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Rules and regulations exist to let us know what behaviors we should expect from the people we do business with. Sometimes, good sense or social convention overtake these rules — and they don’t matter so much. Just about everyone wears seat-belts these days (we all know how much they improve our odds of survival in an accident); the ranks of underage smokers have plummeted (it’s no longer cool). Once the toothpaste is out of the tube, as they say, there’s no cramming it back in.

Such is the case with the Department of Labor’s fiduciary rule. On Friday, President Trump asked the Labor Department to review the rule, which requires brokers working with retirement savers to put the interest of their clients ahead of their own. After years of work on it, the regulation was finalized last year by the Obama administration.

Let me explain. Whether it is overturned by the Trump administration is besides the point. The Labor Department has already taken the key language offline (you can see the earlier text here). Even before the government announced the new standard of care for advisers on retirement accounts, the public had figured it out: Investors have been moving away from high-cost, conflicted advice (with undisclosed kickbacks to brokers on the side) and toward low-cost investment advice where the adviser acts transparently in the investor’s best interests.

They have voted with their feet, and with their dollars.

Long before the 2011 staff report of the Securities and Exchange Commission (Study on Investment Advisers and Broker-Dealers) recommended a uniform fiduciary rule for all investors, the industry was moving in that direction. The fiduciary rule is not shaping investor behavior, it is now catching up with it. It has been six years since the SEC study suggested the standard; while the commission has been stalemated by politics and the Labor Department by the new administration, they are both now far behind the curve.


— Vanguard, the industry leader in low-cost indexing, has attracted $3 trillion since the 2008 financial crisis. It now manages about $4 trillion.

— Blackrock, the world’s largest investment firm, runs over $4 trillion. It notes that it is a “fiduciary for our clients” regardless of whether the new rule is implemented

— Software-managed investing (aka robo-advisors) and Hybrid (robo/adviser combos) will be $100 billion in the next few years. They already are managing almost $75 billion, according to Michael Kitces, an expert on the advisory business. Kitces notes that just the top five robos – Vanguard Personal Advisor Services (over $40 billion), Schwab Intelligent Portfolios (over $10 billion), Betterment (over $7 billion), Wealthfront ($5 billion) and Personal Capital ($3.4 billion) – alone account for $65 billion in assets under management.

Had it gone into effect as planned in April 2017, the fiduciary rule was likely to have accelerated the process of money moving from expensive and conflicted advice to advice that is lower cost and in the clients’ best interest. Changing the new rule implementation plan won’t stop the underlying trend – at worst it might slow it somewhat.

Regardless, the change is now inevitable. Industry expectations, based on an A.T. Kearney study, are that by 2020, “the DOL’s new fiduciary rule will result in a $2 trillion asset shift” that will save investors roughly $20 billion by not having to pay commissions.

In the early 2000s, retail investors whose investments were at these big firms had commission-based brokerage accounts. The primary rules that covered the behavior of brokers were from FINRA, the industry’s self-regulating organization. As you would imagine, letting the industry regulate itself led to all manner of expensive, opaque, conflicted advice that often worked against the interest of the investor, and toward the broker’s financial interest.

Investors have decided that Caveat emptor is not what they want governing their retirement accounts. Having the fiduciary rule in place would surely protect those investors who have yet to figure out who is really working for them. It would be nice to discover that the new administration was more “investor friendly.” But it was not the rules that moved the big firms toward a fee-based business model – market forces did.

Whether the fiduciary rule stays or not, the investing public has figured out what the proper standard should be. Investors are not waiting for the government to make the finance industry put investors’ interests first.

As market forces have revealed, they are insisting on it themselves.

Courtesy of Ritholtz

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Wall Streets Top Picks For 2017 With Trump

We are into the homestretch of 2016, and the markets have seen strong upside this year, benefiting from the domestic economy's resilience and the election of Donald Trump.

