For a supposedly pro-business GOPer to take a stand that attacks the country's financial center is remarkable. » Read More
The Republican Party is going after the big banks.
As the GOP convention gets under way in Cleveland, a top adviser to presumptive nominee Donald Trump said the party wants to revive the Glass-Steagall Act, Depression-era legislation that helped prevent big bank "supermarkets" but which was repealed in 1999.
Critics of the banking industry believe the repeal created too-big-to-fail institutions that required a massive government bailout when the financial crisis exploded in 2008. The repeal often is cited as a cause of the crisis, even though two of the investment banks at the core of the crisis, Lehman Brothers and Bear Stearns, were unaffected by the act's prohibition of combining investment and commercial banks.
"We believe the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her," Trump campaign manger Paul Manafort told reporters, according to an account in The Hill. "We are supporting the small banks and Main Street."
Manafort said the reintroduction of Glass-Steagall will be included in the party platform. Democrats likely will follow suit.
Trump also has been critical of other banking reform measures like the Dodd-Frank law.
Wall Street has targeted much greater campaign funds to Trumps' opponent, Hillary Clinton, who has received $32.5 million from the securities and investment industry, according to Open Secrets.
Friday's ruling that Herbalife effectively is not a Ponzi scheme adds another layer to an already brutal year for hedge fund titan Bill Ackman.
The Pershing Square Capital chief has had a long-standing and very public short position on the dietary supplement company. He already had been sustaining major losses on the bet, but the Federal Trade Commission ruling is the sharpest blow yet. Though the commission found much fault with the way Herbalife operates, it stopped short of the "pyramid scheme" tag at Ackman has alleged in public statements and video presentations.
UPDATE: Despite the huge losses he has sustained on the bet against Herbalife, Ackman remained steadfast Friday after the ruling. He said the commission ruling puts intense pressure on the company to reform its practices, in particular a provision that distributors are only compensated for "profitable retail sales" and not for recruiting or buying products.
"In light of the fact that the FTC found that Herbalife distributors make little or no profit, or even lose money from retailing Herbalife products, there are no longer any meaningful incentives to become or remain an Herbalife distributor," Ackman said in a statement.
"We expect that once Herbalife's business restructuring is fully implemented, these fundamental structural changes will cause the pyramid to collapse as top distributors and others take their downlines elsewhere or otherwise quit the business," he added.
Ackman during a Thursday appearance on CNBC that the short position was costing him in the area of $20 million a year, but he remained confident.
"I think this is going to end up with the government suing Herbalife for being a pyramid scheme, or Herbalife capitulating and agreeing to changes, and in either circumstance the stock's not going to be $60 a share," he said on the brodcast. "While certainly we've been a patient investor here, I think this is the most attractive Herbalife has been from a risk-reward standpoint, and that's why we stayed short," he added.
Corporate bond defaults have just crossed an ominous milestone.
Fully 100 companies have defaulted on debt, 50 percent more than for the same period in 2015 and the highest level since 2009, according to S&P Global Ratings.
Low oil and commodity prices, along with financial market volatility in the United States and abroad, have been the primary problems for the bond market this year. While the actual ratio of distressed issues is on the decline, the level of defaults has climbed.
While the defaults have been weighted heavily to the energy sector, analysts at S&P said there's no guarantee things will stay that way.
"Over the past year, we have seen a strong increase in both the number and percentage of defaults in the energy and natural resources sector," the agency said in a note. "So far, there has been little spillover effect into other sectors, but we are not ruling this out in the coming quarters."
The distressed level declined to 17.1 percent in June, the fourth consecutive monthly drop. Of the 300 issues categorized as distressed, 22 percent came from the energy sector.
Multiyear highs in defaults have failed to dampen investor appetite for corporate debt.
Trading volumes are up 33 percent for investment-grade bonds and 22 percent for high yield, according to Bank of America Merrill Lynch. Flows have been strong as well, with fixed-income funds pulling in $7.95 billion last week, the highest level since February 2015, BofAML also reported.
The hedge fund industry's storied 2-and-20 fee structure finally may be on its way out.
