Tuesday August 23

Stocks rose modestly today, inching closer to a record high. The S&P 500 rose 0.2% to 2,186 and the Dow Jones rose 0.1% to 18,547. Retail companies, home builders, and oil companies led indices as volumes were low. Trading volumes in August are typically lower than the rest of the year, however this year August has been even slower than usual. Retail today put in a strong performance after Best Buy rose 20% after beating expectations. The S&P is currently trading at 18.5x ttm earnings compared with the longer run average of 14.7x. Oil prices rose today which helped energy companies. WTI rose 1.5% to $48.10 and brent rose 1.6% to $49.96. Economic data today showed that manufacturing PMI came in lower than expected at 52.1 versus consensus 53.2. USD fell 0.5% against GBP to $1.3198. USD fell 0.1% against JPY to Y100.19. USD rose 0.1% against EUR to $1.1303. The two year Treasury yield rose 1bp to 0.75% and the ten year also rose 1bp to 1.55%.

Money market reform is reducing the appetite for short term bank debt. New reforms will make money market prime funds price during the day to reflect changes in NAV, as opposed to before when money market funds priced to par. As a result managers are expecting outflows from prime funds around the time of the regulation change in October. To respond to those concerns managers have shortened the maturity of those funds, which has had negative effects on yield. Lower yields further incentivize investors to pull money out of those funds and invest them into Treasury money market funds, which continues the feedback loop. Banks are large issuers of short term debt to fund themselves, so they are negatively affected by this dynamic. In particular prime funds holdings of short term debt issued by financial institutions fell 37% from last year in July. Short term borrowing costs have also risen to 0.75% for 90 day AA rated paper, which is up from 0.55% in the start of the year. The purpose of this regulation is an attempt to make the money market safer in the event of another financial crisis. In addition to offering a floating value, money market fund managers will be able to impose “gates” to prevent withdrawals in certain situations or charge fees for withdrawals.

Goldman Sachs offered a $100mm credit facility to online lender Foundation Group. Foundation has recently partnered with other banks including Regions and other community banks. As opposed to other online lenders that have chosen to challenge the business model of traditional lenders, Foundation appears to be partnering with banks. Foundation uses banks to fund loans and then finds customers, compared with other lenders such as On Deck and LendingClub which match lenders with borrowers directly which effectively sidesteps traditional financial institutions. Foundation is more of a hybrid between traditional banks and fintech. The company holds loans on its balance sheet and makes money that way.

Charitable foundations are feeling the pain imposed by negative interest rates. Foundations invest the capital in their endowments and ideally spend the income from those investments on charitable activities. With yields going to zero they are being forced to eat into their capital which limits the sustainability of the strategy. Data shows that in 2015 private foundations earned a return of 0%, compared to 6.1% in 2014 and the long term target of 7-8%. In order to be eligible for tax benefits charities must spend 5% of their endowment each year, so they must earn around 7% each year to cover that hurdle as well as internal costs. Grants from foundations go towards a wide variety of social purposes. Some foundations have called attention to the fact that many have had to invest in riskier assets just to meet the 5% target.

Tuesday August 23

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