But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Must-know: Credit risk retention in securitization transactions
In its most basic form, securitization pools similar forms of debt—like credit cards, car loans, or real estate mortgages (IYR) (VNQ)—into special purpose vehicles (or SPVs). The cash flow from the debt in the SPV is divided into tranches. The tranches have different risk and return characteristics.
Federal Reserve staff are working on a proposal specifying numerical floors for collateral haircuts in SFTs. The proposal would include repos and reverse repos, securities lending and borrowing, and securities margin lending transactions. Entities that seek funding against these transactions would need to post a minimum amount of excess margin to the lender.
Historically, a flatter yield curve had an adverse impact on the financial institutions’ returns. It lowered their net interest margins. The Fed continues to stress an accommodative monetary policy. The policy and strong overseas demand have kept yields low at the long end of the curve. As a result, the difference between 30-year and five-year Treasury yields fell to 154 basis points on September 5, 2014.
Improved financial stability due to lower short-term wholesale funding risks would benefit financial market (IVV) (or DIA) participants. It would generate business confidence. It would also lead to less market volatility (VXX). As a result, the returns on exchange-traded fund (or ETF) investments (XLF) (KBE) (KRE) would be less volatile.
Short-term wholesale funding refers to a bank’s use of short-term deposits from other financial intermediaries—like pension funds and money market mutual funds. It uses the short-term deposits to invest in longer-term assets—like loans to businesses. Using these short-term funds to invest in longer-term assets causes a timing mismatch between assets and liabilities.
The leverage ratio defines the amount of Tier 1 capital that banks are required to maintain—relative to their assets. Tier 1 capital consists of stock and disclosed reserves. It can also include non-cumulative, non-redeemable, preferred share capital.
The LCR defines the amount of highly-saleable short-term securities and central bank reserves that must be held by financial institutions (XLF) (KRE). It’s the ratio of the High-Quality Liquid Assets (or HQLA) divided by the projected net cash outflows over a specified period. HQLAs help the institution meet its short-term funding requirements.
Signs of financial stress in Global Systemically Important Banks (or GSIBs)—like Citigroup and JPMorgan (or JPM)—would impact the entire financial system. The signs of stress would impact stocks and bonds (BND). As a result, it’s important that the Fed and other regulators establish a suitable regulatory and supervisory framework.
In his testimony on September 9, Governor Tarullo highlighted the progress made in implementing the Dodd-Frank Act’s provisions. At the international level, domestic regulators—in cooperation with the Basel Committee on Banking Supervision (or BCBS)—developed new standards on the capital, leverage, and liquidity requirements for global banks.
As a result of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The Act includes provisions for enhanced liquidity. It also includes provisions for capital and risk-management requirements for large financial intermediaries.
When financial intermediaries allocate funds, they assess the risks and returns that come from various risky claims. Intermediaries help allocate resources and risks throughout the economy. Financial intermediation can result in concentrated risks. The risks increase the financial system’s fragile state. These risks are called systemic risks.
Ensuring that financial intermediaries (XLF)—for example, Bank of America (or BAC), JPMorgan (or JPM), and Wells Fargo (WFC)—are adequately capitalized would reduce their risk footprint. The 2008 financial crisis proved that systemic risks arise from large financial intermediaries. They can also spread across markets.
In short, while there are parts of the global economy that investors should be nervous about, on a global basis the economy appears stable. What is noticeable is a growing divergence between different regions and countries.
Today, most measures of credit conditions are positive, with tight spreads across all of fixed income. Even high yield spreads have come in after a short scare last month.
I see few signs of a cyclical slowdown and related decelerating growth, outside of Europe and a few select emerging markets: Consider the following:
As 2014 is shaping up to be another year of below-trend economic growth, many investors are wondering: Is economic growth once again slowing? Russ explains why his answer is no.
Gold (IAU) (GLD) prices are moving in a path similar to inflation. As inflation goes up, the dollar depreciates. As a result, it makes sense for investors to reallocate their money towards gold. Gold is good for storage value. Also, gold is tied to other macroeconomic factors including interest rates.
According to Johnson Matthey, 65% of the total demand for palladium (PALL) comes from the automobile sector. As the worldwide demand for automobiles increases, the demand for palladium will also increase. Palladium has applications in other industries. For example, it has electrical, dental, and chemical uses. It’s also used to make jewelry.
Most palladium (PALL) supplies come from Russia (RSX) and South Africa (or EZA). Each country produced 82 metric tons in 2013. According to Statista, there were 210.5 metric tons produced worldwide. There are only a few countries producing palladium in the world. As a result, any geopolitical events concerning Russia and South Africa will increase its prices.
Gold is usually a safe haven for investors. However, gold has eroded investor value to a large extent, at -27%, in the last 24 months. It could make sense to have palladium complement the gold position in your portfolio.