(New York)

Rate cuts are going to send shares higher and bond yields lower, right? A win-win for portfolios. Not so fast, as the effect a Fed cut will likely have on portfolios could be anything but predictable. The truth is that monetary easing is not the economic steroid it once was, and investors know it, so the odds of a pop in the market seem low. This is doubly true because much of the possible gain from rate cuts has already been priced in by the market due to how well the Fed has telegraphed this move. If any stocks should do well, it would be small caps, which are more reliant on borrowing and thus would gain the most from lower rates.

FINSUM: This cut has been so anticipated that it will likely be greeted by a shrug. If anything, we think there are more downside risks.

(New York)

The broad expectation is that rate cuts will boost all bonds. To some degree this is likely true. However, not all bonds will be affected to the same degree. For instance, safe bonds—think investment grade corporates and Treasuries—have likely already seen most of the gains they will. But high yields are a different story, as they are much more likely to see a decent rally, as lower borrowing costs are a bigger boon to those companies and the cuts themselves will help sustain the economic cycle, which is more important for them than for ultra-safe companies.

FINSUM: This seems to be pretty good analysis. This rate cut has been widely projected and safe bonds have already seen gains, so junk may be the biggest beneficiary.

(New York)

High yield companies have been big beneficiaries of the tumble in yields this year. But not in the way one thinks, not in the form of a big rally. Instead, highly indebted borrowers have been using the tumble in yields as a way to refinance their debt and lengthen out maturities. The practice has been very widespread. According to one portfolio manager, “It’s a recipe for disaster in the longer term … As an investor, it means you are lending to fairly risky companies at fairly low rates at the end of the cycle. It might not be three months from now or six months from now, but at some point these bonds are going to be pretty challenged”.

FINSUM: Kick the can down the road for as long as you can. That has been the mantra of junk bond markets since the Crisis. When will the musical chairs stop?

(San Francisco)

Big tech companies have had an incredible decade, but that may be about to go the way of Wall Street, and not the post-Glass Steagall Wall Street, more like post Dodd-Frank Wall Street. Regulatory inquiries and fines against Big Tech are starting to pile up, and while the actual fines are tolerable given the companies’ massive profitability, the real change that could hurt them is structural. All the regulatory inquiries have forced tech companies to load up on compliance and related staff—Facebook’s employee count has surged from 6,000 six years ago to 35,000 today. Margins at Google have fallen considerably too. All of that is happening at the same time as top line growth is inevitably slowing because of the size of the businesses.

FINSUM: We think Big Tech might be at the very beginning of the end of its golden age.

(Washington)

The SEC rule has received a lot of attention. Those in the industry have been moderately positive on the rule because of its degree of leniency, but no one really thinks it is a good rule, especially not investor protection advocates. Today we ready an opinion of the rule by an industry laywer, and it was so compelling, we had to share it in its entirety. The below is from Steven Lofchie of Cadwalader, Wickersham & Taft LLP: “Now, in many respects, we have ended up with the worst of all possible situations: (i) the Reg. BI adopting release fails to make any strong intellectual argument for why it is not reasonable to expect that broker-dealers can be fiduciaries to their clients; (ii) Reg. BI fails to make any distinction between sophisticated and unsophisticated natural person clients (treating Warren Buffett no different from a high school dropout); (iii) Reg. BI imposes significant new obligations on broker-dealers that very well may reduce the willingness of broker-dealers to provide "full-service" brokerage to retail investors and instead result in retail investors seeking any level of advice to potentially pay a much higher charge to an investment adviser; (iv) Reg. BI fails to satisfy any of the critics who wanted a fiduciary obligation imposed on broker-dealers; and (v) states are adopting their own "suitability" rules - urged on by Commissioner Jackson - thereby moving U.S. securities regulation away from a unitary system of regulation to a fractured Brexit system.”.

FINSUM: We have never read any commentary that does justice to the new rule better than Mr. Lofchie’s. It hits the nail on the head on why it is a failure from all sides.