe has indeed experienced a significant increase in both the size and market share of BBB rated securities (as compared to “A” rated securities), this does not necessarily imply a decrease in quality. According to Barclays, – “Given the increasing size of the BBB cohort (in both absolute and relative terms), investors have raised concerns about the potential effect that fallen angels (a once investment grade rated bond that has since been downgraded to high yield) could have”… “For the broader BBB category, though, credit fundamentals have remained stable or improved slightly in recent years. Specifically, leverage for BBB’s at 2.8x at the end of 1Q 2018, was down from 3.4x and 3.0x at the end of 2015 and 2016, respectively.”

Barclay’s also points out that the BBB credit segment has grown to about 50% of the U.S. Investment Grade Credit Index, up from 37% at the end of 2010. However, digging a bit deeper we find that the increase in the BBB’s, as a percentage of the overall investment grade market, has been in consumer non-cyclical and defensive industries which can withstand an economic downturn far better than cyclically-levered names. It is also interesting to note that the lower end of the BBB segment (credits rated BBB-) has actually stayed the same, in percentage terms, of the overall investment grade index, implying no increase in the risk of securities “dropping” to high yield. In fact, Fitch Ratings Agency expects that 2019 will have the lowest corporate default rates on bonds since 2013.

There has not been an increase in BBB

What we are thinking:

Corporate profit growth is bound to slow eventually but remains near record highs. The corporate tax rate reduction also leaves companies with higher profitability after taxes to work with (net income, retained earnings etc.) which boosts an issuer’s ability to pay back debt. Investment grade and high yield issuance should decline in the coming years as the corporate tax rate gets reduced and leverage declines, allowing for improved credit quality in bonds purchased.

The size of the BBB market does not matter for an individual investor, but the credit quality of the issuer does. The size of the BBB market relative to the investment grade universe should not be a concern unless those companies that make up the BBB segment actually face credit concerns. At Roosevelt Investments our investment process starts by evaluating current credit market conditions to determine optimal construction. This includes identifying sources of risk, setting effective risk limits, yield curve positioning, sector allocation, diversification and duration management. Yield and spread analysis is an important part of our credit analysis. CIP is an attractive solution for income investors who are looking for conservative allocations and additional yield an either a low rate or rising rate environment. Temporary market distortions and pricing inefficiencies will provide opportunities to improve overall portfolio yield and income characteristics. Let us show you how!

Source: Barclays U.S. Credit Research June 29th 2018

Passive Pride vs. Active Vigilance

Published on Nov. 28, 2018

Passive Pride vs. Active Vigilance

In the News:

Market volatility and the continued rise in interest rates have advisors sticking to allocations driven by active management. 83% of US based financial advisors said they believe the current market environment is likely favorable for active portfolio management, as published by Natixis Investment Management last week. Those who participated in the survey stated that they allocated only one third of client portfolios to passive strategies, while a larger percentage (roughly two thirds) was allocated to actively managed strategies.

This past February ETF Fund flows entered the red for the first time in years, according to DataTrek Strategist Nicholas Colas; which shows investors are thinking about more than passive investments. Active management has not been kind to investors over the past several years, but those returns have been improving as of late. According to Citywire, “In 2017, 43% of active managers beat their benchmarks, up from 26% in 2016, according to the latest Morningstar active/passive barometer report. Year-to-date in 2018, 63% of mutual funds are beating their benchmarks, according to a BofA report”. Lastly, as shown in the graph below produced by PIMCO, the majority of active bond funds and ETFs beat their median passive peers after fees over the past 1, 3, 5, 7 and 10 years. It’s clear that active management in fixed income yields a better outcome, given the bond market’s unique structure.

percentage of active mutual funds and etfs that outperformed their median passive peers after fees

What are we thinking?

While both active and passive management can play a role in overall investment strategy, it is important to be especially vigilant in the fixed income sector. Given the nuances of the fixed income landscape, active bond managers outperform their passive counterparts.

As bond managers focused on maximizing annual cash flows while preserving capital to provide future cash flows, our goal is to provide investors with a sustainable and substantial income stream. We believe the best approach, particularly in today’s uncertain environment, is an actively managed one. Let us show you how!

Oversold

Published on Nov. 15, 2018

Oversold

In the News:

The Bloomberg Barclays US Aggregate Bond Index was down 2.2% in the 10-month period through October 31, 2018. However, a recent report from the Equity Compass Group at Stifel reminds us that sometimes what goes down must go up. Stifel Senior Portfolio Manager Timothy McCann makes two key points in the report: (1) “Over the last 27 years, bonds have produced a trailing 10-month return of -2.2%, or less, just 3% of the time.”, and (2) “During the 27 year time span when the trailing 10-month returns on bonds have been negative, the returns over the next 10 months have averaged 6.1%”.

The report goes on to suggest that there could be a silver lining when considering that the 10-year US Treasury yield is off its low and at its highest level since 2011, and that the Fed could raise rates at a slower pace than the market currently believes. Furthermore, bonds can still post positive returns in a rising rate environment, assuming rate increases are slow and measured.

Historically, 10-month periods of below average returns tend to lead to positive periods of above-average returns.

Barclays Aggregate Total Return Index

What we are thinking:

While this report might offer a feel good analysis of the fixed income market, at Roosevelt, we manage fixed income first as a solution for cash flow needs and secondarily for total return. As income investors, we appreciate that total return includes interest, capital gains, dividends and distributions that are realized over a certain time period. We believe that diversification across industries, maturities and issuers helps to provide consistent and sustainable levels of income, as well as a natural hedge to volatility. In our view, the higher the income in a rising rate environment, the better off your total return can be.

Third Quarter Fixed Income Commentary

Published on Nov. 13, 2018

Third Quarter Fixed Income Commentary

Market Overview

One’s investment perspective, how long market positions are likely held, is an underlying aspect of all investment strategies. Institutional bond managers, such as insurance companies and large pension funds, extend their investment perspective over many years to match against their similarly long-dated liabilities, while at the opposite extreme of the investment timeline are speculators whose investment perspective may be measured in minutes. As a result of these completely dissimilar perspectives, different reporting systems are required and deployed. The prudent speculator is forced to mark a trading portfolio daily if not even more frequently, while the institutional bond managers may not even utilize a mark-to-market system of accounting at all, and simply hold the asset-liability yield differential until maturity.

Even within the broader cohort of institutional fixed income investors, there are subgroups with striking differences in their investment philosophies. Many fixed income investors primarily seek steady and sustainable income through a variety of asset exposures; however income-oriented investors might typically hold a single asset class, investment grade bonds, in order to achieve their specific objectives. The income investor often faces a conundrum of having to balance a short-term need for regular –monthly or quarterly—income generation to meet cash flow obligations, and at the same time, the much longer-term perspectives that comes with the understanding that their income needs will extend for many years into the future, and so they need to plan accordingly.

Historical Market Review

Our Current Income Portfolio is designed with the income-oriented investor’s dual investment perspective in mind. The strategy is devised to produce the highest current income characteristics (short-term perspective) while simultaneously applying our best efforts to protect the portfolio’s principal value (longer-term perspective) in order to:

  • Continue income flows over long time periods;
  • Retain abilities to increase today’s income levels (longer perspective) if and when US interest rates rise.

Rising interest rate expectations (called normalization by the Federal Reserve Board policymakers) have been with all investors for a rather extended time period now. Starting at the end of 2016, the FOMC has slowly and steadily reversed the extraordinary low interest rate policies employed to stabilize the economy after the Financial Crisis of 2007-2008. The short-term interest rate target set by the Federal Reserve Board has been raised eight times, with several more on the expectation horizon. And while that may at first seem extraordinary, a historical perspective may be help evaluate where we have been and where interest rates may in fact settle.

Since the beginning of 2017, the two-year US Treasury has risen about 180 basis points, to end the third quarter yielding 2.81%. Over the same period, the 10-year US Treasury has risen only about 50 basis points, to close the third quarter yielding around 3.00%. Despite the Federal Reserve’s ongoing reversal of short-term rate policy, these market rate changes, indeed the nominal interest rates themselves, hardly seem overwhelming. In fact, the relatively anemic total rates of return for bonds over the recent past stem not from price markdowns as rates rise as much as they do from the historically tiny yields the investment grade bond market has been confined to since 2015. Still, from a historical perspective, and mindful of the Federal Reserve Board’s normalization objective, there indeed may be more upside to nominal interest rates ahead of us. The average two-year US Treasury since the 1980s has had about a 5.3% yield, and the average 10-year US Treasury yield has been about 6.7%. It’s important to note that the 80s included the hyper-inflationary era of double-digit interest rates; however no one is predicting a return to that sort of environment any time soon.

The challenge, therefore, is to determine not only how much higher “normal” rates may be from today’s levels, but of equal importance, how much time will pass before we arrive at normal. In the credit markets, especially to income-oriented investors, the latter question may actually be more important than the former.

Outlook

To best meet our objective of capital preservation paired with the highest level of current income, we have most recently relied on a portfolio constructed with three distinguishing components:

  • A conservative mix of investment grade corporate bonds, diversified across many industries and with a significant weighting of bonds maturing in less than three years,
  • A sleeve of preferred stocks which meaningfully enhances the portfolio’s yield and income characteristics,
  • Utilization of securities which initially pay coupons with attractive fixed interest rates and then either convert to floating interest rates linked to prevailing interest rates or are called at par.

To date, this portfolio structure continues to produce relatively attractive income levels with subdued price changes relative to intermediate-term corporate bonds indices which have higher interest rate sensitivity. Moreover, the fixed-to-floating rate issues have proven less price volatile than the traditional fixed rate alternatives. While it is true that longer-dated portion of the Current Income Portfolio may prove more price volatile in the short-term than the corporate bonds maturing over the next 2-3 years, the income and yield-to-maturity characteristics of the longer dated, fixed investments are dramatically higher today—and may stay so for quite a long time into the future as the market waits for Federal Reserve policy to achieve normalization.

