Thursday April 13

Stocks fell today as geopolitical risk continues to build. The S&P 500 fell 0.7% to 2,328 and the Dow Jones fell 0.7% to 20,453. Over the holiday shortened week those indices were 1.1% and 1% lower respectively as geopolitical risk was the theme of the week. The KBW Bank index lost 1.4% and utilities fell 0.3%. Transportation shares were down as well. Economic data today showed that producer prices fell 0.1% last month compared to estimates which called for prices to be flat. Yearly change was 2.3% headline. On the geopolitical front today was news out of Afghanistan that the United States dropped the biggest nonnuclear bomb in its arsenal at an Isis target. Financials didn’t do well even in spite of positive earnings from JP Morgan and Citi. Additionally analysts are interpreting comments made by Trump that he prefers lower interest rates and could not be ruling out the possibility of keeping Janet Yellen at the Fed. The two year Treasury yield was unchanged at 1.21%. The ten year Treasury yield was also unchanged at 2.24%. Over the course of the week those yields were down 8 and 15bp respectively. The dollar rose slightly today after investors appear to be unconvinced of Trump’s attempts to talk down the dollar. USD rose 0.5% against EUR to $1.0618. USD was virtually unchanged against JPY to Y109.10. USD rose 0.3% against GBP to $1.2503. Over the course of the week the Japanese yen rose 1.9%. Oil prices fell slightly with WTI finishing at $53.06 and Brent fell 0.2% at $55.77. Over the course of the week gold rose 2.6%.

JP Morgan, Citi, and Wells Fargo all kicked off earnings season today for the big banks. JP Morgan and Citi each beat EPS estimates by a fair margin while Well Fargo bear only slightly. On the revenue front Wells Fargo was the only one to miss expectations. Citi and JP Morgan each posted higher than expected trading revenue. For Citi trading revenue was $4.4bn compared to $3.7bn in 4Q 2016. Citi’s EPS was $1.35 compared to estimates of $1.24. JP Morgan benefitted from bond trading and lending margins. Executives at JPM also said they expect that deregulation and tax reforms could also benefit the business going forward and lead to increase spending and borrowing on behalf of individuals and institutions. JPM’s ROE also notched a fourth consecutive quarter above 10% which is a key threshold for banks. Fixed income trading revenue at JPM was up 17% while equity trading revenue was up just 1.9%. They released $133mm in loan loss reserves as result of better conditions for oil companies. However they added $380mm to consumer loan reserves as a result of student loan and credit card defaults. Given the strong results management at JPM took the opportunity to reaffirm their support of the big bank model that has been criticized recently.

As private debt and direct lending strategies become more popular investors are becoming more concerned about overvaluation and diminishing returns in the space. Billions of dollars have flowed into the asset class as banks pulled away which has eroded returns. According to Preqin private credit strategies have increased in AUM by 300% over the last ten years. In 2016 $93bn was raised towards those strategies which brought total private debt AUM to $595bn. Goldman Sachs, Oaktree Capital, and Apollo are all large players in the space. Survey data from Preqin doesn’t look promising given the increasing enthusiasm for allocations there. 90% of the investors polled said that returns have exceeded expectations and 62% said they plan on increasing allocations. Interest in the asset class exceeds interest in real estate, infrastructure, natural resources and private equity. Returns have been on the downward trajectory in recent years falling as a result of this high demand. 2010 funds have returned 10.6% annually and 2014 funds have returned just 7.6%. Given the high demand and optimism that trend looks likely to continue going forward.

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Thursday April 13

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