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- Goldman Sachs launched Marcus, an online lending business, in October 2016.
- The business has originated $3 billion in loans, according to Goldman Sachs CFO Marty Chavez.
- But analysts have expressed concern about the quality of these loans, with one analyst noting on Goldman Sachs' first-quarter earnings call on Tuesday that a chunk of the loan book is subprime.
Goldman Sachs is lending to subprime consumers. Yes, you read that right.
The prestigious Wall Street bank launched Marcus, an online lending business, in October 2016, and it has grown swiftly since. The unit has now originated $3 billion in loans, according to CFO Marty Chavez.
The credit quality of those loans has been a concern for Wall Street analysts, with several asking in October about the quality of the loan book, and again in November at a Bank of America Merrill Lynch.
Goldman Sachs said in February in its 10-K filing that "greater than 80% of the Marcus loans receivable had an underlying FICO credit score above 660."
The implication, then, is that more than 10% of Marcus loan receivables had a FICO score of less than 660, making them subprime.
Guy Moszkowski, an analyst at Autonomous Research, highlighted this fact in Goldman Sachs' first-quarter earnings call on Tuesday after the investment bank smashed analysts' expectations, saying several of his clients were surprised by the scale of subprime lending at Marcus:
"In discussing Marcus, you did say that you were tracking your credit expectations, but I think that a lot of the clients that I've spoken with were a little surprised in your 10-K when you noted the higher-than-expected percentage of assets, which are clients which are essentially subprime, at least according to the FICO definition. And I was wondering if you could give us a little bit more color on what you're seeing in terms of delinquency, formation, and the like in the Marcus portfolio?"
Chavez said there had been "no surprises in the evolution of that business at all," adding: "We're well aware of where we are in the credit cycle as we set those expectations, and we monitor it closely."
He said later:
"We're not approving large numbers of applications. We could approve more, but we're choosing not to, because it's all part of this deliberate organic growth process. We are always thinking of where we are, which is maybe more accurately said as where we might be in the credit cycle, since there will be no announcement of the turn of the credit cycle or any harbingers of when it's going to turn. And so taking all of those into account, we're going to proceed with this methodical growth, always open to revisiting it."
Chavez in November provided some granular detail on the makeup of the Marcus loan book in a presentation at a Bank of America Merrill Lynch event. The loan portfolio has an average annual percentage rate of 12%, he said then, compared with charges of 16%-plus on credit-card balances.
The loans have an average tenor of four years, with an average loan amount of $15,000, a slide from the presentation deck says.
The bank has previously said it sees a $1 billion revenue opportunity in the Marcus loan-and-deposit platform.
Meanwhile, Chavez has said Goldman Sachs can see a $13 billion lending opportunity with Marcus over three years, assuming a 6% market share in what Goldman calculates is an addressable market of $200 billion to $250 billion. SEE ALSO: Goldman Sachs is trying to build the ultimate financial destination for the masses
Join the conversation about this story » NOW WATCH: The chief economist at a $163 billion firm dispels one of investing's biggest myths 
WASHINGTON (Reuters) - The World Bank's shareholders on Saturday endorsed a $13 billion paid-in capital increase that will boost China's shareholding but bring lending reforms that will raise borrowing costs for higher-middle-income countries, including China. 
WASHINGTON (Reuters) - Despite calls to resist protectionism and for the United States to rejoin a multilateral trans-Pacific trade pact, Japan is gradually shifting gear to adjust to a trade environment shaken up by U.S. President Donald Trump. 
- The Wedbush analyst Michael Pachter on Tuesday reiterated his "underperform" rating on Netflix's shares.
- His bearish view comes despite the company's earnings report Monday that said it added about 1 million more subscribers in the first quarter than analysts had expected.
- Pachter is concerned about Netflix's cash burn and thinks the company can't turn that around and post significantly positive cash flow without raising prices to the point that it curtails growth.
When it comes to Netflix, Michael Pachter remains a bear — even after seeing the company post standout quarterly results on Monday.
Long skeptical of the streaming-video company's business model and its ability to generate meaningful returns for investors, the Wedbush analyst on Tuesday reiterated his "underperform" rating on Netflix's shares.
He did increase his price target to $125 a share from $110, but that only underlines his pessimism; in recent trading, Netflix shares were trading at $336.92, up $29.14 a share, or about 9%.
In explaining his rating, Pachter pointed to Netflix's ongoing cash burn. The company had a net outflow of about $284 million in its latest quarter, stemming from its operations and its investments in equipment and DVDs for its legacy business.
The company said Monday that it expected to continue burning through cash for the "several more years," Pachter noted. Realistically, the company won't be able to stanch the bleeding unless it dramatically raises prices — a move that could severely crimp its growth, he said.
"Until we see evidence that it can successfully deliver positive free cash flow, we advise investors to seek more compelling investment opportunities," Pachter said in a research note. "We believe that Netflix's valuation is unwarranted."
While Netflix's reported Q1 revenue and profits were in line with Wall Street's expectations, it added 7.4 million subscribers, about 1 million more than analysts had forecast. Many of Pachter's colleagues on the Street used Netflix's results to issue bullish reports on the company and raise their price targets to the stock's current level or beyond.
Even Pachter was impressed with that kind of subscriber growth.
"Netflix is absolutely delivering on its growth goals," Pachter said, adding that the company "is clearly doing something right."
But Netflix is essentially boosting its subscriber growth by underpricing its service, he said.
While the company posts a profit on its income statement, that accounting ledger accounts for only a portion of what it's spending on producing and licensing movies and TV shows. Once you factor in all the money Netflix is sending out the door, the company's cash flow is deeply in the red and getting worse.
