Category: Markets

(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the “Balanced” section)

Effective as of January 3, 2018 in the European Union, the Markets in Financial Instruments Directive (MiFID) II is a legislative framework that builds upon MiFID I (put into force on November 1, 2007) to regulate financial markets in the EU and to improve protections for investors. MiFID II covers nearly all aspects of financial investment and trading affecting nearly all financial professionals within the EU. A key element of MiFID II is the unbundling of research costs from trading/execution costs. Traditionally and to a large extent currently in the U.S., institutional money managers received access to the investment research of Wall Street brokerage firms as part of doing business with the firm, oftentimes via directing trading activity through such firms. MiFID II requires fund managers in the EU to either pay for research themselves or to set up a research budget account, where the budget has been agreed with the client. 

MiFID II, however, is not compatible with existing U.S. SEC regulations, which prohibits funds from paying cash to U.S. brokers for investment research. This has created some conflict and confusion among investment managers, particularly those with operations that fall under the EU directive. In 2017, the SEC issued three no-action letters allowing U.S. broker dealers to comply with certain MiFID II research unbundling requirements when they are doing business with European investment managers. This relief expires in July 2020.

(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the “Balanced” section)

Washington lawmakers have initiated an antitrust probe into FAANG and other big tech companies in order to review problematic practices relating to unfair competition and anti-consumer actions. The FAANG stocks; Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google’s parent company Alphabet (GOOG, GOOGL), have previously maintained dominance in the market. The break up of these major tech companies may provide more value to shareholders as smaller entities.

Active vs Passive Investing: Is there Still a Place for Stock Pickers?

(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the “Balanced” section)

At some point in 2019, the market share of passive funds will top 50%, marking an inflection point in the active versus passive debate. Since the end of 2006, investors have withdrawn approximately $1.2 trillion from actively managed U.S. equity mutual funds and have allocated some $1.4 trillion to U.S. equity index funds and exchange traded funds (ETFs). At the end of 2018, mutual funds and ETFs that passively track indexes held 48% of market assets. By definition, active portfolio management focuses on outperforming the market compared to a specific benchmark, while passive portfolio management aims to mimic the investment holdings of a particular index. But, as we shall see, the line between passive and active investing is not black and white.

Who benefits from stock repurchases, the investors or the executives?

(Note: companies that could be
impacted by the content of this article are listed at the base of the story
(desktop version). This article uses third-party references to provide a
bullish, bearish and balanced point of view; sources listed in the
“Balanced” section)

Stock buybacks are on the rise and there are concerns over the effectiveness. It is even becoming a Political issue. Share buybacks, also known as stock repurchases, are when corporations purchase its own shares in the open stock market, reducing the total number of shares outstanding. The result of the buyback could increase earnings per share and increase return on equity, possibly increasing the stock price. 2018 was an all-time, record year for buybacks, with $1.1 trillion in announcements and some $800 billion repurchased during the year. Reasons have been postulated about why the pace of buybacks has increased over the years, including the generation of significant free cash flow by companies, muted organic investment opportunities, a lack of accretive acquisitions, as a means of boosting EPS by reducing the share count. Notably, stock repurchases were illegal until 1982 and Congress is looking at curbing the exercise as a means of narrowing the growing income inequality in America and advocating an element of social responsibility. Senators Charles Schumer and Bernie Sanders penned an op-ed in the New York Times arguing that, “corporate boardrooms have become obsessed with maximizing only shareholder earnings to the detriment of workers.” The pair suggest they will introduce legislation to limit buybacks unless companies meet certain conditions, including a $15 per hour minimum wage, providing workers with decent pensions, and solid health benefits, among other things.

The case for high-yield bond investing.

(Note: related companies are at base of the story and all the sources
listed in the “Balanced” section)

High-yield bonds, once thought of as appropriate only for sophisticated investors or bond investment houses, have become more commonplace in recent years with the spread of high-yield bond ETFs.  Through these ETFs, individual investors can have a diversified exposure to an investment class with characteristics of both bonds and equities.  But investing in high-yield bonds is not for the faint of heart.  High-yield bonds performed poorly in 2018 causing the spread between junk bonds and treasuries to widen.  This potential for higher return begs the question:

Is now a good time to invest in high-yield bonds?

The Fed raised its rates, now what?

(Note: all the sources listed in the “Balanced” section) 

In December, 2018, the Federal Reserve raised its benchmark Federal Fund rates 0.25% to a targeted level of 2.25-2.50%.  The increase marks the ninth time it’s raised rates since 2015 and the fourth time in 2018.  The Fed took a slightly more dovish approach indicating that it now expects two additional rate hikes in 2019, down from three, and described a neutral level to be 2.8%, which is down from 3.0%. 

Although the rate increase was largely expected, the Dow closed more than 350 points in the red after the afternoon announcement.  The rate increase is being criticized by many political and economic pundits.  So, is the Fed being overly cautious in raising rates, or are rate increases needed to prevent the economy from overheating? 

Time for Gold to Shine?

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Gold investors remember the good old days, the period from 2001 to 2011 when gold prices climbed 475% from $272 per ounce at the end of 2000 to $1,563 per ounce at the end of 2011.  During that period, gold reached a low of $255 per ounce, peaked at $1,901 and averaged $705 per ounce. The key drivers for the “Gold Rush” were:  1) selling among central banks abated, 2) gold production was constrained, 3) new investment vehicles, such as exchange-traded funds, made it easier to invest in gold, and 4) the U.S. dollar weakened during much of the period.  Since that time, gold prices have languished and seem to be stuck in a trading range for the past 4 years between $1,051 and $1,366.   
During the first three quarters of 2018, the price of gold declined 8.5% to $1,191.  After a 1.7% increase during the first quarter that provided a glimmer of hope, gold prices declined 5.4% and 4.9% during the second and third quarters, respectively.  According to the World Gold Council, third quarter gold demand grew less than 1% on a year-over-year basis to 664.3 tonnes. While bar and coin demand increased 28%, central bank demand increased 22% and jewelry demand increased 6%, outflows in gold-backed ETFs offset much of this growth. ¹
During the fourth quarter through November 14, gold prices rose 1.6% to close at $1,211 per ounce.  Gold’s strength at the beginning of the fourth quarter may be attributed to increased financial market volatility driven by geopolitical tensions and concerns about domestic and global economic growth.  Additionally, reports that central banks may increase purchases of gold, especially among those representing emerging markets, may have provided a boost to investor sentiment.  In the comparable time frame, the performance of the broader market indices was volatile with the S&P 500 posting a 7.3% decline during the period.  Gold may have performed its role as a “safe-haven” investment.
Gold investors may be wondering if the promising start to the fourth quarter will signal continued gains for gold or will it turn into a head fake?