Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
A lot of people are worried about a big market fall, but what would get us to that point? While there was a big warning out of China last week, the most realistic catalyst for a bear market seems like a US recession. Well, the ten-year Treasury, a historically good indicator of economic direction, is signaling that a recession very well may be on the way. According to JP Morgan’s head of fixed income at JPM Asset Management, the ten-year yield should currently be over 3% given this stage of the economic cycle, but it is currently pinned at only 2.3%. “Under the surface, growth has picked up globally and inflationary pressures have picked up, but you aren’t seeing the 10-year rise a lot”, says JP Morgan.
FINSUM: An inverted yield curve is a big warning sign for the economy, and while we aren’t there yet, weak ten-year yields are troubling in an otherwise bullish environment.
The SEC seems to have decidedly changed its approach of late. Under new chief Jay Clayton, the SEC has greatly cut back on fines and disgorgements. Over the last fiscal year, penalties have fallen by 15.5% to a four-year low of $3.5 bn. The total number of cases taken up by the SEC dropped 17%. Clayton has made boosting capital raisings his priority, and has indicated that fining companies may simply hurt shareholders.
FINSUM: In the years leading up to Clayton’s appointment, regulatory over-reach did seem to be hitting extremes. Though, one hopes a pullback in enforcement won’t lead to increased bad behavior.
Healthcare investors are getting very nervous about the industry getting “Amazoned”. Ever since Amazon received several licenses to sell and distribute pharmaceuticals several weeks ago, paranoia has gripped the sector. It is looking increasingly likely that Amazon will start to sell prescription drugs, and in doing so, grab market share and drive down prices. The pharmaceutical business is worth $450 bn per year in the US. The sector is responding with potential mergers and the quick adoption of next day prescription delivery, all presumably efforts to pre-empt an Amazon takeover.
FINSUM: This sector looks absolutely ripe for Amazon, and we expect the company will apply its excellent customer service and major logistics prowess to grab market share here.
Last week the Mueller probe formally charged two former Trump allies with money laundering and tax evasion, while also “flipping” a former Trump campaign aide. Now, there is a potentially more worrying connection coming to light: Secretary of Commerce Wilbur Ross failed to discuss financial connections to Putin’s inner circle earlier this year. Ross’ private equity firm does millions in business each year with a petrochemicals company that is close to the Kremlin. The Russian company’s owner is the husband of Vladimir’s Putin’s younger daughter.
FINSUM: Mueller is going to be all over this like a bloodhound. His tactic seems to be to flip the small fish to try to “tell” on the higher-ups. We are still very unsure if any of this will actually lead back to Trump, or all of this is just part of the deal when you hire successful international business people into key government positions.
The standoff between Madrid and Catalonia took an unclear turn yesterday. Facing the prospect of immediate arrest if he declared independence for Catalonia, the region’s leader, Carlos Puigdemont, did not declare full independence when speaking to the region’s parliament yesterday. Instead, he stopped one step short, saying he fully supported independence, but wanted to pursue dialogue. Madrid reacted by not arresting him, but simultaneously threatening to suspend Catalonia’s autonomy and demanding clarity on the region’s position after Puigdemont’s vague speech.
FINSUM: This situation is very tenuous, and it is difficult to predict where it might head. That said, the relationship between Spain and Catalonia seems very inflamed, especially on the Spanish side, which seems different than other recent sovereignty debates (e.g. Scotland and the UK).
For those who aren’t aware, there have been some major sweeping changes in Saudi Arabia over the last few days. In a broad move to consolidate power, The Saudi Arabian king’s son has had dozens of princes throughout the country arrested. The arrests are being done as part of an anti-corruption drive by Prince Mohammed, but they are raising international eyebrows about the business climate in the country, especially as Prince Mohammed has said he will bring great reform. The big flurry of arrests also come just prior to the IPO of state oil company Saudi Aramco, and many think these moves will accelerate the outflows from Saudi assets which have already been occurring.
FINSUM: This seems like a very counterintuitive move from a prince who says he wants to reform the country and transition it away from reliance on the oil sector. Saudi Aramco just took a huge valuation hit.
