LIBOR Traders Are Predicting Fed Rate Increase

LIBOR traders, who set the inter-bank lending rates that are tied to at least $350 trillion of financial products, are projecting a Fed rate increase. 

The chart shows that traders expect a 0.25% rate increase to take place in the next 3 to 6 month period.

The 30-day LIBOR went up 0.25% either in anticipation or shortly after Fed increased the rate by 0.25% in December 2015.

LIBOR rates are tied to floating rate mortgages, most business lines of credit, money market funds, short duration corporate bonds, etc. LIBOR influences costs of doing business and greatly impacts corporate capital expenditures.

 __________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Dividends...Investors' Search for Value

Dividends. They are one of the first figures investors look for when they believe there is not enough value opportunities in the equities market. 

At the moment, we are currently seeing dividend levels that have not been reached in a very long time. The S&P indicated that the quarterly dividend amount in 4Q15 represented the second largest dividend total in at least ten years. 

On the other hand, the dividend growth rate actually fell to its lowest point since 2011.

"Dividends. They are one of the first figures investors look for when they believe there is not enough value opportunities in the equities market. "

When valuations are uncertain and investors find it too risky to bet on a company’s growth alone, dividends are usually sought in order to ensure a safer return. Many companies even continue disbursing dividends, regardless of how the company is doing financially; simply to maintain investors’ faith in the company. For instance, even though commodities took a big hit in 1Q16, only 12 S&P 500 companies cut or suspended their dividends. However, 919 companies in the U.S. equities market increased their dividend in 1Q16, which was actually 8% lower than during 1Q15.

Though dividend growth is not increasing at the same rate it was just a few years ago, they are still very attractive, especially among more conservative investors or investors who would like to hedge away some of the risk from other investments. 

With interest rates remaining at low levels and thought to remain as such for the time being, dividend rates are providing better returns than government bonds. Though this has become somewhat of a norm, it was not so almost a decade ago. Back then only 5% of stocks in the S&P had higher dividend yields than the 10-year Treasury yield. In the last few years this number has jumped to 65%. At the moment, the S&P dividend yield has about a 20% higher return than the 10-year Treasury. And with dividend yields predicted to stay at current levels for the next couple of years, dividend paying stocks should continue to remain popular among investors; so long as interest rates remain near their current lows as well.

 __________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

6 Best Practices to Protect Your Confidential Information

Although there is a vast amount of technology available that is designed to safeguard your devices and personal information, that information is still vulnerable to cyber-criminals and identity thieves. In fact, security breaches are not always due to a weakness in technology control. Sometimes, they are the result of the action or inaction of the user—you! Therefore, you are one of the best lines of defense against cyber-crime.

It's always a good time to implement the following information security best practices to do your part in keeping your personal information safe and secure.

"Therefore, you are one of the best lines of defense against cyber-crime."

1) Build strong passwords
It's important to create strong passwords for all of your online accounts. But what exactly does this mean? A strong password:

• Contains both uppercase and lowercase characters, as well as digits and punctuation
• Is at least eight characters long
• Is not a word in any language, slang, dialect, or jargon
• Is not based on personal information, names of family members, and so on

A good rule of thumb is that passwords should be hard to guess but easy to remember.

2) Use multifactor authentication
A user ID and strong password alone are not sufficient protections for securing web accounts. Multifactor authentication—one of the simplest and most effective ways to secure your data—adds an extra layer of protection. With multifactor authentication, users must provide two forms of identification in order to log in to a site.

Here's how it works: After a user enters a user ID and password, the website will send a passcode to the user's mobile device. He or she must then enter this code on the site, ensuring that only that individual can sign into the account.

