Yesterday I referenced an UBS report about the lack of liquidity in the bond market under the guise of “it is not what you say but rather why you say it” specifically stating the lack of liquidity is perhaps impacting overall profitability.

On Wednesday, UBS announced its intentions of “weighing options” for its asset management unit, including a partial sale or merger of the business.  Asset management, which offers funds for retail clients and institutions, is different from wealth management.  Margins of both businesses are under pressure, the result of investor flight into cheaper, passive funds.

The merger of funds is accelerating to lower expenses in order to compete.  Passive/ETF funds charge little or no fees but require a constant influx of new monies to pay expenses.

By definition passive/ETFs are capitalization driven thus suggesting the big companies will continue to get bigger. At some juncture buyers will become exhausted.  The question is when?

As noted many times, active management has floundered, a point validated by the massive closure of hedge funds, which was yesterday’s pathway to riches.

Every trade on Wall Street eventually becomes crowded which in turns becomes the next underperforming trade as positions are unwound.  The question that only history can answer is when the turning point occurs.

Speaking of potential turning points, the 10 year is increasing in yield at a rate three times greater than the recent decline.  Three days ago it appeared that every other story was about the inverted yield curve.  The curve began to steepen Tuesday.

I will argue that if tomorrow’s employment data is stronger than expected and February’s statistics are revised considerably higher, the curve will continue to steepen and questions about monetary policy will again surface.

There is a strong probability that yesterday’s tail winds of trade and monetary policy will become a head wind, a head wind perhaps amplified by disappointing profit reports in the must owned mega sized companies.

Speaking of which, nobody saw it coming.  The S & P 500 Technology Index was down 24% on Christmas Eve.  Today it has snapped back 32% in 100 days.  Netflix is up 39% YTD.  Apple and Amazon have risen by 24% and 21%, respectively in 2019.  Microsoft and Google are up 17% YTD.  These are the largest companies in the world trading like a small capitalized explosive growth company of yesteryear.  Can this continue? Are such increases justified or are they result of the massive proliferation of ETFs?

I have opined many times that it is not change that frightens me but rather the velocity of change.  Unfortunately the velocity is typically greater on the downside than upside.

Commenting upon yesterday’s activity, equities retreated from the highest level of the year as declines in consumer staples shares tempered optimism about global growth.   Bond yields globally continued to climb form recent two year lows.

Last night the foreign markets were mixed.  London was down 0.40%, Paris down 0.18%  and Frankfurt up 0.22%.  China was 0.94%, Japan up 0.05% and Hang Sang down 0.17%.

The Dow should open flat waiting for further trade news tomorrow’s jobs data.   The 10-year is up 5/32 to yield 2.51%.


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