With just four sessions to go, the Dow Jones Industrial Average has been a up a solid 14.4 percent, the S&P 500 has risen 10.8 percent and the NASDAQ Composite is 9.1 percent higher — with all the three major averages trading off their all-time closing highs.

Among the ten S&P sectors, eight have been in the green. Old economy stocks such as energy, material, industrial, financial, utility and telecom are all up by double-digit percentages. Technology stocks are also up decently. However, the healthcare sector has taken a hit.

Though it is tough to replicate the performance of 2016, given the tougher comparisons and the uncertainty around policies amid the political leadership transition, Wall Street does see some opportunities that are compelling.

Here is a compilation of some top picks recommended by Wall Street analyst for the year 2017:

RBC Top Small- And Large-Cap Picks For 2017

Large-Cap Picks:

  • Netflix, Inc. NFLX 1.92%: Subscriber additions, New content and new international launches.
  • Facebook Inc FB 0.92%: Muted expectations concerning 2017 earnings and two messaging platforms with one billion users, namely WhatsApp and Messenger.

Small-Cap Pick:

  • Yelp Inc YELP 2.93%: Conservative consensus estimate providing scope for outperformance, revenue and margin expansion opportunities.

Deutsche Bank's Top Bank Picks for 2017

The firm believes higher Fed rates in 2017 will boost net interest margin and earnings per share, although the same is expected to hit tangible book value/capital and may reduce buybacks.

Top Picks Among Regional Gaming Stocks

Deutsche Bank's Carlo Santarelli is favorably biased toward regional operators heading into 2017, given favorable macro-economic indicators and the potential for policy-related boosts to the regional gaming consumer.

RBC's Top Tech Picks For 2017

Large-Cap Picks:

  • Apple Inc. AAPL 0.43%: iPhone 8 supercycle of upgrade activity, growing services business and the possible repatriation of foreign profits.
  • Broadcom Ltd AVGO 1.16%: Deal integration, improved capital structure.
  • NVIDIA Corporation NVDA 6.88%: Tailwinds from virtual reality, artificial intelligence and autonomous driving.
  • Cisco Systems, Inc. CSCO 0.85%: Mix shift away from switching and routing, continued M&A and the potential for repatriation.
  • Texas Instruments Incorporated TXN 1.1%: Gross margin upside and sales growth acceleration driven by market share gains.

Mid- And Small-Cap Picks:

Northland Securities' Top Pick For 2017

  • Silicon Motion Technology Corp. (ADR) SIMO 2.51%: Recent selloff creates significant opportunity for price appreciation — Outperform rating with $60 price target.

MKM Partners' Top Picks For 2017

  • Alibaba Group Holding Ltd BABA 0.19%.
  • Marriott International Inc MAR 0.93%: Stronger corporate transient demand, accelerating share repurchases and execution of revenue and cost synergies from Starwood acquisition.

Altria Is Wells Fargo's New Top Pick For 2017

  • Altria Group Inc MO 0.46%: Due to increased probability of the deal.

Akamai: Oppenheimer's Top Mid-Cap Pick

  • Akamai Technologies, Inc. AKAM 1.2%: 2017 will see vertical integration, driving new revenue streams and disruption. Communication industry to benefit from the incoming Trump administration and Republican Congress.

Courtesy of Benzinga

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Bank EPS Lifted Ahead Of The Fed Rate Hike

The S&P 500 Financials sector has been a focus sector for the markets in recent weeks. This past week, the Federal Reserve Board increased the target range for the federal funds rate. Earnings for banks and other companies in the Financials sector are particularly sensitive to higher interest rates. In addition, this sector has recorded the largest increase in value (+22.2%) of all 11 sectors in the S&P 500 since the start of the fourth quarter (September 30). Given these developments, have analysts been increasing their 2017 EPS estimates for banks and other companies in the S&P 500 Financials sector over the past few months?

The answer is yes. In terms of EPS estimate revisions, 38 of the 63 companies (60%) in the S&P 500 Financials sector have seen an increase in their mean EPS estimate for 2017 since September 30. At the sub-industry level, the three subindustries that have the largest percentages of companies that have recorded an increase in their mean EPS estimate for 2017 (since September 30) are all bank-related subindustries: Regional Banks, Investment Banking & Brokerage, and Diversified Banks.

