(New York)

There has been a lot of media coverage lately about how to protect one’s portfolio from the trade war. We came across an unusually clever idea recently, however, that has nothing to do with trying to forecasting the impact of tariffs on different sectors. Here is the strategy: buy exchange stocks (meaning the stock of stock exchanges, like the Nasdaq). The argument is that panicked buying and selling alongside a trade war will boost trading volumes, which in turn boosts revenue.

FINSUM: We think this is a brilliant strategy. If volatility rises, exchange stocks will likely do well. If volatility is down, meaning less trading volume, the rest of your portfolio is likely to be doing well.

(Brussels)

We thought it would be good to add a little European flavor to today’s coverage. The Financial Times has written a very insightful piece about the EU and the effect Brexit has had on it. In particular, it cites Donald Tusk, one of the EU’s top policymakers, who says that Brexit has been a “vaccine” against anti-EU parties across the continent. “As Europeans see what Brexit means in practice they also draw conclusions … vaccine against anti-EU propaganda and fake news”.

FINSUM: The EU has seen what Brexit has done to quell any anti-EU sentiment within the Union, which means it will never let off the gas pedal in making Britain’s departure a hellish ordeal.

(Washington)

It happened quickly, more quickly than almost anyone expected. The SEC redrafted its “Regulation best Interest” rule and put it to a vote yesterday, with the new version being approved by a 3-1 vote. The new version is a fairly large departure from the previous one, and went in the complete opposite direction versus expectations. Instead of tightening the rule to put more fiduciary duties on brokers, it did the opposite, eliminating language regarding best interests and seemingly watering down the current suitability standard itself. The vote against the rule came from the SEC’s only Democrat, who said “Rather than requiring Wall Street to put investors first, today's rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice. Even worse, contrary to what Americans have heard for a generation, the commission today concludes that investment advisors are not true fiduciaries. Today's actions fail to arm Americans with the tools they need to survive the nation's retirement crisis.”.

FINSUM: In addition to the changes mentioned above, it is also worth noting that the new rule significantly expanded the language regarding “solely incidental”, meaning many more brokers do not fall under the rule’s purview. Now it remains to be seen what the DOL does.

(New York)

Some of the market’s most important indicators are sending warning signs. Both oil and gold are trading in a way that has traditionally signaled that a big downturn is headed our way. Oil has fallen to near a bear market on concerns over growth, while gold has shot higher on the same worries. The extent of the moves is unique and has often presaged nasty movements in broader asset prices. In both the Dotcom bust and the Financial Crisis, oil and gold behaved similarly, so the question is whether they are sending the same message now. One market analyst noted, “Only three other times in history precious metals surged while oil plunged! All of them happened during severe bear markets and recessions … Buckle up, folks”.

FINSUM: It is odd to think that this has not happened more often as it is exactly what you would expect in times of anxiety about growth. Accordingly, this must be noted.

(New York)

The market is overly reliant on a rate cut, say UBS and Goldman Sachs. Both banks think investors are banking too strongly on the Fed cutting rates. The market is currently forecasting three 25 bp rate cuts by the end of the year. Treasury markets have surged, but too far says Goldman. UBS believes “Markets now imply that the Fed will cut rates by around 70 basis points this year and 35 bps next year. We find this excessive … We believe it would take a recession to provoke the magnitude of rate cuts currently being priced by the market, and this remains unlikely in our view”.

FINSUM: We do not believe the Fed will cut rates this sharply unless there is a recession, but maybe that is exactly what markets are expecting (just look at the yield curve).

(New York)

Everyone is trying to figure out how to protect their own and clients’ portfolios from a trade war. “Which sectors will be the hardest hit”, “and by how much” are common questions. Well, a small Virginia based ETF provider has just come to the market with a new fund that is designed to protect investors from that very issue. The new ETF, TWAR, is designed to track 120 companies who are likely to outperform the market during a trade war because of “government patronage”, or special contracts or subsidies which insulate them.

FINSUM: There is some skepticism in the market about this approach, but it does stand to reason that companies who are less exposed to global trade will suffer less than the market.

(Washington)

Investors have been unsure of how the Fed would handle the trade war. Recent minutes from the Fed showed no indication that the central bank was thinking of cutting rates even though the market expects it. However, the silence has finally been broken as Fed chairman Powell announced yesterday that the trade war is on the list of the Fed’s concerns and that the central bank would act to protect the economy from its fallout. In his own words, Powell said the Fed would “act as appropriate to sustain the expansion”.

FINSUM: We took this as a pretty strong affirmation that the Fed is watching the trade war situation closely and is ready to act. Markets liked it.

(New York)

Independent or wirehouse? It is a big decision, especially because it not only means moving firms, but going from being an employee to running one’s own business. Well, to fill the void between those two possibilities, LPL has just launched a new program designed to let advisors half-breakaway. The program lets advisors be independent, but also employees. The new new offering is short on details but follows in the footsteps of Raymond James and Wells Fargo, both of whom have similar opportunities.

FINSUM: This seems like a good option if you are an advisor that wants more flexibility, but does not want the difficulty associated with running your own firm.

(New York)

The big bull market of the last decade is now coming to an end, according to Morgan Stanley. The bank says that the US market cycle has moved into a “downturn” phase for the first time since 2007. The bank says the change in its cyclical indicator adds to “a litany of downside risks we see for the markets”. The bank says the change of phase typically means a bear market is coming. The call on markets came in a report delivered to MS clients on Sunday and follows May’s big 6%+ drop in stocks.

FINSUM: In our view, it is a particularly hard time to make a call on markets. Things do seem to be worsening in the data, but most of the negativity is colored by the trade war, which could conceivably end abruptly. That hint of positivity aside, it seems best to be positioned defensively.

(San Francisco)

All of the last year’s fear of anti-trust regulation seem to be coming true. Tech shares dropped yesterday on news that top US regulators had divvied up jurisdiction of tech giants for a forthcoming probe. The Department of Justice and the Federal Trade Commission, the agencies in charge of anti-trust, have decided who will manage what as they prepare to launch an anti-trust probe into Facebook, Amazon, Google, and Apple. It is still unclear exactly what will be investigated, as well as the scope of the probe. After the market closed, the US House of Representatives also announced its own investigation. The tumble in shares sent Google into a bear market.

FINSUM: This has been looming for some time, but now looks like a reality. This could be the start of some very serious volatility and changes for the FANGs.