(New York)

Those looking for signs of what will happen to the US economy would be wise to keep an eye on mortgage issuance. While the supply of homes is notoriously tight, many are worried that higher rates might doom the mortgage market. Well, despite several hikes in 2017, the year ended up being a very strong one for commercial mortgage issuance. Total commercial mortgage debt rose by $200 bn in the year to hit $3.18 tn total. It was the strongest year of mortgage debt growth since 2007.

FINSUM: This is one of the stats where you are not sure whether to be nervous or hopeful. On the one hand, it is good that issuance wasn’t dented by rate hikes, but on the other, the stats seem almost worryingly positive.

(New York)

Goldman Sachs is in the middle of beefing up its wealth management business. It is adding advisors and trying to boost AUM. The division is very small compared to competitors, but its advisors have very high average revenue ($4.5m vs $1.1m at Morgan Stanley). Now, it is also boosting its securities-based lending offering. Through a program called GS Select, the firm aggregates other wealth managers and makes loans of between $75k to $25m to their clients, all backed by the securities held in the portfolio of the borrower. The program was just joined by LPL, which is now one of 40 firms participating in GS Select.

FINSUM: Aggregating other wealth managers to provide lending sounds very profitable. Evidently GS is also allowing much smaller managers onto the platform.

(Washington)
Advisors should breath a sigh of relief today. Following the fiduciary rule’s resounding court defeat last week, the DOL has done what the industry has been hoping it would—accept the decision. Following the ruling, the DOL now says it will not enforce the fiduciary rule in any way. A DOL agency spokesman said clearly “Pending further review, the [Labor Department] will not be enforcing the 2016 fiduciary rule”. The DOL will also very likely not challenge the court’s ruling.

FINSUM: Given that this is an entirely new DOL versus the one that drafted the rule under Obama, their behavior makes total sense. The way is finally nearly cleared for a new rule.

(New York)

The old fears are rising anew, and not without reason. With volatility now back in a big way, fears are once again stirring about the reliability of ETFs. In previous market flare ups there have been some major ETF losses. The ETF industry is worth $4 tn and has never been through a bear market at its current size. The biggest fears are in fixed income ETFs, where the “liquidity mismatch” is greatest between the tradable ETFs and the illiquid underlying bonds.

FINSUM: With rates and yields set to rise, there could be some volatility in fixed income, which means there could be some big issues in fixed income ETFs, especially in the most illiquid areas.

(New York)

While the acquisition of Whole Foods by Amazon put a great deal of fear into other grocers and investors, things have quieted down since then. Now, the fears appear to be warranted as Amazon’s plan is becoming apparent. Amazon will offer Whole Foods groceries online at the same prices as in store, with free delivery for Prime Now members. The strategy will make it very hard for other grocers, like Kroger, to compete, as Amazon will likely lose money on every transaction. Kroger, and Walmart, are both launching their own delivery programs, but both will cost between $11.95 and $9.95, making them less competitive for short shopping trips.

FINSUM: Walmart can afford to lose money to grab market share, as can Amazon, but Kroger and other small grocers may be very vulnerable.

(Washington)

Though he had remained silent on the issue for three days, Senate Majority Leader Mitch McConnell has finally spoken out on the Trump-Mueller tension. McConnell held a press conference yesterday to commend the job Robert Mueller is doing and to admonish the President to let him finish his investigation. McConnell said Mueller “should be allowed to finish his job”, and that “I don’t think Bob Mueller is going anywhere … I have a lot of confidence in him”. Republican Senator Lindsey Graham also said that if Trump tried to fire Mueller without cause than it would be an impeachable offense.

FINSUM: We think Trump is sharp enough not to try to fire Mueller as it would create an absolute political nightmare.

(London)

If you are thinking about putting some money into foreign stocks, you might want to wait. Overseas stocks need to go through a bear market before they are worth buying again, and they may be well on their way. The MSCI EAFE is seriously underperforming the US market, but don’t be fooled, it has historically done so when when it is ready to continue to underperform, not the other way around.

FINSUM: The big question is why foreign stocks are underperforming The perceived wisdom is that investors want to chase fast moving growth stocks, which are predominantly in the US.

(Washington)

In a new bill to help small US banks, some of the biggest beneficiaries are exactly the opposite. The new bill is set to raise the threshold for strict oversight from regulators to $250bn in assets (up from $50 bn). However, three huge custody banks—BNY Mellon, State Street, and Northern Trust—will also see a major benefit. Because of their custodial structure they will be able to exclude some deposits, pushing their total deposits down under the $250 bn threshold. This development seems likely to boost earnings per share at the custodial banks by 8%.

FINSUM: Talk about regulation going right for these banks.

(Washington)

The ruling against the DOL’s fiduciary rule last week threw a monkey wrench into everyone’s assessment of the future of the rule. While the DOL looked less likely to ultimately implement it, the big worry was that the ruling might dissuade the SEC from getting involved in the space. Well, it appears there is no immediate reason for concern, as SEC head Jay Clayton went on the record yesterday to clarify his agency’s position. Clayton said the ruling “hasn’t affected the way I’m approaching this … I haven’t had any discussions with DOL about what it means from a broader perspective of administrative law. But, as far as I’m concerned, we’re moving forward”. Speaking about the timing of issuing a new rule, Clayton said “the sooner the better”.

FINSUM: This is good news. Whether or not you want any fiduciary rule, one needs to be happy the SEC is stepping in because it lowers the likelihood that each state creates its own rule.

(New York)

Advisors large and small need to worry about this next bear market, as the latter may not survive, according to Barron’s. The reality is that there are many small RIAs who have kept their business alive because of the long bull market. However, “The smaller you are, the more vulnerable you are, because if the market goes down 15%, it gets harder and harder to run a business”, says Fidelity’s clearing division. Margins are already quite slim for small RIAs and lower AUM from market losses would likely kill many businesses. “When the stock market drops, revenues drop, and no expenses immediately come out of the system”.

FINSUM: The big question is whether RIAs who feel vulnerable should perhaps try to sell to larger players now instead of risking a bear market.