(New York)

Well-known hedge fund manager Jeremy Grantham has published an article in Barron’s considering the state of the US equity market. His piece is well-thought out and communicated and comes to a clear conclusion—the bull market has more room to run. Basing his argument on a mix of historical market data, economic info, and psychological analysis, Grantham reluctantly comes to the conclusion that the bull market may be entering its final “melt up” phase. He says that while this is one of the priciest markets in history, “strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing”.

FINSUM: We know Grantham personally and respect his views. He was a pioneer in the statistical study of markets, but here says he leans away from that view, which is very noteworthy.

(New York)

Consider this a warning shot across the bow on a piece of information that no one seems to see coming. The Wall Street Journal has put out a piece saying that fourth quarter earnings season, set to start soon, is going to be miserable. The reason why is that many companies are going to intentionally incur some huge expenses as occurring in the fourth quarter as a way to take best advantage of the new tax regime being brought in during 2018. This will heavily cut into fourth quarter profits, leaving some very ugly numbers.

FINSUM: The piece says this is going to be the weirdest earnings season in years, and that seems right as these losses are somewhat artificial. However, it is never good to have some very poor numbers come out, which could lead to some short-term misunderstandings and volatility.

(New York)

Merrill Lynch took a big step yesterday. Seemingly espousing the same view as Jamie Dimon, the firm officially blocked clients and all advisors who act on their behalf from trading Bitcoin. The firm does not believe in the asset class’ investment suitability. The ban extends beyond direct purchases of the cryptocurrency and extends to all futures and funds that trade in bitcoin. Advisors reportedly have mixed feelings on the move, with some saying it is a missed opportunity.

FINSUM: In our opinion, Bitcoin is a solid idea and is here to stay, but it just has so much regulatory risk right now that we think only accredited investors should be allowed to have it in their portfolios.

(Washington)

Okay we have a major call to make today, and it could go well, or it could get ugly for us. Our contention is that despite fears of jumping inflation and growth, we believe rates and yields are going to rise only slowly. New Fed commentary shows that the central bank does not expect the new tax policy to significantly affect growth, which makes us feel they will lean towards dovishness. Additionally, with inflation remaining subdued, we think they won’t be under a great deal of pressure to hike. Finally, on the yields front, we expect that retiree demand for fixed income will keep a lid on yields. As proof, just look at how stock funds have seen three years of outflows, while bond funds have risen for over a year straight.

(London)

While it has largely faded from the American consciousness, the fallout over 2016’s Brexit vote has been nothing short of an absolute mess. The negotiations for departure have finally made a little progress, but are plagued by internecine warfare at every level. Now, a push for a second referendum, which could refute the first, is gaining traction. Former PM Tony Blair is urging his liberal party to back a second vote. Blair and Liberals believe that leaving the EU is not the solution that will fix the worries of Leave voters.

FINSUM: We think this situation only has upside for investors. If the UK reversed its positon, it would lead to a rally in the Euro and Pound and be bullish for most asset classes.

(New York)

Barron’s has put out a headline article by one of their most favored columnists, the well-known Byron Wien, which argues that stocks are in for a 10% correction this year. The argument is that the economy is going to keep doing well, which will lead to speculative buying getting out of hand. This, coupled with higher interest rates, will then cause a pullback of ten percent on the S&P 500 to around 2,300, but the market will rally strongly later, bringing it back to 3,000 for the end of the year.

FINSUM: This is a fairly complex call given the fall-then-rally argument. We overall don’t like this view, as we think if the market falls significantly, it might remain that way for several months.

(New York)

Anyone on the lookout for signs of a correction might want to pay attention to this. New data shows that US investors are avoiding US stock funds. Of the $4.1 bn poured into mutual funds and ETFs in the week ending December 27th, around 70% of the money flowed overseas. The trend is nothing new though, as US stock funds saw their third straight year of net outflows despite the market rising strongly. Taxable bond funds and international stock funds have seen 56 straight weeks of inflows.

FINSUM: We don’t think this is a warning sign of anything other than good times to come. US investors tend to put more money overseas when they are bullish, so this is not a negative sign.

(New York)

The fiduciary rule is in an odd sort of limbo. Despite being seemingly dead from a rule-making point-of-view, it is still very much alive as a practical rule that needs to be abided by even if it is not in full force. But is still surprising to learn, especially given all the hype over the rule’s possible dissolution, that 42% of all advisor-held US assets under management are now subject to the fiduciary rule. That figure is up from what would have been 24% in 2005 and 33% in 2010. The growth has come from the large number of firms seeking to grow their fee-based managed account programs.

FINSUM: That is a quite a high proportion of assets. We hope the DOL rule will not be implemented and the SEC will come up with a more effectual version.

(New York)

The Broker Protocol just suffered another loss. Despite Merrill Lynch deciding to stay in the agreement, the loss of Morgan Stanley and UBS appeared too much of an enticement, and Citigroup has now departed. Citigroup has about 1,000 advisors across the country, and the bank says that leaving the Protocol will allow them to “continue to invest in our growing team of award-winning financial advisers”.

FINSUM: So MS, UBS, and Citigroup are now gone, with ML and Raymond James saying they will stay in. One side is eventually going to win. We think the leavers will eventually cause MS and RJ to leave.

(New York)

With stocks riding so high and anxiety building about a potential downturn, espousing and building a robust bond strategy is going to be more important than ever. With that in mind Barron’s has put out four bond funds picks for 2018. The picks are the Vanguard Tax-Exempt Bond Index, the Artisan High Income fund, the Prudential Short Duration Muni High Income, and the Dodge & Cox Global Bond.

FINSUM: The Vanguard fund really caught our eye. It has an expense ratio of 0.19% versus an average of 0.8% for its peers, and has more than $190 bn under management, with a lot of expertise managing it.