(Washington)

One of the senior-most figures at the SEC, Michael Piwowar, who has been a commissioner for five years, has just announced he will step down from his post after July 7th. The resignation has massive implications for advisors because Piwowar has been a strong opponent of the DOL version of the fiduciary rule and has generally been very pro de-regulation. His stepping down will leave just four commissioners active, two of whom are Democrats. This means the new SEC version of the fiduciary rule, universally seen as more accommodating to the industry, might have some severe difficulties in getting approved, as the Democrats are likely to vote against its implementation.

FINSUM: So in order to alleviate this risk, the White House and Senate would need to move quickly to nominate and approve a new commissioner/s. Nonetheless, this remains a major risk.

(Washington)

The DOL made an announcement yesterday, telling the industry that it would temporarily suspend enforcement action of various parts of its fiduciary rule. The department said it “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules”.

FINSUM: This was largely expected given the DOL’s loss in the fifth circuit court, but evidently the wording of it came as a surprise.

(New York)

The market has become very fixated on higher rates and yields, with every investor nervous it will cause losses in their stock and bond portfolios. However, one Wall Streeter is saying fears are overblown, especially as it concerns how stocks lose on account of bonds. The logic is that stock P/E ratios never fully took account of ultra-low yields, so in effect, there is a cushion in stock prices against rising yields. Therefore, yields crossing 3% won’t necessarily cause any losses.

FINSUM: This is the “priced-in” logic of stock prices. We must say we do not agree. This kind of argument assumes that investors are being rational and have long memories, as well being agnostic of short-term changes in priority. We do not think the market is this impervious to fear.

(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.

(New York)

If one thing is clear about markets right now, it is that they have no direction. Volatility has been very high, but not in any one direction, as prices have been bouncing around as if they were inside a pinball machine. In this vein, Barron’s makes the argument that markets may keep simply moving sideways, possibly through 2027. The article summarizes the view this way, saying “With the Fed continuing to raise rates, populism still threatening Wall Street, and baby boomers ditching stocks as they retire, the market could be stuck in a rut until the end of 2027”.

FINSUM: Nine years is a long time to move sideways! In the nearer term stocks may struggle as we are in a mid-term election year. In such times, they tend to do well in the fourth quarter.

(New York)

Markets have been very turbulent lately with no clear path forward. With that in mind, and given the stage of life (retirement) of many clients, a lot of advisors may be looking for some good yields to add to portfolios. Well, it might be good to take a look at utilities stocks. While the focus on investors has been on growth, utilities look good at the moment. Despite the fact that utilities generally lose ground when rates rise, and have lost 2.4% this year, well-run regulated utilities still look like a good buy. In particular, look for utilities that do not have massive amounts of capital tied up in a single asset, like a power plant. This means one should focus on utilities in the electricity transmission and distribution areas.

FINSUM: Beyond the yields, utilities would also seem to be quite good at defending against a downturn, as spending on them would be quite resilient in a recession.