(New York)

A flattening yield curve is almost universally seen as bad news, and with good reason. A flattening curve is one of the most reliable recession indicators, with a yield curve inversion successfully portending the last six recessions. Now that we are close to an inversion, experts are weighing on how to play it. One thing to remember is that the peak in stocks tends to not come until several months after the inversion itself, so it is not an immediate divestment indicator. One analyst from Canaccord Genuity says to get overweight “financials, info tech and industrials with an intermediate-term time horizon”. Utilities and REITs are another area to look.

FINSUM: A flattening yield curve is going to be frightening to everyone, especially in the current environment, so our own view is that the peak in stocks may be much nearer to the inversion this time (or it might have already happened).

(New York)

Hedge fund managers have seen a real decline in their reputations over the last decade. Chronic underperformance and the rise of passive vehicles has led to a high degree of skepticism. Therefore, take their comments with a grain of salt. That said, the hedge fund community is ever more loudly saying a new crisis is on the way. Particularly in Europe, famed managers are saying a repeat of the Crisis is coming. These names include Crispin Odey, Alan Howard, Greg Coffey, and Russell Clark.

FINSUM: There is a lot of doom and gloom out there, but there has been for years (periodically). Everyone was saying the same thing in 2015, and here we are three years later with markets much higher and the economy doing well. That said, we do see some storm clouds brewing.

(New York)

Bank shares have been getting brutalized. S&P 500 financial shares are down 12% since their peak in January, and have lost ground 12 says in a row, the longest run ever. JP Morgan’s share price is now below its 200 day moving average, a key technical level. The flattening yield curve has been weighing on the shares even as investors get ready for a flurry of dividends and buybacks from the sector. So far banks have avoided seeing declines in their net interest margins, but that can only last for a time.

FINSUM: Banks trade with the direction of the economy, and a flatter yield curve is both a predictor of recession and directly bad for bank earnings.

(New York)

Investors need to be worried about the amount of corporate debt out there. Over the last decade, companies have binged on corporate debt to the tune of $14 tn of issuance. Total US corporate debt from nonfinancial companies is now 74% of GDP, its highest ever. And total corporate leverage is now 20% higher than before the Crisis. On the back of this, Goldman Sachs says that so far this year stocks with the strongest balance sheets have been outperforming weaker ones considerably. Here are some companies to look at to protect one’s portfolio from a crunch: Mastercard, Electronic Arts, Equity Commonwealth (a REIT), Graco, and Verizon.

FINSUM: The amount of corporate debt is quite alarming, and it does seem like there will be a reckoning. But when? As long as earnings stay strong, it seems unlikely there will be a big blow up.

(New York)

If you are an RIA looking to sell your firm, the environment is looking stronger and stronger. Terms for deals have improved mightily. For instance, whereas terms from a few years ago were typically 30% paid up front with the rest paid over five years based on client retention, currently 60-80% is being paid up front with the remainder paid off over a year. According to Joe Duran of United Capital, “The market is frothy, and terms for sellers are getting better”.

FINSUM: The market is getting better because there are many more buyers than sellers, which is raising prices and pushing terms in favor of sellers.