Sub-Industry Outlook

Eleven of the 11 companies (100%) in the Regional Banks sub-industry have seen an increase in their mean EPS estimate for 2017 since September 30, led by Huntington Bancshares (to 0.94 from 0.88), Citizens Financial Group (to $2.18 from $2.06), and Regions Financial (to $0.95 from $0.90).

Four of the four companies (100%) in the Investment Banking & Brokerage subindustry have seen an increase in their mean EPS estimate for 2017 since September 30, led by Morgan Stanley (to $3.18 from $2.97) and Goldman Sachs (to 18.02 from 16.88).

Five of the six companies (83%) in the Diversified Banks subindustry have seen an increase in their mean EPS estimate for 2017 since September 30, led by Comerica (to 3.84 from 3.37) and Bank of America (to 1.64 from $1.54).

Download the latest insight.

Courtesy of Factset

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As U.K.-based banks wait to see what life will be like after Brexit, one word -- passporting -- will speak volumes. If Prime Minister Theresa May can maintain the passporting rights of City of London banks, the U.K. stands to retain its status as a hub of global finance. If not, hope isn’t lost, but the alternative to passporting requires an arduous approval process and provides no secure basis for long-term planning.

1. What is passporting, anyway?

Passporting refers to the right of companies authorized in one country of the European Economic Area -- currently comprising the 28 EU states plus Iceland, Liechtenstein and Norway -- to sell their products and services throughout the bloc, accessing a $19 trillion integrated economy with more than 500 million citizens. There is not one financial passport, but rather a series of sector-specific agreements covering everything from banking to insurance and asset management. It’s why global firms such as Goldman Sachs or Morgan Stanley canhave the overwhelming bulk of their staff in London, with only satellite offices in other capitals like Paris and Frankfurt. 

2. What banking activities are involved?

Passporting covers a range of activities, including deposit taking, derivatives trading, loan and bond underwriting, portfolio management, payment services, insurance and mortgage broking. A bank does not need a passport to conduct foreign exchange trading because that’s an unregulated activity.

3. What does passporting mean for U.K. banks?

London’s status as the world’s preeminent financial hub is due in no small part to the access companies based in the U.K. have to the EU’s single market. Eighty-seven percent of U.S. investment banks’ EU staff live in the U.K., which also boasts 78 percent of the region’s capital markets activity, according to New Financial, a research group. Consulting firm Oliver Wyman reckons around a fifth of the U.K.’s banking sector’s annual revenue -- between 23 billion pounds and 27 billion pounds -- is based on passporting access.

4. Is it just banks?

No. The EU is also an important market for U.K.-based insurance companies and asset managers. About 28 percent of insurance exports go to the bloc, according to Open Europe. The Investment Association estimates 21 percent of assets managed in the U.K. are connected to EU clients. Financial firms and associated businesses employ more than 2 million people nationwide and paid 66 billion pounds in tax last year, more than any other sector. The Financial Conduct Authority estimates about 5,500 U.K. firms use passporting to do business on the continent, and that 8,000 companies based in Europe use it to access the U.K. So the EU, too, has an incentive to strike a deal.

5. What would the loss of passporting mean?

Banks with their European headquarters in London say they would have to move thousands of employees to new subsidiary offices on the continent. "If we are outside the EU, and we do not have what would be a stable and long-term commitment that we would have access to the single market, we would have to do a lot of things that we do from London somewhere inside the EU27," said Rob Rooney, chief executive officer of Morgan Stanley International, the Wall Street firm’s most senior banker in Europe.

6. Who doesn’t benefit from passporting?

One example: A Hong Kong-based bank with no subsidiary office in the EU could not make use of the passporting system to do business within the European Union.

