August 28, 2017 – Amid typically sluggish late-summer trading, the S&P 500 gained 0.7% for the week while the 10-year Treasury yield closed at 2.17%, little changed from the previous week.  Market participants were anticipating some policy clues from Fed Chair Janet Yellen at the Fed’s annual symposium in Jackson Hole, Wyoming but she steered clear of providing any color for further Fed action this year speaking only about the Financial System broadly.   

The Alternative Lending space remains active with more fundings and partnerships announced.  Multiple sources report that Wal-Mart is working out the details of a pilot program to offer customers installment loans provided by Affirm, a point-of-sale specialty finance company. Prodigy, a U.K.-based lender focused on student lending, raised $240m in equity ($40m) and debt ($200m) to speed up its U.S. expansion. CMFG Ventures, LLC, the venture capital entity of CUNA Mutual Group, announced its latest investment in Portland, Oregon-based fintech company Mirador, a provider of white-label, digital small business lending platforms, to help credit unions provide AutoFi, an online lender focused on automobile financing, just announced a Series A equity round of $10 million; lead investors included CrossLink Capital and Ford Motor Credit.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wells Fargo, Orchard Platform

 

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August 20, 2017 – The Federal Reserve and the European Central Bank (ECB) released minutes from their respective July meetings. The ECB fretted about the Euro’s strength, a potential headwind to both the Eurozone’s recovery and the ECB’s efforts to lift inflation. Based on preliminary data, EU inflation rose just 1.3% in July compared to a year ago. Fed officials debated the U.S. inflation outlook, with some taking the view that further rate hikes should be shelved until data confirms that the recent weak inflation data is transitory. More hawkish members cautioned that such a delay could lead to an overshooting of inflation “that would be likely be costly to reverse.”  

fredgraph (1)Actual inflation and inflation expectations remain quite subdued.  In the graph titled, “5 Year, 5 Year Forward Inflation Expectation Rate”, over the last 5 years, expectations of inflation 5 years has declined and currently  remains below 2% despite a robust and tightening labor market.  Market participants and investors seem to believe that inflation will remain low despite anticipated pro-growth policies from the Trump administration.  

Picture2Similar to long term inflation expectations, rates remain low and range bound as do credit spreads.  In the chart titled, “Rates and Credit Spreads”, 10 Year Treasury yield and CDX Investment Grade 5 year index spread both have declined slightly since the beginning of the year but also have been quite range bound for the first 7 ½ months of the year.  For Alternative Lenders in both US and in Europe, this creates the perfect environment for both borrowers and investors alike.  Investors continue to have appetite for attractive risk adjusted returns being generated in the Alternative Lending space as traditional assets on a relative basis seem ‘rich’.  

 


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  St. Louis Federal Reserve, TIAA-CREF, Barclays

August 13, 2017 – With Congress home for summer, second-quarter corporate earnings season over, the Federal Reserve not scheduled to meet until mid-September, and a potential debt-ceiling debate not likely until Fall, the markets focused on fears of a military confrontation between the U.S. and North Korea.  The S&P 500 Index, which had notched 15 consecutive sessions without closing up or down by 0.3% or more, fell 1.4% on August 10, its worst one-day showing in three months, before rebounding modestly the next day. For the week, the S&P 500 returned -1.4%.   The geopolitical risk caused a flight to quality with the 10 Year Treasury rallying to close at a yield of 2.19% after starting the week at 2.27%.  Additionally, Friday’s Consumer Price Index (CPI) report failed to stoke any inflation concerns.  Excluding food and energy, core CPI came in unchanged at 1.7% year-over-year.  Given the recent  inflation news, markets are pricing less than a 50% chance of a hike for the remainder of 2017.  

In Alternative Lending news, PayPal announced the acquisition of  small business lender Swift Financial — Swift has provided working capital funding for over 20,000 small businesses. PayPal will use Swift’s data and technology to improve its underwriting capabilities and expand its own working capital offering. In the public markets, OnDeck stock rose this week by as much as 17% on Monday after they released their upbeat outlook in their second-quarter earnings report. The company said they have been successful in efforts to cut costs and tighten borrowing criteria. Lending Club’s stock also experienced an 8% rise this week after posting the second-highest quarterly revenue in its history. Lending Club now expects full-year total net revenue to be in the range of $585 million to $600 million.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, TIAA-CREF, Orchard Platform

