Indexology^® Blog

All eyes are on Greece today, as government leaders indicated they will not be making the much awaited €1.7 Billion payment to the IMF.  This comes after banks have been shut, strict capital controls have been set, and after Standard & Poor’s Ratings Services further downgraded Greek debt to CCC- , with a negative outlook.  S&P Ratings said there is a 50% chance Greece will exit the Eurozone.

Greek PM Tsipras has decided to let the people decide via a referendum vote on July 5^th.   A “no” vote would indicate rejection of creditors’ latest proposal, likely causing Greece to be forced out of the Eurozone.  While many were thinking that a last minute resolution to this crisis would come through in the 11^th hour, Greece’s brazen moves are loudly bursting that bubble of hope.

Some say a Greek exit out of the Eurozone would be significantly less impactful today than a few years ago, yet it’s an increasingly likely reality that, ultimately, no one wants to deal with.  As of Monday, European and US leaders, while acknowledging the lesser impact, are still urging a deal.  Whether or not creditors are willing to relax their demands is another question.  The markets are choosing to play it safe however, and reacting as expected, with the reduction of risk.

Greece’s government bond market took a massive hit on Monday with the S&P Greek Sovereign Bond Index yield widening 471 bps, going from 11.48% on Friday to close at 16.197% on Monday.  Despite Spain’s economy minister trying to reassure the markets that the fear of contagion into Spain is significantly less than three years ago, Spain’s government bond markets declined on Monday as well. The S&P Spain Sovereign Bond Index yield widened 20bps to close at 1.52%.  The S&P Italy Sovereign Bond Index and the S&P Portugal Sovereign Bond Index widened 23bps. Germany, viewed as a bond market safe haven, saw its bond market rally in contrast, with the S&P Germany Sovereign Bond Index tightening 8bps from Friday’s close.

The municipal bond market reacted yesterday to the Governor of Puerto Rico’s statement about not being able to repay its obligations. Prices of bonds issued by the commonwealth and various authorities tumbled driving a one day drop of over 6% in the S&P Municipal Bond Puerto Rico Index.  That index now reflects a negative 9.12% month-to-date return and negative 8.64% return year-to-date.  The worst monthly performance of this index since 1998 was August 2013 when the index recorded a negative 9.92% return.

General obligation bonds issued by Puerto Rico tracked in the S&P Municipal Bond Puerto Rico General Obligation Index have returned a negative 11.97% for the month-to-date (a record monthly drop in this index).  Yesterday’s one day drop in return for this index was over 6.8%.  Year-to-date the index has recorded a negative 10.5% total return.

The S&P National AMT-Free Municipal Bond Index, an investment grade index which excludes Puerto Rico bond issues was up modestly yesterday in sync with the higher quality bond markets.

Puerto Rico municipal bonds are included in the S&P Municipal Bond High Yield Index and helped drag that index into negative territory yesterday as the index recorded a negative 2.99% month-to-date and negative 1.24% year-to-date return.

Select Municipal Bond Index Yields and Returns:

It is well known that wedding seasons, especially in India, support gold prices, and although the tradition of gold embellishments is not as prevalent in the United States, wedding rings are a popular symbol of marriage. So, in light of the U.S. Supreme Court’s ruling on legalizing same-sex marriages in all states, how might this impact the gold market?

From a variety of polls summarized here, there is a range of self-reported same-sex preference in up to 5% of the U.S. population (but possibly greater.) Also in the U.S., there are a reported 59.63 million married couples. If we double that number to account for two wedding rings per couple and take 5% of that, we get a total estimate of 5,963,000 wedding rings for same-sex marriage ceremonies. Given the average wedding ring is roughly 3 pennyweight, the value per 14 karat ring (that is 58.33% gold) is $102.82, using $1,175.10 per troy oz. of gold. Check out different values using this calculator that calculates (price of gold /troy oz * percentage gold * pennyweights in troy oz.) This means that the total estimated gold that might be demanded is $613,088,078.14. That is more than $600 million of gold! Let’s put that into perspective…

According to The World Bank data, it is equivalent in U.S. dollars to more than 5% of the gold reserves in Finland, more than 10% of the value of gold reserves in Greece, more than 20% of gold reserves in Honduras, more than 30% of reserves in Nicaragua and almost 40% of reserves in Ireland. It ranks bigger than 31 countries that reported reserves in 2014.