Beyond the portfolio’s current structure, it remains an actively traded portfolio, which in this case refers to our ongoing search for incremental improvements to our portfolio’s characteristics. Through the occasional substitution and replacement of existing holdings for better alternatives, we anticipate we may have the opportunity to significantly enhance income generation. While we foresee the general three-part construction of the Current Income Portfolio remaining much the same as long as the investing environment (Fed tightening, economic growth and low inflation expectations) remains on its current path towards normalization, temporary market distortions and pricing inefficiencies will provide opportunities to improve overall portfolio yield and income characteristics. In recent weeks we have been availing ourselves of such opportunities to improve portfolio yield for our clients.

Positioning for Rates

Published on Nov. 13, 2018

Positioning for Rates

In the News:

Last week it was not a surprise that the Federal Reserve decided to hike interest rates for a third time this year, for a total of eight hikes since December 2015. Short term rates seem to be getting closer to the Fed’s goal of a neutral level. The Fed is projecting another 25bps hike in December of this year along with three more hikes next year and one in 2020. Whether they pause in between any of those points would depend on the path of GDP growth, which has been growing at a healthy pace this year; on core inflation, which is near the Fed target of 2%; and on employment trends. With the current Fed Funds rate at 2.25%, searching for a higher level that neither restricts nor supports economic growth could be tricky, as the yield curve may be on the cusp of inversion.

As the Fed continues to push short term rates higher, longer term rates have not moved upwards with the same exuberance. After touching 3.11% in mid-April and late-May, the 10 year US treasury retreated back below 3% this summer before rising back to 3.09% in late September. As we mentioned in our second quarter commentary, “This has us questioning the direct impact on market rates and the yield curve, with the Fed’s engineered rate increases. We are inclined not to be too focused on interest rate anticipation strategies, as prognostications of higher market rates haven’t borne out.”

Our Thoughts:

We believe we remain well positioned to take advantage of higher yields should they materialize. Our approach is to seek to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible. Income investors have waited a long time to see yields rise, and have been forced to remain patient throughout a prolonged low-yielding environment. Investment decisions should be based on long term plans and risk tolerance levels. As active managers, we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for interest rate volatility.

The Sweet Spot

Published on Nov. 13, 2018

The Sweet Spot

In the News:

In an interview in last Friday’s New York Times, Chief Fixed Income strategist at the Schwab Center for Financial Research, Kathy Jones, relayed her concerns that by holding T-Bills or cash equivalents investors may be too defensive. Interestingly she comments on a Morningstar Direct report stating that for the last six months ultrashort-term bond funds have had the highest net inflows among taxable bond funds. Ms. Jones states, “Implicitly, that is trying to time the market…and such behavior can hurt investor returns.” She also mentions her view that the sweet spot for investors is a fixed income portfolio with an average duration from two to five years.

Our Thoughts:

We feel our Current Income Portfolio (CIP) is designed to take advantage of the current environment. As of 9/30/18, more than half of the portfolio had an effective duration of less than 5 years (the weighted average duration on the total portfolio was 4.24 years). CIP may be a suitable solution for those seeking a risk conscious approach to income generation, as the portfolio strays away from high-yield debt and common stocks. Rather, we look to our preferred security sleeve to act as our yield engine. Some of these preferreds are structured as fix-to-floating rate debt instruments, which may benefit investors as rates rise.

As active managers, we seek to provide value by remaining cognizant of current trends, making reasonable and informed expectations of Fed announcements, paying attention to credit spreads and utilizing a mix of fixed rate and fixed-to-float rate securities in preparation of interest rates possibly trending higher.

October 10, 2018 Press Release: Roosevelt Investments Acquires Value Architects Asset Management and Blueprint Financial Planning

Published on Oct. 10, 2018

October 10, 2018 Press Release: Roosevelt Investments Acquires Value Architects Asset Management and Blueprint Financial Planning

Read the Press Release Here

15 to 20 Percent

Published on Sep. 27, 2018

15 to 20 Percent

Did You Know…

By definition, History is defined as the study of past events. History is studied to help one understand the past, sometimes in an effort to predict the future or to avoid mistakes.

The narrowing gap, or spread, between interest rates on short-term and long-term government bonds has historically signaled the risk of a recession. According to the San Francisco Fed., yield curve inversions have “correctly signaled all nine recessions since 1955 with only one false positive in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession”. A recession is a significant decline in economic activity, normally measured by two consecutive quarters of negative economic growth as measured by GDP.

Presently, the economy is showing strength and corporate earnings are strong. The Federal Reserve has signaled that they will continue unwinding their balance sheet and continue with raising interest rates. Alas, there is still plenty of concern.

The Fed meeting minutes from June 13th mentioned that participants were presented with a Fed Staff paper suggesting better recession indicators than the spread between the 10-year and the 2-year treasury notes. The research paper recommended looking at the near-term forward spread instead, which shows the difference between the current implied forward rate on treasury bills six quarters from now, and the current yield on a 3-month treasury bill. This indicator suggests that the odds of a recession in the next year is about 15-20%.

Since the 1920s, the U.S. economy has been in a recession about 18% of the time. Therefore one could say that the indicator suggests the odds of a recession over the next year are about the same as in an average year, as stated in the article “What are the chances of a recession? Not what you’d think.”

What we are thinking:

What will history teach us this time around? Is it too late to change directions?

At Roosevelt Investments our investment process starts by evaluating current credit market conditions to determine optimal construction. This includes identifying sources of risk, setting effective risk limits, yield curve positioning, sector allocation, diversification and duration management. Yield and spread analysis is an important part of our credit analysis. Our fixed income team diligently monitors opportunities to maximize potential differences between maturity horizons. CIP is an attractive solution for income investors who are looking for conservative allocations and additional yield an either a low rate or rising rate environment. Let us show you how!

Sources:

https://www.federalreserve.gov/econres/notes/feds-notes/dont-fear-the-yield-curve-20180628.htm

https://www.frbsf.org/economic-research/publications/economic-letter/2018/march/economic-forecasts-with-yield-curve/

Now That’s Debt: Time to Think Savings

Published on Sep. 27, 2018

Now That’s Debt: Time to Think Savings

What’s in the news:

Last Tuesday the Federal Reserve Board released a list of the top 33 Nations that own US Treasury Securities, which include Treasury Bills, Notes, and Bonds as well as TIPS. It is not surprising that China and Japan were the two biggest holders of US Treasury debt, about one-third of the total foreign investment. In total, foreign investors hold $6.21 trillion in US government debt, which is more than twice as much as in 2008. In recent years we have seen low and below zero yields in global markets around the world, therefore it makes sense to invest in what is regarded as the safest asset on the planet. A country like China also has few alternatives to invest its approximately $3.1 trillion in currency reserves.

There are always concerns and talks when this report is updated and released and everyone sees the amount of American debt that China holds. What would happen if China decides to dump their US Treasuries out on the market? While highly unlikely, a sell off of bond holdings would reduce the value of outstanding treasuries. Trade negotiations and tariff talks also have the potential for increasing friction along with any type of geopolitical risk. Aside from any exogenous shocks, the US economy still is in a much better place than it was several years ago.

What we may want to start focusing on more is Social Security and Retirement. Did you know that the Social Security Trust Funds are the biggest holders of US government debt at almost three trillion dollars? Therefore, any reduced demand in US Treasuries, at a time when spending on an aging population is projected to only increase, could negatively affect America’s retirees.

Who owns America's debt?

Our Thoughts:

Even with its best intentions, retirees should not rely on Social Security as their only means for retirement savings. The information below further illustrates the need in the US for an emphasis on planning for retirement.

  • Baby Boomers who are gearing up to retire, have less than half of the estimated savings that they will need in retirement.
  • Only 1/3 of Americans who have access to a 401 (K) plan contribute to it.
  • 50% of American workers reported to have less than $25,000 saved for retirement.
  • Only 18% of American workers feel very confident about retiring.

We believe we can help! Our Current Income Portfolio is an attractive solution for investors looking for conservative allocations and additional yields in any interest rate environment that also can provide a sustainable and substantial income stream during your clients’ retirement.

Additional sources:

https://www.marketwatch.com/story/where-did-baby-boomers-go-wrong-this-generation-isnt-financially-prepared-for-retirement-2017-07-05

https://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3426

Enigmas Wrapped in a Vest

Published on Sep. 27, 2018

Enigmas Wrapped in a Vest

In the News:

According to a Deloitte Touche Tohmatsu Limited study, Millennials invest less than 30% of their wealth in the stock market. A study done by Bankrate.com stated that 30% of millennials believe that the best long-term investment is cash. The term Millennials refer to 18-37 year olds and arguably the toughest demographic segment to grab investments from. Why do millennials favor cash? Several reasons for the cautious long-term investment outlook could be scars left by the financial crisis, having tons of debt or parents overemphasizing the need to save. Interestingly only 37% of older respondents “cite the stock market as their top investing choice.” Financial education may be the easiest way to target this demographic, on strategies that emphasize cash growth for example.

Our Thoughts:

We know that there are talented financial professionals that could help millennials save more or help grow their savings more wisely. Millennials seem to be overly cautious and that comes at a cost. Many have borrowed against their retirement accounts such as 401Ks and IRAs to finance home purchases, according to a survey from Bank of the West. Bankrate.com states that just 18% are earning more than 1.5% on their savings. Let us help show you how a risk-conscious approach is suitable for most savers, not just retirees. CIP is a solution for cash flow, not for total return. As income investors, we appreciate that total return includes interest, capital gains, dividends, and distributions that are realized over a certain period. Instead of reaching for that high total return in today’s market place, we strive for reducing risk and providing investors with a sustainable and substantial income stream. Younger investors can take advantage of the compounding of interest income, which when reinvested could get more dramatic as time goes by.

