(Washington)

Advisors all across the country see a major flaw in the SEC rule. Fiduciaries feel they are being completely short-changed by the rule because the way the SEC has drafted it makes advisors and brokers look like identical twins, almost eliminating the distinction from a client’s perspective, according to the “Raise Your Voice” campaign, or a group of advisors pushing against the rule. “The proposed rules depict broker and advisers as essentially the same, like identical twins, but without identical investor protections”, says the spearhead of the campaign, continuing that “The legal, contractual, business and cultural differences dividing brokers and advisers are important and must be clearly stated and explained”. The campaign is encouraging advisors to make their opinions heard while the SEC comment period is open (it closes August 7th).

FINSUM: The SEC tried to make a rule that avoided over-delineating things as part of an effort to avoid loopholes, but this non-standard approach has made many quite angry. We suspect the rule will be edited significantly.

(New York)

Ten-year Treasuries are currently sitting at 2.85%, and according to Barron’s, they aren’t going anywhere. The reason why seems to be three part: a weak inflation outlook, trade war, and the combination of so-so growth and a hawkish Fed. All of this makes investors comfortable with sub-3% yields, and the bonds are being supported by their safe haven nature. Another problem is that US yields are much higher than in other developed countries, such as in Europe, keeping demand for Treasuries high.

FINSUM: We see longer end yields as pretty pinned at the moment. There is not much to be bullish about in the long term economic outlook, so it is hard to see why Treasuries would slide.

(San Francisco)

In what could be a major development for super power Apple, it was reported yesterday that the company was inching towards “Apple Prime”, or some sort of bundled service model similar to Amazon Prime. The company may combine news, magazine articles, and television into a single bundle. Some analysts say Apple needs to increase its service-based revenue, such as that built on monthly subscription fees, in order to continue to expand.

FINSUM: If Apple wants to keep growing at 5%, it needs to add the equivalent of a Fortune 200 company every year. That is a huge revenue goal, and this could be a way to do it.

(New York)

This might be a unique kind of bear market we have on our hands, at least according to Morgan Stanley. The bank’s chief US equity strategist says that this is a “kind of rolling bear market”. Continuing “We are not seeing an ’08 scenario where everything gets hit at once … it’s selectively hitting markets one by one and it’s a rolling sort of correction”. Since that seems to be the case, one good defensive sector to avoid turmoil might be US small caps, which are shielded from trade war and are benefiting from last year’s tax cuts.

FINSUM: We like this description of the kind of correction we are currently in. It might not be a single cataclysmic event that sends the market tumbling, but a series of blows that drives things down continuously.

(New York)

Losses on Bitcoin and other cryptocurrencies are reaching legendary proportions. Total losses on Bitcoin are now around 70% since its peak last December. The loss brings it close to the 78% decline in the Nasdaq seen during the Dotcom bubble. Many other coins have gone to essentially zero.

FINSUM: The Dotcom bubble is an interesting comparison. The reason why is that though prices were far too high, the market did call correctly that the internet would be hugely disruptive to industry and create very valuable businesses. Will the same happen with crypto, but ten years down the line?

(New York)

The flattening yield curve is an indicator of a recession and bear market to come. The last six US recessions have all been preceded by an inverted yield curve. Now it is happening again. The gap between two- and ten-year Treasuries was just 34 basis points last week, the lowest since 2007, or the eve of the worst American recession in almost 80 years. A few factors seem to be guiding the flattening. The first is the Fed’s bullish outlook on the economy and hawkishness on rates. The others are very weak inflation expectations over the long term as well as large demand for even modest long end yields, both of which have combined to keep ten-years pinned for some time now.

FINSUM: Yes a flattening yield curve is a bad sign, but remember that it takes, on average, several months (i.e. ~18 months) from when the yield curve inverts to when the economy actually goes into recession, with stocks historically continuing to rise along the way.

(New York)

Whether investors like it or not, it appears a real trade war has begun. While the US-China spat is getting the most headlines, including President Trump enacting blockages to Chinese investment into the US, we are also putting tariffs on other major trading partners like Canada and the EU. With this new reality taking hold, here are four ETFs that will thrive in the trade war. The first two are the Financial Sector SPDR and the SPDR S&P Regional Banking ETF because Financials are a “screaming buy” according to BNY Mellon Investment Management. Bank revenues are very healthy and the sector is insulated from trade war. The final choice is the Invesco S&P SmallCap Industrials, which will prosper as the economy expands and whose constituents have much lower international exposure versus their larger cap peers.

FINSUM: These seem like well-thought and diversified choices. We are slightly nervous about financial stocks at the moment because of the yield curve, but small caps definitely seem like an excellent choice.

(San Francisco)

Many investors are currently worried about the potential for a tech bubble. Between high valuations, data breaches, and a growing call for more regulation of the sector, it is easy to feel bearish. However, Barron’s is telling investors to not be too worried. The opinion is based on analysis of tech price movements and outperformance against a new Harvard study. Historically speaking, a bubble can be referred to as at least a 100 percentage point outperformance of a sector versus the market as a whole over a two-year period, followed by at least a 40% drop over the following two years. By that metric, the tech sector isn’t even close, as it has only outperformed the market by 36% over the last two years.

FINSUM: So this was a valuation-based study, but it could theoretically also be applied to individual stocks. When you do that, both Amazon and Netflix look vulnerable, as both have satisfied criteria for a bubble.

(Beijing)

If we think the trade war is being rough on our markets, just take a look at China. The country’s benchmark Shanghai Index is down 22% since its peak in January, and the yuan is dropping as well. In addition to Trump’s rhetoric and the threat of a trade war, China is also seeing weakening domestic economic data.

FINSUM: China is a lot more exposed to the trade war than the US. It has less broad and deep financial markets, so there are not as many places for investors to hide, and its economy is much more export-reliant, making it more vulnerable to tariffs.

(New York)

One of the biggest arguments of the junk bond market is this: one needs to be careful of junk bond indexes because they automatically skew investors to the companies with the most debt, making portfolios inherently more risky. The argument has a seemingly sound logic which is similar to the “skew” often referred to in equity ETFs. However, the reality is the complete opposite, as the companies with the most debt actually tend to be larger and have more conservative levels of leverage. The larger companies with the highest total debt in the high yield market tend to have lower default rates, so there is actually no correlative relationship between more debt and higher risk. The analysis is from S&P Global Market Intelligence.

FINSUM: This is very useful analysis, because the more debt = more risk fallacy is an easy-to-fall-into mental trap.