(Washington)

Last week the DOL put out a warning to firms about launching and holding ESG investments. About the socially and environmentally conscious investments, the DOL reminded fund providers that fund performance needs to trump any social impact considerations of the funds. Despite the warnings, Bank of America has just launched five new model ESG portfolios.

FINSUM: What does this mean exactly? ESG portfolios have an explicit focus on social good, which at times could mean the funds either out- or under-perform. To us, this is an odd and pointless warning.

(Houston)

Many investors may still be shy about buying oil companies. After all, oil had a major fallout jut a few years ago and many factors, like green energy, seem to be playing against the future of oil. Accordingly, most oil companies are playing into this logic by cutting back on spending and boosting sources of alternative energy, but not Exxon. The company is boosting R&D spending and trying to grow its gas and oil output counter to all its rivals. Its logic is that demand for gas and oil is forecasted to grow considerably until 2030 as the world’s middle class surges to 5 bn people (versus 3 bn today). One fund manager comments on Exxon that “We think Exxon’s investment opportunities are world-class and that the best time to invest is when everyone else is retrenching”.

FINSUM: Exxon is trying to keep doing what it does best—produce oil. It is interesting they are taking a different approach to the market, but that means they are probably going to have high beta. If you believe in the strategy, it is an interesting buy.

(Washington)

Ding, dong, the fiduciary rule is dead. As was widely expected, the Department of Labor missed its deadline this week to file for an appeal of the fifth circuit court ruling against its fiduciary rule. That means that the ruling given by the fifth circuit court, which vacated the rule, now stands, leaving the rule is all but dead. However, other bodies, including the AARP and the states of California, New York, and Oregon, have all applied to stand in as defendants in the case. None of these requests have been processed yet.

FINSUM: So it will be very interesting to see whether the fifth circuit court approves these requests, especially considering it was so adamantly against the rule.

(Washington)

Over the last several weeks, the market has gone through various fits of panic over whether a global trade war, sparked by the US, might imperil the global economy. However, over that period, sentiment has generally improved, with most investors now thinking a trade war unlikely. That view may be far off the mark, as two major disagreements are worsening. The first is between the US and Europe, on whom Trump may impose additionally steel tariffs imminently. Europeans have vowed to retaliate. With China, the situation is eve more worrisome, as the country has refused to even respond to Trump’s requests tha it slash $100 bn from its trade surplus with the US and lessen its backing for industrial upgrades.

FINSUM: China seems to feel it is finally big enough to stand up to the US. It is probably correct, which means we may end up in a big standoff with Beijing. Here is the big question though—will that ultimately (e.g. 3-plus years from now) be bad for the US economy?

(Houston)

We tend not to write too much about oil, the reason being our readers don’t seem too interested in it. However, the market has quietly seen a really resurgence over the last year or so, and has risen dramatically from lows in the $20s in 2016 to $75 now. The core reason why is that a booming global economy has pushed up demand for oil (to the tune of 5 million barrels per day), which has largely cleared the glut of oil inventories that had been plaguing the market.

FINSUM: The big question now is whether OPEC maintains the supply cuts. It is worried about higher prices inducing increased production from rivals, but the reality is that Saudi Arabia needs oil prices to stay high right now for several reasons (e.g. IPOing Saudi Aramco, domestic social and economic reforms etc).

(New York)

Investors beware, the market might be losing its nerve. Back and forth markets for most of this year appear to be making investors very wary, as the market is fleeing to cash. Investor holdings in “cash sanctuaries”, which include money market funds, are approaching 2%, the highest level seen in a decade. According to one prominent asset manager “Cash is an asset class once again”. According to Crane’s, “Money funds were on a starvation diet with yields at zero percent … Rate increases have given them a stay of execution”.

FINSUM: Aside from volatility, the other big driver is that yields on money market funds have risen considerable alongside the Fed hikes, making them much more attractive.

(New York)

Is value dead? That question has been asked for years now as value stock have chronically underperformed their growth oriented peers. Even now investors look first and foremost to technology (especially FAANG) stocks, prioritizing the richly valued, but quickly growing companies. However, value may be ready to turn around, says Barron’s. One of the big reasons why is that loose monetary conditions, which have held value stocks back, are finally tightening. Some even think value might really soar, as it is exceedingly rare for strong value stocks to be trading at such low P/E ratios this late in a bull market.

FINSUM: We think the biggest problem facing value stocks has been that everyone senses technology is coming to dominate all aspects of life, the economy included. This has meant that investing in tech companies is seen as the way of the future, and that one is foolish not to. It is going to take time, and maybe some cataclysm (e.g. a big regulatory crack down on tech) to disabuse them of that notion.

(New York)

In what comes as an interesting article, Bloomberg has published a piece arguing that instead of the status quo, asset managers should be paying investors for the chance to manage their money. The idea comes from Mercer, a top asset management consultant, and argues that to overcome the problems plaguing active management, investors should agree to pay out a fixed percentage return to investors over a certain timeframe, with the manager keeping any excess that is produced. “We keep getting told by managers that their value creation process tends to be longer than the typical horizon of an investor … This in turn leads to short-termism. Under the new model their investment time horizon can be aligned to their value creation process”.

FINSUM: This would be a total reconceptualization of the way the industry works. The big question is how the investor would get paid if the manager fails to meet the minimum payout. It sounds like third party insurers would have to take part. This is a very interesting proposition.

(Washington)

We urge our readers in strong terms to not get their hopes too high about the new SEC “fiduciary rule”. Putting that in quotes was at the heart of why the rule looks very likely to suffer setbacks and ultimately fail to become an industry standard. The rule is already facing an onslaught of attacks, both externally and internally by the SEC’s own commissioners. The rule has been lambasted as not being a true fiduciary rule, and the long and arduous rulemaking process, combined with a formal public commentary period, mean the rule seems likely to fail.

FINSUM: We don’t think there is any way this rule will turn into an industry standard looking anything like it currently does. We suspect it is time to go back to the drawing board.

(New York)

JP Morgan has just put out a guide which may be very interesting to investors—a manual for how to navigate the end of easy money. The bank thinks the equity market’s response to earnings has been very worrisome lately, and they are very bearish. The bank recommends that in 2019, investors go underweight equities and long gold and long duration as the economic cycle ends and real rates “collapse”.

FINSUM: This is an extraordinarily bearish outlook from JP Morgan, and it seems mostly dictated by weakness in equity prices lately. Investors should take this warning seriously.