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September 21, 2017 - I was wondering whether you can shed some light on whether, in your opinion, the senior loans segment remains one that can generate decent relative returns. A lot of noise lately on weaker covenants and too much money chasing that asset class with few banks suggesting to exit the strategy. A couple of lines highlighting your stance would be much appreciated.

Yes, I still think they Senior Loans are an attractive asset class. In anticipation of a rate surge last year, many investors jumped on Sr Loans driving prices up. But Senior Loans are a good all weather asset. If interest rates rise, they will do well. But even if rates don’t rise they provide coupon interest of 4.6% average, lower defaults and higher recovery rates than high yield bonds if credit conditions were to materially weaken. Our Voya Senior Loan team goes through a rigorous credit underwriting process for each new deal and I have not heard anything about weaker covenants. If you look at the long term averages, Senior Loans are the steady Eddie, returning about 5% with no duration risk.

September 21, 2017 - The Feds are going to start selling the bonds that they bought for the quantitative easing. They say they are keeping the rates the same until maybe Dec. If they are selling bonds are they really keeping rates the same? The whole unwinding of the quantitative easing seems to be a continuation of the same experiment that no one knows the end result. I Have even heard some refer to it as another 1937. The market is on a roll right now and does not seem to care what the news is and just goes up. Almost seems like bubble time again. What do you think?

No one is really sure what will happen for sure but the market is general sanguine about the runoff for a few reasons. The Fed is going to be taking baby steps and the runoff each month is likely to be very small. Second, other global central banks are still accommodative and buying bonds. Third, the global economy is getting stronger and rates should be going higher. And finally, many think the Fed was overstepping its bounds by buying bonds in the first place. Manipulating rates leads to misallocation of capital and mispricing of assets. Perhaps the Fed’s interference actually suppressed economic growth by propping up weaker players. Normalization may get bumpy but it is better for the long term economic growth outlook. We are not quite sure of the benefit the program had on the upside and are therefore not sure of the implications on the exit. However, corporate earnings are the true driver of markets and if they can continue to move forward the market will follow. The lineup is not always a straight line but I’m not worried right now. Global diversification across stocks and bonds is the best way to participate in the market with somewhat of a cushion against any potential market downturns.

How can the Feds raise rates in this environment because we have doubled the debt in the last 8 years and a significant increase in rates would appear to increase our payments to service the debt. Any thoughts?

There are a lot of ways to approach this and in theory you are correct. High debt with higher interest should be dangerous. Unless of course the Fed owns a substantial portion of the US government debt. The $4 trillion or so with interest is paid to the US treasury. All things being equal if interest rates go up due to economic growth and pricing power then tax receipts will go up too. Interest is not the big problem though. Unfunded liabilities like for Medicare and social security is far worse. Again growing the economy is the best solution.

April 25, 2016: Should I "Go away in May." I am up to date. The election scares me the world events scare me. I am think the sideline is looking good until the election is over. Any thoughts?

“Sell in May and walk away” usually doesn’t work! The market follows corporate earnings and the last 3 quarters (and so far for this quarter currently being reported) companies have made less money than they did in the same quarter a year ago. This is why the market has been range bound and is struggling to move forward. However, as we move through the year company earnings look like they will be improving. Why? Oil is now higher, the dollar is weaker which will help overseas sales, the Fed has backed off raising rates four times and China has stabilized and has actually shown signs of improvement. So unless the election derails earnings growth, I think the market looks more attractive in the second half of the year than the first. Sure the election will cause some volatility in the short run but a diversified portfolio of stocks and bonds helps ride out the bumps.

Looking at the fundamental chart today (Jan. 25, 2016), isn't this a bad signal?

Corporate earnings are the fundamental driver of markets. And the fundamentals drive markets chart shows that corporate earnings are not growing. This is problematic and the reason equity markets are struggling. The slowdown in global growth, the strong dollar and low oil prices are dragging down earnings. However, the U.S. economy is still doing ok. The consumer is the primary driver of GDP. Consumer spending is holding up because the employment market, housing, and cheap energy prices are supportive of a strong consumer.

Do you think we will see an uptrend in the Euro zone by year end?

In our midyear update we tripled our GDP growth target for Eurozone. Developed economies Europe, US, Japan are the bright spots as EM struggles. Germany in particular is hitting on all cylinders and Eurozone markets are up double digits this year.

Will negative earnings growth trigger a defensive position to the models?

Yes, if quarterly earnings growth for the S&P 500 year over year are negative then GPMM models and funds are moved to defensive position.

What should we be telling our clients after last week's selloff?

The Global Perspectives October 2014 article gives an in depth assessment to the issues that started with poor German reports on exports and factory orders. The other surprise was the unprecedented climb in the dollar in the third quarter creating disruption in commodity markets especially oil. The dollar rising is not especially a problem it is the speed in which it rose. The biggest concern for global markets is a lack of inflation and this makes it worse since a strong dollar essentially "imports" DEFLATION, in that it lowers prices of imported goods. Europe is the wild card since it looks likely that they are entering a 3rd recession since the end of the financial crisis. The markets are quickly erasing all gains year to date, which is very scary to investors, but we think selling is a mistake, especially before what we expect to be an exemplary 3rd quarter earnings season. Further positives, U.S. GDP hit 4.6 percent for the second quarter bolstered by consumer, manufacturing and housing strength. Although Europe is weak, they have been for the past 5 years, Emerging Market Asia is strong growing at a 5 percent rate.


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