(New York)

The FT ran an article today looking at the tech meltdown from an angle no one else is, and it is definitely worth paying attention to. Their worry is how ETF issuers are going to be able to offload shares of tech giants quickly enough to match benchmarks. For instance, Facebook lost $120 bn of market cap last week, and it will be difficult to source enough buyers to unload all that stock without roiling the market further. The overall point of the article is that trouble in tech might cause the dreaded “liquidity mismatch” issue in ETFs.

FINSUM: It seems like this problem is already rectified for last week’s fall, but the overarching argument is that any falls in FAANG stock prices are going to be exacerbated by large amounts of forced ETF selling. This could explain why the losses have been so steep.

(Washington)

In what could come as very welcome news for investors across all asset classes, Fed Chief Powell has indicated that the Fed may take a break from hikes for a while. The question is when this pause in hikes will occur, and the Fed is debating this internally. The central is expected to introduce the words “for now” in regards to its plan for near-term hikes, a new phrase that signals conditionality. According to a former Fed economist, “Given that there’s no visible inflation threat -- not in the data and not in the FOMC forecasts -- it makes sense to inject conditionality on future moves”.

FINSUM: We hate analyzing Fed speak, but a pause in hikes seems like a good idea to us. With inflation low, there is no reason for the Fed to forcefully invert the yield curve and cause a recession.

(Washington)

The Trump administration is exploring a new $100 bn tax cut for Americans. The plan, which is designed to potentially bypass Congress, will try to use the Treasury Department’s own power to enact the cut. The core idea of the cut is to allow investors to account for inflation when calculating capital gains. What that effectively means is that investors could walk up their basis in shares as time progresses, minimizing the taxable portion of their gains. The cuts are far from final, as Treasury head Mnuchin says he is not even sure if the Treasury has the authority to do so. Mnuchin commented on the cuts that “We are studying that internally, and we are also studying the economic costs and the impact on growth”.

FINSUM: This cut makes logical sense to us, but there is already backlash in the media that this is a major gift only to America’s wealthy.

(New York)

The idea of bitcoin being a 21st century version of gold, a digital value store for the next generation, has become prevalent. However, Barron’s argues, and we second, the idea that Bitcoin can never be gold. The idea comes from a new paper out of the University of Chicago. The core reason why?: It is simply not as secure. If you pay close attention to the headlines, Bitcoin is being hacked and stolen left and right. Even worse, the more valuable Bitcoin becomes, the more it is stolen. The same cannot be said for gold.

FINSUM: The paper argues that bitcoin will never play more than a “bit role” in the global financial system because of its fundamental vulnerability to theft. It sounds like the cryptocurrency needs a digital Fort Knox.

(New York)

There has been a lot of consternation over markets this year, and with good reason. Between a trade war and rising rates, there has been a good deal to be nervous about. But in the last few weeks, something definitely changed, as exemplified by the Dow just recording its best month since January. Worries about the trade war have abated in the last couple of weeks, but the big question is whether recent gains are sustainable.

FINSUM: So on the question of sustainability of gains, big banks like Morgan Stanley, Citi, and Goldman Sachs have indicated this week that they think markets are destined for a near term correction. We aren’t so sure. We are suspicious of how prices have risen, but in this instance we are drawn to the old idea that markets love to climb a wall of worry.

(New York)

Just a day after Citi and Goldman Sachs warned of a market correction, Morgan Stanley has gone on the record with an even more stark warning. The bank says that an even stronger correction than February is looming and that the selloff is is imminent and has “just begun”. MS says that we are in the midst of a “rolling bear market”, and that almost every sector has been de-rated. Investors are unprepared for the big losses in tech, and the market has little to look forward to. Morgan Stanley says the drop will be bigger than earlier this year “if it’s centered on Tech, Consumer Discretionary, and small caps, as we expect”.

FINSUM: This is an even more stern warning than what we ran yesterday, and more specific too. Tech is already having a meltdown, but what really caught our eye was the threat to small caps, which have been on a great run.

(New York)

A lot of worries have been centered on the tech sector. While many are upset about the losses currently being felt, and even bigger fear is that tech might drag down the whole market. Well, Goldman Sachs says investors shouldn’t be too worried about that. The reason why is that while tech makes up a large part of the market’s current capitalization, earnings growth forecasts are much more broad-based, which will limit the fallout to the market as a whole. Goldman summarized their view this way, saying “From a fundamental perspective, narrow market leadership typically reflects narrow earnings strength, which is often a symptom of a weakening operating environment … Unlike past episodes of narrow market breadth, the earnings environment today appears healthy and broad-based”.

FINSUM: Goldman points out what should be a nice buffer, but we are more worried about the emotional, rather than rational, reaction of investors to falls in tech. That said, broad-based earnings strength is a good support.

(Tokyo)

Bond yields had been rising quickly in the US. The rise seemed to come out of nowhere for American investors, but most analysts said the quick jump in ten-year yields was due to a possible policy change by the BOJ to a less accommodative stance. However, the BOJ announced today that it would make only very minor changes and would remain highly loose in its monetary approach. The bank said it would not join other global central bank’s in tightening policy, and would leave rates ultra low for an extended period.

FINSUM: This is good news for bond investors, as Japanese tightening was interpreted as a major threat. This should help keep US yields looking attractive versus global yields, which will in turn keep them lower.

(San Francisco)

Apple’s earnings are always a big deal, but it is hard to remember a time where they were more important than right now. The tech sector, include the FAANGS, of which Apple is a member, have been getting routed. The Nasdaq has fallen strongly as a result of this, but the Dow, of which Apple is the only FAANG member, has held up reasonably well. The market is getting increasingly anxious about how tech stocks might affect the whole market, and how the sector performs seems like it is being taken as a bellwether for the economy. Thus, all now hinges on Apple.

FINSUM: If Apple puts in good earnings, then the market might stay strong and consider tech’s issues isolated. If Apple’s earnings are poor, it could lead to a broad selloff.

(New York)

With tech falling so strongly in recent days, a sense of panic is spreading across the media and markets, and it is all centered around one question—will the trouble in tech bring down the whole market? Tech accounts for a major part of the total capitalization of the market, and thus its ability to bring down stocks as a whole is strong. This seemed to be evidenced yesterday, as big falls in Netflix and Twitter conspired to bring all major indexes down significantly, though the Nasdaq fell the most. Now all eyes will turn to Apple, the only FAANG stock in the Dow, as it releases earnings.

FINSUM: Tech has accounted for so much of the price expansion and earnings growth of the market that it has an importance that extends even beyond these. Thus, we think a lot of investor sentiment about the whole market hinges on the performance of tech.