(New York)

Beyond high valuations and a potentially worrying economy (not to mention a trade war), there is something else investors need to worry about. Goldman Sachs is warning investors that S&P 500 companies are engaging in unsustainable financial payouts. The bank shows that in the year ending in March, companies in the index spent about 104% of their free cash flow on buybacks and dividends. It is the first time since before the Crisis that companies spent more on payouts than they generated in free cash flow.

FINSUM: So far this behavior is not hurting companies because investors are okay with extra leverage given the likelihood of Fed easing, but this is definitely a warning sign of financial excess.

(New York)

So the Fed is widely expected to cut interest rates this week, which has sent market yields tumbling over the last several weeks. However, guess what, mortgage rates were falling steeply well before this telegraphed cut. 30-year mortgage rates have fallen from just under 5% in November of last year to just 3.75% now. What is most interesting here, and most worrying, is that other consumer lending rates did not fall similarly. For instance, auto loan rates, variable credit card rates, and home equity line of credit rates have not changed nearly as much as mortgages, signaling something unique about the market.

FINSUM: We find this to be a sign of market weakness that was more driven by the economy itself than it was the Fed.

(Detroit)

By all accounts, the US car industry should be doing well. Vehicles sales have been good, unemployment is low, and gas is cheap. However, US car companies are closing factories and laying off workers and acting like we are in a big recession. Why? The answer is that their product mix and manufacturing capabilities are seriously out of touch with the market. In particular, they have far too much sedan manufacturing infrastructure in a market that no longer has much use for sedans. This is a huge problem because overcapacity is what doomed car companies in the last recession.

FINSUM: The good thing here is that the car companies are trying to be proactive in adjusting their facilities ahead of a broader downturn. However, closing factories and laying off workers following such a good run is getting a lot of negative political attention.

(Washington)

The first round of the Democratic debates a few weeks ago was a little disappointing from an entertainment perspective. All the candidates seemed loathe to argue with one another, so the overall debate didn’t have the electric atmosphere that many of the candidates seem to have outside the debate venue. However, tonight and tomorrow should be different, as Joe Biden is likely to be under heavy attack as the frontrunner. The field of candidates is thinning and the stakes are much higher this time, which means there are likely to be more aggressive tactics. Biden himself has said he won’t be so friendly this time around.

FINSUM: If we had to make a call right now, we would say that Trump is likely to win re-reelection. Our reasoning is simple—the candidate most likely to win the Democratic bid is probably the one most tolerable to Republicans (i.e. Biden), which means the average American voter is more skewed to the right than to the left.

(New York)

The market seems like it is hurdling towards the same conclusion it experienced last year—a big fourth quarter reversal. This time though, it won’t come because of worries over rate hikes, but fears for the economy itself. Stocks have been on an extraordinary run this year with the S&P 500 up over 20% and the Nasdaq up over 25%, but it all looks likely to reverse. P/E ratios have jumped from an average of 13x to over 17x, all at the same time as the global and US economy is looking more vulnerable.

FINSUM: We think a market reversal will likely come in step with economic signals. If a rate cut actually works to stimulate the economy, then it seems much less likely there will be a correction/bear market like last year.

(New York)

Want to know one of the biggest risks in equity markets right now—parity, and we don’t mean between asset classes, we mean between investors’ portfolios. Momentum buying, or buying up stocks that have performed the best, has become such a hot strategy this year that both mutual fund holdings and hedge fund holdings look very similar. Everyone has the same basket of stocks, such as Mastercard, Paypal, Amazon, and Microsoft.

FINSUM: Since value investing has all but died—no one is interested in undervalued stocks—portfolio parity is increasing. This seems like a big risk that will magnify a reversal.

(San Francisco)

One of the surprises in the Big tech space has been that top names have not moved as much on news of various antitrust and other probes as one might have expected. Here is why: investors just don’t think any current actions will have a material impact on business models. For instance, Facebook agreed to pay a $5 bn fine last week, but that sum is small enough that it does not change Facebook’s incentives in any way, it can just keep on doing what it has been.

FINSUM: We think this is a woefully optimistic view. Regulating Big Tech is one of the few areas of strong bipartisan agreement between Trump and the Democrats. The likelihood of it having a material impact on the sector’s business model seems high to us.

(New York)

How might retail stocks react to rate cuts? That question hasn’t gotten much air time lately, but is a good one considering how much investment there is in the sector. Generally speaking, low rates should be good for the sector as they would technically stoke consumer spending. However, the logic there gets skewed based on the underlying economy (i.e. how it is trending). For the current environment, the answer is that some retail stocks will benefit handsomely, while others will struggle. The “haves” will do well, while the “have nots” will continue to suffer. The “haves” include Amazon, Lululemon, Costco, while the “have nots” include cash strapped retailers like Gap and J.C. Penney.

FINSUM: So basically a rate cut will help those who are already doing well, but won’t do much for the rest of the sector. This makes sense, as it is hard to see consumer spending changing much at the current stage of the cycle.

(New York)

Rate cuts are going to send shares higher and bond yields lower, right? A win-win for portfolios. Not so fast, as the effect a Fed cut will likely have on portfolios could be anything but predictable. The truth is that monetary easing is not the economic steroid it once was, and investors know it, so the odds of a pop in the market seem low. This is doubly true because much of the possible gain from rate cuts has already been priced in by the market due to how well the Fed has telegraphed this move. If any stocks should do well, it would be small caps, which are more reliant on borrowing and thus would gain the most from lower rates.

FINSUM: This cut has been so anticipated that it will likely be greeted by a shrug. If anything, we think there are more downside risks.

(New York)

The broad expectation is that rate cuts will boost all bonds. To some degree this is likely true. However, not all bonds will be affected to the same degree. For instance, safe bonds—think investment grade corporates and Treasuries—have likely already seen most of the gains they will. But high yields are a different story, as they are much more likely to see a decent rally, as lower borrowing costs are a bigger boon to those companies and the cuts themselves will help sustain the economic cycle, which is more important for them than for ultra-safe companies.

FINSUM: This seems to be pretty good analysis. This rate cut has been widely projected and safe bonds have already seen gains, so junk may be the biggest beneficiary.