Despite recent victories for industry lobbyists, regulatory conditions for banks operating under U.S. jurisdiction continue to become more complex. The U.S. Department of Justice has informed a group of banks that includes Citigroup and JP Morgan Chase — the latter of which is also at the heart of a corruption investigation involving Chinese so-called princeling employees — to plead guilty to criminal charges. These charges stem from collusion among currency traders to manipulate prices. While likely having limited practical impact on the business franchise of any that accept the deal, the move demonstrates a stiffened resolve by Department of Justice prosecutors to make examples. U.S. regulators are also continuing to expand their reach beyond their own borders in their attempt to rein in market violations. One day after a consortium of media outlets reported on HSBC private banking practices in Switzerland involving investors from as many as 200 nations, UBS has confirmed that it is cooperating with U.S. regulators researching accounts held in Switzerland by U.S. taxpayers. The investigation is focused on the use of bearer bonds, an easily transferable debt product no longer available in the U.S.
Chinese inflation plummets. January price index data from China’s National Bureau of Statistics showed inflation levels registering at a five-year low, with consumer prices growing at an annual pace of only 0.8 percent for the month while producer prices contracted by 4.3 percent year-over-year. While weak commodity input costs are a primary driver the data, when coupled with sluggish recent activity measures, it raises more questions for investors concerned about slowing demand from some segments of the economy.
Oil inventories to reach historic highs. In a report issued today the International Energy Agency estimated that crude oil stockpiles among OECD members will reach a historic high in 2015 of 2.8 billion barrels. According to the IEA’s analysis, the supply-side dynamic in the oil industry has not yet been dramatically altered by price pressures, as production in North America continues to expand. Coming only a day after an OPEC monthly report that outlined the case for only a marginal increase in demand in 2015, this new data point casts a shadow over the recent rally in crude oil futures.
Cash-strapped Greece continues to seek a deal. With the clock ticking down for an agreement that would replenish Greek government coffers, there is speculation that the newly installed Syriza government in Athens is planning to propose a new series of compromises at tomorrow’s Eurogroup meeting. Among the possible options to be vetted are a short-term debt facility to allow for further negotiations and a more modest scaling back of austerity measures than previously demanded.
Earnings announcements season continues. In a busy day for earnings releases, CVS Health, the second-largest operator of pharmacies in the U.S., reported a strong rise in net revenues for the fourth quarter of 2014, driven by an increase in same-store sales. Western Union and Genworth Financial are among the companies posting results after equity markets close in New York.
Portfolio Perspective: Community Banks and Munis: The Year of Knowing What You Own — Triet Nguyen, NewOak
Barely a month and a half into 2015, investors are already being treated to some rather significant market volatility courtesy of the energy market. Just when the U.S. economy is about to settle into a more stable growth mode, the trouble in the oil patch is threatening to derail the nascent recovery. While lower costs at the pump should have a stimulative effect on consumer-oriented sectors of the economy, the swift and dramatic retrenchment in oil-related capital spending and employment may have a larger negative economic impact on select local communities.
While the corporate bond market has reacted dramatically — and in some cases, perhaps overreacted — to the plight of many exploration and production issuers, the municipal bond market appears to have taken it all in stride, at least for the time being. While several oil-producing states — Texas, Oklahoma, Alaska and North Dakota in particular — will experience sharp budget pain as the result of lower oil prices, the common market wisdom is that a repeat of the oil-induced debacle of the 1980s will be unlikely.
This time around, we expect much of the fiscal pressure from lower energy prices to be felt at the local level. And this could pop up in surprising places. Just two weeks ago, Kern County, California, without much warning, declared a fiscal emergency, anticipating a shortfall because oil companies account for one-third of the county’s property tax revenues.
As you may recall, the last oil bust created one of the first large-scale municipal credit debacles in the country, as unemployed oil workers in Texas literally walked away from their homes, leading to massive defaults in local single-family housing loan portfolios. Most of those housing bonds were issued by local government agencies and many were held by local banks.
In the era of the Dodd-Frank Wall Street Reform and Consumer Protection Act, community banks and other mid-market institutional investors are required by the Office of the Comptroller of the Currency to accurately assess the credit and liquidity risk they have on the books — without relying on agency ratings.
If you are also among the rising number of local community bankers who have discovered how lucrative it can be to lend directly to local governmental entities, it might be time to go over your muni loan portfolio more closely and figure out exactly where your risk is before your bank examiner comes around.
As community bankers gather this week in Boca Raton, Florida, for the annual American Bankers Association conference, the topic of muni risk management may not be high on their list of concerns. We at NewOak believe that it should be, as 2015 may truly turn out to be “the year of knowing what you own.”
Triet Nguyen is a managing director in the corporate and municipal credit solutions group at NewOak in New York.
