June 3, 2018

Easing Volcker Rule Restrictions for Big Banks

Posted in Keith Knutsson tagged at 2:34 am by Keith Knutsson

Future changes in the Volcker Rule restrictions on big banks’ trading have been backed by the Fed. These changes will loosen compliance requirements for all banks and provide a sense of relief for firms with small trading desks. The Fed will be easing the rule designed to curb risky trading in the wake of the financial crisis. The new plan will place fewer audits of individual securities and derivatives transactions for bulge bracket banks like J.P. Morgan and Goldman Sachs. This means banks will spend less time providing compliance and traders would be given more freedom to buy and sell securities.

However, critics claim that this proposal will be risky since banks could create loopholes that allow them to engage in risky trading. The proposal is part of a broader regulatory rollback that includes a recently enacted law easing rules on small banks and less aggressive leadership at the Consumer Financial Protection Bureau. Regulators said they want to enforce the rule differently because the existing practices are costly.

In the new proposal, the Fed and other agencies wouldn’t audit individual transactions as often, but they would check to see that bank managers set limits on traders aligned with expected customer demand. Law’s allow hedging and market-making on customers’ behalf. Powell says, “The proposal will allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness.” On the other hand, banks say “We’re all somewhat perplexed and challenged by the implementation.”

The proposal could revolutionize the banking infrastructure, but the loopholes could potentially weaken rather than advance the implementation of the rule. It would lead to banks betting against, rather than service their client’s needs. Banks have spent millions of dollars developing systems to measure trading activity and model future customers’ demand. Not only that, but banks will have to reevaluate how they define whether a trade is violating the Volcker rule or not. However, the proposal would lessen the tensions to justify hedging trades and seeks to reduce the impact of the rule on foreign-owned banks’ overseas activities.

The Fed is separately reviewing capital restrictions, including the leverage limits, which could loosen for some banks. Regulators are also proposing to create three new categories of banks. Those with more than $10 billion in trading assets and liabilities would face the highest expectations under the Volcker rule. The newly proposed Volcker rule and the three categories of banks would redesign the banking industry and divide firms in this space.

May 24, 2018

Oil Prices Rise as U.S. Withdraws from Iran Nuclear Deal

Posted in Keith Knutsson tagged at 5:53 pm by Keith Knutsson

The oil market has recently seen an increase in prices as the U.S. pulls out of the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). In addition to petroleum trade, the sanctions will include restrictions on transactions with the Iranian central bank, shipping agencies and other insurance firms that have an impact in oil trading. While the removal from the plan can create potential unknowns for the future of oil prices, a definite reduction in Iranian supply will likely exacerbate market deficits thus further suggesting an upward pressure on oil pricing.

As the overall oil market tightens, the near-term price is expected to rise towards $80 per barrel, which has been above the long-term market expectation. Not only that, but Venezuelan output has drastically decreased over the past six months and a lack of offsetting increases from other members of the cartel. This has led to the OPEC’s overall output to fall around 500,000 barrels per day below quota. The U.S. has not been able to compensate for declines elsewhere because it is facing constraints in U.S. production growth. This has led to a positive trigger in the oil market.

Analysts say, “We assume Iran’s oil exports will fall by 150,000 b/d in the second half of the year compared to the first half of the year. The amount potentially could rise to 300,000 b/d in 2019, assuming close but not full compliance with a 20% requested curtailment on a base of roughly 2 million b/d of exports.” This means the net impact on the overall oil market could potentially be greater if condensates and liquified exporters are also affected the same way. However, as historical data has shown, the most important piece of this puzzle comes from the OPEC’s final decision on tightening which will determine the future of the oil market.

The ultimate impact on balancing supply and demand in the oil market will be a function of OPEC and Russia’s responses to rising oil prices and tightening balances in the market. As prices trend higher than expected, pressure to increase supplies will start to emerge as allies will want to compensate for any supply reductions in oil output from Iran. A higher price also decreases demand, which would mean that certain actions will have to take place in order to correct the supply and demand balance. For now, it seems as if investors should cautiously watch for increases in oil prices, be aware of tensions rising from the U.S. backing out of the nuclear deal and the overall reduction in oil output globally.

May 22, 2018

US Consumer Oil Prices

Posted in Keith Knutsson tagged , at 1:47 am by Keith Knutsson

Higher prices surprised the U.S Energy Information Administration which had to raise forecast for summer gasoline prices to $2.90 from the estimate of $2.73 two months ago. Oil prices are rising on outlooks of a tightening global oil market, despite the release of robust OPEC data regarding production. In the meanwhile, average U.S. retail gasoline prices are climbing toward $3 a gallon, roughly the highest price in three years. The national average was around $2.86 at the end of last week.