Inversion Good?

Published on Sep. 27, 2018

Inversion Good?

What’s in the News?

In an August 2nd interview, David Kelly, Chief Global Strategist of JP Morgan Asset Management, explained how an inverted yield curve could create income for consumers. Like many strategists David believes that the fed will pull off 4 more rate hikes by June 2019. After these hikes, he expects the yield curve to be flat. Even though an inverted yield curve has historically suggested looming problems for the US economy, he adds a spin to that.

In his interview David stated, “American households have got about three dollars in financial, interest-bearing assets for every one dollar they have in debt. And most of those interest-bearing assets are short-term, things like CDs, and most of that debt are long-term, things like mortgages, so if you got an inverted yield curve and short rates go up more than long rates, guess what, you’re giving more income to consumers, and you’re not pushing up their expenses. It actually stimulates the economy.” Recessions don’t always follow an inverted yield curve, and more often than not when a recession has followed inversion, the stock market may rally considerably before the recession occurs.

An inverted yield curve isn't trouble immediately

An inverted curve warns of recession. But some nice stock gains occur between inversion and recession. LPL FINANCIAL

What are we thinking?

The shape of the yield curve is definitely something to monitor since an inverted yield curve has often followed by recession. Could an inversion be different this time? If you are looking for income we can help do it with a risk-managed approach. Our Current Income Portfolio opportunistically manages corporate bonds and preferred securities and is designed to position investors to benefit in a rising rate or a low rate environment while generating high and reliable levels of income without taking on excessive risk.

What are your unique investment needs? If income is a need, our conservative approach to generating current income may be what you are looking for.

Seeking Advice on Income

Published on Sep. 27, 2018

Seeking Advice on Income

In the News:

According to a recent Nuveen survey, households have a more positive outlook on the economy and personal finances than they did three years ago. Despite this apparent confidence, the survey and wealthmanagement.com, both point out that while 80% of survey respondents say they pay particular attention to investment risk, in reality we believe many pay less attention to attendant risks such as interest rate, credit risk and inflation. Of those surveyed, only 32% were able to identify the inflation rate, with 60% not knowing the current rate or thinking that it is higher than 5%. Regarding Interest rates, 40% believe bond values increase when the Fed increases interest rates while 30% believe bond values decrease and another 30% believe the value remains unchanged.

What makes these statistics even more interesting is that 77% of those surveyed say they rely on a Financial Advisor. Households may not fully understand the impacts of interest rates or inflation but according to the survey more that 50% would make an investment change because of rate hikes. The percentage is much higher with millennials as over 80% say they would make and investment change in such a circumstance. This may be great news for advisors who want to reengage with existing clients since 56% of investors indicated that in the next six months they would like to discuss with their financial advisors a portfolio that can generate income while seeking to preserve capital.

The Case for Income Diversification

Adding diverse sources of income to your traditional bond portfolio may help reduce risk, as no single asset class leads in all markets

Chart does not represent the past performance or yields of any Nuveen fund.
Data source: Morningstar Direct, 1 Jan 2008 – 31 Dec 2017. Past performance does not guarantee future results. Performance of all cited indexes is calculated on a total return basis and includes income reinvestment but does not reflect taxes. Diversification does not assure a profit or protect against loss.
Representative indexes: broad bond market: Bloomberg Barclays U.S. Aggregate Bond Index; high yield corporates: Bloomberg Barclays Corporate High Yield 2% Issuer Capped Index; high yield municipals:Bloomberg Barclays High Yield Municipal Bond Index; investment grade corporates: Bloomberg Barclays U.S. Corporate Index; investment grade municipals: Bloomberg Barclays Municipal Index; preferred securities: ICE BofA Merrill Lynch Preferred Stock Fixed Rate Index; real assets: Real Asset Income Blend; senior loans: Credit Suisse Leveraged Loan Index; U.S. Treasuries: Bloomberg Barclays U.S. Treasuries Index; emerging markets debt: JPMorgan Emerging Markets Bond Index (EMBI) Global; U.S. equities: S&P 500® Index. Different benchmarks, economic periods, methodologies and market conditions will produce different results. It is not possible to invest directly in an index.

What are we thinking?

We feel we have a unique perspective when it comes to fixed income and the generation of income. At Roosevelt, we believe in not taking excessive risks to generate income today that may jeopardize the ability of the portfolio to provide income in the future. To produce high levels of income, many portfolios assume a variety of different types of risks. We take a different approach. The Current Income Portfolio (CIP) seeks to benefit investors who desire high and reliable levels of income from an investment grade portfolio. CIP seeks to provide a substantial income stream by maximizing annual cash flows while preserving capital.

To get started feel free to learn more by clicking on any of our links or give us a call, we are here to help.

Second Quarter 2018 Fixed Income Commentary

Published on Aug. 2, 2018

Second Quarter 2018 Fixed Income Commentary

Market Overview

Over the course of 2017 and the first half of 2018 the Federal Reserve has raised interest rates. In June, the federal funds rate was adjusted upwards to a 1.75 – 2.00% target range. This has been the seventh 25 basis point increase by the Fed since December of 2015.

A change in leadership at the Federal Reserve Board’s FOMC did not appear to alter the committee’s long-standing, public commitment to “normalize” US interest rates, especially on the short-end of the yield curve. After nearly a decade of historically aggressive and prolonged accommodative monetary policy to aid recovery from the financial crisis, the time had come to begin a tightening of monetary policy. We believe this shift reflects the Fed’s view that our economy has definitively moved off of life support and back to good health.

Longer-term rates, in contrast, have not moved upwards with the same alacrity. After touching 3.11% in mid-April and late-May, the 10-year US Treasury yield ended the quarter at a yield of 2.85%, consistent with its level in February 2018.

This has us questioning the direct impact on market rates and the yield curve, with the Fed’s engineered rate increases. We are inclined not to be too focused on interest rate anticipation strategies, as prognostications of higher market rates haven’t borne out. Instead our more tried and true approach has been effective. That is to remain fully invested, yet well positioned to take advantage of higher yields, should they materialize. Our approach is to build client portfolios with the most attractive levels of internal cash flows while limiting traditional bond market risks as reasonably as possible.

We believe it’s possible there will be three, maybe even four, rate hikes a year over the next two years, after which point- federal funds rate would then reach 3.25 – 3.50%. Under this scenario, the 2-year US Treasury would likely see 4.00%, and the 10-year US Treasury would trade at 4.00 – 5.00%, possibly higher. This is how we could see the domestic credit market attain “normalcy.” US 10-year-note yields have barely nudged higher from a year ago. This market benchmark, rising only slightly with successive Federal Reserve actions in the short-term market, bounced off a temporary flirtation with 3.0%, but quickly returned to about 2.85%, the identical levels seen for 10-year Treasury notes back in 2013. This leaves the possibility of a 4% 10-year note suddenly further away than it may have seemed to most investors, proving how difficult it can be to forecast interest rate changes with much certainty at all, especially in the short-term.

The surprises for interest rate forecasters so far in 2018 reinforce the potential pitfalls that may be unnecessarily created from abruptly straying from your investment philosophy and process, solely in reaction to volatile news cycles or wavering expert opinions and prognostications. A consistent approach, matching risks to potential rewards, remains an invaluable virtue across most investment enterprises, and we believe it is especially necessary to maintaining long-term success in fixed income management.

Performance

We have not strayed from our core objectives or disciplines, and have remained fully invested and well-positioned to take advantage of more generous yields on the expected horizon. As a result, our portfolios have continued to produce attractive levels of current income levels and relatively generous internal cash flows, while maintaining relatively stable market values. We believe we will have to be a bit more patient than original contemplated to see our way through short-term price volatility to the realizations of longer-term planning.

Late last year we opted to select shorter rather than longer maturities for reinvestment operations. This has proven helpful to dampen price volatility relative to the overall market, since bond prices have declined as interest rates have moved higher. In this regard, the first half of 2018 has not been particularly kind to investment grade, intermediate-term US corporate bonds. Corporate bonds underperformed government bonds in the second quarter, continuing the trend experienced in the first quarter this year.

Similarly, we opted for a more defensive investment approach by moving a portion of the portfolio from BBB-rated issuers into similar maturity investments with A-ratings. This approach has helped moderate the price decline of our income portfolio this year as higher rated corporate issues have outperformed lesser quality issues. In fact, since early February the yield spread difference between an index of BBB-rated corporate bonds and the US 10-year note has steadily widened from 1.20% to 1.64% at the end of June.

We maintain a sleeve of investment grade preferred stocks as a key component of our income investment strategy, albeit to a limited allocation of approximately 24%. We continually weigh the structural risks and potential rewards of these fixed income investments against alternative investment grade sectors. We have elected to increase our portfolio’s use of fixed-to-floating rate preferred securities as opposed to fixed rate, traditional preferred stock issues. We believe that the variable rate structures offer flexibility to maximize opportunities afforded by higher nominal interest rates, should they become available. In the meantime, the fixed rate preferred stocks have also added to our portfolio’s year-to-date performance.

Outlook

Federal Reserve Chairman Powell recently re-confirmed the FOMC’s present intention to gradually raise the federal funds rate. Economic conditions at present are quite healthy, but may change at any time. We remain committed to implementing our current approach and remaining steadfast to our income–oriented portfolio’s long-term strategy. This approach allows us to best preserve capital and retain significant ability to reinvest at higher interest rates should they become available.

June 25, 2018: Jason Benowitz, CFA appeared on TD Ameritrade Network

Published on Jul. 5, 2018

June 25, 2018: Jason Benowitz, CFA appeared on TD Ameritrade Network

Watch Here

No Stress

Published on Jun. 19, 2018

No Stress

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.

