(New York)

Prepare to have your eyes opened, wide. US investors have taken out $642.8 bn of loans against their stock portfolios in order to deepen their positions in the market. That huge margin debt exacerbated this month’s selloff, and is likely to make the next one even worse, as many investors will be forced to liquidate positions. The size of the total margin debt (as a percentage of total market cap) is greater than at any point since the figure started to be tracked in 1980.

FINSUM: Record high margin debt sounds like a great leading indicator for a crash.

(Washington)

The financial industry just won a big concession from regulators. In a piece of Obama era legislation, mutual funds were set to have to make disclosures to investors whenever they hard large piles of hard-to-sell assets. However, the SEC has just pulled away from the measure, saying mutual funds will not need to do so. The measure was set to take effect in 2019, but has now been delayed because of disagreement on the total scope of the disclosures.

FINSUM: The big sticking point with this rule is that it would force asset managers to make judgments about liquidity even when they have little insight into it.

(New York)

Bonds have stopped their losses and there is a clear reason why—the market does not believe that the Fed is going to be as hawkish as many feared. The Fed’s January minutes were not as aggressive on raising rates as many suspected, and now bond traders are afraid that inflation may run quite hot without the Fed doing anything about it. Therefore, there is upward pressure on yields, but that force is being contained by the fact that rates are unlikely to be hiked aggressively. The current consensus, based on Fed comments, is that inflation could run to 2.5% before the central bank would become concerned.

FINSUM: The economy is doing quite well at the moment and the Fed doesn’t want to disrupt that by hiking too early.

(New York)

Famed bond fund manager Jeffrey Gundlach loves to put out scary warnings about the markets. Naturally, he often focuses on fixed income and macro themes. However, today he has a new prognostication. Gundlach says that Bitcoin is a good barometer for the direction of stocks. “Strangely, bitcoin seems to be the poster child for social mood and market mood”, says the bond fund manager, continuing “If stocks are going to take another tumble, I think it would be preceded by a bitcoin decline”.

FINSUM: We don’t think bitcoin and stocks have much relationship to each other. The factors that caused Bitcoin to fall (mostly regulatory concerns) have very little to do with why stocks fell.

(New York)

There is a lot of hype about disruption in the shipping business right now. Many investors fear that Amazon will start a major delivery network, and/or come to deal with a smaller company that undercuts the profits margins of UPS and FedEx. But make no mistake, that is going to be very difficult to do because of the nature of the delivery business itself. Residential deliveries, especially the “last mile”, are very capital intensive and require major installed bases of infrastructure for fulfillment. This means any loss-leading pricing will likely prove short-lived.

FINSUM: The big old players have a strong grip on the market. Only Amazon has the clout and capital to unseat them, but it would take several years of major capital commitment to do so, and it doesn’t seem to make enough sense to undertake that.

(Washington)

There has been a flourish of fiduciary rule-related activity over the last couple of weeks. While the SEC and DOL have been very quiet about their progress on a new rule, Massachusetts and other states have been busy prosecuting and formulating their own rules. Now, a new rule has emerged: Maryland is meeting today to decide whether to make a new rule that would compel all brokers (not just advisors) to adhere to a fiduciary standard. A Senator from Maryland says “In Maryland, we’re trying to do our part to protect our citizens from financial abuses”.

FINSUM: The DOL and SEC need to hurry up and get a new rule out, or at least do some handholding with the states to get them to delay their own rules. The leadership vacuum is causing a flourishing of state-based rules which will fragment the wealth management industry. That situation is helpful to no one.

(New York)

Bank of America just put out a weird warning that caught our eye. The bank—the largest retail bank in the US—said that it may face “substantial costs” as it deals with cryptocurrencies. In its SEC filing, the bank warned that cryptos were one of its risk factors for investors. The bank elaborated, saying “The widespread adoption of new technologies, including internet services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services”.

FINSUM: Was this reference to some future risk of business disruption, or does BofA have some exposure to cryptos that is not well understood? Certainly something to pay attention to.

(New York)

We are entering a period of rising rates. This is a fundamental change from the modus operandi of the last decade and represents a paradigm shift for markets and investors. Therefore, volatility looks likely to stick around for some time. Accordingly, investing in low volatility stocks, which have been shown to perform just as well, if not better, than stock market indices during periods of stress, seems like a good idea. Barron’s chooses the ten lowest volatility stocks on the market, a list which includes Aflac, Coca-Cola, Loews, PepsiCo, Berkshire Hathaway, and Procter & Gamble, among others.

FINSUM: Given the ground shifting beneath investors’ feet, having some allocation to low volatility stocks seems like a wise plan.

(Washington)

Labor unions have long been a hallmark of developed economies. While their power has been on the decline for decades in the US, they are still a principle part of the labor market. Now, with their grip already in decline, they might be dealt a death blow by the Supreme Court. The court is about to hear a case on whether it is constitutional for labor unions to require government workers to fund the unions which represent them. Because of the decline in private sector unions, about half of all US union membership is now held by government employees, so a ruling against mandatory union dues could likely spark the end of American unions as we know them.

FINSUM: The decline of unions has been a complex and long-term affair. Aside from this case, we wonder if the power of unions might increase or decrease as automation takes further hold of the workplace.

(New York)

Despite a seemingly very hawkish Fed, bond traders just aren’t buying it, according to Bloomberg. Traders think the economy is burning very hot, and that the Fed, despite rhetoric, is actually content to just stick to only gradual rate hikes. According to one CIO, “The bond market is telling the Fed we see rising inflation pressures and if you are going to be gradual and crawl into three more rate hikes this year we are not going to wait around”, continuing “The long end of the yield curve is tightening for the Fed”.

FINSUM: Fed minutes did not show that the bank was considering four hikes this year, and the market thinks they should be.