3) Be suspicious of unsolicited e-mail
Be wary of any e-mails that convey a sense of doom and gloom (e.g., threatening to close an account) or that claim immediate action is required. Grammar mistakes, spelling errors, and generic salutations are also red flags. Perhaps most important, scrutinize those e-mails that contain links and attachments from sources you don't know (and, unfortunately, even from sources you do know). It's quite easy for cyber-criminals to craft a legitimate-looking e-mail in the hopes that you'll be fooled into thinking it came from a company you do business with or from a friend. To protect yourself from this scenario, don't hesitate to verify: Call the source directly to authenticate from whom it was sent it; if it came from a company you know, go to the company website directly to log in.

4) Protect your mobile devices
Outdated software can leave your mobile devices open to security vulnerabilities. By keeping your apps and mobile operating system software up to date, you can mitigate the risk of a cyber-criminal exploiting a hole in your system. Most devices simplify this process for you by offering automatic update options for apps, as well as notification systems that let you know as soon as an operating system update is available. It's your job to take care of these updates immediately!

Another mobile device necessity is to do your homework, making sure the apps you're downloading are from a reputable company (e.g., by checking their ratings and comments). Be sure you know what the app does and what information it's going to access on your mobile device.

5) Engage in safe web browsing
Keeping your browser up to date is critical in preventing malware. Just like apps and your operating system, an out-of-date browser can open up security gaps that cyber-criminals will take advantage of. Be alert to pop-ups and advertisements: Both could be spyware used to plant tracking cookies on your machine, which can steal your information, direct you to bogus phishing sites, and pummel you with pop-ups.

When transmitting personally identifiable or payment information, you can ensure that you are on a secure site by checking for the "https://" before the "www.whateversite.com." When on public Wi-Fi networks, consider connecting through a personal virtual private network (VPN) and disable auto-connect; this way, your device won't automatically connect to found public networks.

6) Stay vigilant
Although advanced technology today is certainly a safeguard and buffer to keep cyber-criminals at bay, it's critical to remember that you are in the first line of defense to keeping your data safe and secure.

For more tips and tricks to stay safe online, visit the National Cyber Security Alliance at www.staysafeonline.org.

 __________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

As Credit Tightens, Entrepreneurs and Dealmakers Turn to Non-Traditional Lenders

After what occurred in 2000 and 2008, one should have expected banks and other common lenders to become more regulated and scrutinized. Though this may have created some inconveniences for some firms, it helped open the door for others. Banks have established more rigorous qualifications for companies to be given financing, and capital constraints and shareholder activism are becoming more influential when it comes to publicly traded business development companies (BDC). For middle markets in particular, this has allowed alternative lenders to emerge and acquire more market share than would otherwise have been possible, because of the vast amount of competitors.

“Banks have established more rigorous qualifications for companies…”

With public perception of banks still relatively low and regulators keeping a close watch, it is not difficult to see why banks want to keep a low profile and not conduct any business that may raise a red flag. In 2015, 25% of middle market loan transactions featured deals of more than 6x EBITDA; an example given by regulators as a possible red flag. It is why most traditional bank lenders are currently staying away from making leveraged loans deals on private equity firm deals.

Similarly, BDC’s are also currently sourcing fewer deals. They are currently facing difficulties in raising capital, because as of March, most were trading below book value. This has prevented many from issuing new equity for funding. Without cash to fund new transactions, the only alternative would be to fund from repayment on existing loans.

Collateralized loan obligation (CLO) issuances are on the decline. About $4 billion in CLOs were priced for what was most of the first quarter, a harsh decline from almost $17 billion during the same time period just last year. During 2013-2015, the CLO market grew by more than 50%. However, the market has decreased by about 50% during the past year. Additionally, under the Volcker Rule which is set to take effect at the end of 2016, managers will be required to hold 5% of their CLOs. Though many managers are attempting to adapt and others are selling off their CLOs, it remains to be seen how the rest of the market reacts.

