(New York)

One of the market’s big worries over the last few years has been centered around the idea that ETFs may have some sort of implosion the next time there is a Crisis, or at least some major volatility. However, S&P has just come out with a report saying that won’t be the case. The piece cites the numerous instances of when major volatility hit markets, including this past February, and ETFs held up just fine. That said, ETFs do have the potential to be distortive, and they have been implicated in some major flare ups, such as that linked to the CBOE Volatility Index this winter. S&P concluded that “There’s not much cause for concern for systemic risk … But we have been able to quantify that there’s some minimal impact”.

FINSUM: Our feeling is that equity ETFs should be fine. However, for less liquid fixed income and other low liquidity areas, ETFs could theoretically have a “liquidity mismatch” which might cause some issues.

(Houston)

The oil market is continuing to experience some deep tremors after a great year. The oil benchmark dropped another 1% yesterday, bringing prices down to their lowest level in three months. After months of rising on concerns of weak output, the market is plunging on the threat of oversupply, especially from Russia and OPEC countries. Additionally, the IEA put out a report saying it saw global oil demand falling, another factor which weighed on the market. In addition to worries about rising supply and weakening Chinese GDP, Commerzbank commented that “The unexpected increase in U.S. crude oil stocks by 629,000 barrels reported by the API is generating headwind, as is a sharp rise in Russian oil production”.

FINSUM: It is starting to feel like the tide might really be turning on the oil market, which has had a great 18 months.

(Washington)

Three of the foremost experts on Financial Crises—proven by their experience in 2008—have just weighed in on the threat of another Crisis. Ben Bernanke, Tim Geithner, and Hank Paulson have just commented in a joint press conference that while the US financial system has better barriers in place to prevent a crisis, its tool kit should one come is considerably weaker than in 2009. The main weaknesses cited were the massive increase in debt the government has experienced since the Crisis, giving it less room to bail out the market; and secondly, the deep political divisions which could more easily block any bipartisan action that may be necessary to save the financial system. Geithner summed it up this way, saying “Better defenses, weaker arsenal”.

FINSUM: This is some very good insight from the most experienced Crisis fighters out there. All their points sound quite reasonable to us.

(New York)

All the focus in the fixed income world is currently centered around whether the yield curve will invert. However, investors should know something—the yield never inverts in municipal bonds. That’s right, the muni yield curve has never inverted. The reason why being that short-term munis are always very rich, with small supply and high demand. However, looking at longer-term yields, munis look like a great buy. While the average ten-year muni yield is only 2.43% versus 2.86% for Treasuries, for any investor in a tax bracket above 15%, buying munis makes more sense.

FINSUM: The current spread between ten-year munis and Treasury bonds makes the former look like a smart purchase right now, especially because the market seems to be in healthy shape.

(New York)

The current fixed income environment is very challenging. The yield curve continues to flatten, and long-term yields have stalled, yet could move higher at any point. One great way to play the situation is through floating rate notes and funds. One floating rate fund that has been very successful is the American Beacon Sound Point Floating Rate Income, which has a 5.7% annualized return over the last five years. This year it has returned 4.5% versus Vanguard Total Bond Market Index’s -0.1%. The fund specializes in floating rate bank loans, so the higher rates go, the more those loans pay.

FINSUM: Floating rate notes and funds seem like a really good approach in the current environment, and this one might be an excellent choice.

(New York)

Most of the indicators that the media is discussing at the moment have to do with a recession (e.g. an inverted yield curve). But today, there is an important one that speaks directly to a bear market—flows in pension funds, insurers, and sovereign wealth funds. There is a combination of factors happening which shows markets have reached the end of this cycle. On the one hand, pension funds and insurers are pulling money out of public markets in order to chase private investments (e.g. real estate and infrastructure). But at the same time, the world’s largest sovereign wealth funds are now pulling out of private market investments because there is too much money chasing too few deals. In other words, valuations have gotten too high everywhere and some of the world’s biggest investors are moving into cash.

FINSUM: When the world’s biggest investors are getting out of both public and private markets, it seems to indicate that the end of the market cycle is near. That said, this bull market has revived itself many times.

(Houston)

The oil market has been doing very well for the last year and a half or so, and has performed especially strongly in 2018, outperforming every major asset class. However, US oil prices fell over 4% yesterday on growing fears of a boost in supply, following a 5% drop last Wednesday. Most of the gains in the market over the last 18 months have been because of coordinated supply cuts by world oil powers. However, while there still are some supply constraint issues on the table (e.g. US sanctions on Iran), the increasing worry is that production may rise more than expected, which would bring prices back down. Further, the US is indicating it may start to use some of its strategic oil reserves in order to avoid another sharp move higher in prices.

FINSUM: To be honest, we have been surprised by how well OPEC has been able to hold the output cut alliance together, so we really should not doubt their ability to continue to do so. That said, we do see at least a plateau coming in prices.

(Washington)

President Trump faced nothing short of public and political outrage in the US yesterday, after he essentially sided with Russia’s view of the 2016 election meddling scandal. When asked about Russia’ alleged meddling in the election, Trump insinuated that he believed Putin’s side of the story more than that of US intelligence agencies (though he did not say this outright). That sparked widespread condemnation from political foes and allies alike.

FINSUM: Whatever you think of Trump’s comments, most might agree that these are some of his most provocative and risky comments yet. The reason being that appearing to “side” with Russia might undermine some of his own nationalist voter base.

(New York)

US financial shares might be in for a quick ride higher. Bank of America’s earnings came in 33% higher than last year, leading to a blowout for the sector. The news followed strong earnings from JP Morgan and Citi. BAML’s shares rose over 4% on the news with one analyst commenting that the numbers were “almost all you could have hoped for”. Rising interest rates were a key factor in the increasing earnings, as banks earned more from net interest margins.

FINSUM: These are great numbers, but they may only be temporary. Consumers have not yet started demanding higher interest payments on savings, but once they do (and we think they will), then banks’ net interest margins will start shrinking again.

(Washington)

Something very odd has been going on in markets for the last few weeks—investors are completely tuning out politics. The political situation both domestically and internationally has grown steadily worse in recent weeks. The US has a growing trade war with China, Brexit is a complete mess, Trump is meddling with allies etc., yet markets continue to move higher. Even emerging markets have rallied.

FINSUM: On top of politics, recession fears are also growing. Accordingly, it is slightly concerning markets are rising. Markets have learned to not take Trump’s comments too seriously, but that lack of sensitivity might be serving investors poorly right now. The Wall Street Journal says it best: “Markets are notoriously bad at pricing changes in the political weather until they are forced to”.