Sources:
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

Medical device maker Stryker says not in talks to buy Boston Scientific

Published on Jun. 13, 2018

June 13, 2018: Jason Benowitz, CFA was quoted in the Reuters article, “Medical device maker Stryker says not in talks to buy Boston Scientific”

Read the Full Article Here

May Markets Trump Along Despite Trade Talks and Italian Politics

Published on Jun. 8, 2018

May Markets Trump Along Despite Trade Talks and Italian Politics

Market Overview

Despite turbulence in trade negotiations and Italian politics, US stocks enjoyed a strong May, with the S&P 500 advancing 2.2%. With seemingly improved economic activity following a subpar first quarter of 2018, we expect corporate profits will remain strong and we maintain our positive outlook on the market.

Trade remains a focal point for investors. US aluminum and steel tariff exemptions expired for the EU, Canada, and Mexico, and the Trump administration announced tariffs would be imposed on certain imported Chinese products starting on July 1st. Meanwhile, the failure to make progress with NAFTA negotiations has dimmed the prospect of reaching a deal by year end. Although we are seeing retaliatory tariffs imposed on US exports, we do not believe that these actions will have a materially adverse impact on US economic growth. However, the uncertainty of Trump’s rhetoric and capricious negotiating tactics may create a challenging environment for corporate management to make long-term capital investment decisions.

Trade related headwinds aside, US stocks have been quite resilient. In our view, a strong economy and positive corporate earnings have created a buffer against negative trade headlines. We believe that investors are viewing most of the White House’s rhetoric as means of negotiation, and that the President’s positions may suddenly change. Therefore, we think markets are reacting less to policy announcements and are waiting on concrete policy action.

Italian politics briefly rattled capital markets after President Mattarella vetoed the 5 Star and League party’s choice for Minister of Economy and Finance. Amid the uncertainty of whether Italy would be able to form a coalition government, Italian 2-year government bonds had their worst day since 1989 (when Thompson Reuters began tracking the data), as yields jumped more than 150 basis points to close at 2.4%. Upon reaching a compromise that keeps the coalition government intact and avoids the potential for snap elections, Italian bonds recovered as 2-year yields retraced nearly half of the advance from the previous day.

We believe that the odds of an Italian exit from the Eurozone are low and we will continue to monitor the situation, but we are not overly concerned by the dramatic headlines. Another potential issue to consider is whether the country’s bonds might have to be restructured, although we view this as unlikely over the near- to intermediate-term. Moreover, we would not expect US capital markets to be directly impacted in the event of a restructuring, since the majority of Italian government bonds are held by Italian citizens and European banks. However, we are cognizant that some degree of contagion might transpire.

Outlook

We continue to hold a positive view on the market and expect that a healthy economy will help to sustain strong corporate profits. In recent years, economic growth has slowed during the first quarter, and recent data suggests that growth is progressing. Regional Federal Reserve surveys aimed at capturing economic activity in various parts of the US have been robust, and forecasts for second quarter GDP growth are in the 3-4% range. Additionally, while we have yet to see a meaningful impact from the recent tax reform, we expect that it will soon give a boost to both corporate investments and consumer spending.

A key risk for markets in our view is trade, as we see the tariff announcements as potentially increasing trade friction with multiple countries. As noted, we think that capital markets can continue to show resilience despite these risks, given a healthy economy and strong profits. However, if the situation were to escalate, we expect that markets would price in weaker fundamental conditions, putting stock prices at risk. We are also keeping close tabs on inflation, as a sharp pick-up could compel the Fed to raise interest rates at a faster pace than markets are currently expecting. This could curtail GDP growth, leaving the economy more vulnerable to exogenous shocks, such as the aforementioned potential trade negotiations. Fortunately we are not yet seeing any signs that inflation is rising to levels that would force the Fed’s hand in this regard.

Passive Pride vs Active Vigilance

Published on Jun. 6, 2018

Passive Pride vs Active Vigilance

In the News:

Market volatility and the continued rise in interest rates have advisors sticking to allocations driven by active management. 83% of US based financial advisors said they believe the current market environment is likely favorable for active portfolio management, as published by Natixis Investment Management last week. Those who participated in the survey stated that they allocated only one third of client portfolios to passive strategies, while a larger percentage (roughly two thirds) was allocated to actively managed strategies.

This past February ETF Fund flows entered the red for the first time in years, according to DataTrek Strategist Nicholas Colas; which shows investors are thinking about more than passive investments. Active management has not been kind to investors over the past several years, but those returns have been improving as of late. According to Citywire, “In 2017, 43% of active managers beat their benchmarks, up from 26% in 2016, according to the latest Morningstar active/passive barometer report. Year-to-date in 2018, 63% of mutual funds are beating their benchmarks, according to a BofA report”. Lastly, as shown in the graph below produced by PIMCO, the majority of active bond funds and ETFs beat their median passive peers after fees over the past 1, 3, 5, 7 and 10 years. It’s clear that active management in fixed income yields a better outcome, given the bond market’s unique structure.

Percentage of Active Mutual Funds and ETFs that outperformed their median passive peers after fees

What are we thinking?

While both active and passive management can play a role in overall investment strategy, it is important to be especially vigilant in the fixed income sector. In recent years, active bond managers have more often than not outperformed their passive counterparts.

As bond managers focused on maximizing annual cash flows while preserving capital to provide future cash flows, our goal is to provide investors with a sustainable and substantial income stream. We believe the best approach, particularly in today’s uncertain environment, is an actively managed one.

Best Buy online growth slows, overshadowing strong earnings

Published on May 24, 2018

May 24, 2018: Jason Benowitz, CFA was quoted in the Reuters article, “Best Buy online growth slows, overshadowing strong earnings”

Read the Full Article Here

LIBOR, It’s Leaving

Published on May 22, 2018

LIBOR, It’s Leaving

Did You Know…

That LIBOR, the benchmark that underpins over $350 trillion in securities, is scheduled to end in 2021? The Financial Conduct Authority (FCA) which has served as the regulatory agency responsible for overseeing LIBOR, has been on a quest to ensure that contributing banks do not leave prior to 2021 before transitions to new benchmarks have been solidified.

Most corporate bond terms state that if LIBOR is no longer available and the calculation agent can’t get submissions from banks, then LIBOR will become fixed at the most recently reported value. This would cause floating rate securities to have fixed rate exposure, potentially exposing investors to significantly lower coupons over the life of the security. Many argue that while the phase out of LIBOR is still years away investors are accepting market risk by buying LIBOR-based floaters with maturities extending beyond 2021. They suggest that investors be compensated for that risk with additional spread or contractual protections and spread curves should steepen for floating rate exposure maturing beyond 2021 to reflect this.

Segments of US Credit Markets Referencing Libor

Our Thoughts:

Are you positioned to monitor the fixed income landscape? There are a lot of moving parts like, market fluctuation, economic and legislative changes not to mention the various structures of bond offerings and the different ways to analyze those. We believe active bond management is prudent. As active managers, we position our income portfolio to take advantage of rising rates by actively monitoring credit valuations, interest rates and yield spreads. We believe good credit and covenant analysis can yield relative value in this current environment.

Source: Barclays, US Credit Research Libor Worries Afloat, August 2017

Volatility Makes an Appearance in the First Quarter

Published on May 1, 2018

Volatility Makes an Appearance in the First Quarter

Market Overview

The return of volatility took investors on a wild ride during the first quarter of the year. While the overall trend for market yields is higher, several factors complicated the picture this quarter, resulting in market gyrations that kept investors on their toes. We believe historical relationships and trends that have characterized the last several years are beginning to fray, suggesting to us that markets have reached an inflection point. Pattern changes that point to this include unusual changes in credit spreads and the shape of the yield curve, as well as the correlation between stock and bond prices relative to economic activity.

While the past several years have been characterized by accommodative monetary policy, a low-growth economic recovery, and very slight inflation, leading to a persistent flattening of the yield curve and tight spreads, an abrupt reversal occurred mid-February, sparked by labor market data which triggered inflation fears and concern this could prompt the Federal Reserve to accelerate their plans. In March, these concerns abated, and were sidelined by fears of a potential trade war, which sparked volatility in the stock market and precipitated a “flight to safety” in Treasury bonds, driving yields lower. Despite the 10 Year Treasury spiking to a four-year high of 2.95% in February, the yield curve’s overall trend for the quarter was continued flattening.

We view the shape of the yield curve as noteworthy relative to the past five years. The difference between the US Treasury 2-year and 10-year notes has compressed throughout the economic recovery from the financial crisis, ranging from a modest 0.50% to over 2.50%. Interest rates on both short- and long-term US bonds have been rising as the Fed continues its slow and steady approach toward a more normalized rate environment. However, the ascent is following a bear flattening approach, whereby short-term rates are rising faster than long-term rates. While this may prompt questions on whether an inverted yield curve may be on the horizon, this phenomenon is traditionally short-lived and occurs when recessionary pressures are far more pervasive than what we are seeing right now.

We believe corporate credit markets may be beginning to separate and move in more independent directions. Yield spreads between investment grade corporate bonds and the US Treasury 10-year note had been narrowing steadily for nearly two years, yet this yield spread reached historical narrow levels during the first part of the quarter then reversed dramatically, returning to the yield spreads of mid-2017. Over the quarter, spreads between US Treasury and US corporate issues tightened, widened, and then tightened again. Going forward, we anticipate greater potential for widening.

Based on these observations, our thought is that after many years of bond and equity price changes being tied closely together, the strength of this relationship may be starting to weaken. Instead of bond prices rising and yields declining in tandem with economic good tidings, bond prices may begin to decline while yields rise, independent of equity market fortunes. There are significant trends to consider in support of this inflection point: tightening monetary policy remains in place for further rate hikes, loosening fiscal policy seems likely following plans to expand the Federal deficit, and the yield spreads necessary to compensate lenders for the risks of non-government-guaranteed issues may be expanding.