Finally, we come to the benefactors. Alternative lenders are currently taking advantage of the current state of the lending market with great vigor. A great advantage they have is being able to act quickly and with much flexibility. This is possible, because most are either non-regulated or regulated far less than traditional lenders. These alternative lenders are beginning to develop close relationships with private equity firms for these particular reasons, which helps PE firms acquire financing for deals, and as a result fund the investments in their portfolios. Small Business Investment Company (SBIC) funds are also benefiting from the current state of the financing landscape, especially considering the two new regulatory changes made at the end of last year; reduced registration requirements by advisors and the amount of capital an SBIC can control has been raised to $350 million from $225 million.

Though the availability of attaining financing has become more difficult, not all have been affected negatively. The financing landscape will improve, but in the short-term, in its current state, we should expect alternative lenders to become more prominent players in the space.

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

The State of Commercial Real Estate

The NCREIF ODCE Index NOI growth is currently at its lowest point in the past decade (as shown in the graph on the top-right). 

Also known as the NFI-ODCE, the index consists of 30 open-end commingled funds, pursuing a diversified core investment strategy and primarily investing in private equity real estate, with $173.1 billion of gross real estate assets and $133.3 billion of net real estate assets. 

An important criterion for a fund to be considered for the NFI-ODCE index is that at least 80% of market value of real estate net assets must be invested in office, industrial apartment and retail property types. The decrease in net operating income growth is important to note, given that U.S. commercial real estate prices have been rising steadily since 2009 and are only now beginning to plateau; decreasing in some sectors and locations. 

Though one cannot be sure whether this bull market is finally coming to an end, one must consider that it is a possibility. 

According to deal tracker Real Capital Analytics, Inc., $25.1 billion worth of commercial property was exchanged in February compared to $47.3 billion in February 2015; a decrease of approximately 88%.

Commercial real estate valuations have been on the rise since 2009, with retail and apartment properties above 2007 levels. Though not quite as high, industrial and office properties have also surpassed values reported in 2009. 

One of the reasons for the appreciation is the increase in demand for commercial real estate, resulting in some of the lowest vacancy rates in the last 25 years. The apartments sector has the highest vacancy rate, relative to vacancy rates in the respective time period, when compared to the office, retail and industrial real estate sectors. If this data concerns you, you are not alone. 

Last week, Kansas City Fed President Esther George expressed her concern for the commercial real estate market by saying it is a potential asset bubble that “bears watching”. George encouraged the U.S. central bank to stay on the course and gradually raise interest rates. This has been a growing concern for many, with the U.S. central bank acting increasingly dovish in recent times.

Something else to consider is the beginning of the end of SIFI designations. The SIFI designation for non-bank companies and a similar designation for eight of the big banks were established to create safeguards to prevent or minimize the effects of another financial crisis by requiring financial institutions recognized as being too big to fail maintain high levels of capital reserves and liquidity, and be subject to extensive government oversight. However, both MetLife and GE have recently filed to have the SIFI designation removed. If successful, this may mean an increase in capital available. Though the effects may not be immediate, commercial real estate lending might increase for those firms with exposure to the industry.  

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

The State of Federal Finances

The economy is one of the most popular topics among Americans. Both business and non-business individuals concentrate on the fed’s annual budget to help predict which direction the economy will move. The federal budget is garnering much interest now that the presidential election is coming closer, the next interest hike is being anticipated to take place in the near future and the many domestic and international issues are taking the spotlight at the moment.

So let us discuss some of the areas where the allocation of federal funds will be especially important. In order of % of the federal budget, the following are the main budget areas:

Medicare & Medicaid (27%)

• Medicaid and Children’s Health Insurance Program enrollees will total 68 million people in 2016
• Runoff costs over the next decade are estimated to be $146 billion
• 31 states participate in the Obamacare program

Social Security (23%)

• Has been running on a deficit since 2010
• Number of people receiving social security: 65.3M (Feb. 2016)
• Number of people in labor force who are employed: 151M
• Current social security tax rate is 6.2% for both employer and employee (12.4% total)

Non-Defense Discretionary (16%)