After years of underperformance and in the face of growing competition elsewhere for the deep-pocketed investor's dollar, hedge fund investors are clamoring for lower costs. The current structure, which charges 2 percent of assets annually and 20 percent of return, has long been a sticking point, but the demand for change has grown in recent years.
"Looking forward, you've seen this huge trend on average fee-collecting for hedge funds declining. That trend is strong and it's going to continue going forward," said Donald Steinbrugge, managing partner of Agecroft Partners, an industry marketing firm. "There's going to be pressure on new funds coming out to be in line more with a 1½-and-20 model than a 2-and-20 model."
That sentiment is reflected in a recent survey of managers in the $3 trillion industry.
Industry tracker Preqin found 52 percent reporting that investors have grown more negative about the industry over the last 12 months. Of the more than 270 fund managers who responded, 43 percent said clients are citing fee structure as the primary concern, up from 28 percent in December.
So much for 2016 being the year of the stock picker.
In fact, this has been the year investors wanted to do anything but try to pick stocks. Active fund managers had their worst first half ever, with fewer than one in five beating a basic market benchmark, according to data from Bank of America Merrill Lynch that go back to 2003.
Stock pickers were done in by two major factors: following the crowd and an uneven pattern of correlations among stocks. The 10 most-crowded stocks lagged the 10 least-owned by a whopping 18 percentage points, which BofAML called "an atypically high spread."
The opportunities are there for stock picking, but the pros still have faltered. Correlations, or the tendency of stocks to move up and down together, had been falling but rose in June to 35 percent, a number that is still low compared with levels of 90 percent or higher in recent years but high enough to be disruptive.
"This makes the environment more challenging for active managers when stocks are more correlated with one another," BofAML said in a note. The firm noted that dispersion, or the difference in performance between sectors, also has remained narrow, further limiting opportunities for stock picking.
"While intra-stock correlations had been trending down for most of the year, they spiked again in the period surrounding Brexit as macro came back into focus," the note said. "Long-short alpha opportunity also remained scarce, another challenge to stock pickers."
The active fund industry has been fighting to stave off a market trend where dollars have been flowing heavily into passive funds that track indexes rather than rely on individual stock picks. The $3 trillion global exchange-traded fund space took in $24.5 billion in June alone, part of a pattern that has seen $117.9 billion in inflows for 2016, according to State Street. That is behind trend compared with 2015, though ahead of the $13.2 trillion mutual fund industry, which saw outflows of $46.9 trillion in the first five months of the year, according to Investment Company Institute data.
Overall, just 18 percent of large-cap fund managers have beaten the Russell 1000 benchmark for 2016, with the number rising to 22 percent in June. The average fund fell 0.7 percent in the month. In the entire active fund industry, just 17.6 percent have topped the benchmark, BofAML said. The best year for active was 2007, in which 61 percent outperformed; the total was 41.3 percent in 2015.
Although it is widely expected there will be more pain than benefits stemming from June's monumental Brexit vote, there is one key business that may benefit: Italian banks.
There are a number of factors that converged at a key time to lend a hand to some of Europe's most troubled banks, S&P Global Ratings analysts said in a report.
They include rising skepticism of the European Union brewing in other nations and market turbulence generated from the U.K.'s vote to leave the union, and "could provide the Italian government with some bargaining power in these ongoing discussions," they said.
The last thing the EU can afford at this point is a growing exodus of key nations from its governing collective, and heading off a crisis in Italy would be a crucial step in preserving the union.
After wrestling with a multitude of thorny issues this year, investors finally are getting around to thinking about the presidential election. They may not get good news for the markets.
Surveys from multiple Wall Street firms show growing concern over how the race between presumptive nominees Hillary Clinton and Donald Trump will play out. By large numbers, Morgan Stanley clients believe the market is far too apathetic about the contest. UBS says its high net worth customers are hoarding cash, while Credit Suisse clients view the election as having "broad-based" market implications.
Up until now, investors have been focused primarily on three issues: global economic weakness, Britain's vote to leave the European Union and unpredictable Fed policy in which the U.S. central bank has backed away from its stated intentions to raise rates. However, the focus toward politics is growing.