Analyst believe that economic growth has boosted demand for oil. Yet, it is also conflicts the Middle East that could fuel higher prices. Especially given recent US involvement with the US embassy, consequences remain to be seen. Should prices continue to rise, U.S growth could face some headwinds. Airline, delivery companies among others depend on lower prices for their margins.  Another factors that might be affected are measures of inflation and therefore interest rates. Historically, the Federal Reserve attempted to ignore volatile energy prices.  

Should the trend continue for the longer term, investors might be able to expect the opposite to happen as in 2014; instead of driving more and buying less fuel-efficient cars, driving could decrease and the switch to compact and electric vehicle accelerate. Caps to the forward price do exist given the United States’ increasing prominence as an oil supplier – Production reached 10.7 million barrels per day and is expected to continue increasing.

 Keith Knutsson of Integrale Advisors commented, “In the long-term the U.S economy is flexible, and I see very little impact, but in the short term we might see these trends affect corporate earnings and consumers alike.”



May 12, 2018

U.S. to Loosen Bank Leverage Ratio

Posted in Keith Knutsson tagged at 2:00 am by Keith Knutsson

The Trump administration has been actively working on retooling the leverage ratio for big-banks moving forward. This will curb excessive borrowing and serve to provide more freedom for large lenders to expand in areas they once lacked. This does not mean that banks will be allowed to take on excessively risky projects, the capital rules and regulations from the past will still hold. This is great news for banks as the current leverage strategy discourages bankers from taking on many low-risk activities.

The Federal Reserve and the Office of the Comptroller of the Currency have been closely working with the Trump administration to lower the leverage ratio. This will positively affect cash flows and return more profits for shareholders. This will also be implemented in the future stress testing models for the big banks. A recalibration is just the first step to transformation; the Trump administration is also working with appointed officials to redesign the Volcker ruler proprietary trading ban and other liquidity regulations

Officials state, “We haven’t had a recession since 2008, so from one point of view, our ‘too big to fail’ banks have never really been tested. However, a booming economy can lead to a relaxation in lending standards and an attendant increase in risky debt levels.” 

Bank capital levels are measured in two primary ways, risk-weighted indexes and leverage ratios. Risk-weighted rules give each asset different values, thus making banks fund mortgages with more equity than bonds. On the other hand, leverage ratios simply compare a bank’s equity to its total assets. The 2008 crisis proved that the risk-weighted index needed to be re-written and that the leverage ratios needed tightening. However, the problem with a strict leverage ratio is that it treats relatively safe, low-margin projects the same as riskier and more profitable ones. This is not a good representation of the risk-return strategy and gives bank’s less room to pursue smaller activities with low risk. One question to dig deeper into is whether banks will use the recalibration of the leverage ratio to grow the overall business or draw down capital and send it to shareholders. Drawing down capital will be a major problem for bank’s because it would mean less equity to absorb losses in the future if a potential downturn occurred. Moving forward, it will be up to the decision makers at these big banks to successfully navigate the new and upcoming policies.

April 27, 2018

10-Year Treasury Yield Tops 3%

Posted in Keith Knutsson tagged at 1:25 am by Keith Knutsson

The yield on the 10-year U.S. Treasury notes hit its all-time high in more than four years at 3%. Yields have been a hot topic for many investors around the world as its movement significantly triggers the global finance markets and currencies around the world. Yields have been driven higher as strengthening inflation prospects added to expectations for a faster rate of monetary tightening from the Federal Reserve.

One head of Equities in London claims, “The three percent level is a big psychological point for investors and has gained huge focus. It is not the move towards three percent yield that is unusual, but the historically low level of yields we’ve seen in recent years further reflecting the long-lasting scars of the financial crisis.”

The increase in rates not only reflects a higher cost to borrow money, but also makes debt a little pricier for companies. This will play a major impact within the operational side of the business as room to increase salaries might shrink and significantly decrease shareholder returns due to a slowdown in investment ideas.

Investors should be wary that a higher treasury yield will not only affect everyday consumers, but it will also make equities less attractive while signaling that the economy could potentially be at risk. With people not being able to spend as much on other investments due to an increase on mortgage rates and borrowing costs, spending will decrease and possibly kick off an economic crisis in the future.

However, with higher rates and the government set to report first-quarter GDP this Friday, some see higher rates as a vote of confidence on the strength of the economy. Traders and investors have blamed the central bank’s actions to unwind its massive balance sheet and gradually hike rates because these actions have resulted in a sharp rise in short-term rates and a flattening in the yield curve. Perhaps, it might make sense to look into investing within the bond market as it might seem like a favorable market with the current economic situation.


