(San Francisco)

Talk about comments coming right from the source. Microsoft CEO Satya Nadella went on the record this week telling the market that tech companies should “expect” regulation. Nadella walked through current areas of tech and regulations, like facial recognition or GDPR, and explained their implications for the industry. He said that “As tech becomes more and more pervasive, I think for all of us in the tech industry we should expect—whether it’s on privacy or on cybersecurity or even ethics or AI—government and regulatory bodies to take interest in it”.

FINSUM: We think the writing is on the wall that tech is going to face some form of regulation, especially given that the Trump administration is rather hard on the sector. The question is when, not if.

(New York)

Anyone who pays attention to the bond markets will know that there has been an extraordinary run up in BBB rated bonds since the Financial Crisis. From just $700 bn worth of bonds in 2008, to a whopping $3 tn now. Using the metaphor that such bonds, which are just one rung above junk, are like the dead trees and limbs in the forest before a fire, Barron’s is predicting big problems. The trigger is likely to be the next recession, which would cause many BBB bonds to fall down into the junk category. This would spark mandatory selling by many funds, leading to sharp losses for investors. What’s worse, such bonds, at an average yield of 4.3%, are not compensating investors for this risk, as they have only a 60 bp spread to A rated bonds.

FINSUM: There are bound to be a lot of fallen angels and losses in the next economic downturn. As one analyst summed it up, “With all this dry tinder lying around, it wouldn’t take much to set off a raging fire”.

(New York)

The current rate environment has put investors in a pickle. How does one protect short-term income needs while also protecting against interest rate risk? One important factor is to remember is that one can balance short-term losses by holding bonds to maturity, so stringing together groups of short-term bonds can be a solid risk-mitigating, but yield-maximizing strategy. There are a number of funds to look at to make managing the situation easier. These include the Lord Abbott Short Duration Income Fund (LDLFX), Transamerica short-term bond (ITAAX), and the Nuveen Short Duration High Yield Municipal bond (NVHIX).

FINSUM: It is a difficult fixed income environment right now, with corporate bonds broadly in the red for the year. A well-crafted and balanced strategy is a must, and given that short-term bonds currently have strong yields and less interest rate risk, they seem like the best bet.

(New York)

The US real estate market is in a worrying period. New builds, home sales, and inventory have all been showing weak signs for the last few months, and it seems to portend the start of a reversal in the market after a long run higher. This week will see if the current downward trend holds, or whether the data was an aberration. New data this week will cover new and existing home sales, which the market will be watching closely for signs of a downturn.

FINSUM: Housing and building-related stocks have suffered this year on a worsening outlook. Our instinct is that housing has a hit a wall and may be at the start of a correction.

(New York)

One would think that 2018 is the perfect time to boost lending to consumers. The economy is strong, the job market is robust, and things are generally humming along nicely. Think again, as US banks are worried about US consumer credit quality and are starting to reign in lending. Bad debt is rising and so is the amount of bad credit banks are having to swallow. Beyond just fundamentals, the competition to lend has made the market uber-competitive, which heightens the risks for lenders because of weaker terms.

FINSUM: Consumer credit is tightening its belt across the board as credit balloons and standards fall. We wonder how much this tightening might impact the economy over the next year.

(San Francisco)

The market has become very worried about tech valuations. Even with recent selloffs, tech stock prices are very rich. However, despite the broad fears, some fund managers are ditching the concerns, as they think the obsession with P/E ratios is short-sighted for tech. In particular, one manager says that he likes to think about how tech companies will look as mature businesses, and thus judging them by their current P/E ratios is unfair.

FINSUM: We agree that it is hard to assess tech stocks according to standard P/E ratios. They are growing much faster, have much higher margins, and have a brighter future than stocks in any other sector of their size. Accordingly, it is hard to contextualize their P/E ratios because there is no benchmark.

(Washington)

Late last week President Trump announced a new idea that would be a major change for US markets. Trump requested that the SEC look into whether the US should abolish the quarterly earnings reporting requirement. The president says he is hoping the US can move to twice-a-year reporting instead of the current model of reporting four times. He says he got guidance from top business leaders before his request and that he thinks it would improve the US’ business environment.

FINSUM: The big hope here is that by reporting earnings half-yearly, companies would be able to be more strategic in their focus and less obsessed with short-termism. We would welcome the change, but it would have some risks, and we hardly think a six-month focus is “long-term”.

(New York)

Pimco has just gone on the record warning that indicators of a recession are flashing worrying signs. Based on trends in the economy and markets, including inflation, Pimco says it is time for investors to adjust their portfolios. In order to play the looming recession, Pimco suggested five trades. These include: short-term corporate bonds, a basket of EM currencies (Finsum comment: ??), gold, large cap stocks over small, and alternative investments.

FINSUM: Wow, most of these are deeply contrarian (i.e. EM currencies, gold, and large caps). All three of those picks have major headwinds against them. The case against EM currencies is clear but why pick gold when rates are rising, the Dollar is strengthening, and investors have shown zero appetite despite all the volatility?

(New York)

The US real estate market has seen a string of bad news over the last few months, but many were hoping July housing starts would see a rebound. New data out shows that such a boost did not materialize, with housing starts underperforming expectations. The previous month’s reading was also downgraded by 13%. “Housing is the sole weak spot in the economy right now, and that’s probably not going to change”, according to one economist.

FINSUM: There is no near-term recovery in sight. We wonder if housing might be a leading indicator of a looming recession.

(Washington)

Some very interesting news about Tesla emerged yesterday. While it was already known that the SEC had subpoenaed Tesla over Elon Musk’s recent tweet about taking the company private, it emerged yesterday that the company was already the subject of an SEC investigation into whether it had misled investors. In particular, the SEC is probing whether Tesla misled the market with its Model 3 production forecasts. The actual production of vehicles last year was woefully short of the company’s forecasts.

FINSUM: Musk’s actual delivery of vehicles was just 10% or so of his initial forecast, which is likely what sparked the investigation. However, this is apparently a very difficult case for the SEC to prove, so it seems unlikely to amount to much.