Outlook

These new pressures are already presenting challenges in terms of relative performance between US credit market sectors, as demonstrated in the wide range of total returns across sectors for the first quarter. While the ICE BofAML 1-10 US Treasury and Agency Index returned -0.69%, the ICE BofAML 1-10 US Corporate Index returned -1.46%, and the ICE BofAML Fixed Rate Preferred Securities Index returned -1.00%.

The Roosevelt Current Income Portfolio (“CIP”) remains focused on providing the highest possible current income investment characteristics while assuming the least amount of risks. While total rates of return (over longer investment periods) remain an important measurement of wealth creation, and a cornerstone of our underlying process and strategic decision-making, the CIP strategy is focused primarily on maximizing current income through a reliance on a relatively patient and conservative approach.

At the end of 2017, we reduced the portfolio’s overall duration (interest rate risk) as well as its allocation to preferred stocks, while shifting the allocation towards fixed-to-floating rate preferred structures. These adjustments helped to moderate a slightly negative total rate of return over the quarter. Equally important, the portfolio is strategically designed to preserve its ability to take advantage of rising rate environments as they become available. A slow drift higher in nominal US interest rates as changes in expectations for inflation and monetary policy manifest remains the most reasonable expectation, in our view. How the markets respond remains fluid, of course, but we continue to maintain our view of greater downside price risks than upside potential, and are conservatively positioned as a result.

Default Risk

Published on Apr. 27, 2018

Default Risk

Did You Know…

The amount bond holders can recover once a bond has defaulted can vary? Typically, the recovered amount is less than par. And because the bankruptcy process can be drawn out, investors could find themselves stuck with non-interest bearing investments for an unknown period of time.

To gauge default risks, credit ratings are often used to determine the health of the issuer. Lower rated issues frequently are less liquid than conservative, higher-rated investment grade securities.

The chart below illustrates default rates for the spectrum of bond ratings.

What are we thinking?

It is pretty evident which ratings class has the highest default rates. Global investment grade corporate debt has only seen one default in the last five years, while global speculative-grade bonds have defaulted 429 times in the same time period.

It is easy for investors to be lured in by yields offered in the high yield, non-investment grade space, especially when the pace of ratings upgrades actually increased last year, but this exposure can increase your portfolio’s risk.

To mitigate this risk, the Current Income Portfolio only invests in investment grade corporate bonds and preferred securities at purchase. Our risk conscious approach includes ongoing monitoring of credit ratings, interest rate sensitivity, callability, sector mix, and structure risks – with a continued focus on income generation in both a low and rising rate environment.

Fed Up

Published on Apr. 10, 2018

Fed Up

What’s in the news…

Recent political, economic, and market volatility continues to keep everyone on their toes.

After climbing to 2.95% on February 21, the 10 year Treasury dipped to 2.73% last week before settling at about 2.78% [1]. With the Fed continuing rate hikes and unwinding of QE, recent tax cuts, an implied increase in government spending and a healthy economy, what gives? Is the market over valued at its current level or could the recent spike in yields be a flight to safety after President Trump initiated tariffs on China, threatening a trade war and commented on Amazon? And most importantly, where will rates go from here?

Disparity among global interest rates could be a headwind on the Fed’s path. “The US continues to attract world-wide demand for its bonds…this difference creates a headwind for higher domestic rates.”[2] Meanwhile the balance sheets of the Bank of Japan, the European Central Bank and the Peoples Bank of China each have surpassed the size of the Fed’s balance sheet. This increased money supply could prolong lower rates globally.

Also, it is important to remember that Fed policy does not necessarily influence the intermediate and long ends of the yield curve and, as of now, spreads between short and long term rates are shrinking, making shorter duration bonds more attractive.

Source: Raymond James

What are we thinking?

Investors have steadily been offered less incentive to extend the maturities of their investments and simultaneously are having to assume more credit risk to obtain the same returns which were available to them two years prior. Income investors have waited a long time to see bond yields rise, and while there is opportunity for these investors they are forced to remain patient as the market faces volatility.

Investment decisions should be influenced by long term plans with risk tolerance in mind. While some variables are uncertain, we think the Fed will more than likely continue to increase rates. As active managers, we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying the portfolio in preparation for interest rates to trend higher. CIP is currently designed to benefit from rising interest rates, with about 30% of the corporate bond allocation currently due to mature in 1-3 years, which may enable reinvestment at higher rates.

[1] As of 4/9/18
[2] Source: Raymond James, Fixed Income Quarterly

A Taxable Equivalent

Published on Mar. 27, 2018

A Taxable Equivalent

Did you know…

In the quest for higher yields tax implications are an important consideration. With that in mind, investors often turn to municipal bonds as a tax free, bond alternative with higher yields. But are tax free muni’s the best route to take when looking for higher conservative yield? With new 2018 tax laws, we thought it would be helpful to update one of our popular CIP Quips, “A Taxable Equivalent”.

According to FMSbonds, the national inventory of 10 year maturity issued municipal bonds offer the following yields to maturity: AAA rated offering 2.45%, AA rated bonds offering 2.65% and A rated bonds offering 3.00%.*

The chart below shows the taxable equivalent to tax free yielding municipal bonds. For example, an investor in the 22% tax bracket would need to find a taxable yield of about 3.21% to equal a 2.50% tax free yield.

2018 Taxable Equivalent Yield Table for National

2018 Taxable Equivalent Yield Table for National

The chart to the above shows how much more you will have to earn with a taxable investment to equal the return of a tax-free investment. To use the chart, find your taxable income and read across to determine your tax rate and the taxable equivalent of various tax-free yields.

Source: Nuveen

What are we thinking?

It’s important to weigh the value of potential tax savings against your investment goals. Depending on your goals, it could make sense to incorporate higher yielding taxable corporate bonds rather than tax free lower yielding municipal bonds, even for those in higher tax brackets.

Currently yielding about 4.74% our Current Income Portfolio Strategy (CIP) maintains a shorter duration with a significant portion of the portfolio set to mature in the next few years in order to take advantage of the potential for higher interest rates. At Roosevelt, we believe active management of credit quality and duration along with portfolio diversification can lead to higher yields and income stability helping to mitigate bond price declines in this rising rate environment.

Jubilate for Rising Rates

Published on Mar. 13, 2018

Jubilate for Rising Rates

Did you know…

Generally speaking, when interest rates rise, bond prices decrease. For total return investors this may not be ideal, but as income investors we think it’s time to get excited about rising interest rates.

Coupon income is a significant contributor to bond returns. During the periods of (I) November 1986 to March 1989, (II) January 1994 to April 1995, (III) February 1999 to July 2000, and (IV) June 2004 to August 2006, every fixed income sector experienced positive returns, coupon returns accounted for over 90% of bonds’ total returns, and the coupon income generated offset the negative price returns.

Analyzing 1994, when the Fed was arguably its most aggressive, the Barclay’s US Aggregate Bond Index declined just shy of 3%. Over the course of that year, the Barclay’s US Aggregate Bond Index saw yields above 7%. From the end of 1993 to the end of 1995, the Barclay’s US Aggregate Index returned 15%. Not a bad run.

While we cannot predict the future of the current rising rate cycle, and recognizing that each interest rate cycle has its own unique characteristics and circumstances, in general we know that the higher the coupon and the longer the holding period, the higher the income cushion is in helping to offset the impact of price declines.

Rising Rate Periods Chart
Source: ICMA-RC via Barclays Risk Analytics and Index Solutions ltd (BRAIS); BofA Merrill Lynch Global Index System; Hueler Companies Inc.

What are we thinking…

At Roosevelt, we manage CIP as a solution for cash flow, not for total return. As income investors, we appreciate that total return includes interest, capital gains, dividends, and distributions that are realized over a certain period. Instead of reaching for that high total return in today’s market place, we strive for reducing risk and providing investors with a sustainable and substantial income stream.

CIP is structured to benefit from a rising rate environment while also providing income investors with high income in low rate environments as well. Our strategy is suitable for most savers, not just retirees or those soon approaching retirement, but also for younger investors who can take advantage of the compounding interest gained, which when reinvested could get more dramatic as time goes by.

Corporate Profits Remain Strong Despite Volatility

Published on Mar. 9, 2018

Corporate Profits Remain Strong Despite Volatility

Market Overview

Volatility returned to markets in full force in February, and the reversal of some very crowded trades led to a 3.7% decline for the S&P 500. Macroeconomic fundamentals however, remain sound, in our view. Despite some uneven data points in recent weeks, we maintain our positive stance on the market and continue to believe that strong corporate profits can carry stocks higher.

Stocks corrected in early February. In our view, this was largely a function of equities having been overextended following the run up through January. We believe that the unusually long period of market stability resulted in too many investors crowding into low beta and low volatility strategies, leaving these areas ripe for correction. While sharp declines and surging volatility are not ideal for markets, we currently are not overly concerned, as we view these conditions as largely technical in nature rather than reflecting weakness in underlying fundamentals.

Inflation has been a focal point for investors of late. Markets appeared to be caught off guard by the 2.9% wage growth reported for January, and yields moved abruptly higher in the aftermath. Subsequently, both the CPI and PPI for February printed numbers ahead of consensus expectations. These data points have heightened concerns among certain investors that the Fed may be behind the curve with regards to its interest rate policy and may have to ramp up the pace of rate hikes as a result.

However, we note that while inflation has surprised investors by moving incrementally higher, its absolute levels are still modest by historical standards. Moreover, we would expect that the yield curve would flatten if markets were truly signaling a policy mistake, but that has not been the case. In fact, the yield curve has steepened in recent weeks. Should inflation to move sharply higher from current levels, we would expect valuation ratios to compress and stocks to decline. We are therefore keeping a close eye on consumer prices and other inflation indicators, and stand ready to act should conditions warrant.

