(San Francisco)

As of today, the FAANG stocks have shed over $1 tn in market cap since their recent highs. The turmoil pulled markets down around 2% across indices, with the Dow seeing the biggest drop at 2.21%. The losses mean once again that indices have lost virtually all their gains for the year. As one CIO put it, “absolute bloodbath for technology stocks”. The selloff seems very forward looking, as investors are quite focused on what might go right and wrong in 2019. The biggest worries seem to be around trade.

FINSUM: Here is a question: why exactly is tech selling off? Apple obviously has its own problems, but those particular issues don’t seem very relevant to Facebook etc. Panic?

(New York)

How to protect against the next recession? This is a difficult question. Since it may be rate induced, it will be hard to hide out in Treasuries, and gold has not inspired much confidence. Well, SkyBridge Capital thinks the big money maker is to short high yields. “Our largest short position right now is in high yield, and it’s not because we think we’re going to make money this year or next year … It’s to protect against the eventual recession or [a] surprise recession”, says a portfolio manager there. “If you’re looking to put on [a] relative cheap short position, it’s hard to figure out how you lose money given how tight spreads are”.

FINSUM: High yield has seen a big expansion of credit and a decline in quality, and when the next recession rolls around there are going to be some big losses.

(New York)

There is a lot of focus on stocks, bonds, and oil right now, but a very important US asset class is sending increasingly bleak signals: real estate. Data out of the sector has been growing weaker for months, and now new figures reinforce the trend. US homebuilder confidence has fallen to its lowest level in two years. The National Association of Homebuilders commented that “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall. As a consequence, builders have adopted a more cautious approach to market conditions”.

FINSUM: The rea estate market is slowly but surely tightening up. However, because price gains were never as over-the-top as pre-Crisis we only expect shallow declines as the next recession unfolds.

(Houston)

Oil, like many other commodities, is seen as a good leading indicator of the economy. Because it is a strong gauge for total economic demand, it functions are a good bellwether of future growth. However, Barron’s is arguing that, right now, the signal is broken. There are a number of reasons why. The foremost of them are that the recent moves in oil have much more to do with supply growth and geopolitics than they do with economic demand.

FINSUM: Oil is not a good barometer of the economy right now because of its own issues. The oil market has changed dramatically in the last decade because of the huge expansion of oil reserves due to shale. That has led to the whole sector recalibrating itself. As evidence of this argument, take for instance the fact that oil suffered an extreme bear market from 2014-2016, but the global economy kept expanding nicely.

(San Francisco)

Apple’s CEO Tim Cook went on the record yesterday telling the market that he feels pending regulation of the tech sector is inevitable. Cook has been a recently strong critic of the data abuses exhibited in the sector. He argued that the free market is not doing its job to protect privacy and that governmental action is necessary. In cook’s own words, “Generally speaking, I am not a big fan of regulation … I’m a big believer in the free market. But we have to admit when the free market is not working. And it hasn’t worked here. I think it’s inevitable that there will be some level of regulation . . . I think Congress and the administration at some point will pass something.

FINSUM: We have to agree with Cook about the likelihood of regulation here. The financial incentives for companies are not aligned with protecting privacy, so the government would likely need to step in to make that happen.

(Washington)

Few would argue that the tax cut passed in late 2017 was one of the main drivers of the strong economy we saw this year. Corporate earnings have been stellar, the economy is expanding at a good clip, and the labor market is tight. However, the IRS looks about to undermine the benefit of the tax cuts. The agency just announced a new policy for 2019 regarding how it accounts for inflation. The move will undermine much of the value of the tax cuts by raising tax bills for almost all Americans. The new policy will increase tax revenue for the government by $133.5 bn over the next decade.

FINSUM: This is the kind of policy that is going to hurt more over time. That said, the current deficit is huge, so from a fiscal responsibility view it is hard to argue this is unnecessary.

(New York)

This is a tricky environment for income investing. On the one hand, rising rates generally mean better yields, but at the same time, the chance of rate-driven losses is high. What if investors wanted to get safe 5% yields? Doing so is a little bit tricky and requires a blend of riskier credit and a mix of durations. However, investors can get pretty close with some individual ETFs. For instance, BlackRock’s iBoxx $ Investment Grade Bond ETF yields 4.39% and has shorter dated maturities with comparable credit quality to other funds.

FINSUM: This seems like a good choice, but there are also a number of rate hedged ETFs that have similar yields and almost no interest rate risk.

(San Francisco)

We have covered a lot of bear market indicators this year. Every investor is understandably wondering when the next bear might bite. So how about this for an indicator—Apple just entered a bear market. Now we know that Apple’s decline seems to be quite particular to its own situation—especially the fear over iPhone sales that were cemented by the company’s announcement that it will stop reporting such figures—but what if it is a leading indicator for the whole market? Apple is not alone among big companies either—over 40% of the S&P 500 was in its own bear market at the October low in equities.

FINSUM: We do not think Apple’s bear market in its self signifies much about the underlying market. Apple’s trouble really stems from one issue—one of the most successful products in history is finally starting to see slower growth as the result of its own spectacular success. We do not think that is a bear market indicator.

(New York)

It might not always feel like it, but rising rates are good if you are an income investor. Rates are most definitely rising. Treasury yields are up strongly and the Fed is hiking quarterly. That can cause some rate driven losses even as yields on fixed income assets rise. One fund manager summarized the risks and benefits this way, saying “Rising rates and/or lower equity valuations should lead to higher long-term expected returns, although the movement from low yields to high yields, or high valuations to low valuations, often requires a painful short-term capital loss”.

FINSUM: The move to “low valuations” sounds terrifying as an investor, but the key is to take advantage of higher yields while holding hedged positions.

(New York)

Those worried about rate hikes will be happy to hear this news. Ever-hawkish Jerome Powell is finally starting to sound just a bit more dovish. Powell says the economy is strong, but could face “headwinds”. He says the Fed is discussing how much and how fast to raise rates and acknowledged that the Fed’s actions could inhibit the economy. He said the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low”.

FINSUM: It is good to hear some public consideration that rates might get in the way of the economy. While we would not exactly say this is dovish, it is certainly less aggressive than previously.