(New York)

US Treasury bonds got walloped yesterday. Yields on the ten-year fell over 10 basis points following weeks of relative calm. The big move happened in the early afternoon yesterday, and sent ETFs sharply lower. The jump in yields was not contained to the 10-year either, as 20-years and 2-years rose as well. The big question is why the sharp move occurred. Analysts are saying it was actually overseas influences that drove the losses. In particular, the Bank of Japan announced a policy change that would send rates higher, which spilled over to the US. Further, some better news on the trade war front might have sent some money out of Treasuries after a flight to quality in previous weeks.

FINSUM: This is a really sharp move for it to have been from overseas alone, as these kind of big jumps usually move in reverse. It is hard to draw any conclusions, but it may indicate there are bigger losses to come.

(Washington)

The US property market is a complex and bifurcated sector right now. On the commercial side, prices look set to weaken on huge supply of property and financing. On the residential side, inventory is tight and prices are rising. On the latter market, new data out shows that home sales and inventory are plummeting, and prices are rising quickly. Home sales have fallen for a third straight month, and according to the National Association of Realtors, “The root cause is, without a doubt, the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast, and in many cases has multiple offers”. US median home prices are up 5.2% year on year and have set a new high of $276,900.

FINSUM: So the market is seeing rising prices and rising rates. What gives? At some point fairly soon the market almost has to stall by default.

(New York)

Despite a generally weak year in equities, the market is still very expensive. That said, not every sector is and there are still some bargains to be had. Interestingly, more than half the S&P 500’s sectors currently trade at a discount to their historical relative value (relative to the S&P 500’s P/E ratio). These include: Tech, Materials, Real Estate, Industrials, Health Care and Telecom. Telecom is 60% below its average relative valuation, for instance.

FINSUM: Interesting to see how many sectors are at discounts. That said, the problem with this view is that there are no catalysts to prompt a return to the mean.

(New York)

Investors really focused on small caps may have noticed, but others wouldn’t have. There is an odd quirk occurring in the Russell 2000 this year. A third of the index doesn’t have any profits, yet those companies are rallying 50% faster than the rest of the index. Money losing small cap stocks are up 14.5% this year versus 9.2% in profitable ones. The big question is why. Bloomberg offers no clear answers, but does say that ultra low rates have historically boosted the proportion of money losing companies.

FINSUM: Passive investing is surely helping, as all these money losing firms are still seeing their shares bought purely because of index replication. A Russell 2000 minus money losers ETF would be interesting.

(New York)

Ever since the Republican tax package was passed, along with its limitation on SALT deductions, there has been a lot of speculation that there might be a mass exodus of wealthy northeasterners to no-tax states like Florida. However, in practice that does not seem to be materializing. Financial advisors in New York and California say many clients are considering relocating, but in reality few are. A quote from Bloomberg explains why: “Wealth managers and tax lawyers say many of their (New York) clients are staying put after hearing about the scrupulous records they would have to keep to show they’ve really uprooted their lives and severed ties with their former states … and that it’s not as easy as just spending a few more days a month in a Florida vacation home”.

FINSUM: It is a very big lifestyle change to uproot one’s life in your 50s and 60s and move thousands of miles away purely for financial reasons. We suspect that there will only be a trickle here rather than a flood.

(Johannesburg)

Emerging markets had a very poor first half to the year, with equities entering into a bear market and bonds suffering losses too. However, in recent weeks, bonds have started to rally, which has made some hopeful a big rebound is on the way. That said, American fund managers are not rushing back in, saying that the bonds are very risky. In fact, a survey by Citi found that even though prices are rising, top EM bond fund managers are getting bearish and are setting aside more cash in anticipation of losses.

FINSUM: Dollar-denominated bonds from the likes of Argentina, Egypt, and Brazil have their appeal—high yields, but they do hold a lot of risk, especially in a period of rising rates and a rising Dollar.

(New York)

If you have been following the situation closely, you will have noticed that the Fed is pretty uniformly dismissing the risks of our almost-inverted yield curve. The central bank thinks that central bank bond buying has held long-term yields to artificially low levels, and accordingly, they think the only 30 bp spread between two- and ten-year Treasuries is of no concern. The problem is that this is almost the exact same logic the Fed used when the yield curve inverted in 2006. Then they said it was a global savings glut keeping long-term yields pinned. Soon after, the US went in to recession and the Crisis erupted.

FINSUM: A big part of the problem here is not just that higher rates could lead to a recession, but that low long-term yields drive investors into riskier investments (just as they did pre-Crisis), so the flat yield curve is actually very worrying. The Fed is sleeping walking into a bear trap.

(New York)

There is a new big asset class getting very popular on Wall Street. You may think it is some new esoteric structured credit or volatility product. But guess what, it is just about the oldest product in the world—business lending, or “direct-lending” as it is being called. It has been increasingly apparent on the fringes that big Wall Street players, like Goldman Sachs, have recently taken an interest in direct lending. Now, the whole Street is getting in on the action. Major private shops like KKR and others have started direct lending funds, and the area has returned handsomely, up over 20% this year. The idea of the funds is to lend to businesses and whose credit excludes them from the usual channels.

FINSUM: These funds seem likely to do well until a recession or period of deleveraging occurs, at which time they are likely to see high levels of defaults.

(New York)

There have been a lot articles and discussion lately about the new cap on so-called SALT deductions (state and local taxes). Much of this conversation has been centered around wealthy New Yorkers and others in the northeast considering moving their primary residences to low-tax states like Florida. Well, if anecdotal evidence is worth anything, the conversation is just that, talk. The reason why? New York’s onerous tax collection department dives into credit card records, confirms doctor’s appointments, and does door to door checks to make sure you have really uprooted your life and left the state. Evidently, after speaking with the financial advisors and lawyers, many residents have decided to forget about moving, saying it is just too big a disruption.

FINSUM: This makes sense given how rigorous the tax inspectors are. Further, New York is probably going to find a way around this lack of SALT very soon, so it is not worth uprooting.

(Rio de Janeiro)

Emerging markets have been in a really tough patch lately and generally entered a bear market recently. Their losses have been urged on by higher rates and a stronger Dollar. However, the situation may be about to turn around. The argument is from UBS Asset Management, who says that EMs have de-risked from five years ago during the Taper Tantrum, and that they are in a much stronger financial position now. In particular, whereas investors were worried about EM risk during the Taper Tantrum, now the losses have just been down to a rising Dollar, which does not signal any fundamental weakness.

FINSUM: Our worry with this argument is the lack of a catalyst. While all of what UBS argues may be true, what will cause the market to comprehensively reverse?