(New York)

The financial media and the research side of Wall Street both seem to have completely succumbed to bearishness over the last couple months. Alongside rising rates, inflation, and yields, as well as some signals about the potential end of the cycle, commentary has become decidedly negative. However, the CIO of Evercore Asset Management has just put out a contrary opinion, arguing that stocks are not overvalued and could return 7% for the next ten years. The crux of his thinking is that P/E ratios are not a good metric of valuation. Rather we should be looking at real earnings yield, which is yields minus inflation. By this metric, stocks are only at average valuations.

FINSUM: Basically this approach tries to take account of the fact that we are in a low-yield, low-inflation environment, and it does make some sense.

(Washington)

For all intents and purposes, the US government has just declared a trade war on China. Rightly or wrongly, President Trump’s list of demands for China to undertake on trade are so onerous that it is impossible they will acquiesce. The US seems to know this, but is drawing a line in the sand. Here is an example of the scope of the demands: “China is to reduce the US-China trade imbalance by $100bn in the 12 months beginning June 1 2018, and by another $100bn in the 12 months beginning June 1 2019”.

FINSUM: We have very mixed views about the new US protectionist approach. On the one hand we do feel the US has gotten the short straw on several trade deals, but on the other, we think this standoffishness could possibly damage the US economy (short-term), or worse, cause a geopolitical conflict.

(New York)

It has been many years that analysts have been talking about how and whether technology would disrupt bond trading the way it did stocks. However, until very recently, and aside from ETFs, the market had remained very steady, with voice trading and human connections driving the market. An example of the changes can be seen at fund manager AllianceBernstein, where 35% of all fixed income trades are conducted by an in-house algorithm rather than people. Automation of government bond trading is happening rapidly, as liquidity and standardization is quite high, but some are skeptical technology will ever come to change other areas of fixed income such as corporate debt, municipals etc.

FINSUM: There are simply too many idiosyncrasies (e.g. terms) and too many different bonds to have enough liquidity for electronic trading in corporate and other debt markets. That said, sovereign debt seems likely to be completely dominated by automated trading.

(Washington)

On Friday we reported that the DOL had let its deadline for asking for an appeal to its fifth circuit court loss pass. That meant the DOL could no longer challenge the ruling and was effectively letting the rule die. However, the AARP, as well as the states of California, Oregon, and New York, had all requested the court to let them stand in as defendants in an appeal. After about a week of time in limbo, the court has now denied all the requests, meaning case-closed, the DOL’s fiduciary rule is no more.

FINSUM: The DOL rule is so dead, that even the Consumer Federation of America, which was a major champion of it, has said it is now just focused on getting the best version of an SEC fiduciary rule.

(New York)

If you are looking for great stock yields from reputable names, look no further than preferreds. While the stocks are facing headwinds from rate rises, check this out: KKR, leading private equity firm, has been issuing preferred securities with 6.5% yields that have to pay out to holders before they do to common shareholders. This is not an isolated case, the average yield of investment grade preferred shares is 5.8%. This is contrasted to 4% for corporate bonds and 4.4% for municipals.

FINSUM: Preferreds are an old but niche asset class. They are safer than common stock, but less secure than bonds. Interesting to take a look at as they could fill a nice niche in many portfolios.