(New York)

The junk bond sector feels like it is on the precipice right now. After years of great performance, valuations and yields are at lofty levels. At the same time, there has never been more BBB bonds, or bonds just one notch up from junk. All of that means the market looks fragile. However, one of the lesser discussed risks in the high yield market regards a sea-change in accounting practices. Just as with startups, the high yield sector has seen major growth in suspicious accounting practices, such as inflating EBITDA to make debt multiples look lower. Often times this is done on a highly speculative basis that misleads investors.

FINSUM: This is just one of the many growing risks in the high yield market. It seems like the SEC needs to crack down on this sort of creative accounting.

(New York)

One of the important elements of last year’s tax changes that has not been covered much by the mainstream financial press is the way in which the new tax code proves a big boon for REITs. That big gain is that the effective tax rate on REITs has been slashed from 37% to just 29.6%, a big move downward. One REIT industry expert summed up the changes this way, saying “Now, REITs have even more of an advantage over fixed-income products … Seventy percent of REIT returns have historically come from income, so any relative pickup in income is a big benefit for investors”.

FINSUM: This seems like a big help to REIT investors, and it couldn’t have arrived at a better time given that rate rises will inevitable hurt REITs a bit.

(New York)

US dividend stocks are in a curious, if tenuous, positon at the moment. They have done well recently, but rate rises seem poised to bring prices down. Overseas dividend stocks, however, are not in the same predicament, as the rate environment in many other parts of the world is more benign. Accordingly, here are six overseas dividend stocks to consider: Allianz (4.1%), Hang Lung Properties (5%), Heidelberg Cement (2.8%), Nestle (2.9%), Royal Dutch Shell (5.3%), and Sanofi (4.1%).

FINSUM: Not only are these stocks attractive because of the good yields and mild rate environment, but they mostly have very attractive P/E ratios as well.

(New York)

Several Wall Street analysts are warning that the US will fall into a recession in 2019. Some are even pegging the odds as high as 100%. The reason for the recession will be the increasingly aggressive Federal Reserve, which yesterday adopted a more hawkish stance on the economy and rates (with a more aggressive dot plot and the removal of “accommodative” from its policy statement). The current trade war is the other big factor which could push both the US and global economy into recession, as international trade is already contracting.

FINSUM: Forecasting the timing of the next recession seems futile to us. However, we will admit that the Fed adopting a more hawkish stance (and the fact that the funds rates is now higher than inflation) worries us.

(New York)

Morgan Stanley has just put out a warning, or perhaps better stated, a notice to investors. The bank is reminding the market that this year will likely have the lowest returns in a decade. The bank’s strategists say that “2018 is on track to have the lowest share of positive returns adjusted for inflation across 17 major asset classes since 2008”. The poor returns have been particularly true for those holding globally diversified portfolios. What’s worse, Morgan Stanley thinks returns are going to get worse because of rising rates. According to the bank “We’re big believers that real rates matter most for risk markets, as it’s the rate over and above inflation that matters most for discounting future cash flows … As ‘invincible’ as the U.S. equity market has been, it hasn’t had to confront a different rate regime”.

FINSUM: If you look internationally, this has been a terrible year for markets, and it does seem true that rising rates won’t help anything in the coming year.

(New York)

Something very interesting is happening on Wall Street. Just when US outperformance over global assets has been peaking, US analysts are urging clients to move their money into emerging markets. The catalyst for the recommendations is that the Fed’s tightening cycle is getting more intense, which means US equity values might be peaking before a downturn. That, coupled with currently weak emerging market valuations, means EMs seem to have better upside.

FINSUM: We see the argument, but must disagree. There are two reasons why. Firstly, emerging markets have tended to do badly in periods of rising US rates, and secondly, because EMs will feel the pinch of the trade war, which means their economies are likely to be hurt even more than the US’.

(Washington)

The market took a big hit yesterday following the Fed’s expected rate hike. However, it was not the rate hike itself that caused the problems, rather it was the Fed’s statement and its dot plot. The Fed removed the word “accommodative” (regarding its policy) from its statement, which combined with its more hawkish dot plot, got investors worried. The Fed funds rate is now higher than inflation for the first time in several years. Stock markets fell on the news, with the Dow dropping 0.4%.

FINSUM: The Fed getting more hawkish should make investors worried, as the more restrictive Fed policy becomes, the sooner (and more likely) a recession will arrive.

(New York)

Amazon has announced the launch of a new store in New York city. So far, most of Amazon’s brick and mortar aspirations have been unfulfilled, with only a handful of physical stores across the country. However, the company will launch a new store in New York that will feature the top-ranked and trending items from its website. The company is seeking to offer the items New Yorkers buy most directly in its store. Everything in the store will be a 4-star or higher item. The store is called 4-star and will launch in the SoHo neighborhood of Manhattan today.

FINSUM: We think this is an excellent theme for Amazon stores and could be a concept for the company to launch many more physical outlets across the country.

(Chicago)

McDonalds is taking one of its boldest menu steps in years. The company has announced that it will eliminate all artificial ingredients from its burgers. Ingredients such as calcium propionate and sodium benzoate will disappear from the Quarter Pounder and Big Mac as McDonalds tries to project a more healthy image. The move follows efforts earlier this year to use fresh beef and natural beta carotene in its burgers. Since the changes, many menu items have seen sales increases.

FINSUM: The healthy food movement has reached a significant mass and we think these changes were ultimately a must for the company.

(New York)

US stocks have simply blown away the world this year. The S&P 500 is up around 9% while global shares are down 6%. The outperformance has been driven by a supportive tax policy, great economic performance, and a pro-business attitude out of the White House. However, JP Morgan says that the outperformance of US stocks relative to the globe is set to stop. US stocks and global ones will move towards parity in coming quarters as the stimuli helping American shares wanes. The parity will not come from global stocks catching up as much as the US will stagnate or fall.

FINSUM: When we take everything into account right now, we are feeling increasingly positive about the the next year. We think Democrats winning the House would be favorable for shares as it would calm money managers’ worries about some of the GOPs more extreme positions (e.g. trade war). This could bring on a “goldilocks” scenario, where the economic and political conditions are just right for stocks to move strongly higher.