(New York)

While there are a lot of concerns about the bond market right now, one of the risks that is being ignored is credit quality itself. Well, there might be a bomb set to go off in credit. In particular, there appear to be major risks in the Triple BBB category of bonds. This group is considered investment grade, but only just so. There are currently $2.5 tn in US debt with this rating, double the level of five years ago, according to Morgan Stanley. MS says that in a downturn, investors may abandon this type of debt, raising rates for the borrowers, and in turn exacerbating the economic contraction. All of which seems likely to hurt the stock market.

FINSUM: This part of the bond market is so huge, that an exodus from this area would greatly wound the economy.

(New York)

We at FINSUM have been keeping a close eye on the economy, and in particular, looking for any signs of the end of the current business cycle. Today, we might have found one. One of the big worries of economists and investors of late has been the slowdown in consumer spending—a concern in its own right, but not conclusive. Today, we might be seeing why. Lenders all over the US have been tightening their businesses and lending out less cash. That has left less money available for purchases. From 2011 through the end of 2016, credit standards had loosened, but since then they have tightened, even as wages have grown and unemployment has fallen.

FINSUM: This decline in lending seems to show that many lenders think there is more risk than reward in the economy, which may in turn bring on the recession they sense is coming.

(San Francisco)

Tech has been doing very poorly lately. Between the heat on Facebook and the growing threat of regulation to Amazon and other big tech companies, things look bleak. However, they may not be as bad as they seem. The reason why is two-fold. Firstly, many experts think any tech regulation won’t be hugely disruptive to the industry. Secondly, the underlying businesses look strong and the worries about regulation have not really dented earnings expectations. All of this leads many to believe that the whole selloff is overdone and things will blow over.

FINSUM: We can’t see any major tech regulations coming out that would really dent the industry, so all else equal, we do think the selloff might be overdone.

(New York)

Barron’s put out a very troubling article today. The piece contends that even great earnings are not going to save the current market rout. The reason why is two part. Firstly, worries about the broader economy, and things like regulation of tech, are overwhelming the influence of strong earnings. But secondly, markets have seen these good earnings coming for a year, and have already priced them in. Therefore, strong numbers’ influence on investors is weak. In fact, the good earnings are more of a risk than a boost at the moment, as any underperformance could cause a big bout of selling.

FINSUM: This makes perfect sense to us. Everyone has seen these earnings coming from a mile away and has been betting on them for a year. They definitely have more risk than upside right now.

(Atlanta)

The type of loans that fueled the Financial Crisis are making a comeback in a big way. Issuance of subprime mortgages is surging once again, with the total volume of loans issued in the first quarter doubling from a year ago. Such issuance fell to almost zero in the years after the Crisis, but specialist lenders have sent it surging yet again. The loans have been very popular in the debt markets as investors have been snapping up the loans. “[Investors] are definitely chasing yields. Whenever these deals come out, for the most part, they are oversubscribed”, says a New York hedge fund.

FINSUM: This is a bit worrying, but given how low the starting base for the market is, this is just not big enough to be a concern, yet….

(New York)

One of the big developments in the wealth management industry right now is the big increase in recruitment spending by large independent broker-dealers. Even as wirehouses are cutting back on spending, big independents like LPL, Commonwealth, and Raymond James, are spending big on new talent. The payouts are usually being given in the form of forgivable loans. The spending on such payouts has been large, with LPL increasing its budgets for such items to $159.9m in 2017, 17% higher than the year prior.

FINSUM: So while wirehouses have been cutting back, independents have been heating up.

(Washington)

The fiduciary rule has suffered many blows over the last several months, none stronger than in the 5th circuit court in March. However, despite all the doom and gloom over the rule, there is still a good chance it will hold up. The 5th circuit court was the first circuit court to come in against the rule, which paves the way for the Supreme Court to hear the case (impossible to predict the outcome there). Furthermore, the courts may let an outside party step in and take up the DOL’s right of appeal on the recent 5th circuit court ruling, all of which means the rule is far from gone.

FINSUM: We do not think fiduciary rule advocates are going to give up this easily, especially because there is still a lot of legal recourse available to them.

(New York)

The bond market is in flux. It is caught between several strong opposing forces. On the one hand, the Fed looks intent to raise rates. On the other, many are worried about a recession. Finally, the huge and increasing crop of retirees need reliable income. With that in mind, here are some potentially good bond buys from Pimco. The fund manager doesn’t think we will have a recession soon, saying “We think the [economic] cycle will continue for the next couple of years, but stocks aren’t cheap and bonds aren’t cheap”. Pimco suggests looking at high quality junk bonds, and the short end of the Treasury yield curve (e.g. 2-years, which are yielding over 2%).

FINSUM: High quality junk is still yielding over 5%, while the short-end of Treasuries also looks appealing. We don’t think there is a reason to flood out of bonds yet.

(New York)

Despite the recent falls in the market, stocks still look quite expensive, and are, historically speaking. With that in mind, many investors may be looking for stocks with a strong value proposition. Barron’s has put out a piece choosing three: General Mills, Tractor Supply, and UPS. In the case of General Mills, the panic over grocery wars and pre-packaged food looks overdone, and the company is actually performing well in a number of areas. Tractor Supply has done very well historically, but its growth rate has slowed recently, but this may because of two mild winters, and not a sign of trouble to come. UPS has declined because of an announcement of increased capital spending, but given the health of the underlying business, it seems too cheap to pass up, says Barron’s.

FINSUM: These seem like very knowledgeable picks. We particularly like UPS, which is trading at a historically low P/E ratio right now.

(New York)

There is some speculation that bank stocks may be set to go on a tear. Rising rates are usually good for banks. They cause bond volatility, which boosts trading income, and they boost net interest margins, which raises interest income. However, so far this year, things have been weak. Barron’s also adds a solid point—insiders are not buying bank stocks. It has been two years since Jamie Dimon bought his company’s stock, and BAML top brass have been notably absent too. That seems to reflect a lack of conviction on the part of management.

FINSUM: The lack of buying from management is a troubling sign for us, as they certainly have the best insight into the future of the company. It is odd though, as ostensibly things look very positive.