(New York)

Bloomberg has published a thoughtful and interesting article arguing that there is a little-known sign in the market that prices are likely to fall. This year’s trading activity has been in major contrast to the last few years, and not just because of more volatility. Rather retail investors have come back en masse. In the March of this year, retail trades from TD Ameritrade’s and E*Trade’s platforms accounted for more than 25% of all trading volume. Historically, investors coming back to the market is such fashion has been negative for prices.

FINSUM: If you combine this view with the reality that stocks have not really gained despite the best earnings season in many years, you do start to worry the bottom might be ready to fall out.

(New York)

There has been a lot of fear about bonds lately. Higher inflation readings, a more hawkish Fed, and 3% Treasury yields have gotten investors nervous. However, bonds might be in for some big gains, especially Treasuries. The reason why is that there is a huge pile of short positons held by hedge funds who are betting against Treasuries. Yet, yields have been stubborn over the last couple of weeks and now it appears the positon might be broken by a strong short squeeze that would send prices higher.

FINSUM: We had not paid much attention to this, but given the weak US inflation reading that has just been released, this may play out very soon.

(New York)

The industry has been talking about it for years, but now it appears to be happening in earnest—advisors are finally targeting younger clients in force. While Baby Boomers dominate the industry’s AUM right now, 42% of firms say they are actively changing their marketing and networking to attract Gen Xers and Millennials. TD Ameritrade comments that “In just five years, RIAs expect 41% of their clients to be Gen Xers or millennials. This should be a wake up call to those who think that Next Gen wealth is literally still a generation away”.

FINSUM: The tide is really starting to shift and it is going to happen faster and faster over the next few years as Baby Boomers age and the wealth of the young grows.

(San Francisco)

Sometimes a story is just so out there that you have to cover it, and today that story is about Uber. Last year a self-driving taxi fleet sounded progressive, but Uber announced this week that it is planning to launch a flying taxi service by 2023. The company is planning to work with NASA on an urban air traffic control system and it debuted a vision of greatly scaling up aircraft manufacturing. Uber believes airplanes could be built with such scale that the cost of a commute in a flying tax would be the same cost as their ground transportation today.

FINSUM: This is quite an ambitious vision! We suspect it will take at least a decade longer to achieve this plan, but it would certainly be revolutionary.

(Washington)

President Trump made what may turn out to be a landmark move yesterday when he announced a proposal to reign in drug prices. The plan is a blueprint to drive down costs, and it transfers more power to health insurers to compete on pricing. Medicare is also involved, as the huge US health care service has a major influence on drug prices. Critics say the plan falls well short of what Trump promised during his campaign, when he said drug companies were “getting away with murder”.

FINSUM: We do not fully have the expertise to comment on the potential effectiveness of the plan, but it certainly seems a step in the right direction, and one in which drug company shareholders don’t need to be too worried.

(Washington)

One of the senior-most figures at the SEC, Michael Piwowar, who has been a commissioner for five years, has just announced he will step down from his post after July 7th. The resignation has massive implications for advisors because Piwowar has been a strong opponent of the DOL version of the fiduciary rule and has generally been very pro de-regulation. His stepping down will leave just four commissioners active, two of whom are Democrats. This means the new SEC version of the fiduciary rule, universally seen as more accommodating to the industry, might have some severe difficulties in getting approved, as the Democrats are likely to vote against its implementation.

FINSUM: So in order to alleviate this risk, the White House and Senate would need to move quickly to nominate and approve a new commissioner/s. Nonetheless, this remains a major risk.

(Washington)

The DOL made an announcement yesterday, telling the industry that it would temporarily suspend enforcement action of various parts of its fiduciary rule. The department said it “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules”.

FINSUM: This was largely expected given the DOL’s loss in the fifth circuit court, but evidently the wording of it came as a surprise.

(New York)

The market has become very fixated on higher rates and yields, with every investor nervous it will cause losses in their stock and bond portfolios. However, one Wall Streeter is saying fears are overblown, especially as it concerns how stocks lose on account of bonds. The logic is that stock P/E ratios never fully took account of ultra-low yields, so in effect, there is a cushion in stock prices against rising yields. Therefore, yields crossing 3% won’t necessarily cause any losses.

FINSUM: This is the “priced-in” logic of stock prices. We must say we do not agree. This kind of argument assumes that investors are being rational and have long memories, as well being agnostic of short-term changes in priority. We do not think the market is this impervious to fear.

(New York)

The financial media and the research side of Wall Street both seem to have completely succumbed to bearishness over the last couple months. Alongside rising rates, inflation, and yields, as well as some signals about the potential end of the cycle, commentary has become decidedly negative. However, the CIO of Evercore Asset Management has just put out a contrary opinion, arguing that stocks are not overvalued and could return 7% for the next ten years. The crux of his thinking is that P/E ratios are not a good metric of valuation. Rather we should be looking at real earnings yield, which is yields minus inflation. By this metric, stocks are only at average valuations.

FINSUM: Basically this approach tries to take account of the fact that we are in a low-yield, low-inflation environment, and it does make some sense.

(Washington)

For all intents and purposes, the US government has just declared a trade war on China. Rightly or wrongly, President Trump’s list of demands for China to undertake on trade are so onerous that it is impossible they will acquiesce. The US seems to know this, but is drawing a line in the sand. Here is an example of the scope of the demands: “China is to reduce the US-China trade imbalance by $100bn in the 12 months beginning June 1 2018, and by another $100bn in the 12 months beginning June 1 2019”.

FINSUM: We have very mixed views about the new US protectionist approach. On the one hand we do feel the US has gotten the short straw on several trade deals, but on the other, we think this standoffishness could possibly damage the US economy (short-term), or worse, cause a geopolitical conflict.