7. Will banks in the U.K. retain their passport?

It’s highly unlikely. Under current EU rules, the U.K. would have to become a member of the European Economic Area for British firms to retain unfettered access to the region’s single market. EEA membership comes at a price May might not be prepared to pay: contributing to the EU budget and following its rules, including the free movement of workers, while having no voice in making them.

8. What does the government say?

In July, Foreign Secretary Boris Johnson said he expected the U.K. would keep its passporting rights. May says she will seek "to give British companies the maximum freedom to trade with and operate in the single market, and let European businesses do the same here," though not if that means giving up "control of immigration." Prior to becoming chancellor of the exchequer, Philip Hammond said, “I know and understand the importance of passporting.” He’s since retreated to pledging to aim for the “best” deal.

9. Is there a Plan B?

Maybe. If passporting is off the table, the U.K. may have to fall back on regulatory “equivalence,” which allows companies based outside the EU privileged, if targeted, market access. It would require the European Commission to recognize that the U.K.’s rules and oversight of specific business lines are as tough as -- equivalent to -- its own. The EU utilizes equivalence to reduce overlaps and capital costs for EU companies that must comply with rules in other countries. Most EU financial-services acts contain provisions for equivalence, including the updated markets rules known as MiFID II, which come into effect in 2018. Equivalence is also possible for some purposes in the EU’s bank capital rules and in Solvency II, which governs the insurance industry.

10. How might equivalence work in practice?

Take the recent agreement the commission struck with the U.S. Commodity Futures Trading Commission on central counterparty clearing. EU law, in this case the European Market Infrastructure Regulation, allows companies based outside the bloc to provide clearing services in the EU on two main conditions. First, the commission has to determine that the country’s legal and supervisory systems are an “effective equivalent” to those in the EU; second, the companies must be recognized by the bloc’s markets regulator. The deal with the CFTC enabled companies such as Chicago-based CME Group Inc. to continue providing services to EU firms. Without it, traders would have faced higher EU capital requirements to clear swaps, futures and other derivatives in the U.S.

11. Why isn’t equivalence as good as passporting?

Passporting is a right, while equivalence is a privilege that can be unilaterally withdrawn by the European Commission at short notice. Also, equivalence doesn’t cover some core banking activities such as deposit taking and cross-border lending. Firms may have to endure a long period of uncertainty as the U.K. negotiates with the EU to have rules deemed equivalent. It took the EU four years to negotiate the CFTC deal.

12. Where does this leave the banks?

Facing an uncertain future with no clarity on what access they will have to the single market after Brexit, banks are lobbying May and EU leaders to strike an interim agreement which would allow them to continue to provide services across the EU from London beyond the end of the two-year negotiation period. In the meantime they are planning for the worst and accelerating plans to move thousands of employees and operations to the continent.

Courtesy of Bloomberg

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Weekend Reading

In addition to charts I uploaded (which there are many more but I'm short on time, it being a holiday) here are a few of my weekend email reads I found interesting. Enjoy - and Happy Easter.

  1. Variant sees commercial and industrial lending to continue to fall.  No, not a good thing.
  2. The top 20 reasons start ups fail.  Visual Capitalist
  3. Think renewables will gain usage over coal and crude oil?  You may be surprised.  McKinsey
  4. Domo origato mr roboto Visual Capitalist
  5. Here we go again as banks ramp up and push home equity loans (because we didn't learn the last time).  WSJ
  6. Brookings says technology actually has not made up more productive (say what?)
  7. The richest and poorest countries in the world. Visual Capitalist

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Poised For Jobless Claims

Ready for tomorrow's numbers, gold and IWM are ready to head either way.  Utilities are sitting at support and banks are ready to scream up.

Higher-than-expected claim numbers will mean the economy is not as strong as we believed and the chances of a June rate hike will be off the table until September. 

No support or resistance is broken so we'll wait for the numbers but isn't it grand; how the markets are not rigged.  Sarcasm alert there.  Good luck.

