The markets have firmed up quite a bit in the last couple of months, but we’re likely to be in for a rocky summer. Summer has a tendency to be volatile. Earnings reports are mixed and diverse - Apple is clearly entered a soft patch, but Facebook is charging forward and beating estimates.("Sell in May and go away.")
Companies overall are maintaining spending at relatively modest levels, while consumers are belt-tightening. We’ve seen some increases in the individual savings rate, suggesting that behavior is shifting towards more conservatism. Data says they’re optimistic about their prospects, but are very concerned about the future. (This is usually a good predictor for the markets, ironically.)
Probably the most attention grabbing issue is Puerto Rico, which will be upping the ante in a new phase of its bankruptcy with a negotiated default on a 'Puerto Rico Government Development Bank' bond that came due on the 2nd. This was predictable but one thing is clear - the matter is far from resolved.
What’s significant about this recent change is that it now unquestionably places the territorial government in “default." This particular defaulted GDB bond was a little different in that it’s specific holders were a fairly concentrated group. It looks like the pool of hedge funds / mutual fund investors will get something between $0.45 and $0.55 on the $1 for the face value of the bonds (plus all of the high interest they collected over the last few years.)
The Puerto Rican government (PR) seem to be genuinely committed to avoid a default on the General Obligation (GO) debt. A default would be unprecedented, and PR’s pretty much stated policy at this point is to try to heavily bail out the GO bondholders -- by imposing much worse terms on the non-GO debtholders (the electric utility, the Development Bank, highway bonds, etc) in the hopes of continuing their future access to the bond market.
Nobody has confidence in the locals’ solution, and everyone is waiting for congress, or the Supreme Court, to act, so we have paralysis. We should expect more defaults, and more rhetoric in the coming months.
What this means, is that (barring some miracle), the process of resolution will likely head well into next year and we still don’t know what ‘resolution’ will look like. Investors need to be patient and let the process work itself out. Everyone agrees that Puerto Rico needs access to a bankruptcy process, and there is now pretty much consensus from the mainland institutions that a Financial Control Board needs to be put in place. At issue is how powerful the board would be and over several labor and tax / entitlement reforms. We’re still working things out I remain confident that the matter will be eventually be resolved, but not fully until next year.
Much more interesting and indicative of the current economic environment was Apple’s disappointing revenue growth over the last year (worst in 13 years.) It’s certainly gotten a lot of investors worried that Apple has ‘lost its mojo.’
Largely unnoticed was that Apple is increasing its dividend considerably (9%) and buying back more shares. At its current dividend, strong financials; I think it’s hard not to make the case that the company is both an attractive, stable company with both near term and long term prospects. Its main problem is that it’s too big in terms of market capitalization, and its non-dividend growth shouldn’t be expected to be too high in the future. I see Apple is a “value stock” and an "income play."
But it’s true, the problem with Apple isn’t confined to its sheer size. The last few products the company put out were disappointing. But the company has a long history of innovation, and seems to have the best minds in the industry. (And, even without high growth in the future, it’s income yield is equivalent to US treasuries.)
Finally, on a more pleasant note - it’s interesting that Goldman Sachs has chosen to enter the online banking world and start collecting retail deposits. This might be a great way to leverage their brand. They’ve recently announced some very attractive cash management products. (1% on money market; Apparently their status as a bank holding company really encourages them to try and bulk up on deposits.)
We’ll see if they’re serious about gathering retail deposits in the coming year, but the high interest they’re offering is an extremely encouraging sign and a reason to look both placing cash positions there and to look at the stock.
