(New York)

Investors beware, the market might be losing its nerve. Back and forth markets for most of this year appear to be making investors very wary, as the market is fleeing to cash. Investor holdings in “cash sanctuaries”, which include money market funds, are approaching 2%, the highest level seen in a decade. According to one prominent asset manager “Cash is an asset class once again”. According to Crane’s, “Money funds were on a starvation diet with yields at zero percent … Rate increases have given them a stay of execution”.

FINSUM: Aside from volatility, the other big driver is that yields on money market funds have risen considerable alongside the Fed hikes, making them much more attractive.

(New York)

Is value dead? That question has been asked for years now as value stock have chronically underperformed their growth oriented peers. Even now investors look first and foremost to technology (especially FAANG) stocks, prioritizing the richly valued, but quickly growing companies. However, value may be ready to turn around, says Barron’s. One of the big reasons why is that loose monetary conditions, which have held value stocks back, are finally tightening. Some even think value might really soar, as it is exceedingly rare for strong value stocks to be trading at such low P/E ratios this late in a bull market.

FINSUM: We think the biggest problem facing value stocks has been that everyone senses technology is coming to dominate all aspects of life, the economy included. This has meant that investing in tech companies is seen as the way of the future, and that one is foolish not to. It is going to take time, and maybe some cataclysm (e.g. a big regulatory crack down on tech) to disabuse them of that notion.

(New York)

In what comes as an interesting article, Bloomberg has published a piece arguing that instead of the status quo, asset managers should be paying investors for the chance to manage their money. The idea comes from Mercer, a top asset management consultant, and argues that to overcome the problems plaguing active management, investors should agree to pay out a fixed percentage return to investors over a certain timeframe, with the manager keeping any excess that is produced. “We keep getting told by managers that their value creation process tends to be longer than the typical horizon of an investor … This in turn leads to short-termism. Under the new model their investment time horizon can be aligned to their value creation process”.

FINSUM: This would be a total reconceptualization of the way the industry works. The big question is how the investor would get paid if the manager fails to meet the minimum payout. It sounds like third party insurers would have to take part. This is a very interesting proposition.

(Washington)

We urge our readers in strong terms to not get their hopes too high about the new SEC “fiduciary rule”. Putting that in quotes was at the heart of why the rule looks very likely to suffer setbacks and ultimately fail to become an industry standard. The rule is already facing an onslaught of attacks, both externally and internally by the SEC’s own commissioners. The rule has been lambasted as not being a true fiduciary rule, and the long and arduous rulemaking process, combined with a formal public commentary period, mean the rule seems likely to fail.

FINSUM: We don’t think there is any way this rule will turn into an industry standard looking anything like it currently does. We suspect it is time to go back to the drawing board.

(New York)

JP Morgan has just put out a guide which may be very interesting to investors—a manual for how to navigate the end of easy money. The bank thinks the equity market’s response to earnings has been very worrisome lately, and they are very bearish. The bank recommends that in 2019, investors go underweight equities and long gold and long duration as the economic cycle ends and real rates “collapse”.

FINSUM: This is an extraordinarily bearish outlook from JP Morgan, and it seems mostly dictated by weakness in equity prices lately. Investors should take this warning seriously.

(New York)

Something very interesting is going on in the junk bond market—things are good. The market for risky corporate debt has seen a resurgence over the last couple of months, and even as benchmark yields have risen, returns for junk bonds have been positive. The spread between high yield and benchmark Treasuries has shrunk from 369 basis points to just 333 basis points since February 9th.

FINSUM: This is a very important move as it it is a positive sign about the business cycle. Junk bonds and other credits have often been leading indicators, and the fact that investors are still showing faith in them is very positive.

(Washington)

One of the elements that has been weighing on technology companies this spring has been the threat of regulations. To judge that risk, Barron’s interviewed a number of Wall Street Analysts to get their views. Overall, the consensus was that future regulatory risk for fangs was muted. One managing director for Canacord Genuity commented that, “Facebook management addressed important data and privacy issues head-on, outlining new disclosure standards for political ads and hiring aggressively against privacy initiatives.…For the time being, the worst is very likely behind Facebook stock.”

FINSUM: We tend to agree here. We do not see the government taking major action, and the worst seems to be behind tech companies, for now.

(New York)

Barron’s has just put out a strong warning telling investors that they should stay away from long-term bonds. If you step back from the day-to-day movements, the picture is clearly that yields are moving higher. For instance, they started April at 2.7% and are now at 3% for the ten-year. The longer the bond, the more its value is affected by yield movements, a concept called “duration risk”. Therefore, when markets are this volatile, it is best to stick to the short end of the curve.

FINSUM: Most advisors will know that investors have been pouring money into short-term bonds, probably because they seem like a great buy. For instance, two-year Treasuries are yielding around 2.5%.

(New York)

Talk about a mega merger. In a deal with huge regulatory implications, T-Mobile announced an acquisition of Sprint for $26.5 bn. The deal would be all stock, and is a bet that the 3rd and 4th largest mobile providers in the US can team up to create a rival to the leading players, AT&T and Verizon. The two companies, which are owned by Deutsche Telekom and SoftGroup, respectively, tried to merge 5 months ago, but the deal collapsed.

FINSUM: This is a big play to capture the next generation of data, or 5G, which is being heralded as a sort of holy grail for mobile providers.

(Washington)

Just when you thought it was all over, it isn’t. The DOL technically only has until Monday to try to appeal its court loss in March, but one of the risk factors cited in the case just came to pass. The AARP, a big proponent of the DOL’s version of the fiduciary rule, has just asked the courts if it can step in as the defendant in the 5th circuit court case the DOL has already lost. It is doing so in an attempt to appeal the verdict and keep the rule alive given the agency’s reticence to ask for an appeal itself. According to the AARP, “AARP is not giving up on our fight to make sure that hard-earned retirement savings have strong protections from conflicts and hidden fees”.

FINSUM: This is one of the eventualities we warned about. We would not be surprised if this attempt was successful and the DOL fiduciary rule saga went on. In reality, the AARP was probably just waiting to see how strong the SEC’s proposals were before launching this effort.