President Trump’s decision to impose tariffs on steel and aluminum imports – 25% and 10%, respectively – has rekindled investor concerns about potential trade wars. While some industries will likely benefit from these policies, we believe that they may also have the potential to negatively impact the aggregate economy. That being said, we are more keenly focused on trade as it relates to the NAFTA negotiations, which, while ongoing, grant Mexico and Canada exemption from the tariffs. We are closely monitoring these talks to better understand how US trade will be impacted in the coming years.

Outlook

We maintain our positive stance on the market. With consumer sentiment strong, job growth continuing apace and wage growth accelerating, we would expect to see healthy consumer spending this year, which in turn should boost overall economic activity. A healthy economic backdrop should help to sustain what has been a very strong period for corporate profits. In this regard, we note that following the robust fourth quarter earnings season, analysts have hiked their earnings estimates for both this year and next. With consensus S&P 500 forecasts now in the low to mid $170’s for 2019, the market’s forward PE is a reasonable 15.5x as of this writing. This is noteworthy as valuations had become somewhat extended in recent months, but the combination of higher earnings estimates and a pullback in the market has left stocks more reasonably valued, in our view.

While we are not concerned with inflation levels at the moment, a potential spike in inflation remains a key risk. The latest CPI reading came in at 2.1% – essentially in line with the Fed’s 2% target – and if sustained, would be quite comfortable for markets, in our view. However, with unemployment having been at very low levels for some time now, it is not difficult to conjure a scenario in which inflation moves materially higher, perhaps exacerbated by the recent tax reform which is expected to give a further boost to economic activity. With bond yields still low by historical standards, we would expect them to move higher in this scenario as well. Most notably, the Fed may have to accelerate its planned rate hikes. While this is not our base case, it is one which would likely roil markets and we will therefore continue to monitor pricing pressures closely.

Tricky Treasuries

Published on May 8, 2018

Tricky Treasuries

What’s in the News…

With five interest rate hikes since the end of 2015, the expectation has been for a much higher 10 year Treasury yield. Yet while the Fed controls the short end of the curve, supply and demand move the longer end of the curve. With this in mind, Informa financial intelligence Chief Macro Strategist David Ader argues that two things will hinder a dramatic rise in bond yields: the increasing Federal budget deficit, forecasted to hit $1 trillion in 2020, and the dynamics of fixed income indexing. As a result, he believes the rise in yields may in fact soon be at a peak.

Ader argues that according to the law of supply and demand, more supply warrants lower prices. That should lead to higher yields, but as a major federal budget deficit prompts additional Treasury issuance, he believes this will induce forced buying on the part of indices, which will in turn inhibit a dramatic rise in bond yields.

Currently, US Treasuries make up 37.8% of iShares Core U.S. Aggregate Bond ETF. As more Treasuries are issued in the market, he says, they will also enter fixed income indices – and as they are purchased by investors to keep pace with changes in the index, this will ultimately send prices higher. It is these higher prices that could keep a lid on bond yields.

At the same time, Ader also considers how “not only will [investors] be forced to buy, but what they buy likely will be longer maturities”. He notes that “over the course of the recovery, the average maturity of outstanding Treasury debt has increased dramatically—to a near record 70 months, from less than 50 months in 2008”. Just as the Treasury market has gotten longer, the index’s Treasury allocation has as well. In this way, bond investors may be less subjected to the Federal Reserve raising rates if the mechanisms in place keep a lid on yields.

US average maturity of total outstanding marketable debt

What are we thinking?

Many are asking the question whether it’s time to get back into the bond market. In general, we believe that market participation should be based on your long term goals, risk tolerance, and other personal variables.

Designed to provide high income without taking excessive risk in a low rate environment, as well as benefit from a rising rate environment, our Current Income Portfolio is a suitable solution for investors seeking a risk conscious approach to income generation. As active managers, we seek to provide value by remaining cognizant of current trends, making reasonable and informed expectations of Fed announcements, paying attention to credit spreads, and diversifying in preparation for interest rates to trend higher.

Float On

Published on Feb. 27, 2018

Float On

Did you know…

When interest rates are threatening to rise, many income investors hesitate to lock in fixed rate coupons. The use of Fixed to Floating or Floating-Rate securities in an income generating strategy could be a solution for obtaining higher yields with investment grade securities as rates rise.

A floating rate structured security has a variable interest rate which is tied to a reference rate. Common reference rates include the 3-month LIBOR (London Interbank Offer Rate) and the Consumer Price Index (CPI).

Once the reference rate has been established, the issuer will determine the spread it is willing to pay above the reference rate, let’s say 200 bps. And finally, the issuer will determine a reset period which designates how often the interest rate is adjusted, which could be daily, monthly, quarterly, or annually. The coupon for this security would then read something like “Quarterly Reset, 3-month LIBOR + 200bps”.

Fixed to Floating Rate preferred securities offer a fixed coupon until a certain date, when they become floaters.

Example of Fixed Floating Rate Structure

What are we thinking?

Compared to traditional fixed rate securities, floating rate securities offer some interest rate risk protection, pay higher yields as rates rise, are less rate sensitive than Treasury yields, and are not as price sensitive since coupons change when the market rate changes.

By incorporating Fixed to Floating rate preferred securities into CIP’s preferred allocation, we believe we are offering an attractive solution for income investors who are looking for conservative allocations and additional yield. And as active managers, we monitor the reference rates, credit, and call risks.

Source: Raymond James

Strong Start to the New Year

Published on Feb. 13, 2018

Strong Start to the New Year

Market Overview

Stocks began the year with considerable strength, as the S&P 500 returned 5.7% for January. Investors appeared to key in on robust global growth and healthy US corporate profits. While we are keeping a close eye on interest rates, we maintain our constructive stance on the market, as we continue to expect that the combination of strong fundamentals and still easy financial conditions should bode well for stock prices.

The steep increase in Treasury yields has been one of the key capital market developments to begin the year, as the 10- year US Treasury bond recently yielded about 2.8%, up from just 2.4% at the end of December. We think that much of this move has been a reflection of healthy economic conditions, both domestically and abroad. Moreover, the recent rise notwithstanding, yields are still low by historical standards and in our view are not approaching levels which would materially derail economic activity.

However, while the absolute level of interest rates remains subdued, the velocity of the ascent has been disconcerting for investors. If yields continue to climb rapidly, we would expect it to cause perturbations throughout capital markets. With valuations somewhat stretched, equities would likely be vulnerable to a pullback, as for some time now investors have been able to justify higher P/E ratios at least in part due to the low interest rate environment. In summation, a 10-year Treasury yield of less than 3% need not be a headwind for stocks in and of itself. However, a 40 basis point move in one month is a great deal of volatility for the Treasury market, and therefore we will continue to closely monitor it as a source of risk for equities moving forward.

The dollar, which recently fell to a multi-year low, has also been in focus for investors. We view this drop as being favorable for equities, as a weaker dollar typically boosts exports and enhances the profits of US based multinationals. We think that a key factor behind the decline has been healthy international economic growth. Momentum in major foreign economies has led investors to speculate that central banks will speed up their monetary policy normalization, boosting their currencies in the process. We do think there is a threshold after which further dollar declines become counterproductive for stocks. For now though, particularly with inflation remaining low by historical standards, we continue to view the dollar’s weakness as being supportive for stocks.

Fourth quarter earnings season is well underway, and thus far the results have been quite encouraging. With just over 40% of the S&P 500 having reported, aggregate profits are up a healthy 12% – well ahead of expectations for 9% growth – and 81% of companies are exceeding earnings estimates, the highest level in 7 years. Moreover, a record 75% of companies have raised guidance for the year, and while some of this has likely been a function of the recent tax legislation, we think that strong fundamentals are playing a role as well.

Outlook

We maintain our positive stance on the market, as both fundamental and financial conditions remain supportive, in our view. Global economic growth has been robust and the IMF recently raised its growth estimates for both this year and next year to 3.9%, which would be the best performance since 2011. It is not just the magnitude but the breadth of the growth which has been impressive. Furthermore, 2017 marked the broadest synchronized growth since 2010, as 120 countries representing 75% of global GDP saw higher year-over-year levels of business activity.

While many investors are beginning to anticipate tighter global monetary policies, particularly in Europe and Japan, we continue to view financial conditions in aggregate as being supportive of equities. Market indicators such as corporate bond spreads and the aforementioned weak dollar do not suggest tight conditions. As well, even with certain central banks seemingly poised to pick up the pace of their policy normalization plans, we note that projections for the aggregate balance sheet of the Federal Reserve, ECB, BOJ, and BOE is to be little changed from current levels over the next few years.

As noted, we view any further spikes in treasury yields as the key risk factor for equities currently. Elsewhere, we are concerned about certain pockets of the US economy. Housing, for example, is particularly vulnerable to a higher yield environment as affordability drops with increasing mortgage rates. The industry may also experience some headwinds pertaining to the recently enacted tax legislation, which limits deductions on mortgage interest expense. While we have little exposure to this space in the portfolio at this time, we will continue to monitor these risk factors as they develop.

What a Nail Biter

Published on Feb. 6, 2018

What a Nail Biter

What’s in the News:

The last few days have prompted many questions for investors. What happened to solid economic expansion? What happened to improved corporate earnings? What will be the effects of the Fed’s balance sheet reduction? Will the government avoid another shut down?

Inflationary fears are causing a bit of panic in the capital markets, so that could be the short answer; however, it doesn’t fully explain why equities were on such a free fall.

After Friday’s jobs report, many were left wondering whether the labor market is healthy enough to sustain increased wages throughout 2018, and whether that could be a catalyst for an increased pace in interest rate hikes.

Given all the market news over the last few days, the odds of a Fed hike in March did decline slightly. However, the probability of an interest rate hike in March remains high, at 83.5%. All in all, Jerome Powell’s first day as Federal Reserve Chairman was a not a dull one.

Fed effective rate
Source: Bloomberg

What are we thinking?

