It’ll Never Happen?

Like all financial institutions, Schwab’s stock price is subject to the changes in prevailing interest rates.  As rates fall, banks make less money as the spread between borrowing and lending (profit) shrinks. With inverted yield curves, falling yields, a global economic slowdown and the possibility of a recession in the forefront, financial institutions have been one of the weakest performing US sectors.

Schwab’s long-term chart below looks quite similar to many and reflects the current weakness in financial stocks. It has broken below its long-term uptrend line and sits right on the neckline of a bearish reversal head and shoulders topping pattern. If this pattern were to trigger and play out, its target is way down at T1, more than 50% below yesterday’s closing price. That is a huge drop and unless there is a major catastrophe, there is a low probability it comes to fruition. For it to occur, a catalyst (such as a full-blown trade war) triggering a global recession would need to be present. Anything is possible but unlikely to occur any time real soon. If never, it will go down in the books as another false signal breakdown. As of right now, it should be only viewed as a possibility (apparently an escalation to trade confrontation has been put on hold by POTUS until Dec 15th) but without question a concern all investors should be watching closely because global recessions are not selective in their damage to portfolios.

Coming to a Bank Near You?

A bank in Denmark is offering borrowers mortgages at a negative interest rate, effectively paying its customers to borrow money for a house purchase. Jyske Bank, Denmark's third-largest bank, said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%. To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000. It should be noted that even with a negative interest rate, banks often charge fees linked to the borrowing, which means homeowners could still pay back more.

Jyske Bank's negative rate is the latest in a series of extremely low interest offers from Danish banks to homeowners. It should also be noted that negative rates have been available on short-term mortgage bonds in Denmark since May.

It may seem counter-intuitive for banks to lend out their money at such low rates — but there is a rationale behind it and driven by fear. Financial markets are in an especially volatile and uncertain spot right now. Factors include the US-China trade war, Brexit, and a generalized economic slowdown across the world — noticeable especially in Europe. Many investors are fearing a substantial crash in the near future. As such, some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by lending money at higher rates that customers cannot meet. It shows how scared some European investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.

It's Easy

If the markets don’t like uncertainty, why should anyone invest during these times of

·         Slowing global economies

·         Worldwide political discord

·         Trade wars

·         Nuclear proliferation

·         Fake meat (Cows, pigs and chickens are happy)

The answer sis easy. No need to look any further than current global central bank’s monetary action

·         Fed: easing

·         ECB: easing

·         BOE: easing

·         BOJ: easing

·         Australia: easing

·         New Zealand: easing

·         Brazil: easing

·         Russia: easing

·         India: easing

·         China: easing

·         Korea: easing

·         Indonesia: easing

·         South Africa: easing

·         Turkey: easing

The Ides of August

We have now entered the longest economic expansion in history. Starting in June of 2009, this record-setting run has seen GDP grow a measly 25% total, far slower than all previous expansions. As is usually the case, the stock market sniffed out the end of the ’08-;09 recession early as they bottomed in March of 2009.

Interestingly, August is the only month of this record setting 10-year run that seen US stocks fall more often than they have risen. There is a plethora of reasons one can assign to why but since we usually don’t find out “why” until after the fact, it’s only the probabilities we need to pay attention to.

Even though there is only a slightly negative bias, the seasonality stats are telling us better months are ahead but more importantly our patience and investment fortitude may be tested in the short term. 

Just Follow the Money

This article appeared as a Bloomberg Opinion piece.

Saving for retirement can be a perilous endeavor in the U.S., thanks in part to the Trump administration’s moves to weaken safeguards against unscrupulous sellers of financial products. Now Congress is poised to make things worse -- by undermining protections governing the country’s most popular investment vehicle, the 401(k) plan.

Named after a once-obscure 1978 provision in the tax code, the 401(k) allows people to set up retirement-savings accounts through their employers, with income taxes deferred until the money is withdrawn. Employers and their chosen administrators assume fiduciary responsibility for the plans, meaning that they’re supposed to offer a menu of sensible investment options. Ideally, these include low-fee mutual funds, sometimes targeting a specific retirement date.

Amid growing concern about the number of people financially unprepared for retirement, Congress is considering tweaking how the 401(k) works. The overall intent of the relevant bipartisan legislation, known as the SECURE Act in the House and RESA in the Senate, seems admirable: Encourage people to save more. Among other provisions, the bills could help small employers band together to create efficient 401(k)s, and increase age limits for contributions to tax-deferred accounts.

Yet the bills also seek to encourage a currently rare option in 401(k) plans: annuities. In principle, this could be wonderful, if the bills permitted only true annuities -- that is, investments that pay a guaranteed, fixed sum of money each year -- and if the fees they charged savers were kept in check. Unfortunately, neither is the case.

Many annuities sold in the U.S. are complicated, overpriced products with payments determined by sometimes deceptive formulas that even sophisticated investors struggle to understand. Worse, the legislation specifically frees 401(k) providers from any hard obligation to pick the lowest cost products, allowing them wide leeway to consider a range of factors. That’s startling, given that excessive cost is the single greatest critique leveled against both 401(k) plans and many forms of annuities.

Granted, it’s possible that 401(k) providers will work with insurance companies to offer annuities with genuinely transparent, predictable streams of retirement income. The providers’ fiduciary duty should hold them to a higher standard than the insurance agents who typically peddle the worst products. Yet given 401(k) plans’ mediocre track record, coupled with the insurance industry’s long track record of selling inappropriate products, I wouldn’t bet on it.

Why would legislators expose savers to such risks? I won’t speculate, but I will note one potentially relevant fact: Over the past 30 years, according to OpenSecrets.org, people and entities associated with three organizations -- Mass Mutual Life Insurance, FMR (the parent company of Fidelity Investments) and the National Association of Insurance and Financial Advisors -- have collectively been the largest donors to Congressman Richard Neal (D-MA), who introduced the legislation in the House