Back to the Old Normal and Today’s Other Top Stories

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There are signs the U.S. economy is gaining traction, casting doubt on doom mongers who claimed that lasting stagnation would become the new normal for the world’s largest economy.

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Consumers spent more freely in March after working down their debts since the onset of the financial crisis, and yesterday’s data showed that the housing sector has finally turned a corner.

“We are returning to an old normal,” Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York told Bloomberg. “A lot of the headwinds that are holding the economy back are beginning to abate, including local government spending, fiscal tightening and household balance-sheet deleveraging.”

The news flies in the face of several doom mongers, including Bill Gross and former Treasury Secretary Larry Summers, who warned the U.S. was entering a prolonged period of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations.

Even former Fed Chairman Ben S. Bernanke got in on the act when he told a conference in Toronto on April 22nd: “Many forecasters, and I would put myself among them, think we’re looking at a very good potential for faster growth in the U.S. and continued progress towards a full recovery from the tremendous impact of the financial crisis.” Bernanke said.

However, not all economists share this upbeat view.

Northwestern University’s Robert Gordon says that Growth remains “below the historical trend.” Gordon also says that the U.S. economy still faces many headwinds such as an aging population and increased income inequality. Adding that innovation’s contribution to higher standards of living will also slow.

And former Treasury Secretary, Larry Summers said he remains concerned the U.S. could be in for “secular stagnation,” in which the Fed can’t provide enough stimulus to deliver full employment without risking financial stability.

As usual economists can’t make up their mind either way. But one thing is for sure. Many of the headwinds that have been affecting the economy over the past few years are diminishing. This can only be a good sign, so as investors we can remain hopeful for the future.

 

Todays Other Top Stories

Municipal Bonds

Bloomberg: – Stanford University to tap muni rally with $410 million of bonds. – Stanford University, with the fourth-richest endowment among U.S. schools, plans to tap the municipal market with $410 million of top-rated, tax-exempt debt as soon as this week as benchmark yields set 10-month lows.

Investment News: – Navigating the global fixed income waters when interest rates are rising. – The environment is turning for municipal bonds, where opportunities are emerging. With the Federal Reserve gradually tapering its quantitative-easing program, interest rates will eventually rise from the historic lows fixed-income investors have become accustomed to in recent years. As advisers look to restructure their investors’ fixed-income portfolios in light of this changing environment, they should consider the municipal bond sector, which currently offers one of the most compelling value-investing opportunities in the fixed-income markets.

Market Realist: – When geopolitical risk takes precedence over interest rate risk. – Municipal bonds may be poised for a comeback this year. The total returns on municipal debt came in at 3.32% in the first quarter of 2014, as measured by the Barclays Municipal Bond Index. This was a nice turnaround considering their bleak performance in 2013, when they clocked a negative return of 2.55%, their worst performance since 1994.

Investopedia: – Top 2014 Muni Bond ETFs. – April 15 came and went, but the memory of how much of your pay the Internal Revenue Service helped itself to should remain clear. As should the realization that you probably should have done more to limit your tax burden.

MarketWatch: – BU(TM) Rolls out new issue muni bond platform for individual investors. – BondUnderwriter, Inc. (BU(TM)) has expanded its proprietary online new issue municipal bond platform to allow retail investors to create advanced customized searches and access the primary bond markets.

 

Education

LearnBonds: – Interest Rate Swap – Definition and example. – An interest rate swap is a financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount, over an agreed period of time. Interest rate swaps provide a way for businesses to limit or manage exposure to fluctuations in interest rates.

 

Treasury Bonds

WSJ: – Treasury bonds fall on strong housing data. – Treasury bond prices fell for the first time in four sessions Monday as a strong U.S. housing report dented the allure of safe-haven bonds.

 

Corporate Bonds

WSJ: – Apple returns to bond market. – Apple Inc. is selling bonds in seven parts on Tuesday, one year after inking a $17 billion bond sale that was the largest corporate bond deal on record at that time.

