(New York)

Some may like it, some may not, but there is no changing the fact that ESG, or the acronym used to describe various social, governance, and environmental considerations when investing, is now part of the mainstream. Asset managers large and small, recently led by BlackRock, are now using ESG as a key factor in their investing. One asset manager comments that “In general, companies with the strongest records on employee relations and environmental sustainability, for example, often have better financial performance over the long run than those with the weakest records … Do you really want to hold a carbon-intensive company that’s not thinking about [the risks?”.

FINSUM: The big news here is that ESG and other “responsible” funds have had better returns in recent years than conventional funds, so the old mode of thinking this area has poor returns needs to shift.

(New York)

Goldman Sachs put out a big warning to the market yesterday. The bank’s fixed income division says that it thinks yields on ten-year Treasuries are going to rise to 3.5% within two quarters as the Fed continues to hikes rates and the market sells off. Goldman called its prediction “not very brave”, indicating it thinks yields might be higher, especially since it feels the Fed will hike four times this year. Goldman’s forecast for rates is much higher than most analysts, so if it comes to pass, it could have big ramifications for equity investors.

FINSUM: If yields rose to 3.5% or above that quickly, we expect the equity markets would perform very poorly, and it may be the kind of scenario where we have a recession.

(New York)

Well the stock market finally stabilized yesterday with a solid rally (who knows where it will end up today), which may let many breathe a sigh of relief. However, one of the most prominent names in investing, in his typically unemotional way, says that stocks are currently very dangerous as they look like the definition of a bubble. Investors are still buying the market even though they think it is overpriced, saying Schiller. According to him, “that's almost the definition of a bubble. If you think it's overpriced but think it still has time to go, that's the definition of a bubble”.

FINSUM: So our view is that there is still a good deal to be positive about, but that if you really think we are in for a correction, then what just transpired was not nearly enough to “correct” the market.

(Washington)

We don’t run a whole lot of news on the geopolitical and military fronts, but we think we found a story today that everyone needs to be wary of. Bloomberg reports, along with confirmations from the US military, that US troops engaged and killed around 100 Russian soldiers, injuring 200 to 300 hundred. The soldiers were reportedly mercenaries fighting for the Assad regime in Syria who attacked a US held refinery/base. Russia says it had nothing to do with the attack and that it would not engage US forces.

FINSUM: This seems like it could spark a very tense geopolitical situation, but luckily it looks like Russia distanced itself very quickly and is not seeking any confrontation.

(New York)

One of the biggest names on Wall Street is warning investors that a recession is coming. Ray Dalio, head of the world’s biggest hedge fund, says that we are likely in for a recession as the Fed has to navigate a tricky tightening cycle. Dalio says the economy is in a hard-to-navigate period of tightening rates that will be hard for the Fed to get right. Rates are likely to rise quickly, which could spark a recession. The view is a reversal for Dalio, who had been until very recently saying that it was foolish to be wary of the stock market.

FINSUM: Dalio’s calls from Davos just a few weeks ago look foolish now, but he does make a good point that this will be a tricky period for the Fed to navigate well.

(New York)

Until the market downturn over the last couple of weeks, the oil price had been rising strongly for a period of several months. OPEC’s strategy to cut supply to the market seemed to have balanced supply and demand, which boosted prices. However, one big beneficiary of the cuts was the US shale industry, which has been boosting output to the highest levels ever. This big surge might be the ultimate unwinding of the price rise, however, as US output is surging to levels not seen since oil was at $100 per barrel. This is likely to once again flood the market with supply, sending prices back downward.

FINSUM: We think this oil output growth is unsustainable, both because it will lead to oversupply, but also because it will eventually crack OPEC’s resolve to contain their own output (as the benefits are disproportionately flowing to the US).

(Seattle)

Last week Amazon made big news as it became clear that the company had plans to launch its own full scale delivery network both for its own shipments and for any retailer. The big players in the space are FedEx and UPS, and Amazon sees an opportunity to grab market share. However, the Wall Street Journal has published a “sense check” type of article showing that it would take a massive amount of investment and many years to gain the delivery scale to truly compete with UPS and FedEx. The WSJ reports that “FedEx has roughly 650 aircraft, 150,000 trucks, 400,000 employees and 4,800 operating facilities globally to handle about 12 million shipments a day”. Amazon has just a tiny fraction of that sort of infrastructure.

FINSUM: It is going to take Amazon several years, and a lot of patience from investors, to get in a position to compete with UPS and FedEx. We would never count the company out, but it is a distant goal.

(New York)

The market fell another 4% yesterday, pushing all the major indices into a correction, meaning a 10% drop or more. However, the reality is that this really isn’t much of a correction, at least yet. Looking at a number of the most common valuation metrics, such as P/E, CAPE, dividend yields etc, stocks are still very expensive. Even considering this fall, they are still up 19% over the last year. That means it would take much a more substantial fall to push them into the territory where they could be a buy on a “value” basis.

FINSUM: A few thoughts here. Firstly, stocks are only a buy right now if you think the market is taking a break before heading higher. Well, that is our view. The market is all concerned that growth is too good, which through some mechanisms (like the Fed) will lead to a recession. In early 2016 (the last time a correction happened), the market was worried about a dismal economy. That time the fears were wrong, and we think they will be this time too. This has been a middle of the road recovery for almost a decade, and we think it will revert to that mean, avoiding investors’ worst nightmare—growth! (as if that is such a nightmare).

(New York)

The VIX is the predominant measure of volatility. Everyone keeps and eye on it, and everyone trades it. Over the last couple of years many have made great money shorting it. However, the focus on it has now led the index to outgrow itself, says its founder. Now, we have a case of the tail wagging the dog, where instead of the VIX measuring market volatility, the market is watching the VIX, which itself incites volatility. In his own words, VIX founder Sandy Rattray, formerly of Goldman Sachs and now with Man Group, says “The Vix has moved from being a measure of something to being something that influences this thing it is trying to observe”.

FINSUM: Observing the VIX has turned into an obsession to the point where it creates a self-fulfilling prophecy. This is quite similar to the case of technical traders who are all observing the same measure and then all act at the same time, creating the reality they predict.

(New York)

The last two weeks could hardly have been worse for investors. Stocks plunged and bonds are falling, with the former led by obsession over the VIX. However, according to Bloomberg there is a ticket timing much bigger than the VIX, and one you probably aren’t paying much attention too—ETF loan funds. The market is much bigger than the $8 bn of volatility linked ETFs that got wiped out over the last couple of weeks, try $156 billion between loan ETFs and mutual funds. The big worry is that since these kind of illiquid underlying investments—actual loans—cannot be sold so quickly as the ETFs, that it could cause huge losses as ETFs stampede out but fund managers cannot liquidate the underlying quickly enough.

FINSUM: So this is a provocative spin on a common argument. Our counter, however, is that credit worthiness is pretty good overall, so it doesn’t seem like an exodus will occur.