1. Andreessen Sees Big Exits for Tech Startups in Next Wave

Long term venture capital investor Marc Andreessen is preparing for increasing IPO and M&A activity in the technology sector. Andreessen notes large cash positions held at mature technology companies and decreasing valuations as drivers for the potential activity. Research firm CB Insights estimated there are 168 unicorn candidates that are currently private.

Source: CB Insights

2. Eurozone Stocks Overtake US

Stocks domociled in the European Union are now outperforming U.S. stocks for 2017. The EURO STOXX is up 4.3%, while the S&P 500 is up 4.0%. One Factor influencing this is increased policy uncertainty in the US, following the withdrawal of the Obamacare replacement bill in the US. The question becomes to what degree other policy initiatives, such as corporate tax reform, can be passed. Additionally, the economic fundamentals in Europe are improving relative to their recent levels.

 

3. “Deep Subprime” Auto Loans are Surging

Roughly one-third of the auto loans packaged into asset backed securities are considered ‘deep subprime.’ According to Morgan Stanley, the deep-subprime loans default at a higher and accelerating rate, when compared to ‘traditional’ sub-prime borrowers. ‘Deep subprime’ borrowers now account for 32.5% of subprime auto loans orignated, compared to the 5.1% of 2010 subprime auto originations. Investors should take default rates and leverage ratios into account when analyzing consumer health in the U.S.

 

4. Insatiable Demand for Long Bonds Isn’t Short Term

Long term bonds are being used by banks, insurers, and other financial institutions to meet strict capital requirements regarding the amount of excess capital required. This response to stricter regulations has capped rates for longer term debt securities, and industry participants expect the demand (and rates) to stay lower for longer.

Regulations are not the only source of demand for high quality government bonds. First, bonds are a source of collateral for institutions borrowing securities in short term markets. Second, institutions are shifting to bonds for hedging interest rate risk, as swaps and derivatives have become more complex and more expensive, relative to their historical structure and cost, respectively.

 

5. Weekly Portfolio Insight: Bonds, Jammed Bonds

Bond ETFs are seeing an increasing acceptance by institutional investors. This is demonstrated by the increase in liquidity of these instruments during periods of increased volatility. An advantage to this increased liquidity is the decrease of the bid-ask spread, traditionally seen by investors when purchasing individual bonds. This article indicates that bond ETFs may be a price-advantaged medium for investors looking for bond exposure.

Ed McCarthy (2017). Bonds, Jammed Bonds. CFA Institute Magazine, Vol. 28 (1).

 

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