Investors should be worried about US real estate. That is the conclusion of new data analyzing the US housing market. This worries are particularly high at the top end of the market, where a mountain of new luxury apartment inventory is about to hit the market at a time when vacancy rates are already rising. As a result of the glut, banks have been tightening credit lines to developers, and previously planned projects are stalled. Rental inflation also appears to have peaked, all of which has weighed on residential REITs.
FINSUM: This article paints a pretty bleak picture of US real estate, but on the flip side, the low end of the market seems like it will stay strong as first-time Millennial buyers keep things buoyant.
Source: Wall Street Journal
The high yield market is looking shaky, and that may spell bad news for shares. The junk bond market has succumbed to a wide spread selloff this Autumn, led by the telecoms sector, and that is raising fears that the trouble may spread to stocks. Telecoms account for a major chunk of high yield, and most retail investors have exposure to the junk bonds through passives. If the selloff continues, they could get spooked, and pull out of not just high yield but also other risk assets like stocks. Shares of telecom companies have fallen 20% in 2017.
FINSUM: While junk has been weak, the telecoms sector is experiencing some sector-specific upheaval. Thus, the gloom may not spread across the entire market.
Hiding in plain sight is probably the best way to describe it. The new Republican tax plan has a major tax hike for stock investors that has largely gone unnoticed to this point. The tax plan contains a new provision that would do away with the status quo of letting investors choose which shares to sell off first as part of unloading a holding, and instead force investors to sell the oldest shares first. Many fund managers say the change could cost investors millions. The CEO of Eaton Vance summed up the changes this way, saying that if they become law, “markets will work less well. Our fund managers will have their hands tied, and our shareholders will owe more in taxes”.
FINSUM: This is a major change that has not been covered at all by the financial media. It will not only raise tax payouts, but it also constrains financial freedom. Bad policy.
There has been a lot of hope lately about the likelihood for the SEC to take control over the fiduciary rule and craft a comprehensive new regulation. However, the odds of the SEC doing so look increasingly long. The agency itself has made several distancing comments lately, such as SEC chief Jay Clayton admitting there was “no silver bullet” for a new rule. Not only does the SEC have the big challenge of harmonizing a fiduciary rule across all types of accounts, but it is facing a fierce and divisive political climate. Many states are already crafting their own fiduciary rules, another factor the SEC must overcome as it needs to appease all the states. There is also internal division within the SEC, as some commissioners are against the crafting of a new fiduciary rule, while others are for it.
FINSUM: On top of all these headwinds, there is also the constant barrage of lawsuits which will try to stop the SEC at every turn. We think it will take several years for the SEC to make a rule, if it ever even gets there. That means we will either need to live with the DOL fiduciary rule, or it will be tossed out once and for all.
Oil has been doing well lately, putting a smile on the faces of traders and the shale industry and a grimace on the faces of everyday Americans. Well, Barron’s says the grimace won’t go much longer, as this oil rally is bound to fade. Oil is almost back to $60 after reaching $44 in July. However, for it to move any higher the market would need to be banking on geopolitical supply disruptions, which seems like a long shot to rely on.
FINSUM: The fundamental demand and supply picture simply don’t justify prices much higher than now, so we don’t think this run will be able to maintain its momentum.
One of the bright spots in the post-Crisis era has been the collectibles market. Everything from antique cars to high end art has surged in value since the Crisis, making collectibles one of the better returning asset classes. However, at least for the art market, that appears to have changed, as 2016 saw sales shrink 11% to their lowest point since the recession. 2016’s poor performance follows a down year in 2015 as well, when sales slipped 7%. The combined losses have now wiped out all the gains seen in 2013 and 2014. 2016 was particularly poor for auction houses.
FINSUM: Hard to say exactly what slowed the sector down as it had been doing so well. One interesting factor—the declines directly coincide with the bear market in oil.
The new Apple iPhone X has gotten a lot of hype in media. Aside from all its new features, which are admittedly extensive, its ~50% price hike to $1,000 has received a great deal of attention. That price hike is testing a long-held economic principle which says that as prices for a good rise, demand falls. However, for the last 100 years there has been a view that rising prices could raise demand for certain goods because they amounted to “conspicuous consumption”, or saw their demand rise as prices did because owning them signaled wealth and status.
FINSUM: Apple’s new iPhone X, with a lofty $1,000 price tag, may just prove conspicuous consumption true.