FINSUM

FINSUM

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Monday, 29 June 2020 16:35

Reg BI Lawsuit May Go to Supreme Court

(Washington)

Most advisors will have heard of Michael Kitces’ lawsuit to try to stop Reg BI from implementation. This lawsuit, often cited in media as XY Planning Network, is an effort by the RIA planning group to block the lawsuit. XY says that the new Reg BI does not represent Congress’ intent with the Dodd-Frank Act, and that it does not creative a uniform standard of conduct for brokers and advisors as the 2010 law intended. Seven states joined the XY effort, but last week a US circuit court of appeals upheld the SEC. This means Kitces and the team may try to take the rule to the Supreme Court.


FINSUM: This effort seems completely doomed to us. In Kitces’ own words “Courts do tend to give [government regulators] deference and the bar is fairly high to prove that they misunderstood the law itself and did not apply it properly”.

Monday, 29 June 2020 16:33

BoA Says High Yield to Outperform

(New York)

While some are saying that we are in “TINA” mode with equities (i.e. there is no alternative), high yield bonds have been seeing a big influx of demand. Because dividends are drying up in the stock market, high yield bonds are becoming increasingly attractive, and Bank of America thinks they are going to do well. They point out that yields in some bonds are much higher than similar yields on equities in the same sector and they expect spreads to tighten in the coming quarter. “While the easy money was last quarter, we still see many tailwinds to nudge high-yield spreads tighter in Q3...Markets should be treated to plenty of positive data surprises now that economies are exiting their lockdown hibernation…an essential ingredient for leveraged credit to perform.”


FINSUM: This seems like a reasonable call, but we think the positive data surprises might be a stretch. That said, yield-hungry investors will likely keep the high-yield space humming along.

(Washington)

In a week that saw American COVID cases surge and claim one quarter of all the world’s 10m cases, the US health secretary said that the US may not be able to contain the virus. The US has recently seen a huge jump in cases, with only two states showing a weekly decline in cases. This has led to speculation that the virus may be completely uncontained in the country. Health secretary Alex Azar appeared to acknowledge this, and when discussing containing the virus, he said “The window is closing…”, and that the southern US was seeing the worst of the flare up.


FINSUM: All the hopes that warm weather would hurt the virus have been proven wrong—the hottest places in the country are having the worst outbreaks! How does one price the odds of another economic decline because of this surge?

(New York)

Markets have been rough for the last few weeks. Investors are doubting the pace of the recovery because of a big renewed rise in cases and the possibility of new lockdowns. And according to market analysts, signs are increasingly pointing to another meltdown. If you study various volatility indexes, starting with the VIX, it is becoming clearer that another big move lower is on the horizon. The VIX and other indexes have recently shot back higher after a steady fall after the huge March volatility and their momentum indicates investors may panic sell and create another big correction.


FINSUM: We do not give much respect to technical analysis on its own, but it is useful (in our opinion) as a tool to quantify what one is seeing in the real world. Right now, this makes sense given the rising worries about new cases and lockdowns.

(New York)

The long sought V-shaped recovery has been like a white elephant for investors. It has been hoped for since March when the economy started to shrink, but in the last couple months, most let go of the hope as the depth of the downturn became clear. However, given recent economic data, there are growing odds that the economy might vault out of its recession like a rocket ship. Morgan Stanley says it won’t be long until investors completely buy into that narrative. MS thinks in the next six months investors will go from “doubting to believing” in the v-shaped recovery, and that by the end of the year risk assets will be in a “mid-stage bull market mind-set”.


FINSUM: This is highly speculative, but it is a clear un-muddled position. We suspect the recovery is going to be slower than v-shaped, so our expectations are not nearly so bullish.

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