August 6, 2017 – The U.S. labor market generated 209,000 jobs in July while the unemployment rate dipped by 0.1% to 4.3%, matching a 16-year low.  The labor force participation rate ticked up by 0.1% to 62.9%, or roughly where it has averaged the last several years.  Average hourly earnings rose just 0.3% for the month, or 2.5% over the past year.   More importantly, the Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Index was unchanged in June and rose just 1.4% compared to a year ago.  Core PCE which excludes food and energy costs, increased only 0.1% last month and 1.5% in the past year.  July’s employment report is solid but not game changing for the Fed given tepid inflation data.  The real question is how long can the current steady growth and low inflation environment last?  If labor market slack remains, then wage growth and overall inflation could stay at current low levels for an extended period of time.  In contrast, less slack could trigger stronger wage gains leading to higher inflation and a faster pace of Fed rate hikes.  The bond market seems to be indicating overall inflation will remain low as it has been for the last several years.  The 10 Year Treasury were little changed on the week despite the robust labor market report.  Over the past 3 months, rates have remained within a 25 basis point trading range.  For Alternative Lenders, the environment remains strong.  

This week, Kabbage announced a $250 million equity investment from Japanese telecom giant SoftBank. The company plans to use the money to expand its lending products for small businesses and explore non-lending products and services for these customers, including invoicing and payments products.  Bread, the consumer purchase finance technology company that builds customizable pay-over-time solutions for online merchants, announced that it completed $126 million of equity and debt financing.  Menlo Ventures led the equity round, with participation from Bessemer Venture Partners, RRE Ventures, and others.  The debt facility was provided by Victory Park Capital.  PeerIQ announced our $12M Series A round, led by TransUnion, Hearst Financial Venture Fund, and Macquarie Group.  Kroll Bond Ratings has assigned preliminary ratings to Prosper Marketplace Issuance (PMIT 2017-2) which priced last week. The three classes of notes, classes A, B, and C, totaling $501.06 million, were assigned preliminary ratings of A, BBB, and B+ respectively.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, TIAA-CREF, Orchard Platform

July 30, 2017 – The Federal Reserve voted unanimously this week to maintain the federal funds target rate at 1%-1.25%, a conclusion the markets widely expected.  Additionally, as anticipated, the Fed stated they would be implementing a plan to unwind QE “relatively soon”.  However, the market seized on a few tweaks in the policy statement that made it appear slightly more dovish.  The Fed described inflation as running “below” target rather than “somewhat below.”  In a nod to the economy’s prolonged period of sluggish price gains, the Fed omitted referring to declines in inflation as “recent.”   Markets interpreted the Fed’s inflation assessment as dovish.  In response, the dollar fell to a 13-month low against a basket of currencies and a 2½-year low ($1.17) versus the euro. The yield on the 10 year Treasury note dropped before heading gently higher to close the week at 2.30%.  At a yield of 2.30%, that is in the middle of a 10 basis point trading range for the past 30 days.  Also of note, the spread between 3-month and 10-year Treasuries reached as low as 105 basis points this week, down from 194 basis points on January 1. A narrower spread reflects the bond market’s subdued view of growth and inflation.  A flat yield curve, low rates and a low volatility environment are the perfect ingredients for Alternative Lenders operating in the capital markets.  

In Alternative Lending news, Varo Money, a mobile first banking product that accepts deposits and makes loans, announced it has applied for a traditional bank charter. This is the second fintech company to apply for a bank charter after SoFi applied for an industrial bank charter last month.  Darien Rowayton Bank priced $221 million of student loans  in three tranches (DRB 2017-B) in their second securitization this year.  Prosper Marketplace Issuance (PMIT 2017-2), filed form 15G with the SEC for a securitization of consumer loans. This will be the second loan securitization of 2017 for Prosper.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, TIAA-CREF, Orchard Platform

 

July 9, 2017 – The US labor market generated 222,000 jobs in June, the second strongest month of 2017. Job gains were broad-based, with healthy hiring in construction, government and leisure and hospitality. The unemployment rate rose a tenth of a percent to 4.4% amid an uptick in the labor force participation rate rising to 62.8% from 62.7%.  In addition, payrolls for April and May were revised higher by a combined 47,000. The major weak spot in the report was another flat average hourly earnings growth. Wages improved by only 0.2% in June and 2.5% compared to a year ago, well below what would be expected at this stage of the economic recovery.  As recently as December, the figure was 2.9% and in the months before the recession, wage gains consistently topped 3%.  Since mid-2009, when the expansion started, hourly earnings have grown on average 2.2% a year, much less than the 3% expansion of the 2000s, the 3.2% expansion of the 1990s or the 3.3% expansion of the 1980s.  The lack of a marked acceleration in earnings reinforces a belief that the Fed will maintain its slow and steady approach to tightening policy in the months ahead. June’s employment numbers help confirm what Fed officials have already suspected, namely, that the economy is on solid footing. At the same time, the lack of serious wage pressure, which has helped keep inflation low, allows them to continue their gradual pace of tightening. Most market participants are expecting one more rate hike this year, in December.