Income investors have waited a very long time to see yields rise, and have been forced to remain patient throughout this low yielding environment. We continue to see yield opportunities across the investment grade corporate and preferred securities spaces, especially within the hybrid fixed-to-floating rate structures. While the last few days were nail biters for market participants, investment decisions should be led by long term plans and risk tolerance levels. As active managers, we seek to provide value by filtering out the noise, making reasonable and informed decisions, and diversifying in preparation for interest rates to trend higher.

Tight Grip

Published on Jan. 23, 2018

Tight Grip

What’s in the News:

The extended hunt for yield that began after the 2008-2009 financial crisis continues to exert extraordinary pressures on fixed income yields, pricings, and the interdependence between credit markets. Demand for investment grade assets to produce the highest possible current income has led to a persistent flattening of the US Treasury yield curve, while yield spreads between US Treasury and US corporate issues continue to tighten.

Just two years ago, the US Treasury 2-year note traded at 1.05% yield to maturity, while the US Treasury 10-year note traded at 2.27% yield to maturity. At the conclusion of 2017, the same two issues were priced at 1.88% and 2.41%, respectively. While the Federal Reserve’s tightening monetary policies have effectively increased short-term interest rates, nearly doubling the market yield on the 2-year note, the 10-year note has barely budged.

Put another way, the US Treasury 2-10 year yield curve has flattened from 123 basis points (1.23%) at the end of 2015 to just 53 basis points (0.53%) at the end of 2017.

US Treasury 2-10 year yield curve
Source: Bloomberg

For conservative income-oriented investors, the compression of yields available from investment grade corporate bonds over the same time has been even more pronounced. The 2-10 year yield curve of the domestic corporate bond market has collapsed to 113 basis points (1.13%) – nearly half of the 207 basis points (2.07%) steepness that existed along this yield curve two years ago – dramatically reducing the availability of potential current income levels.

2-10 year yield curve of the domestic corporate bond market
Source: Bloomberg

What are we thinking?

There are many explanations for such dramatic movements along these yield curves, but the bottom line is one and the same: investors have been steadily offered less income incentive to extend the maturities of their investments while simultaneously being left to assume more credit risk to obtain the same returns available to them two years prior.

As pressures on fixed income investing have changed the market environment, innovations in the bond market are increasingly tailored to meet the demands of both lenders and borrowers to address the challenges of transitioning from a historically low interest rate environment to a potentially more normal landscape. One of these developments has been the growing issuance of fixed-to-floating rate preferred securities, which we incorporate into CIP’s allocation to preferred securities.

Double Whammy for Credit Markets in Fourth Quarter

Published on Jan. 18, 2018

Double Whammy for Credit Markets in Fourth Quarter

Market Overview

The Federal Reserve Open Market Committee (FOMC) maintained its slow and steady approach to normalize interest rate levels when it announced an increase to the federal funds target rate during its December 2017 meeting. This move marks the Fed’s third rate hike over the course of 2017, and expectations remain high for further rate hikes during 2018. Nevertheless, domestic interest rates remain stubbornly low by historical standards, namely those assigned to conservative vehicles such as bank savings offerings and US Treasury notes. While broad-based inflation statistics have also remained quite tame, economic barometers of general pricing pressure do not include the more volatile components of food and energy, nor do they reliably reflect monthly stresses faced by most individual savers and consumers to meet more basic needs such as rent, groceries, and tuition bills.

The extended hunt for yield that began after the financial crisis continues to exert extraordinary pressures on fixed income yields, pricings, and the interdependence between credit markets. Demand for investment grade assets to produce the highest possible current income has led to a persistent flattening of the US Treasury yield curve, while yield spreads between US Treasury and US corporate issues continue to tighten. Just two years ago, the US Treasury 2-year note traded at 1.05% yield to maturity, while the US Treasury 10-year note traded at 2.27% yield to maturity. At the conclusion of 2017, the same two issues were priced at 1.88% and 2.41%, respectively. While the Federal Reserve’s tightening monetary policies have effectively increased short-term interest rates, nearly doubling the market yield on the 2-year note, the 10-year note has barely budged.

Put another way, the US Treasury 2-10 year yield curve has flattened from 123 basis points (1.23%) at the end of 2015 to just 53 basis points (0.53%) at the end of 2017. For conservative income-oriented investors, the compression of yields available from investment grade corporate bonds over the same time has been even more pronounced. The 2-10 year yield curve of the domestic corporate bond market has collapsed to 113 basis points (1.13%) – nearly half of the 207 basis points (2.07%) steepness that existed along this yield curve two years ago – dramatically reducing the availability of potential current income levels. There are myriad explanations for such dramatic movements along these yield curves, but the bottom line effect is one and the same: investors have been steadily offered less income incentive to extend the maturities of their investments while simultaneously being left to assume more credit risk to obtain the same returns available to them two years prior.

The double whammy of a flattening US Treasury yield curve and a concurrent tightening of credit market yield spreads has not, however, been without recent benefits. Last year, despite the Federal Reserve Board’s monetary policy changes, domestic credit market indices produced significant total rate of return performances versus government-based indices. For instance, the ICE BofA Merrill Lynch 1-10 Year US Treasury Index produced a paltry 1.08% total return over 2017, while the ICE BofA Merrill Lynch 1-10 Year US Corporate Index produced 4.08% total return over the same period. As more risk was assumed, the rewards were further multiplied over Treasuries. The longer overall duration ICE BofAML US Corporate Index, which contains 1-30 year maturities, produced a 6.48% annual total return for 2017, while the ICE BofA Merrill Lynch Fixed Rate Preferred Securities Index returned 10.58% over the same period. As satisfying as this relative outperformance may have been for some investors, there may be a ceiling on the extent to which the same forces at play can influence further relative outperformance. With lessening yield curve protection and diminished credit spread advantages, there may be fewer opportunities for future relative return enhancements without assuming greater risk.

Outlook

As previously noted, expectations remain high for further target rate increases during 2018, as well as the potential for more to follow in 2019. These rate hikes may work to alleviate some of the pressures for a more normalized rate environment that have been building among income-investors. In order to benefit from these potential changes on the horizon, fixed income portfolios will have to be allocated properly among various maturities to maximize the opportunities afforded by higher nominal interest rates, should they become available. As such, investing in short- to intermediate-term investment grade maturities may prove beneficial for income investors seeking consistent levels of annual cash flows and portfolio stability in rising rate environments.

Preservation of capital while maximizing current income remains a hallmark of prudent investment practices, and one of the governing tenets of the Roosevelt Current Income Portfolio Strategy. As pressures on fixed income investing have changed the market environment, innovations in the bond market are increasingly tailored to meet the demands of both lenders and borrowers to address the challenges of transitioning from a historically low interest rate environment to a potentially more normal landscape. One such development has been the growing issuance of fixed-to-floating rate preferred securities, which allow investors to earn initial fixed rate coupons for five to ten years while offering buyers the comfort thereafter that the issuer may either call the bond at par value or switch the coupon to a generous yield spread floating over money market rates. As highlighted last quarter, we believe that these securities offer a number of advantages, given the Current Income Portfolio’s fundamental objectives of current yield enhancement and principal safety. We continue to seek inclusion of these securities, as we deem appropriate, as well as other investment grade opportunities that may develop, in order to maximize income levels for our clients while preserving principal for future yield enhancement.

Stocks Move Higher to Close Out the Year

Published on Jan. 12, 2018

Stocks Move Higher to Close Out the Year

Market Overview

Stocks moved higher to close out the year, as the S&P 500 climbed 6.6% during the fourth quarter. Investor sentiment was boosted by economic data that continued to surpass expectations. Markets also reacted well to the passage of the GOP tax bill. We maintain our positive outlook as we continue to believe that healthy economic growth, strong corporate profits, and easing financial conditions should bode well for stocks moving forward.

For many investors, we believe that the tax bill was among the most eagerly anticipated policy initiatives of 2017, and that its progress and ultimate passage were likely key drivers helping to lift stocks during the fourth quarter. The tax bill also likely contributed to the sector rotation seen last month, during which cyclical and value stocks outperformed their growth stock peers. Details of the bill include a reduction in the corporate tax rate from 35% to 21%, lower individual rates, and the elimination of certain deductions in an effort to simplify the tax code. We believe that 2018 aggregate S&P earnings could see a boost of approximately $10 per share as a result of the lower corporate rate.

The extent to which passage of the GOP’s tax bill may boost the economy remains a topic of debate. Some critics of the bill point out that many corporations have effective tax rates that already approach the new statutory rate, and therefore they may not see a material boost to their net incomes. That said, in our view, smaller companies – many of which are domestically oriented and therefore typically pay higher tax rates – are likely to see greater benefits. Moreover, it is these smaller businesses which are typically the primary drivers of job growth. To the extent that these smaller businesses benefit from the new tax code, an already healthy labor market could get a further boost. Finally, we believe that small- and medium-sized businesses are likely to reinvest a significant amount of their tax savings, as opposed to increasing share buybacks or dividends. These investments have the potential to be another positive factor driving GDP growth in 2018.

The Federal Reserve will have a new chairman next month as Jerome Powell takes the helm from Janet Yellen. We expect that this will be a relatively smooth transition, as Powell has not dissented on any policy votes during his tenure as a member of the Federal Reserve Board of Governors, and his remarks have typically echoed the committee’s consensus view. In terms of any stock market impact, we view financial companies as potential beneficiaries, as we believe that Yellen is more hawkish with regards to banking regulations than Powell appears to be. In our view, should Powell relax banking industry regulations, it would likely enhance the sector’s earnings power.

The flattening yield curve has garnered a great deal of investor attention in recent months, with some wondering whether it is portending weaker economic conditions ahead. At this point, we are not overly concerned with this because, as we have noted in the past, it is not unusual for the curve to flatten while the Fed is raising rates. Moreover, we believe that very low government bond yields in other developed economies are also playing a role in depressing US yields. The flattening curve is more a reflection of divergent monetary policy and relative bond values in our opinion, as opposed to signaling an impending recession. However, we are keeping a close eye on this indicator. If the curve were to continue to flatten and ultimately invert, we would view this as a troubling sign and we would likely reassess our economic forecasts.

