(Washington)

A senior wealth management expert, Scot MacKillop, has just run a piece in Wealth Management, arguing that the SEC has made a big mistake in the drafting of its new rule. The piece carefully employs various SEC statements to show that there is no sound logic for why the regulator created an entirely new two-tier structure for regulating brokers versus advisors. The piece makes clear the idea that if there is no fundamental difference between the service of brokers versus an advisor (something the SEC’s Clayton has said), then why should there be a regulatory difference. The SEC could have simply extended the rule from the Advisers Act of 1940 to also cover brokers.

FINSUM: It is true that simply extending the rules to brokers would have created the littlest amount of confusion amongst clients (one of the stated aims of the SEC). But at the same time, the nature of the relationship between brokers and advisors and their clients is different, so we understand the road the SEC took.

(Washington)

Trump has named his next choice for the Supreme Court—Brett Kavanaugh. Mr Kavanaugh has a long judicial history to review, and by all accounts, he looks like a very friendly pick both for Wall Street and wealth management. He has consistently sided with the interests of financial businesses in his rulings, including rulings against regulators like the SEC.

FINSUM: Obviously all the focus of the media is on Kavanaugh’s impact in a wider sense, but from a purely financial standpoint, he appears to be very anti-regulation.

(New York)

Whether investors like it or not, a lot of signs are currently pointing to a pending recession. The yield curve has flattened dramatically, and the trade war and hawkish Fed loom large. With that in mind, JP Morgan has put out a piece telling investors which currencies to own when a recession hits. According to Paul Meggyesi of JP Morgan, it will be best to own the US Dollar, Swiss France, Japanese Yen, and Singapore Dollar, and to get rid of any emerging market currencies. The Yen and Dollar look best, as in a deleveraging scenario, the whole world needs to buy back Dollars as it is the default funding currency.

FINSUM: No surprises here, but given how long it has been since a recession, it is always useful to revisit the logics and strategies to use during one.

(Detroit)

The auto industry has been the center of an ongoing technological battle. Not only are auto companies and tech businesses battling over self-driving vehicles, but there is another competition going on over how to power them electrically. With that in mind, here are four stocks to play the electric vehicle revolution; hint, you won’t know any of them. The four names are Aumann, Constellium, Sherritt International, and Visteon. All of the companies make some key component for electric vehicles, from batteries to copper wire installations.

FINSUM: Electric vehicles are one of those revolutions where it seems best to own the component makers rather than the actual carmakers. The big question for us is the horizon for appreciation, as the exact timeline for electric vehicles becoming mainstream still seems unclear.

(New York)

One of the really worrying parts of this year’s stock market is that buybacks are booming to new records, yet share prices remain flat. US companies are on pace to buy back $800 bn of stock this year, a figure which would even eclipse 2007’s bonanza. But worryingly, 57% of the more than 350 component companies that have bought shares back this year are trailing the S&P 500’s return. That is the highest share to fall short of the index since the 2008 Crisis.

FINSUM: Aside from the worries about share prices not responding, the other concerning factor is that companies are buying their shares back at very high prices, which seems like it might portend the end of the bull market.

(New York)

Everyone knows it has not been a good year for bonds, especially Treasuries and long-dated bonds. However, did you know that it is July and the bond market is on pace for its worst annual performance in a century? (yes you read that correctly). Global bonds are on pace for an annualized loss of 3.5%. So the question is how can one keep money in the market, but not get hammered. The answer is high-grade, short-term bond funds. Floating rate corporate loans and high-yield municipals seem like good areas of focus. Remember that shorter duration bonds are less susceptible to interest rate risk, which makes them safer as the Fed raises rates.

FINSUM: These picks seem spot on to us. Higher-yielding, shorter duration, and floating rates all appear to be good selections for the current environment.

(New York)

It may have become such a part of your daily routine that you don’t notice it, but new technologies have completely transformed the RIA business. “The revolution in fintech has allowed advisors to now do in minutes what it used to take them all day to do”, says Wealth Management. With all the portfolio management software, robos, and beyond, technology has changed the nature of the business more towards client engagement and offering insights and opinions. One small RIA says new technology means they can grow AUM 10x but only make two new hires.

FINSUM: Technology does seem to have changed the nature of the business by taking out much of the mechanical work. We haven’t seen anybody that is upset with the change.

(Houston)

Investors in oil need to be aware—the market is increasingly looking like a price surge is in store. Supply constraints are currently looming over the market, which has pushed prices to a 3.5 year high. Now, some are calling for a spike that would take oil to $150 or, almost double the level of now. The call comes from renowned research house Sanford Bernstein. The logic is that the oil price tumble over the last few years has caused “chronic underinvestment” in supply which will power the next “supercycle”. According to Bernstein, “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008”.

FINSUM: The view here seems sound. However, we must saw\y that there is one overarching logic that bothers us about this call—that the world has bountiful oil that has becoming ever cheaper to extract. That makes us think supply constraints could be overcome more quickly.

(Washington)

In a cruel twist of fate, guess who the biggest losers are when a country imposes tariffs on imports? Its own exporters. The reason why seems to be two-fold. Firstly, the tariffs on imports take cash away from foreign countries to buy exports. Secondly, such tariffs often lead to retaliations, which then shrink the size of exports (e.g. what is happening to Harley Davidson right now). The link has been well understood by economists for almost a century, but new research shows it concretely in trade flows. Overall, the trade balance does tend to improve, but exporters suffer significantly.

FINSUM: The problem is that trade wars are almost a zero sum game. That said, the US has a better bargaining position than usual in this one.

(New York)

We have been hearing it for a couple of months now—it is time for financial stocks to shine. Yet, financial shares are having a pretty poor year. The reason appears to be the flattened yield curve. However, a new academic study finds that it is not primarily the yield curve, but rather short-term rates alone that dictate most of financial share performance. The spread between government and corporate bonds is also a factor. Looking at historical performance of financials as compared to rates, it seems like financial shares are about 9% below their fair value.

FINSUM: As our readers will know, we are not fond of historically-driven strategies, but we do give this one credit in that it is finally a new way of looking at the situation in bank shares.