Monday May 8

Stocks were flat after Macron wins in decisive fashion in the French election. The S&P 500 and the Dow Jones each moved less than 0.05% and finished at 2,399 and 21,012 respectively. The KBW Bank index rose 0.3% while the DJ Utility average fell 0.1%. Loretta Mester spoke and came across as somewhat hawkish saying that the economy was on track for rate hikes. In spite of the favorable outcome in the French election the result seemed to be priced in based on the market impact. Oil prices found support today after verbal support from Saudi Arabia which said it would do “whatever it takes” to support rebalancing prices. The next political event in Europe will be the German elections in September but for the time being economic fundamentals should shift back into focus. Stocks in France were down today as the result was already priced in. Rates in the US rose as investors continue to price in the next Fed action. The two year Treasury yield rose 3bp to 1.34%. The ten year Treasury yield rose 4bp to 2.39%. Accordingly 2yr vs 10yr bear steepened to 1.05%. The dollar was stronger on the day against peers. USD rose 0.6% against EUR to $1.0931. USD rose 0.5% against JPY to Y113.26. USD rose 0.3% against GBP to $1.2945. WTI and Brent each rose 0.6% to $46.48 and $49.40 respectively.

The IPO market is having a resurgent year however the most sought after names are still staying on the sidelines. Year to date U.S. companies have raised $18bn in the IPO market which is 4x the amount raised last year at this time and the largest YTD total since 2014. Among the companies in the current IPO pipeline are Mongo, Switch, Axiom, and Altice. Bankers on those deals include Goldman Sachs, Morgan Stanley, and JP Morgan. The most high profile public companies however aren’t joining in on the action. Companies such as Uber and Airbnb are able to garner attractive valuations in private markets given the growing pool of venture capital money so they are staying private. IPOs listed this year have performed decently rising 11% so far. Last year’s IPOs have return 29%. Companies that IPO earlier in the cycle typically have to offer more of a discount on their shares which disappears as the IPO cycle matures. Snap’s valuation was successful as well. The concern for some large private companies might be that they don’t want their valuation to fall when they IPO compared to the most recent private financing round. Cloudera IPOd last month at a level that was well below its private valuation. Another factor that is keeping IPO volumes slow is high corporate cash piles. Corporations could opt for internal deals using record amounts of cash which would reduce the amount of companies ready to go public.

While the banking sector in general benefits from higher interest rates Bank of America especially benefits in an outsized way due to the characteristics of its deposits. Bank of America pays significantly less on its deposits than other banks do, which means it has much cheaper access to funding. Bank of America on average pays just 0.08% on its US interest bearing deposits. That is half of what Wells Fargo and JP Morgan pay, and it is significantly lower than what Goldman Sachs and Ally Bank pay on their platforms. Regardless Bank of America continues to pull in deposits as consumer banking deposits increased by $29bn in the first quarter to a total of $706bn. It pays just $617mm for those deposits compared to Goldman which pays $828mm for just $115bn in deposits. Consumers are drawn to the convenience of Bank of America’s platform due to its 4,559 branches and 15,939 ATMs. Bank of America also specializes in small deposits, which are stickier than larger deposits. That is because even if the interest rate is higher the effective difference isn’t really worth the hassle of switching banks for a customer with just a few thousand in the account. That gives Bank of America a competitive advantage across its lines of business and reflects the benefits of having a large diversified platform in the face of some regulators which want banks to scale back and specialize more. That has manifested itself in Bank of America’s earnings where profits were up 40% in the first quarter from the previous year.

As the VIX approaches a 1993 low point many analysts are calling attention to the dangers of investing in products linked to the VIX. Investors and traders can’t buy the VIX directly so instead they use VIX futures. VIX futures are regularly in contango so the ETPs that track the VIX continuously buy more expensive longer term futures and sell cheaper ones. For an investor who wants to buy volatility that makes it especially dangerous as that process heavily erodes into returns. Shorting the VIX has been much more profitable over the longer term however that is highly risky as well. Researchers at Goldman Sachs estimate that someone who shorted volatility at the peak would have returned 4,364%. Since the Daily Inverse VIX Short-Term ETN debuted in 2010 it has returned 700%. However it can lose a significant amount of value in a short period of time. In just one day after the Brexit the inverse VIX fund lost 25% of its value and fund managers have the right to invoke a “kill switch” if losses exceed 80% in one day. Regardless of those dangers the market is growing significantly. Assets in the volatility sector have increased to $4bn recently and trading volumes total $2.6bn per day.

Monday May 8

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