Monthly Archives: October 2013

Thinking Ahead

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One of the challenges of living in the Upper Midwest is that you have to prepare for the Holidays now before it gets too cold. As we say in our household, “Easter is the time of year when can take down the outside Christmas lights you put up after Halloween because the extension cords were frozen solid to the ground since Thanksgiving.” Therefore, we in the Tundra pride ourselves on thinking ahead. We were wondering if we need to think ahead about Affordable Care Act impacts, or if it is too early.

Many health care consumers are having their coverage dropped from their insurance provider (see link below). Much ink has been spilled discussing how that may impact health care companies. We also wonder if this will impact the broader economy, and if so when and do we need to prepare now as investors?

Our gut feel is that it will have less of an impact on the truly affluent in this country as many can pay out of pocket or find alternative sources of care worldwide. We also wonder if little will change with the less affluent. Yes many more will have affordable insurance, but we also do not know what the final deductible and co-payments might be until we get more data on the demographic characteristics of those that signed up. That leaves our large middle class. If premiums, deductibles and co-pays rise for a good percentage of middle-class Americans (e.g. those without existing conditions), what will that mean for disposable income? Will increasing health care costs crowd out consumer spending and will it impact other sectors?

Part of us says that it is too early to make any investment decision, especially since those who work for larger corporations will not feel the impact until 2015 since larger companies received a one year extension under the Affordable Care Act. But still a sizable subsector of the middle class could feel the impact by January, and others who are not affected now may see the impact higher costs have on their neighbors and act accordingly beforehand. What do you think?


 

 

Supporting links:

http://www.kaiserhealthnews.org/Stories/2013/October/21/cancellation-notices-health-insurance.aspx

http://www.bloomberg.com/news/2013-07-02/health-law-employer-mandate-said-to-be-delayed-to-2015.html

A Horse with No Name

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It looks like we will end this week with negative excess returns – just barely, as spreads have moved around in a fairly directionless market. Part of the issue, from our perspective, is that the current credit cycle is getting a little long in the tooth. Credit regularly goes through a boom and bust cycle. Corporate debt levels expand (slowly at first, then rapidly as companies face an earnings shock) and contract, while credit spreads tend to follow this cycle. Right now, revenue growth at most companies is lagging earnings growth, and that is precisely the time management teams turn to higher leverage to boost shareholder returns — which will eventually push credit spreads wider. But spreads can move sideways for quite a while, generating solid excess returns. The challenge for credit investors right now is to figure out which horse they’re riding.

It has continued to be a bit of a desert with respect to new issue. We had another light week, with just about $12 billion in supply. Following earnings releases, a few banks came to market – Wells Fargo brought $3.5 billion of 5s and 30s, Citigroup did $2 billion of a senior unsecured 10 year, while Bank of Nova Scotia and Suntrust were both in the market with 5 year deals. The Wells Fargo 5 year was probably the star of the week – the deal was well oversubscribed, priced at a spread of 85bps to Treasuries, and is trading about 10 tighter. The Citigroup deal is the laggard for the week, trading a few basis points wider. Continue reading →

Climate Change and Investment Analysis

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Tom Brakke, CFA

When readers of the print edition of Bloomberg Markets received the November issue, they were confronted by bold letters on a red background that proclaimed, “The Risks Heat Up.”  A light blue circle provided visual contrast and more context: “Special Report:  Climate Change.”

The four items in the issue included a feature story (the subhead for which began, “As the risks grow on a hotter planet . . .”); a sidebar on how rising seas have affected agriculture in Vietnam; a look at the “laboratory” that is Alaska; and a graphic of the threats and opportunities around the world as a result of climate change.

Bring up climate change and you are sure to get immediate reactions from those on one side of the debate or another, although this is an issue where the political lines aren’t always predictable.  For analysts, however, the question should not be a political one, but a research-based one, dependent upon the facts to date, the scientific possibilities, scenario analyses, and educated estimates of probabilities.

Like it is with other investment endeavors, time horizon is very important here.  As a society, we should be considering the potential long-term impact of climate change and making the appropriate policy changes on that basis.  As investors, that societal horizon might seem too long for our purposes, the impacts too far away to be relevant.  But at some point, our analytical methods may need to be adjusted based upon the range of possible climate outcomes.  (Disclosure:  I wrote a piece on warming up the models of investment analysis in 2008.) Continue reading →

Not Your Typical Charterholder: Jeff Branstad, CFA

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jbranstad_NYTCHInterview #2: Jeff Branstad, CFA

Jeff Branstad is a Senior Investment Product Specialist at Thrivent Financial, where he serves as an expert on investment products, portfolio construction and asset allocation strategies as well as serving as a resource for economic, financial market and specific asset class commentary. He also supports other areas including product management, product development and product marketing. He received his undergraduate degree from Luther College in 2004 and later earned his MBA from Augsburg College in 2007. He received the CFA Charter in 2010.

Tell me a little bit about yourself, where did you go to school?
I received my undergraduate degree from Luther College in Decorah, Iowa, where I majored in Economics and Accounting. The business department did not have a specific “finance” degree, but I was able to take a handful of finance courses. I was always interested in the investment industry and my dad is a Financial Advisor, so I had been exposed to the industry to some degree. However, I wasn’t certain what I wanted to do when I left school except that I knew I didn’t want to be an accountant. Continue reading →

Mall Rats Abandoning Ship

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We’re a guy, so we only go to the mall when one of two things occur:

1)      A kid’s birthday party at the Mall of America

2)      When we need underwear

However, we need to focus on consumer spending for investment purposes despite our lack of fashion élan. One thing we have noticed is the number of retailing companies that are mentioning weak traffic and heavy discounting. It seemed to start with the teen retailers, but the trend seems to be more systemic than we thought. Even some of the better performing names in the group and even certain ecommerce companies are discussing weakness. That got our attention.

The question we have is why is this happening? One argument is the government shutdown. Perhaps, but some retailers, especially the teen retailers, were seeing less traffic/conversion well before the shutdown. Could it be the sequester causing the slowdown? We would like to see results out of broader areas of the economy this earnings season, such as manufacturing, before we lay credence to that theory. Could it be employers are adjusting hours in advance of the Affordable Care Act? We have seen some companies such as Forever 21 adjusting hours downward to limit the number of full time workers. Others such as Walgreens are moving their employees to private healthcare exchanges, and some other companies are doing the same for their retirees. Could it be tax increases earlier in the year now affecting the consumer? Is it the consumer trying to tell us something about their future spending and job prospects that are not showing up in the data yet? Could it be a combination of all of the above? Or are there a lot of people like us that have plenty of underwear and don’t need to go to the mall? What do you think?

Supporting links:

http://money.msn.com/now/post–forever-21-caught-in-obamacare-controversy

http://www.reuters.com/article/2013/09/18/us-healthcare-exchanges-private-idUSBRE98H03120130918