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Christmas Came Early For These Sub Sectors

Who doesn't love the lame duck session?  It's that special time of year when Santa comes early to Wall Street and you too, can benefit.  As one example, outgoing Congressmen and woman who lost during mid terms, tend to throw in the towel (they won't be around next session anyway) and all types of goodies get through the Congressional pipeline which were stalled during the normal session.  This years winners if you're an investor are:

  • Banks and insurers.  Congress repealed a portion of Dodd-Frank so that derivatives will now be covered once again by FDIC Insurance, thus lowering the risk to banks and insurers like AIG.*
  • Health insurance companies get to keep their special tax breaks.
  • Tourist destinations like Las Vegas get their travel promotion subsidies.*
  • In a victory for food companies, the legislation even makes federally subsidized school lunches less healthy by allowing companies that provide them to include fewer whole grains. This boosts their profits because junk food is less expensive to make.
  • Major defense contractors also win big. They get tens of billions of dollars for the new warplanes, missiles, and submarines they've been lobbying for.  (We pointed out defense and aerospace moving last week).
  • Big Pharma gets a big benefit: a prohibition on government using its vast bargaining power under Medicare and Medicaid to negotiate low drug prices.

Sure there's a lot of junk.  Yes, it's crony capitalism but if you're ahead of curve, why not benefit?

*Full disclosure long positions in BAC, AIG and LVS.  Hat tip to HuffPo

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Banks Breathe A Sigh Of Relief

While the market continues to digest yesterdays' comments from new Fed Chairwoman Janice Yellen that rates will begin to rise possibly as early as six months after tapering is complete (mid-2015 rather than late 2015), banks are definitely yelling pahtay with big gains across the financial sector today.

Even $C (who I normally detest) is attempting to breakout of a beautiful double bottom pattern. 

Like it or not, banks will be more willing to lend in a rising rate environment and let's face it; it's tough to make a buck when you're lending at 3%.  I would imagine this will be good for broker/dealers as well although not shown here.  Now if only we could get Congress to do away with that pesky transaction tax debate.  Life would be wonderful.

Full disclosure; I'm long JPM and loving today's action.

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I gleaned this from a twitter mention and after searching a bit, I found it in pdf form.  Ironic, I found it on a blog resource I sometimes frequent.  It is dry reading, but it is full of useful information.


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Banks Holding REO's For Higher Prices

If they were to pursue foreclosures in a timely fashion as well as push out the REO's sitting on the books, prices would fall.  Don't believe for a minute this is only the U.S. either.  This is/will be a global approach.  Now that values in many areas are almost back to pre-crisis levels, are we about to see a glut of inventory hit the market?  I'm willing to say so.  House hunting anyone?  (RealEstateEconomyWatch)

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Meet "Curt" who, as credit lines worldwide were tightening, lost his middle management job in finance in 2006.  Of course Curt had no idea of what was to come.  He was a good worker, great work and credit history and was lucky to have a nice nest egg saved up.  He wouldn't need unemployment, no.  He'd have a job in no time so he did what every good American in his position would do.  He dusted off his resume, began to network/emailing his resume and paid his bills using his hard earned savings and waited.......for a job that would never come.  

Then bubble burst.  The market began it's long downwards spiral but Curt, undaunted, continued emailing and living off of his savings....and still did not file for unemployment.  Surely something will turn up any day now, he told himself.

For four years.  

Four years of bank failures, branch closings, massive consolidations and layoffs.

By 2010 the stock market was clearly rebounding however it was all over for Curt.  After four long years he had drained his savings, cashed in his CDs, sold his 2nd car and withdrawn his 401k's one by one until there were no more.  Even if he wanted to get back into the market to raise cash, there was no cash left to invest.  His family wasn't in any better shape.  There was no one to borrower from.  Too late to file for unemployment now.  That window was closed.  His life was collapsing further.  His once 760 credit score, was now sub 600.  He could scarcely afford his utilities much less his mortgage.  He did the only thing left to him.  He sought counsel of an Attorney file to Chapter 7 (no assets). 

