Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
Barron’s has published a very curious article. The piece takes a look at the market and spends a great deal of time showing how the current stock market is both technically and fundamentally sound. The economy is good, market momentum is strong, the rally has good breadth—the whole nine yards. Yet, its overall tone is that investors need to be worried, and prepare themselves for the inevitable downturn. One way to prepare would be to cut out the weakest stocks in your portfolio (likely all with gains, but less than others) as these are likely to fall harder than the best performing stocks. Additionally, consider cashing in some chips, and also, importantly, defining clearly when you will pull out, whether it is when a trend line is broken or at a 10% loss etc.
FINSUM: This market is very rich, but also incredibly hard to time (as always). However, there could still be a lot of gains before a correction arrives.
With the stock market as nuts as it is, there has been preciously little talk about the real estate market. While housing did somewhat dodge a bullet because interest deductions were not entirely done away with in the recent tax overhaul, some think the market is ripe for a big fall. By some indicators, the market is overheated, with hefty price gains and wide optimism, leading some to hear echoes of 2005. However, generational factors seem likely to bolster the market as Millennials age into home ownership and Baby Boomers sell their homes and move into assisted and planned communities.
FINSUM: The market probably won’t fall legitimately until we have another recession. However, given the fact that Millennials (the largest generation) are just entering the home buying age, it appears there will be robust demand for years.
The SEC has just made an announcement that those in financial industry, and beyond, were waiting for. That announcement was that the SEC has now all but grounded all hopes of having bitcoin ETFs. There has been a remarkable amount of hype about the chances of launching bitcoin ETFs in the hope of getting more mainstream investors involved in the asset class. However, the SEC dashed those hopes, saying “Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products”.
FINSUM: This was effectively an unsolicited warning not to try to shirk investor protection rules in efforts to create bitcoin ETFs. It looks like the SEC is taking a hard line here.
One of the big issues with the current tax plan is that it partially does away with state and local income tax deductions. In particular, it eliminates the ability to deduct state and local taxes above $10,000. That means personal taxes are set to rise for 13% of New Yorkers and 11% of California and New Jersey residents. However, states are already developing workarounds, such as replacing income tax with payroll tax or classifying state taxes as charitable donations.
FINSUM: Some say that the elimination of the deduction is unconstitutional. That will likely be fought out in court, but until then we imagine states will get very creative about this, especially as some of these states (like those mentioned) already pay in more to the federal government than they get back.
For the first time in half a century, Sweden is seriously prepping its country for the possibility of war. Growing national anxiety over the threat of Russia has led the government to send out 4.7m information pamphlets to all households informing them of what to do in the event of war. “All of society needs to be prepared for conflict, not just the military. We haven’t been using words such as total defence or high alert for 25-30 years or more. So the knowledge among citizens is very low”, says the government. The country is also considering whether it should join NATO.
FINSUM: The Baltics and Scandinavia are particularly exposed to possible Russian military aggression, so it makes sense they are nervous.
For those who aren’t aware, there have been some major sweeping changes in Saudi Arabia over the last few days. In a broad move to consolidate power, The Saudi Arabian king’s son has had dozens of princes throughout the country arrested. The arrests are being done as part of an anti-corruption drive by Prince Mohammed, but they are raising international eyebrows about the business climate in the country, especially as Prince Mohammed has said he will bring great reform. The big flurry of arrests also come just prior to the IPO of state oil company Saudi Aramco, and many think these moves will accelerate the outflows from Saudi assets which have already been occurring.
FINSUM: This seems like a very counterintuitive move from a prince who says he wants to reform the country and transition it away from reliance on the oil sector. Saudi Aramco just took a huge valuation hit.
Investors should be worried about US real estate. That is the conclusion of new data analyzing the US housing market. This worries are particularly high at the top end of the market, where a mountain of new luxury apartment inventory is about to hit the market at a time when vacancy rates are already rising. As a result of the glut, banks have been tightening credit lines to developers, and previously planned projects are stalled. Rental inflation also appears to have peaked, all of which has weighed on residential REITs.