US fixed income markets have been taking their cues from Europe. Despite a series of below consensus data releases over the past few weeks, the yield on the 10 Year Treasury note has grinded higher, closing at 2.39% on July 7, a jump of 25 basis points since June 26.  Global yields rose further this week.  With the Eurozone’s economy continuing to improve, markets have been anticipating the ECB’s decision to begin scaling back its aggressive quantitative easing package. The yield on Germany’s 10-year government bond closed the week at 0.57%, its highest level since January 2016.  Yields on Italian, Spanish, and French sovereign debt also rose.  The move in European yields has been compared to the so-called “Taper Tantrum” of 2013, when the Fed hinted at the end of its bond-buying program. Thus far, however, the cumulative increase in interest rates is still relatively small compared to the 150 basis point jump in 10 Year US Treasury yields seen during that time.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, TIAA-CREF, Wells Fargo, Bureau of Labor Statistics

 

July 2, 2017 – As proxy, central banker gatherings in resort towns sometimes serve as pivotal moments for the capital markets. For years, the annual Jackson Hole gathering in August provided the setting for big news: Raghuram Rajan’s 2005 unheeded warning about financial system risk and Ben Bernanke’s 2010 tip to QE2 (Quantitative Easing).  This year, the ECB meeting in the Portuguese resort town of Sintra has upstaged the US Fed’s meeting in Jackson Hole. In his remarks, ECB President Mario Draghi sounded optimistic and spoke of “prudence” in withdrawing stimulus. The Bank of England’s Mark Carney said, “some removal of monetary stimulus is likely to become necessary” if Brexit worries lessen.  US Fed Vice Chair Stanley Fischer worried about financial stability rather than low inflation.  Taken together the monetary authorities were more hawkish than expected.  Ten-year government bond yields in the U.S., U.K., and Germany shot higher by 10-25 basis points in reaction to all the combined statements from central bank leaders.  As market participants have been calling for and expecting rates to rise for the past few years but haven’t, will we look back on this as a pivotal week in 2017 for global rates?  Economic data, labor and inflation levels in particular, will drive rates in the long term.  

All that said, the capital markets have remained friendly for Alternative Lenders executing term financing of their loans via securitization transactions.  College Ave, an online student loan refinancing and origination company, closed its first securitization for $160.89 million. DBRS assigned the notes A-1, A-2, B, C ratings of A, A, BBB, and BB respectively.  SoFi Consumer Loan Program priced $500 million of notes in a two tranche deal where S&P, DBRS and Kroll rated the tranches AA and A respectively.  This is SoFi’s 4th securitization of consumer loans in 2017 and 7th overall.  Additionally, Kroll upgraded SoFi’s class A notes from A to AA in their SOFI 2016-1 deal issued over a year ago due to less than expected losses.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, Orchard Platform

June 25, 2017 – With limited economic data releases to digest and a quiet week overall, the markets turned their attention to the speeches made by Federal Reserve officials. Vice-Chairman of the Federal Open Market Committee and New York Fed President William Dudley expressed confidence that the tight U.S. labor market will eventually spur higher wages, triggering a rebound in inflation. He also added that this process will likely be gradual, meaning the U.S. economic expansion still has far to go.  Chicago Fed President Charles Evans was far less bullish in his inflation outlook, preaching patience in analyzing the data. In his view, the Fed could wait until December before deciding whether to raise rates for the third time in 2017.  Whether the Fed tightens or not for the remainder of 2017, rates and credit spreads continue to remain near lows of 2017.  

rates & CreditThe chart titled, “Rates and Credit Spreads”, yields, as measured by the US 10-Year Treasury are at their low point for 2017 despite the Fed raising rates three times in the last six months.  Credit spreads as measured by the CDX.IG 5-Year On-the-Run, also remain near the lows of 2017.  Investors seem to have a different view that is contrasting with the Fed’s view.  For Alternative Lenders, this benign environment continues to be helpful for their businesses.  

