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Between The Lines

Wealth & Investment Articles.

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    Why Fed Watchers May be Overestimating the Pace of Rate Increases

    This article sheds light on the inner workings of the U.S. Federal Reserve and the power structure behind interest-rate decision-making. It points out that the Fed’s smaller Board of Governors (BOG), five of its Federal Open Market Committee’s (FOMC) 10 members, will control the rate paid on bank’s reserves held at the Fed. Since open market operations are no longer sufficient to drive the cost of borrowing in the federal funds market to the FOMC target, the BOG will be able to essentially set overnight rates. So, while improving economic data may increase the probability of an initial rate increase in the fall of 2015, since the BOG is considerably more dovish than the FOMC, Fed watchers may be overestimating the pace of rate increases because they are focusing on the wrong committee.

     

     

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    It’s OK to Enjoy Summer Without Fear of Equity Market Correction

    As the current bull market ages and we enter the months where returns have historically been harder to come by, many prognosticators are anticipating a market correction. Common catalysts mentioned include a long list of potential risks including Greek loan default, Fed interest rate hikes, and slowing Chinese growth. However, two market pundits offer an alternate view that the market may not necessarily be poised for a decline. Jonathan Golub, Chief U.S. Market Strategist at RBC Capital Markets, points out that while the Standard & Poor’s 500 Index has gone 1,350 days without a 10 percent dip, this is only the third longest uninterrupted rally in the last 25 years, and RBC believes that current economic conditions are not flashing recessionary red flags. Robert Doll, Chief Equity Strategist at Nuveen Asset Management, notes that when the Fed begins to raise rates it will be at levels much lower than prior cycles which should mitigate the impact on economic growth.

     

     

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    Stand Back: China’s Bubble Will Burst

    Governor Alejandro Garcia Padilla warned that Puerto Rico will not be able to repay its $73 billion in debt, as the territory faces double digit unemployment and an exodus of many in its middle class fleeing the island’s economic woes. The White House has urged Congress to allow Puerto Rico’s public companies to restructure its debt using Chapter 9 bankruptcy filing, something that is not available to Puerto Rico as it is for U.S. municipalities. Bondholders and citizens of Puerto Rico would likely have to take a hit in the event of debt restructuring and austerity measures. “On Monday morning, the price of some Puerto Rico general obligation bonds declined as much as 12 percent, to about 68 cents on the dollar, one of the largest declines in recent months, traders and analysts said.”

     

     

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    Puerto Rico’s Bonds Drop on Governor’s Warning About Debt

    Governor Alejandro Garcia Padilla warned that Puerto Rico will not be able to repay its $73 billion in debt, as the territory faces double digit unemployment and an exodus of many in its middle class fleeing the island’s economic woes. The White House has urged Congress to allow Puerto Rico’s public companies to restructure its debt using Chapter 9 bankruptcy filing, something that is not available to Puerto Rico as it is for U.S. municipalities. Bondholders and citizens of Puerto Rico would likely have to take a hit in the event of debt restructuring and austerity measures. “On Monday morning, the price of some Puerto Rico general obligation bonds declined as much as 12 percent, to about 68 cents on the dollar, one of the largest declines in recent months, traders and analysts said.”

     

     

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    Have the Saudis Miscalculated the Impact of Lower Crude Prices On U.S. Production?

    Following last year’s sharp decline in crude oil prices, many analysts expected that U.S. production would be curtailed as prices below $70 per barrel would not support profitability. As predicted, the active U.S. oil rig count dropped significantly. However, the level of U.S. production hasn’t fallen but rather increased due to improvements in technology, which have enabled producers to achieve record efficiencies. Going forward, we will see if these efficiencies are sustainable with WTI crude stabilizing at around $60 per barrel over the past two months.