(Houston)

Investors need to take note of the oil market, which has been spiking recently. Prices for Brent crude are now above $80 per barrel, a price that would have seemed unimaginable even a year ago, and a world away from the $20s we had in early 2016. The market is partly being driven higher by geopolitics, such as the new sanctions against Iran, but it is also a product of supply shortfalls. Higher prices are now coinciding with all the cost decreases firms made during the market rout, which is allowing them fat margins and the cash to pay dividends and pay down debt.

FINSUM: If the market can stay elevated, which seems likely for a while, then it will be transformative for the many oil and oil-related companies that have been struggling for years.

(New York)

Equity investors need to accept a new truth, says the Wall Street Journal—that earnings and fundamentals have given way to a new “boss” of the markets. Instead of stocks trading based on the performance of companies, they are now trading almost squarely on movements in rates. Recent equity performance could not have made the new reality more clear—companies saw outstanding earnings performance, yet stocks have simply muddled through. The reason why—yields have been moving higher on Treasury bonds.

FINSUM: The current obsession with yields reminds us of the 2014-2015 mode for stocks, when everyone was tied up on whether the Fed would start hiking or not.

(New York)

If there was ever a counterintuitive sentence about stocks, it is the title to this article. However, that is what has proven to be true in the past. According to research produced by the Wall Street Journal, stock markets tend to perform poorly after great earnings seasons. The study found that over the last seven years, both US and European stocks tend to perform poorly following great earnings. Perhaps even more interestingly, when earnings undershot estimates, stocks tended to perform better than average.

FINSUM: This is a tough one to explain except by taking account of markets’ pre-pricing of earnings. Nonetheless, something of which to be mindful.

(New York)

Morgan Stanley has put out a unique list of stocks. The bank has published a piece outlining what it sees as the thirty best stocks for the medium term. The picks are based on having a sustainable competitive advantage and were viewed as having the best chance in this sideways-moving market. Some of the picks include: Accenture, Alphabet, BlackRock, BNY Mellon, Charles Schwab, Dollar General, JP Morgan, Microsoft, Salesforce.com.

FINSUM: This is a very interesting list, especially because it is cross-sector (which does not happen as much given the sector-first structure of equity research). It was also particularly useful that many of these names are in wealth or asset management, allowing advisors special insight.

(New York)

Investors beware, credit quality is quickly eroding in the real estate sector. While lending standards started strong after the Crisis, they have eroded significantly in the last few years as investor demand for yields has pushed lenders further down the credit spectrum and eroded protections. The credit quality of both prime and sub-prime borrowers has fallen and the popularity of CRT (credit risk transfer) securities, or mortgage bonds not fully backed by Fannie and Freddie, has risen. Worryingly, yields have not reacted to the decline in quality, as such risky CRT bonds have recently traded at less than a 100 bp premium to Treasuries.

FINSUM: So the big worry with mortgage bonds is that they always collapse faster than any model can predict. Because mortgage payments are so linked to the underlying economy and employment, when a recession happens, the defaults just flood in. We could be headed in that direction.