(New York)

Investors are doing a lot of economic data analysis these days. As the economy picks up (for the most part) after the COVID lockdown, everyone is trying to guess the trend of the expansion. Well, in our search for new economic data, we found something that really stuck out to us as a positive: lumber demand. The whole lumber sector got hurt very badly in the first quarter as COVID shut down real estate construction. The collapse in demand led to a halt in production in the lumber industry. However, lumber demand for construction projects has come back faster than anyone anticipated and the supply chain cannot even keep up. Lumber prices rose 60% in the second quarter alone.

FINSUM: We think it is an excellent sign that builders and consumers have enough confidence in the economy and their financial positions to be able to create this kind of demand. V-shaped recovery?

(Washington)

It has not gotten much major media attention yet, but there is a big battle brewing between asset managers and the Trump administration. The reason why is a new rule proposal by the DOL which seeks to require private pension plan administrators to prove that they are not sacrificing client returns by putting money into ESG-oriented investments. The proposal was not some by-product or unintended consequence of a larger regulation, it was the point. In the words of Eugene Scalia, head of the DOL, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan”.

FINSUM: In our opinion, this rule by the DOL is very out-of-step with current market trends. We totally understand the need for the DOL to protect retail investors, but Millennials and Gen Xers love ESG and will be the ones inheriting wealth soon. This seems heavy-handed.

(New York)

For those interested in dividend investing, REITs have always been a key area. While rate sensitive, they can also provide strong and steady income streams. REITs may seem particularly risky as a whole right now because of the ongoing reckoning in commercial real estate as a result of the pandemic, but there are still some good opportunities to be had. The reason why is that REIT dividends, which have fallen 20% since the beginning of COVID, have likely hit their floor. JP Morgan says “that the current 3.5% dividend yield for the REIT group should be sustainable at this point.” Some of JPM’s best REIT picks right now include Brandywine Realty Trust (BDN, yielding 7.6%), Four Corners Property Trust (FCPT, 5.5%), Welltower (WELL, 5%), Medical Properties Trust (MPW, 6%), and W.P. Carey (WPC, 6.3%).

FINSUM: As obvious as it is to say, in our view, the key to REITs right now is the area of real estate they focus on. Mall REITS—probably not, storage/industrial RETS—much better.

(New York)

Coronavirus cases across the country are surging. On Wednesday the US announced there were 62,000 new COVID cases, exceeding the record set the previous Friday by almost 5,000 cases. Some states, like California have actually started to reverse opening plans, not merely pause them as so many other states have. The huge surge in cases is leasing investors to fret that large-scale second lockdowns may be in the works. Anthony Fauci even openly said this yesterday, adding to fears.

FINSUM: Whether or not you think the case rise is just because of increased testing, the fact remains that as numbers soar, there is growing discourse about lockdowns. That is an undeniable risk to markets.

(Washington)

A top industry legal firm—HaynesBoone—has done a nice brief write-up about the new DOL rule. The piece summarizes the key components, including the five-part test and key exemptions. The new rule brought back the 1975 standard five-part test for determining who is a fiduciary. The test consists of:

1. Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
2. On a regular basis;
3. Pursuant to a mutual agreement, arrangement, or understanding with the employee benefit plan, plan fiduciary, or IRA owner;
4. The advice will serve as a primary basis for investment decisions with respect to the employee benefit plan or IRA assets; and
5. The advice will be individualized based on the particular needs of the employee benefit plan or IRA.

Now to the exemptions. According to HaynesBoone “fiduciaries may not (i) engage in self-dealing, (ii) receive compensation from third parties for transactions involving such plan assets, or (iii) purchase or sell investments with plans when acting on behalf of their own accounts. Provided the conditions of the exemption are met, the Proposed Exemption would allow investment advice fiduciaries to receive compensation for certain transactions that would otherwise be prohibited.” HaynesBoone continued “The Proposed Exemption would require investment advice to be provided in accordance with the “impartial conduct standards.” Under this standard, investment advice fiduciaries must provide advice that is in the retirement investor’s “best interest” (i.e., in adherence to the duty of prudence and loyalty), charge only “reasonable compensation,” make “no materially misleading statements,” and satisfy various other requirements, each as further described in the Proposed Exemption. The Proposed Exemption also requires certain disclosures be made to retirement investors, the implementation of certain policies and procedures, the performance of certain retrospective compliance reviews, and the adherence of recordkeeping obligations”.

FINSUM: This coverage makes it clear why this is such an industry-friendly rule versus the first iteration.