• Programs include education, scientific research, infrastructure, law enforcement, courts, national parks and forests,  and other national needs
• Bipartisan Budget Act of 2015 expires in 2018
• Projected to fall to historic lows; less than 8% of GDP beginning in 2018

Defense (15%)

• Consumed slightly over 21% of 2015 federal budget
•  Department of Defense projects a budget averaging $534 billion from 2016-2020
• Defense as a share of federal spending at all-time lows since 1950

Other (12%)

Net Interest (6%)

The federal budget deficit has been decreasing drastically since the millennium highs of 2009. However, the deficit is expected to increase steadily beginning in 2016 through 2026, though not as intensely as ’08-’12 levels. It is estimated that this will mean an increase in federal net debt, in the same period, of about 12%. If this materializes, this means federal net debt in 2026 will be equal to 85.6% of GDP.

The Congressional Budget Office predicts 10-year U.S. Treasury notes and 3-month U.S. T-bills interest rates to rise to 4.1% and 3.2%, respectively. These levels are thought to be reached and held, beginning 2021-2026. These rates will need to be tracked closely, T-bills especially, given that the interest rates have not changed much since 2009.

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

PMI Index Signals Industrial Production Rise in 2H16

Purchasing Managers Index 1/12 rise signals industrial production rise in the 2nd half of 2016

The Purchasing Managers Index (PMI) 1/12 rate-of-change rose for the third straight month in February, confirming that a cyclical low occurred in November 2015. The upward movement in the 1/12 rate-of-change suggests that the current trend of decline in the US Industrial Production 12/12 is likely to transition to rise in the second half of 2016.

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Contributors to World GDP Growth, Years 1 to 2015

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

The Chart Explaining Fed Rate Policy: Wages, The Real Reason why Fed Raises Rates

________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Can Maturing CMBS Loans Wipe Out Your Equity and Wealth?

The large volume of maturing CMBS loans combined with new regulatory hurdles and widening spreads will have big impacts on the market in the coming year.

The wave of CMBS maturing loans that were created at the height of the real estate bubble will crest in 2016 and 2017. According to estimates by Trepp, nearly 20% of these maturing commercial mortgages will demand additional capital from current borrowers or new buyers when the loan is refinanced or the property is sold.

How Does the CMBS Market Work?

New risk retention rules coming into play in 2016 require that either the originating lender will have to hold a certain piece of the loan for at least 5 years and/or the B-piece buyer will have to hold the paper for that amount of time. As B-piece buyers aren't set up to comply with these regulations, they will be forced to create processes to handle, which will result in increased cost passed on to the borrower in the form of higher spreads.

Meanwhile, CMBS spreads are drifting wider with a recent 10-year AAA bond clearing at 140 basis points over swaps. This ongoing weakness has led some issuers scheduled to price this year to push off their deals until later in 2016.

CMBS Swap Spreads

What are the possible solutions for you?

Non-Bank Balance Sheet Lenders

Since 2008 a sizable contingent of non-bank balance sheet lenders have sprung up and they unencumbered by banking regulations, legal lending limits, or geographical footprint. They keep all loans in-house and rarely outsource underwriting or servicing to third parties. Permanent loans offered by non-bank lenders provide long-term financing for stabilized commercial real estate, with loan terms up to 20 years and without the hurdles of defeasance. Bridge loans by same lender are designed for un-stabilized properties or shorter term business plans and include leading-edge features such as additional future facilities for lease-up costs and loan terms up to 7 years. Most non-bank lenders make non-recourse loans 

Non-Real Estate Collateralized Lenders

Perhaps one of the oldest lending communities, non-real estate collateralized lenders offer flexible loans secured by a myriad of assets, including securities, business and real estate equity, etc. The closing processes are simplified and with lower costs. Financing may be used in combination with real estate backed loans.

To prepare for the coming wave please contact Redmount Capital Partners or learn more about our capabilities.

__________

Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.