Wednesday September 2

Stocks rise as volatility in stock markets continues. The S&P500 and the Dow Jones both rose 1.8% to 1,948 and 16,351 respectively. An ADP report today showed that 190,000 jobs were created last month, which slightly missed expectations. This is still a modestly strong headline number, and is up from 177,000 in July. The highly watched Friday jobs report is expected to show that payrolls increased by 220,000. This will be a heavily scrutinized report as the Fed is paying close attention to the labor market in deciding whether or not to raise interest rates this month. The Fed’s beige book report showed that economic activity in most regions of the US expanded which supports the Fed’s view that the economy as a whole is improving. The dollar appreciated following today’s news, rising 0.8% against the yen to Y120.26 (yen per dollar) and 0.9% to $1.1217 against the euro. Stock markets in China continue to fall. The ramifications of China’s economic slowdown will be felt all around the world. To reflect this, Australian 2Q GDP results today showed that the economy grew 0.2% which was less than expectations which called for 0.4% growth. Economists noted that decreases were due to reduced mining and construction activity. China’s markets are closed for the rest of the week to honor the anniversary of World War 2, which could be positive for US markets as they won’t be dragged lower by further losses in China.

Puerto Rico restructures its bonds with a group of bondholders. PREPA (Puerto Rican Electric Power Authority) reaches a deal with certain mutual funds and hedge funds, and hopes to reach similar deals with further groups of investors. GDB (Government Development Bank) is also in the process of negotiating. Bond prices from various Puerto Rican issuers rose on the news. PREPA bonds were trading as low as 54 cents on the dollar as recently as Monday, however prices rose 23% to 67 cents on the dollar after today’s news. This shows that investors had possibly priced in further principal reductions. Investors will receive new securities that are worth 85% of face value of the original, and they will carry an investment grade rating. The debt was previously rated junk. The restructuring will reduce principal by $670MM and the authority will save more than $700MM in principal and interest payments over the next five years.

The landscape is changing in CLO markets as a result of changing regulation. CLOs are typically high yielding loans that are taken out to finance private equity acquisitions, or debt from companies without easy access to capital markets. The increasing capital requirements will begin at the end of next year. CLO managers will then have to hold at least 5% capital against all of their deals. Before the crisis there were 181 CLO providers, however only 120 have issued new deals since 2010. This downward trend is expected to continue due to consolidation. In spite of this regulation, issuance is on a rising trend. In 2011 $266bn in CLOs was issued, compared to $416bn so far this year. This is a good landscape for larger CLO managers.

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Wednesday September 2

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