 

Junk Bonds

Bloomberg: – Junk-bond skeptics squeezed as JPMorgan sees tears in ’15. – It’s a painful time to be a junk-bond skeptic. It may seem inevitable that the riskiest corporate debt will lose value, since investors are getting paid about the least ever to own such bonds. Yet after bearish wagers on the biggest junk-bond exchange-traded funds surged to a record last month, the market just keeps on rallying.

Blanchard: – Two Harvard professors link low quality issuance to imminent credit crises. – Below-investment-grade companies have been rushing to cash in on 2014’s still low rates, this year so far raising $157 billion of junk bonds worldwide, according to Dealogic. That included an $11 billion junk bond offering for French cable operator Numericable Group, the largest ever. The flood of junk issuance is troubling, according to two Harvard professors – Robin Greenwood and Samuel G. Hanson.

FT Adviser: – European high-yield bond market set for record 2014. – The European high-yield bond market is set for a record year of issuance in 2014, according to research by continental asset manager Candriam.

 

Emerging Markets

Larry Cao, CFA: – What makes emerging market debt tick? – Asset allocators and wealth managers are always on the lookout for new asset classes, or beta opportunities, as a way to enhance portfolio risk and return. The ideal beta opportunities are those that offer high return, low risk, and low correlation with other assets in the portfolio. Over the last decade, emerging market debt as a group seems to have done just that, so no surprise then that it started gaining popularity as a fixed-income asset class in recent years.

 

Catastrophe Bonds

Businessweek: – Pension funds and catastrophe bonds: What could possibly go wrong? – Pension funds, in particular, have moved into catastrophe bonds. But Ed Noonan chief executive officer of Validus Holdings, which manages an investment portfolio of insurance-linked securities. Says other fund managers are becoming irrationally exuberant about a high-yield risk that’s fundamentally unlike any of their other investments.

 

Investment Strategy

About.com: – The right and wrong reasons to shift your asset allocation. – According to Barron’s the average holding period for mutual funds is just three years. Based on the overall fund flow data, one reason for this short holding period is investors’ attempt to base allocations on market conditions rather than a longer-term plan. This kind of bad decision-making is the rule rather than the exception. And when investors buy high and sell low, these poor entry and exit points prevent them from gaining the full benefit of the long-term return potential of their investments.

Gary Gordon: – Bond ETF patterns suggest an appetite for less wealth destruction. – According to the chief U.S. market strategist at RBC Capital Markets, Jonathan Golub, seven of the last eight bull markets ended at the onset of a recession. There are several problems with this assertion.

NASDAQ: – Another way to build your fixed income portfolio. – It seems low yields are here to stay for now, as the Federal Reserve’s latest minutes reinforced that it intends to keep rates “low for long”. That’s why it’s especially important to have a well-diversified portfolio of investments at the center of your portfolio, one that includes a fixed income allocation that is structured towards yield, but is also mindful of risk.

Adam Aloisi: – Is dividend growth alone enough? – Dividend growth should be a prime consideration for retirement investors. Unfortunately, in today’s market most “traditional” dividend growth stocks only yield in the 3-4% range. For those with multi-million dollar portfolios and minimal, but incrementally increasing income needs, it might be perceived as a single stop, or dominant strategy for a comfortable retirement. But for most, with not-so-lofty sums of personal capital, they won’t be able to get away with dividend growth alone.

 

Bond Funds

Donald van Deventer: – Kinder Morgan energy partners leads 20 best value long-term bond trades. – One measure of reward to risk in bond investing is the ratio of credit spread to default probability. We rank 27,674 bond trades on April 25 and rank those over 20 years to maturity by this criterion of “best value.”

Trustnet: – Are your low-risk funds protecting you from an equity market correction? – Investors typically view bond funds as a good diversifier, but those that are upping their risk exposure to prop up their yield are highly correlated to equity markets.

 

 

 

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