The Lawyer, hearing Curt's plea to somehow keeps his home, advised if he felt he was going to have his mortgage modified, he could leave the house out of the Chapter 7; reaffirm with the lender and therefore not be evicted.  If included in the Chapter 7, Steve would have to vacate the property within 30 days of the final filing.  Steve had no where else to go and his lender had be so reassuring that he'd be granted a modification.   He took the bait - reaffirmed with his lender and filed the Chapter 7.  After all, he didn't want to lose his home and he was certain something would turn up soon.

Oh poor Curt. 

Having no job (and no unemployment income) he was denied for a loan modification. 

Badly upside down in debt now, he hosted what seemed to be a perpetual garage sale to keep the lights on and food on the table.  Selling his tools, furniture, guns, even his pool in the yard simply to keep on going.  His attempt to sell his home on a short sale was rejected.  You see Curt had a 2nd lien holder who would receive absolutely nothing under the proposal AND to add insult to injury he now had enormous tax liens; a result of liquidating his 401k's and not being able to cover the tax on same.

The Spring of 2011 Curt finally gave up.  Temp agencies were not even returning his call.  Just sending him email links to apply.  With his skills five years dormant and his credit destroyed, he must have felt no one wanted him (my opinion not his).

He packed what very little he could into his car, called his lender, told them he was leaving the keys on the counter and he walked away leaving all his life long possessions behind.  A totally broken and beaten man.

Fast forward to 2013.

Every month since that day in 2011 Curt says he has kept in touch with his lender.  He has given them his addresses as he moves from place to place.  His cell phone number WHEN he can afford a pay-as-you-go phone.  At some point he was diagnosed as having had "a mental break with severe depression" or what you and I would call a nervous breakdown.  He hides from the public, neighbors, friends and family.  Shys away from any personal interaction including eye contact.  He doesn't want anyone to "see him" hiding behind sun glasses and wishes he was "invisible" doing small painting or carpet cleaning jobs.   He's nervous, jumps and flinches at small everyday noises, suffers panic attacks, admits he cries each day and I believe he's now agoraphobic (afraid to go outside).  His small cash jobs pay the rent but he still does not receive food stamps or a government subsidy phone.  He says he has to retain what little pride he has left. 

He's open to the idea of being treated for his depression again but cannot afford it.  To hear him tell it, the last clinic he visited estimated his wait time to be 2-4 hours and even then, it would only be an evaluation.  He wouldn't receive medication until a subsequent visit.  He left the crowded, apparently smelly waiting room after only 20 minutes in a panic.  "It doesn't matter" he says, "I couldn't afford meds anyway."  Such is the demeanor I feel of many Americans.  Deeply forlorn, empty and broken describes him well.

It's been almost two years since he gave up and handed them the keys..........and his lender has yet to foreclose.  "What are they waiting for?" he wonders.  His death so they can saddle the bill to his children?  Indeed what are they waiting for?  I wonder as well.

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Big Banks: Going Where No Bank Has Gone Before

Oh, the controvery over the proposed bank tax is getting good; get your ringside seat tickets now - they're going like hotcakes. This was my thought this morning as I awoke to this WSJ article on banks hiring a Supreme Court litigator to investigate whether the Obama administrations proposed tax is unconstitutional "because it would unfairly single out and penalize big banks. LOL Oh, put me in [office] Coach! They also don't feel they should be held accountable for the billions of losses incurred by nonbank recipients such as AIG, GM and others but one must wonder if GM would've been in the mess they found themselves in if it weren't for the economic meltdown.....but I digress. For the record I feel AIG should be included but that's not my point. If I were Obama right now, I'd be standing up, extending my arm forward and bending my fingers as if to say "bring it on big boys!" So the political posturing, lobbying and money flow will continue but if people have any brains [or balls], they'll lift their voices in unison at the audacity and the Supreme Court will scoff in bankers faces holding them finally accountable for their actions. With any luck, this will turn out to be one can of litigation worms they'll wish they didn't open.

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