FINSUM: This article paints a pretty bleak picture of US real estate, but on the flip side, the low end of the market seems like it will stay strong as first-time Millennial buyers keep things buoyant.
Source: Wall Street Journal
There has been A LOT of talk lately about a bond bear market. The idea is that rates are now in a secular rising cycle led by a hawkish Fed and rising inflation. The issue with that view is two-fold. Firstly, the bond market “experts” calling for the bear market are well-served if it comes true because of the strategies they use. And secondly, there isn’t really evidence of much inflation and the Fed is not looking overly hawkish. The one really worrying thing is that the economy has been performing well, which does lend itself to rising rates and more money flowing into risk assets.
FINSUM: We think all these worries are premature. We have a new Fed chief coming in which now one is sure about, and there just isn’t much inflation. Plus, there are tens of millions of people retiring who will need income investments.
The stock market is very highly priced at the moment and many think we are in the middle of a “melt up”. With that in mind, many are constantly on the lookout for warning signs that the market might be ready to tumble. Well, some are appearing. The big warning sign is that credit spreads are widening and implied volatility is picking up. It is very unusual for this to occur during a rally, as it usually happens during corrections. This warning comes on top of other red flags, such as stretched investor sentiment, and very positive earnings revisions.
FINSUM: The bond market has long been known for leading the stock market, and credit spreads are one of the indicators we tend to take very seriously. Definitely something to pay attention to.
Morgan Stanley’s wealth management can be described as nothing other than an unmitigated success in the fourth quarter. The numbers are in, and the data show that the unit is minting cash as the broker enjoys the transition from commission-based to fee-based accounts as provided by the fiduciary rule. Revenue increased a whopping 10% and the profit margin rose from under 10% the previous year to an eye-watering 26% in 2017.
FINSUM: We realize the importance of fiduciary duty, but how is a transition to much more expensive fee-based accounts—which are hugely boosting net profits to big firms—in the ultimate best interest of clients?
Oil prices have done very well over the last several months. Prices have been rising at the pump, making producers happier and consumers less so. However, gloomier days may lay ahead. The IEA thinks US shale oil output may soon surge on the back of higher prices. If this happens, it would undue the supply reduction OPEC’s cuts have created and send the market downward. Additionally, it would likely lead to an unwind of OPEC’s cuts, as if they were maintained, the reductions would be disproportionately benefitting OPEC’s competitors.
FINSUM: Oil prices have been doing better, but that does not change the fact that world has a fundamental oversupply of oil. This is not a problem by any means, but is a factor that will weigh on prices for years to come.
Call it a “silent killer”, but there is a big threat coming to US malls that many don’t see coming. While the big bout of retail bankruptcies in 2017 hit the industry hard, a less headline-grabbing, but more widespread issue might cause bigger issues in 2018. That issue is that smaller mall tenants are likely to simply not renew their leases. Smaller operators between the big anchor stores actually generate more revenue for malls, and a decrease in tenancy would be a big blow to mall revenue. Smaller operators are actually better indicators of retail health because their lease terms keep them on the lookout for greener pastures.
FINSUM: Mall REITs could be in for a rough time here. While little companies won’t get much press, this pending increase in vacancy rates could hit malls hard.
The new Apple iPhone X has gotten a lot of hype in media. Aside from all its new features, which are admittedly extensive, its ~50% price hike to $1,000 has received a great deal of attention. That price hike is testing a long-held economic principle which says that as prices for a good rise, demand falls. However, for the last 100 years there has been a view that rising prices could raise demand for certain goods because they amounted to “conspicuous consumption”, or saw their demand rise as prices did because owning them signaled wealth and status.
FINSUM: Apple’s new iPhone X, with a lofty $1,000 price tag, may just prove conspicuous consumption true.