April 21, 2018

What does Rising Inflation Mean for Your Portfolio

Posted in Keith Knutsson tagged at 2:04 am by Keith Knutsson

With current market conditions this past quarter and U.S. inflation climbing towards the central bank’s target, commodities and other “real assets” are set to outperform the market giving investors a chance to diversify their portfolio holdings.

Investors tend to flock away from drastic changes in their portfolio as safe haven assets seem more favorable at times when the economy is unpredictable. We now need to consider the facts that output gaps have closed, trade frictions have kicked off and the overall business cycle in the U.S. is maturing. With all of this kept in mind, it is safe to assume that the U.S. inflation rate is on track to meet the central bank’s target after their meeting earlier last week. However, will this increase in rate lead to a potential overshoot picking up inflationary risk in markets like India, China and Japan? The U.S. has been in a state of transition from a time where deflation posed as a critical risk while higher inflation was beneficial for the markets, to one where the economy prefers a lower inflation rate.

Unlike equities, which often times over-anticipate earnings and growth, commodities historically have tended to do much better in the later stages of the business cycle. Its main focus is on the present economic conditions and has also shown strong performance once capacity constraints start to develop. Another factor that further suggests a growing commodity market is the crude oil futures and the analysis behind its “backwardation” curve.

Backwardation is a theory developed in respect to the price of a futures contract and the contract’s time to expire. As the expiration date comes close, the contracts start trading at a higher price compared to when the expiration date was further away. Simply put, this creates a downward sloping futures curve and implies a tightening supply. This means that commodity investors can expect to receive returns by rolling a higher-priced short-term contract into a lower-priced lower-term contract. This will in turn allow commodity investors to capture a higher return and broaden the indexes. Investors should look into “smart beta” commodity strategies to hedge their risk against bonds and equities in the coming months as we see crude oil returns tend to be positive even in the short term “backwardation” period.

Not only that, but because of a major supply shortage in the early 2000’s and a surplus in the recent years, supply and demand have started to balance out. Diversification becomes even more favorable to investors as commodities begin to react more to idiosyncratic imbalances. With the current environment, investors should reconsider their portfolio allocation strategies to further diversify their investments in oil, natural gas and metals.

April 16, 2018

Why Policymakers Shrug at Market Volatility?

Posted in Keith Knutsson tagged at 1:44 am by Keith Knutsson

The Fed will continue to use its methodical approach on slowly increasing interest rates after the Federal Open Market Committee (FOMC) meeting in March. One statement that caught a lot of attention last week was the relatively high chance for policymakers to change the current plan for two or three hikes in the year of 2018. Even though the full picture moving forward is a bit cloudy, there are talks of a mild overshoot of the inflation target of 2% by 2020. Keep in mind that this news does not reflect the more pronounced period of above-target inflation. The bar to change the plan of increasing rates two or three times in 2018 was further supported after most of the Fed officials upgraded their opinions on global growth, expansion of the fiscal policy and the near-term outlook for the U.S. economy.

Even though a number of Fed officials sided on a “steeper” path for the federal funds rate, it will be important to consider whether this means two or three hikes in 2018. The majority of the participants agreed to a “more appropriate and gradual” approach on the hiking cycle. Some factors investors should be wary of are prospects for retaliatory tariffs and continuing tensions of a trade war. Fed officials appeared to shrug off the increase in equity market volatility. Some policymakers predict that it would be a better option for the Fed to raise the fed funds rate above its long-run nominal rate, while showed uncertainty around the overall policy picture and “steepness” of the curve.

 An anonymous policymaker suggested, “a range of views on the amount of policy tightening that would likely be required over the medium term.”

 Taking a more technical approach to this situation, the Laubach and Williams natural interest rate model suggests an estimate of the real neutral rate of 0%. This implies that a 2% neutral nominal fed funds rate is consistent with the estimate of 0%. However, investors should consider the risks and alternatives to this model. The FOMC will continue studying the gradual tightening of the monetary policy to evaluate the neutral policy rate and further assess changes in economic conditions moving forward.