Outlook

We continue to hold a constructive view on equities. Economic activity has picked up over the last few quarters, and more recent data has also been encouraging. Consumer confidence hit a cyclical high during the fourth quarter, and the labor market remains robust with both unemployment and job openings at multi-year bests. The ISM’s manufacturing sector index easily surpassed expectations for December, and its forward looking new orders sub index showed particular strength. Looking forward, we believe that consumption is poised to support future economic activity. With some tax relief on the horizon, in addition to minimum wage increases and many corporations having already announced special one-time bonuses, we anticipate strong consumer sentiment should continue to translate into healthy consumer spending.

International economic activity continues to firm coinciding with the domestic strength. This synchronized recovery, in addition to a US corporate sector which is generating strong profits, and financial conditions which remain quite accommodative, are the key underpinnings to our optimistic outlook.

There are, however, pockets of the US economy that we have concerns about. While the holiday season was a good one, we expect that mall-based retail will continue to weaken as more spending moves online. We also would not be surprised to see some reduced levels of activity in the housing and automotive industries, as they may have seen some unsustainable pent-up demand in the aftermath of last year’s severe hurricanes.

We are also keeping a close eye on currency markets, as we see several factors which could lift the dollar in 2018, potentially crimping corporate profits in the process. With the passage of the GOP’s tax bill, corporations may soon be repatriating large sums of money back to the US. Depending on the magnitude of these transfers, they may be sufficient to move the dollar higher, but we also see other factors such as Brexit and potential trade disputes which could magnify the effect. With valuations somewhat extended, earnings will likely have to meet expectations in order for stocks to continue to climb higher in 2018; a strong dollar would make this more difficult to achieve and we therefore consider this to be an important risk factor to monitor.

Many market strategists are calling for clients to increase their exposure to more cyclical holdings, based on the belief that strong economic momentum will enable these securities to outperform. While we share this optimistic view of the economy, we do have some concerns and believe that it is more prudent to take a diversified approach. We have therefore constructed our portfolio in a barbell fashion, whereby we are allocating material exposure to cyclical and value stocks, while also maintaining sizeable exposure to more defensive names that should help to protect the portfolio in the event of worsening economic conditions.

Rates & Retirement – A Power Struggle

Published on Jan. 9, 2018

Rates & Retirement – A Power Struggle

What’s in the News:

In a recent NASDAQ article, a 59 year old man preparing for retirement remarked, “It’s absolutely ridiculous how hard it is to generate income”. While we all continue to wait for higher interest rates, baby boomers and older retirees are thirsting for yield after spending roughly a decade waiting for a meaningful increase. Desperation for income translated into strong demand for higher yielding bonds last year, with bond mutual funds taking in $201.9 billion in net new money over the first nine months of 2017.

This year, the Federal Reserve officially projects three rate hikes. However, there seemed to be disagreement at the Fed’s December meeting as to whether these three projected hikes will become reality. Rate hike schedule aside, other variables such as US tax legislation, tight credit spreads, a flat yield curve, trimming of the Fed’s balance sheet, and an uncertain geopolitical environment need to be monitored as boomers look to generate high income in a risky environment.

Rate Hike Projections for 2018

Rate Hike Projections for 2018
Source: Bloomberg 1/8/17

What are we thinking?

All signs point to 2018 being an eventful year, but when those events will take place is uncertain. While rates will rise eventually, we believe that attempting to forecast when is a futile exercise.

Designed to provide high income without taking excessive risk in a low rate environment, as well as benefit from a rising rate environment, our Current Income Portfolio is a suitable solution for investors seeking a risk conscious approach to income generation. As active managers, we seek to provide value by remaining cognizant of current trends, making reasonable and informed expectations of Fed announcements, paying attention to credit spreads, and diversifying in preparation for interest rates to trend higher.

Inflation Hesitation

Published on Dec. 12, 2017

Inflation Hesitation

What’s in the News:

You may have noticed that the yield curve has been flattening over the past few weeks, with the spread between the two-year Treasury yield and the 10-year treasury yield narrowing to a mere 56 basis points. Flattening of the curve often signals concerns about economic growth, and when the curve dips below or inverts it can signal a recession, as evidenced in the nine recessions since 1955.

So what could a flat or inverted yield curve mean for the Federal Reserve?

Global Fixed Income Strategist for Société Générale, Kit Juckes said, “FOMC Minutes indicated that a December hike is almost certain, but longer-dated bond yields didn’t rise, hearing enough concern about possible asset-price corrections and the softness of inflation expectations, to flatten the curve”.

As Merrill Lynch advises in its most recent Monthly Letter, “economic conditions have not yet heated up enough, in our view, to require tight monetary policy. Given the typical long lead time from a flat or inverted yield curve to a recession, this suggests that the probability of recession should remain low into 2019”.

Stubbornly low inflation has the Fed stuck between a rock and a hard place:

Interest Rates & US Breakeven Inflation Rates

11/30/16 – 12/11/17

Interest Rates and US Breakeven Inflation Rates
Source: Bloomberg

What are we thinking?

As the year winds down and we prepare for the holidays, the last thing investors want to do is to have to watch inflation and yield curves, the Fed’s balance sheet reductions, price pressures, rate expectations, and issuer capital structures. As active managers, we can help you position your clients along the yield curve. We believe it is just one block in building a risk conscious and conservative income portfolio.

Janky Junk

Published on Nov. 28, 2017

Janky Junk

What’s in the News:

In November, several high yield, non-investment grade “junk bonds” declined, causing concern about the high yield bond market. Consequently, ETF’s that buy high yield bonds have seen price declines, for example, iShares iBoxx High Yield Corporate Bond ETF (HYG) had a six day decline, and SPDR Bloomberg Barclays High Yield Bond ETF (JNK) declined for 10 of the 11 trading sessions, according to MarketWatch.

In the article, Deutsche Bank’s Chief International Economist, Torsten Slok, states he believes the market decline stems from deteriorating earnings in the telecommunication, healthcare, and retail markets. And while Mr. Slok believes this is not a signal of an impending recession or economic slowdown, market participants seem to be cutting their exposure to high yield debt.

Junk bonds yielding 5.6%

What are we thinking?

As investors hunt for yield in this low interest rate environment, junk bonds have become an attractive option. But as the risk-reward dynamic changes, junk bonds can become less attractive. At Roosevelt, we take a risk conscious approach to income generation and invest in investment grade corporate bonds and preferred securities. CIP is designed to provide high income without taking excessive risk in a low rate environment as well as benefit from a rising rate environment.

Low-lapalooza

Published on Nov. 7, 2017

Low-lapalooza

What’s in the News:

Last week was a busy week for the fixed income markets.

Federal Reserve policy makers chose to keep interest rates unchanged. The Fed believes that the economy is growing at a “solid rate”, however, core inflation remains below their target of 2% and expected labor market conditions gave them pause.

Before jetting off to Asia, President Trump officially nominated Jerome Powell to replace Janet Yellen in February as the new Federal Reserve Chairperson.

And lastly, Republicans unveiled a new tax bill which, if passed, could widen the budget deficit – potentially forcing the Treasury Department to issue more debt, which would weigh on bond prices. This immediately led to a decline of the 10yr Treasury yield.

Amongst all of these newsworthy bits, one thing seems clear, lower for longer will remain the mantra for the income investor.

What are we thinking?

As we touched on in our most recent quarterly commentary, “this slow and steady market mentality toward future interest rate hikes has worked to compress yields along the US Treasury maturity curve, as well as yield differences between government and investment grade corporate debt. Domestic interest rates remain very low by historical standards, and as a result, the hunt for additional yield persistently dominates credit market activities – as it has since the financial crisis prompted strong monetary policy response. If interest rate increases are believed to occur only sporadically, then market participants will likely become increasingly content with making the best of their steadily shrinking options.”

It feels like we have been talking about interest rate hikes forever and that that may not change anytime soon. While income investors are forced to remain patient they shouldn’t be doing so on the sideline. A portfolio designed to provide high income without taking excessive risk during low rate periods, and positioned to benefit when rates start to rise could be just the spoonful of sugar to help this bitter pill go down.

Only One Can Win

Published on Oct. 25, 2017

Only One Can Win

What’s in the News:

As we prepare for the President to possibly replace Janet Yellen as Federal Reserve Chair in February, the fixed income markets have been reacting as possible front runners for the seat have been announced.

Earlier this month the market was rattled by the news that John Taylor was allegedly the front runner for the position, causing yields to increase. Taylor is the creator of the “Taylor Rule” forecasting model, which discredits the traditional rational expectation model in favor of one that relies on the difference in the calculation of nominal and real interest rates and its relation to inflation. The Taylor Rule suggests that interest rates should be three times higher than current levels.

Then last week, talks of Jerome Powell as the front runner caused yields to decline. A member of the Fed’s monetary policymaking committee, Fed Governor Powell has been recommended by some commenters as the best candidate for continuity and least likely to rock markets.

And no competition is complete without a wild card, such as the White House’s Top Economic Advisor, former Goldman Sachs executive Gary Cohn.

Janet Yellen game of thrones picks to replace

What are we thinking?

It is possible that interest rates could face the hurdle of a new Fed Chair. A more aggressive Fed Chair could be beneficial to income investors who have been starved for yield. But this could also bring more market volatility. By contrast, a more conservative Fed Chairperson would likely continue the pace of slow and measured interest rate increases, therefore not surprising the market.

Regardless of the decision that President Trump makes, we believe that as the economy and employment continue to trend higher, rates have to eventually normalize. As we prepare for the unknown, one certainty is that diversifying in anticipation of these changes is critical – and as active managers we can help income investors maximize yields in any environment.