Morgan Stanley specifically reports that 70 percent of 650 investors it surveyed say markets are "too sanguine about election risk," believing that the outcome could alter the landscape substantially.
The firm's analysts, though, aren't buying it, despite the contentious tone and a raft of proposals from both candidates that would, if enacted, cause significant shifts in fiscal policy.
Instead, Morgan Stanley's analysts envision the most likely scenario being "policy incrementalism," where either candidate will be hard-pressed to push major reforms through a divided Congress.
Wall Street's most prestigious banks are hoping for a strong rebound coming off of a terrible first quarter that prompted big banks to slash headcount to maintain profitability.
The good news is that things have gotten better; the bad news is that investors who are hoping for earnings numbers this week and next to top all of Wall Street's 2015 figures will likely be disappointed. Wall Street's major investment banks have under-performed compared to some of the top U.S. consumer banks so far this year.
"Quarter over quarter there has been a recovery in the capital markets area," Rafferty Capital vice president of equity research for financial services Dick Bove said.
The ETF industry has come a long way in 23 years, and indications are that it's only going to get bigger — a lot bigger.
If projections from a PwC survey released this week hold up, assets for exchange-traded funds will nearly triple in the U.S. and more than double globally over the next five years. That comes after a decade of rapid expansion for an industry that has benefited from low costs and an ever-increasing array of new products in hot demand by institutional investors, and increasingly by the retail crowd as well.
The survey of more than 60 firms in 2015 showed that global ETF assets likely are going to jump from $3 trillion to $8.2 trillion, with the U.S. portion of those assets moving from $2.3 trillion to at least $6.2 trillion by 2021.
"As investors get further educated on the product and how to use it and find different ways to use it, it's only going to help growth. There's a reasonable possibility those projections will be achieved," Bill Donahue, managing director with PwC's Asset Management Assurance Practice, said in an interview. "A number of folks we talked to were even more bullish on the growth opportunities."
ETFs are funds that trade like stocks but track indexes like the S&P 500 and various sectors, as well as multiple facets of the bond and commodities markets. They come in plain-vanilla forms, like the SPDR S&P 500 ETF Trust that tracks the broad index, as well as exotic offerings like double- and triple-leveraged funds that generate amplified returns from gains and losses in particular asset classes.
Though the $13.2 trillion mutual fund industry still dominates ETFs in asset size, the two industries are moving in opposite directions. Mutual funds, which are mostly actively managed and trade only after market hours, have actually seen a 3.6 percent decline in assets under management over the past 12 months, according to the Investment Company Institute. ETFs have grown 4.1 percent during the period.
Reasons typically cited for the industry's growth include low costs — fees are generally a fraction of what mutual funds charge — as well as tax advantages and liquidity.
However, the PwC survey found those factors to be significant but secondary:
"We were surprised related to the low-cost consideration. It's hard to go a day without seeing some firm lowering their fees to be competitive," Donahue said. "While tax efficiency is certainly a consideration, people obviously are refocusing on performance more so."
The reason anyone would buy negative-yielding debt is actually pretty simple: Because they have to.
They are central bankers looking to help promote economic growth. They are insurance companies, pension funds and money managers who have to match liabilities with assets. They are not, by and large, retail investors who are so afraid of risk that they're willing to pay for the privilege of lending money to a government.
Together, those buyers have helped build a nearly $12 trillion funnel of negative-yielding sovereign debt — unprecedented in world history.
Ostensibly, the global race to the bottom was supposed to stimulate growth, and it may just well keep pushing risk assets higher. But what awaits on the other side is adding to the worries of investing professionals.
"Ultimately, there will be a day of reckoning," said Erik Weisman, chief economist at MFS Investment Management. "When that will be remains very much to be seen."
Weisman spoke as the level of negative-yielding global debt was at $11.7 trillion, according to an estimate in late June by Fitch Ratings Service that no doubt would be higher now. Equity markets were in rally mode Monday, with major U.S. stock market averages touching record highs.