April 6, 2018

Wealth Management: China

Posted in Keith Knutsson tagged at 9:23 am by Keith Knutsson

Discussed earlier, the US wealth management industry is adapting to changing demands. This is also the case in China but under different circumstances. The Chinese industry is in the hands of the younger 30s-40s demographic. With the cultural emphasis on savings adapting towards investment, the Chinese have driven worldwide investments in recent years, allowing its country to be an investment powerhouse. These factors lead to a rapidly growing industry for wealth managers. The growth is part of Chinese incredible pace in digitization. Hence, in this industry the transition went from savings accounts to digital wealth management, skipping the personal advice from financial advisers. Generally, only individuals higher up in the wealth segments request personal advice, but in China, that trend isn’t quite clear; pure technological familiarity seems to be the indicator, and the differentiation between digital wealth management and personal wealth management is not differentiable based on an account balance. Investment-wise, Chinese investors in the Wealth Management space have been focused on fixed income. They seek after products in the 3-6 percent yield range.

Another major differentiation in the Chinese Wealth Management market is its regulatory limits. Capital controls of the renminbi have created Chinese wealth-management firms that focused on local investments. With optimism about the markets opening up, such as connections with the Hong Kong markets, allows the wealth-management market to grow outside of China.

Keith Knutsson of Integrale Advisors commented, “It remains to be seen how the Chinese will respond to the ambitions of bigger banks from Europe and North America establishing a presence in China. An often-overlooked factor is that the loosening regulation might open up Chinese banks to become global players. “

March 27, 2018

Brief Look on Chinese Investment Policies

Posted in Keith Knutsson tagged at 1:50 am by Keith Knutsson

With China and the U.S. reported to have quietly started negotiating to improve U.S. access to Chinese markets, it remains important for investors to understand the perspective of the Chinese government. New research suggest that the investment of Chinese ventures is set to reach $2.5tn throughout the following decade in spite of rising protectionism. Investors believe yearly sums to consistently beat the record set in 2016, the year preceding Beijing’s wide crackdown on “nonsensical” arrangement making. Limiting the opaqueness from Beijing about what sorts of arrangements controllers will support will be pivotal to helping Chinese arrangements succeed. In the past, privately owned groups such as Anbang Insurance Group and HNA Group suffered blotched deals due clarity issues regarding ownership. Be that as it may, following a period of unclear directions from Chinese authorities, China’s bureau explicitly outlined rules before the end of 2017, laying out the kinds investments that are supported and unsupported.  The rules welcome investments that meet China’s modern approach; for example, securing cutting edge innovation and brand names, while investments in luxury products (i.e entertainment, sports, real estate) are discouraged. Even before those rules were outlined, state-owned enterprises caused the cash flow stream to rise in the past year by 50%. Over the long term, authorities will most likely continue to be supportive of overseas acquisitions to acquire advanced technology and strategic assets. 

Keith Knutsson from Integrale Advisors commented, “with the volume Chinese investments have taken on the global scale, it remains important to consider the view the state takes for investments.”



March 23, 2018

2018 Industry Outlook: Media & Entertainment

Posted in Keith Knutsson tagged at 1:53 am by Keith Knutsson

When it comes to media and entertainment, consumers will sift through abundant streaming options to find content they like. In the past few years we have seen major advancements in mobile applications that make it possible for consumers to stream across various popular steaming services.

The question is, what type of advancements have a great opportunity for growth in the content streaming business and should businesses be mindful of these developments?

As the big data space grows exponentially, we can see major growth opportunities on the advertising side of the media and entertainment segments. With customer behavior and demographics constantly analyzed by big data analytics companies, consumers are able to find content that fits their taste and personality.  With the fractured media-distribution channel, it is becoming difficult for companies to advertise new content without the reliance of social media. Of course, a major play in this space will be social media as more and more consumers latch onto social media platforms like Twitter and Facebook. However, diving deeper into the future, one challenge multiple media companies will continue to face is figuring out how to create an experience that caters to each individual customer.

Media companies continue to race one another to find applications best suited for their content when it comes to future 5G wireless technology and autonomous vehicles. Whether it be through virtual and augmented reality or wearable devices, the media and entertainment businesses are in full throttle to create a personalized user experience for its viewers.

Looking back a few decades ago, media companies benefited by making content available in specific windows at customized times, also known as “content scarcity”. Technological advancements have changed user experience by providing the opportunity to view content through “multiple windows”. This idea makes it extremely difficult to monetize content availability, but there’s one simple solution media businesses should consider. Using the bundling technique, one potential solution is to create a demand-based pricing strategy. This will give media businesses an opportunity to charge its customers based on the number of viewing windows; via mobile devices, home and theaters. Not only that, but these companies can also take advantage of the booming data analytics industry by matching variable pricing with consumer behaviors and demographics to further garner additional revenue.

One key question for investors to ponder upon is whether it will make sense for media and entertainment companies to fortify their content by making advancements in the streaming business or becoming distributors instead.

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