For sale: U.S. auto industry
The second quarter saw a new round of business dislocation, this time with automakers.
· Chrysler filed for Chapter 11 bankruptcy, entering into a prepackaged agreement engineered by the federal government.
· General Motors (GM) followed suit, announcing bankruptcy protection under a White House-engineered plan to create a leaner, profitable company. The company will be 60-percent government-owned as compensation for $50 billion in taxpayer money used to keep GM afloat.
Better news on the banking front
· The results of the stress tests were announced.
o 10 of 19 banks needed additional capital, with Bank of America accounting for more than half of the $74.6 billion needed.
o Banks raised capital and converted debt and preferred stock to common shares.
· Banks got the green light to repay Troubled Asset Relief Program (TARP) money, relieving them of restrictions imposed by the program.
o 10 banks announced plans to repay TARP money.
· U.S. banks may be subject to increased regulations going forward, if the president’s proposal to overhaul the financial regulatory system makes it through Congress.
Overseas investors enjoyed a strong quarter
· International and emerging markets were clear standouts.
o The MSCI EAFE Index gained 25.43 percent, leaving the benchmark higher by 7.95 percent year-to-date.
o The MSCI Emerging Markets Index gained a whopping 33.57 percent for the quarter and 34.26 percent for the year.
· Global markets were boosted by optimism about economic recovery, but MSCI Emerging Markets Index turned lower in June in the wake of talk that a recovery might be premature.
Fixed income bounced back
Fixed income markets had a tremendous quarter; credit spreads narrowed significantly, resulting in strong gains for domestic corporate bonds and high-yield bonds in particular.
· High-yield spreads narrowed by 500 basis points (bps) to 950 bps; corporate spreads tightened from 500 bps to just under 300 bps, leading to substantial reductions in borrowing costs for companies.
· High-yield bonds gained 26.72 percent for the quarter and 30.43 percent for the year, as measured by the Barclays Capital High Yield Index.
· Corporate bonds were up 10.45 percent for the quarter and 8.32 percent for the year, as measured by the Barclays Capital U.S. Investment Grade Corporate Bond Index.
· Municipal bonds gained, as supply in tax-free bonds was squeezed by the issuance of the Build America Bonds.
· The Barclays Capital Municipal Bond Index returned 2.11 percent for the quarter, leaving it higher by 6.42 percent for the year.
Looking ahead
· The economy has showed marginal signs of improvement, but it is too early to say that it is on the upswing.
· Fears of a slowing recovery hindered market gains over the last couple of weeks of the quarter.
· It is critical to stay the course and continue to execute the investment policy you have developed to weather these uncertain times.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Barclays Capital High Yield Index covers the universe of fixed-rate, non-investment-grade debt. Pay-in-kind bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g. Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in nonemerging market countries are included. The Barclays Capital U.S. Investment Grade Corporate Bond Index covers all publicly issued, fixed-rate, nonconvertible, investment-grade corporate debt. Issues are rated at least Baa by Moody's Investors Service or BBB by Standard & Poor's, if unrated by Moody’s. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.
Authored by Simon Heslop, CFA, director of asset management, at Commonwealth Financial Network.
© 2009 Commonwealth Financial Network®
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