The capital markets remain active as well for Alternative Lenders.  SoFi Consumer Loan Program (SCLP 2017-4), filed form 15G with the SEC meaning they will soon be in the market with their fourth securitization for 2017.  Kroll Bond Rating Agency, assigned preliminary ratings to three classes of notes worth $322 million to be issued by Marlette (Marlette Funding Trust 2017-2). Classes A, B, C were assigned preliminary ratings of AA, A and, BBB, respectively.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  TIAA-CREF, Orchard Platform

June 18, 2017 – As expected, the Federal Open Markets Committee (FOMC) raised its short-term target rate 25 basis points at its June meeting to 1.00–1.25 percent, and published an addendum to lay the foundation for normalizing the Fed’s balance sheet, with the caveat economic activity “evolves broadly as anticipated.”  It is that “anticipation” that is causing the latest divergence in views between the Fed and financial markets on current and future economic conditions and whether the outlook substantiates an additional rate hike this year, and the start of the balance sheet reduction program.  In particular, the morning of the FOMC meeting, the May Consumer Price Index (CPI) was weaker than expected. On the back of weak energy prices, headline CPI slipped 0.1 percent from the month before, pulling the year-over-year reading down to 1.9 percent. Core CPI, which excludes food and energy, rose just 0.1 percent month over-month, with the three-month annualized rate coming in flat during the month further underscoring the softening trend and below the Fed’s 2% inflation target.  Despite the Fed tightening three times in the last 6 months, interest rates have rallied to the lows of 2017 this past week as markets have not seen the firming of inflation to be expected with a robust labor market.  As such, the market has significantly handicapped further tightenings for 2017 until the data shows more.  For Alternative Lenders, the low rate environment remains a positive for business.  

It was reported this week that SoFi filed its application for a industrial loan bank charter. This is a big step for the industry as it marks the first online lender in the U.S. to seek a bank charter.  In an example of innovative partnerships, Comcast Business and Lendio have teamed up to improve access to capital for small businesses. The partnership is primarily meant to help Comcast’s small business clients use Lendio to obtain pre-approved or qualified loans.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wells Fargo, Bureau of Labor Statistics,  Wall Street Journal, Orchard Platform

June 11, 2017 – Markets weathered a trifecta of global events this week; ECB rate decision, UK election and Comey testimony.  The ECB left interest rates unchanged although it tweaked its closely watched forward guidance by dropping a reference made in earlier policy statements that rates could be lowered in the future. Markets viewed this omission as the ECB’s first step toward scaling back its aggressive quantitative easing (QE) program. It also confirmed that it will continue QE until the end of the year, or beyond if necessary.  

In the UK, British Prime Minister Theresa May fell eight votes short of the 326 needed to secure a majority – a hung Parliament.  In April this year, May stunned the political world calling for a “snap” election to be held on June 8.   Acting from a position of strength, she hoped to gain a greater majority in Parliament, win an election on her own (she replaced David Cameron after the Brexit vote) and strengthen her hand in Brexit negotiations with the European Union, due to start on June 19.  Her opponent, Labour’s Jeremy Corbyn, focusing on welfare issues that appealed to young voters, benefitted from a 20 point rise in turnout among 18-24 year olds vs the UK’s 2015 general election.  The results leave May in a precarious position and she now will attempt to strike a deal with Northern Ireland’s right-wing Democratic Unionist Party (DUP) in order to gain the seats necessary to govern.  Finally, former FBI director James Comey testified before the Senate Intelligence Committee. Markets were anxious that he would disclose details about his interactions with President Donald Trump and Russia’s alleged involvement in the U.S. election that could further derail the administration’s pro-growth agenda. The hearing shed little new information, as Comey’s remarks largely echoed a written statement he had released the day before.

Markets took all the events in stride. The S&P 500 retreated slightly from the previous week’s record high while the bellwether US 10 Year Treasury note ended the week at 2.20%, up six basis point from 2017 lows.  

Alternative Lenders continue to tap the capital markets for funding via rated securitizations taking advantage of the strong demand for paper by investors.  Kroll Bond Rating Agency, assigned preliminary ratings to three classes of notes to be issued by first time issuer Upstart Securitization Trust 2017-1 (“UPST 2017-1”). Classes A, B and, C were assigned preliminary ratings of, A-,  BBB-, and BB-, respectively.  Consumer Loan Underlying Bond (CLUB) Credit Trust 2017-NP1 (CLUB 2017-NP1), filed form 15G with the SEC. This will be the first securitization of 2017 for Lending Club.  Finally, on Thursday, the House of Representatives voted 233 to 186 (along party lines) to pass the Financial Choice Act (FCA). The FCA rolls back many of the Dodd-Frank reforms instituted under the Obama administration.  The FCA addresses many concerns of the banking industry introduced by the Dodd-Frank bill of 2010 and although it is unlikely to advance in the Senate, passage of the FCA does advance a deregulation agenda supported by the Trump administration. Furthermore, certain elements of the FCA may be extracted from the legislation and passed separately. Over the next four years banks will be the beneficiary of less stringent regulation.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Orchard Platform, TIAA-CREF, Wall Street Journal