Given the gold price has been stable since the historically big loss 2013, it will be interesting to see if this wedding season, from the U.S., can help gold shine. 

Source: S&P Dow Jones Indices

Data as of June 26, 2015:

The investment grade municipal bond market has managed to hold steady with a modest negative return of -0.37% through June 26th 2015.  Investment grade corporate bonds have returned -1.13% during the same period.

High yield municipal bonds have been pulled downward by Puerto Rico but have still managed to eek out a positive return of 0.59%.   Meanwhile, junk corporate bonds have returned 3.7% year-to-date.

Select Fixed Income Index Yields and returns:

This past weekend Puerto Rico’s governor has stated the public debt is un-payable.  Last week, the G.O. debt had plumbed new depths helping to record a negative 5% month-to-date return for the S&P Municipal Bond Puerto Rico General Obligation Index. The facts are the situation isn’t looking good: the pending PREPA July 1st default looms on the market, the possible restructuring of the Government Development Bank debt and the possible postponement of G.O. set – asides have sent alarms to G.O. bond holders.

Select Municipal Bond Indices: (Month-to-Date)

After years of turmoil, the events in Puerto Rico are beginning to come to a boil.  The impact of defaults on the rest of the bond market, if any, remains to be seen.

On June 24, 2015 S&P Dow Jones Indices hosted an ETF Masterclass in Canada: ETFs as a Catalyst for Canadian Advisory Growth.  In advance, we believed that what would be top-of-mind for advisors was the use of ETFs for global diversification.  Our panels were also prepared to address proactively positioning their firm for regulatory change, such as the Client Relationship Model.  In reality, what was really top-of-mind for our attendees were advisor fees and robo-advice.

Fees came up as a response to Beth Hamilton-Keen’s comments during her presentation on “Putting Clients First…”  She voiced an opinion that Canadian mutual fund management expense ratios (MER) seem high compared with other countries and that  part of those fees are received as compensation by Canadian advisors and banks using those mutual funds.   During Q&A, some advisors vocally interpreted Beth’s comments to mean that they should cut their fees.  One advisor spoke of his right to defend his fees as long as he was delivering value to the client.

Clare O’Hara of the Globe and Mail asked her panel to share thoughts about robo-advice.  Panelist Mark Yamada, President and CEO of PŮR Investing offered remarks that are not completely reprintable here.   Certainly Mark believes robo-advice will disrupt some financial advisors.  Specifically, he said robo-advice will reduce the value of financial advisors that solely offer investment advice, similar to a robo-portfolio.  Instead, he expressed that advisors could either charge a lower fee for investment advice only or focus on more valuable areas of practice, such as planning or tax advice.  In Q&A, a few questions came up about the ability of robo-advisors to match the quality and timeliness of the advice services an advisor may provide to keep clients on track, particularly in down-markets.

What of ETFs?  Advisors I spoke with after our event were universal in their praise of comments made by panelist Raymond Kerzérho, Director of Research at PWL Capital.  Raymond described humbly and in clear and concise language how PWL Capital adopted ETFs.  He stated that PWL Capital uses all ETFs for their high net worth (HNW) clients, and the company has now grown in that practice to manage more than USD1 billion in HNW client assets with ETFs as their investment tool of choice.

Several advisors attending our event mentioned that there is still not enough high quality, simple-to-understand educational materials available on ETFs for their clients, or enough practical education for advisors to use.  In order to make this information easily accessible, we have published several new papers on index themes in Canada which can be found on spdji.com.