(New York)

Stocks are in an interesting place right now. The year is off to a feverish start and momentum is strong, yet some are worried the rally has been too fast and that shares are vulnerable. Barron’s ran an article arguing the bull case for stocks. The core bull argument is that the economy is not as late cycle as many currently fear. While some think we are the very end, data and history suggest returns could be good. Based on a combination of economic signs (e.g. purchasing managers index) versus the recent market decline, stocks look poised for a great year (they are already well on their way). Macro indicators show the economy is still mid cycle, not at the end, such as private investment’s share of GDP.

FINSUM: We think the economy may be mid-cycle, but only if the Fed lets it be that way. The Fed can manipulate the economic cycle significantly, and markets generally follow.

(New York)

The real estate market has been heading south for almost a year. Disappointing numbers keep coming in, but there has not been major urgency or alarm. In fact, homebuilders are having a stellar year, up almost 20% and well above the S&P 500’s gain. However, Stephen Kim at Evercore is warning that investors should be wary of hosuing stocks. Citing the most risky names as DR Horton, PulteGroup, Toll Brothers, and KBHome, Kim says about the group that “Hope is not a strategy”. Kim was bullish on the shares in the Fall before their big move higher, but now believes they are fully valued.

FINSUM: The trend may be your friend, but given the direction of the housing market and the big recent price rises, we wouldn’t want to be long the homebuilders index right now.

(New York)

One of the big challenges in digesting earnings is trying to parse through what are and what are not material statements made by company executives on earnings calls. Executives at publicly traded companies have become experts at deflecting tough questions and use sophisticated and evasive language to obfuscate the direction of their companies. However, American Century Investments is debuting a new piece of language processing software which can intelligently understand the commentary and identify material versus immaterial statements, or what they call “BS”. The software is highly sophisticated in spotting not just key words, but patterns and relationships between statements. It cites four areas that can help it find BS: omission, “spin”, obfuscation, and blame.

FINSUM: This seems as though it could be a useful tool, especially as it is more sophisticated than just using key words (which people can easily adapt to).

(New York)

A fool-hardy travesty is the word that came to mind when we read the headline that Bank of America was dropping Merrill Lynch branding. Our worst fears were allayed when we saw the move was only for the investment banking brand, not wealth management. Yet the change stills begs big questions and seems like a poor idea for B of A. Bank of America had little in the way of a strong investment banking brand before it bought Merrill Lynch, so the change is an interesting (read “odd”) one. It also makes one wonder if the Thundering Herd is safe from its own B of A rebrand in the near future.

FINSUM: We have to believe B of A will be smart enough not to drop the Merrill Lynch name from the wealth management business, but even the current move is an exceptionally poor idea. Members of our team worked in investment banking at “Bank of America Merrill Lynch” and can say from experience that the first part of that name didn’t carry much weight. To be honest, Bank of America would have done better to drop its own name!

(New York)

New economic data was released on the US economy and fourth quarter growth was a mixed bag. The economy expanded at 2.6% annualized in the fourth quarter, a decent number that exceeded estimates, but did nothing to change the overall downward direction of the economy. Consumer spending slowed in the quarter. The economy expanded at 4.2% in Q2 2018, 3.4% in Q3 2018, and 2.6% in Q4 2018.

FINSUM: The trend downward is clear on many levels. That said, this should have been expected as the benefits from the tax cuts continue to fade. We think the economy is in the late stages of its expansion, but so long as the Fed stays quiet, we could drift on solidly for a while.