(New York)

Investment bank research teams all over Wall Street have been sounding the alarm about how untether from reality markets seem to be. Many are warning investors of another big fall in stocks, and at the same time are telling corporate customers to tap markets for funding as much as they can before another fall. Now hedge funds are joining too, saying it is time to pull back. One manager said “The markets are priced to perfection … The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally”. Paul Singer of Elliott Management made a specific call, saying “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.

FINSUM: In principal a big fall seems warranted, but it is hard to fight the Fed.

(New York)

Morgan Stanley says the big gains in travel stocks are way overblown and will likely prove dangerous to investors. Carnival, Royal Caribbean, and Norwegian have all seen their shares rise in the double digits recently as investors have grown increasingly optimistic about their prospects and their cash reserves. However, Morgan Stanley threw cold water on those sentiments, saying “The cruise industry will take longer than almost any other form of travel to return to normal” as it downgraded the stocks to Underweight (two of them were already Underweight). UBS also pointed out that there will likely be no meaningful cruise activity until next year.

FINSUM: Even once cruises get running again, all it will take is one minor flourish of COVID—and the associated news cycle—for the whole sector to freeze up again. Too risky to invest in at this point.

(New York)

In a recommendation that speaks volumes to clients about the bank’s position on the markets, Citi put out a note to corporate clients this week which instructs them to tap markets for as much funding as they can get right now because the market is totally unrealistic. According to the co-head of investment banking at Citi, “We definitely feel that the markets are way ahead of reality. We really are telling every client to tap the market if they can because we think the pricing now couldn’t get any better”. He continued, “Markets are pricing a V [shaped recovery], everyone’s coming back to work, and this is going to be fine … I don’t think it’s going to be that easy quite frankly”.

FINSUM:A V-shaped recovery is highly unlikely at this point. We think the Nasdaq being where it is isn’t illogical because of how many of its constituents benefit from COVID. But for everyone else, this level of optimism seems disconnected from reality.

(New York)

Don’t be fooled by this rally. Many research analysts, including those at Citi, say that this big rise in markets is not being driven by bulls, but by bears. One of the odd parts of these gains has been that money has been continuously flowing out of equity funds since March, but prices have risen despite that. The reason why may be that instead of bulls buying stocks, the gains have been driven by short-sellers buying back short positions they opened at the start of COVID.

FINSUM: This is good, simple analysis from Citi. Their additional comment could not have summed it up better: “From here, a move higher will need new longs and inflows”.

(New York)

For the better part of a decade now, major socio-political disruptions never seem to rattle markets. Think back to Occupy Wall Street, the events in Hong Kong over the last year, or the protests in the US over the last week. The question is why? The main reason is that historically speaking—think the entire 1960s and up through the 1992 riots—markets and the economy were never particularly affected by social unrest in the months following big social disruptions/protest.

FINSUM: Essentially the argument here is that there is no precedent for needing to worry about social unrest. That approach only makes sense until protests do cause a big problem.

(New York)

Goldman Sachs put out a pretty serious statement today. The bank said the surprising and “unloved” rally since stocks bottomed in March will not continue. The bank thinks that the market has set very high expectations for the recovery, and that waters are currently troubled with China. Furthermore, the huge gains have largely been driven by 5 stocks, and their needs to be much broader-based price increases for the market to rise. This will be tricky because the other 495 stocks in the index are more economically-sensitive. “Broader participation in the rally will be needed for the aggregate S&P 500 index to climb meaningfully higher. The modest upside for the largest stocks means the remaining 495 constituents will need to rally to lift the aggregate index”, said the bank.

FINSUM: This makes complete and total sense and helps explain why the rally has slowed in recent weeks.

(New York)

If you survey advisors—which many have done—they will tell you that the hardest part of the forthcoming Reg BI rule from the SEC is how to handle all the requirements of the new Customer Relationship Summary form (Form CRS). With that in mind, Pershing has just launched an interesting new end-to-end Form CRS product that helps advisors comply with the rule, as well as a Tracking and Reporting Solution. According to Pershing, “We recognize that account opening is not the only [thing used], so we’ve rolled out a new forms management system where the CRS can be directed and stored digitally, and married that system with a number of trigger points that require the delivery of a Form CRS … We’ve given our clients the opportunity to both deliver forms in paper where it’s still necessary, or digitally to the extent that the investor has opted into electronic delivery”.

FINSUM: Compliance with Form CRS is a challenge, and one that is being exacerbated by COVID and people working from home. This sounds like a great solution.

(New York)

May was a rough month for dividend stocks. Many companies announced the suspension of dividends or at least a cut. However, 11 companies in the S&P 500 announced dividend increases. That is an interesting group to look at because it likely means their businesses are thriving. Ten of those are: Medtronic, PepsiCo, Clorox, Cardinal Health, Chubb, Expeditors International of Washington, Baxter International, Northrop Grumman, TE Connectivity, Ameriprise Financial.

FINSUM: Pepsi and Clorox are the most interesting of the bunch for us. Both are consumer staples and because of their unique positioning, both seem likely to thrive.

(New York)

Morgan Stanley put out a very direct research report this week. In it, it tells investors which stocks they definitely should not buy. The bank selected 22 “Secularly Challenged Stocks” which it says no one should own right now. Here is a selection: Alcoa, AMC Networks, Abercrombie & Fitch, CenturyLink, Macerich, Cheesecake Factory, H&R Block, Michael’s, and Molson Coors Beverage.

FINSUM: A lot of names one would expect here, but some that are a bit of a surprise. We certainly would not want to own Macerich given the state of commercial retail real estate, but CenturyLink would not seem nearly so dangerous.

(Seattle)

One of the things that makes Amazon such an extraordinary company is that it is always on the look out for the next great business opportunity, and always seems to be one step ahead in executing it. AWS anyone? Now the champion of Seattle may be eyeing a new target—ride-sharing. Amazon is considering the acquisition of Zoox, a well-known autonomous vehicle company. If it were to acquire Zoox, it would immediately be in competition with Uber and Lyft in the soon-to-be autonomous ride-sharing market.

FINSUM: We assume Amazon also has some yet-to-be-understood purpose for this beyond just competing with Uber and Lyft. For instance, autonomous delivery/logistics vehicles?