Last year, the company's free cash flow — which takes into account operating expenses and investments in property and equipment and other long-lived assets — was in the red by $2 billion. This year, the company expects an outflow of $3 billion to $4 billion.
To break even from a cash flow perspective, Netflix would have to raise its prices to about $15 a month globally, Pachter estimated; right now, it charges $11 a month in the US and about $9 internationally.
To be a significantly profitable business, he said, it would have to charge about $20 a month.
At that level, Netflix's growth rate would almost certainly slow to a crawl, given the increasing number of competitors, all of which offer their services at significantly lower prices.
"In conclusion, we aren't yet ready to drink the Netflix Kool-Aid," Pachter said. SEE ALSO: Netflix doesn't have to worry about the cloud threatening companies like Facebook and Google says CEO Reed Hastings
Join the conversation about this story » NOW WATCH: Netflix is headed for a huge profit milestone in 2018 
Spring meetings end with call for firm action by US Treasury secretary
- Netflix briefly considered acquiring Landmark Theatres, according to the Los Angeles Times.
- The move would have allowed the streaming giant to get their prestige titles better award seasons consideration.
- However, numerous sources told Business Insider that Netflix has the opportunity to screen its movies at more theaters but has declined some offers.
It seems that, for at least a fleeting moment, Netflix was interested in buying movie theaters that would play its movies on the big screen.
According to the Los Angeles Times, the streaming giant “explored” the idea of acquiring Landmark Theatres, the 53-theater chain with locations in New York, Los Angeles, Denver, and San Francisco (among others).
Netflix eventually decided the price was too high, according to the paper (a source familiar with the situation confirmed to Business Insider that Netflix is not buying Landmark). But the news has puzzled many in the movie theater community because for years Netflix has been playing a cat-and-mouse game with exhibitors, especially arthouses.
On one hand, Netflix paints itself as the ultimate Hollywood disrupter — releasing movies simultaneously across the world on its streaming service, from blockbusters to award-season bait. However, on the other hand, Netflix craves prestige from Hollywood and wants its movies to be recognized with multiple Oscar nominations, just like how its TV shows are received by the Emmys.
But the big problem is movie theaters still hold some strong cards. Specifically, no movie can receive Oscar consideration unless it plays in movie theaters in New York and Los Angeles for a specific time. Because Netflix rarely gives its moves theatrical releases, and when it does they are "day-and-date" (playing in theaters when the movies are already streaming), the major movie chains refuse to show them.
This hasn’t stopped Netflix from getting acclaimed documentaries recognized (Netflix’s documentary “Icarus” recently won the best documentary Oscar), but when it comes to its narrative titles they are all but ignored. The acclaimed “Mudbound” received four nominations at this year’s Oscars, but none were for any of the major categories.
 So Netflix considering buying its own movie theaters to show its titles makes sense.
“They are looking for awards to boost subscription revenue and buying a theater chain would potentially allow them greater access to awards through key theatrical runs in target markets,” a source who works in exhibition told Business Insider.
However, some in the business are wondering why they just don’t play on more arthouse screens.
“Wouldn’t it be infinitely cheaper to just exhibit their movies like everyone else?” asked one source.
Despite the major multiplexes like AMC and Cinemark blocking Netflix movies because it does day-and-date, independent theaters want them.
Multiple sources in the arthouse community told Business Insider that Netflix has refused theaters that have asked to show its movies. Alamo Drafthouse, which has screened Netflix titles in the past, asked to screen “Mudbound” and Netflix declined, according to numerous sources.
“Netflix has specifically chosen not to make its films available,” a source said.
And there’s another reason why Netflix may have decided owning theaters wasn’t worth it: They would have finally have had to reveal to the public how their titles perform.
“Netflix movies do not report their grosses through comScore, which would likely have to end if they owned a theater company,” one industry source said. “It would look very bad for Netflix movies to underperform against traditional releases in their own theaters.”
Netflix declined to comment for this story. SEE ALSO: Netflix's "Amateur" director had to navigate real-life NCAA regulations in casting a 15 year old as a basketball star
Join the conversation about this story » NOW WATCH: Jared Kushner and Ivanka Trump tried to cut a secret deal with Planned Parenthood — here's what happened 
- Morgan Stanley's US equity strategists have identified early signs that the nine-year old bull market may be coming to a close.
- Although talk of the end of the cycle evokes a 'sell everything' response, their forecast is for 10-20% price swings over the next year or two — not the wipe-out scenario bears have been calling for.
If Morgan Stanley's US equity strategists are correct, the February sell-off in stocks was a glimpse of things to come.
In a note on Thursday, the team of strategists led by Michael Wilson laid out their case for why they think stocks are further into the cycle than most of their peers do. And, they singled out one trend.
"The true tell will be when the market begins to rotate more aggressively towards defensive leadership," Wilson said. "We have seen some early signs of defensive outperformance emerge recently as the 10-year stopped its ascent, volatility rose and tech's market leadership has been challenged."
In the periods since the stock market peaked for the year in January, and after its most recent top mid-March, utilities, traditionally a defensive group of companies, have been the best-performing sector.
This doesn't do away with what several strategists are expecting to be a strong earnings season that could provide a lift to stocks. Several companies have raised their earnings guidance, and analysts are expecting more of the same, thanks to benefits from corporate tax reform, including share buybacks.
But that's exactly what could mark the death knell for earnings growth, the most important driver of stocks, according to Wilson. If 2018 earnings are disproportionately strong, it sets up the risk of an earnings recession in 2019 even if an economic one in the US is unlikely, he said.
"The bottom line for us is that the US equity market is going through a fairly clear topping process," he said.
It's a familiar warning for anyone who's kept track of Wilson's work in recent months. He had the most bullish outlook on stocks among major strategists in 2017. But his 2018 outlook, published late last year when volatility was still almost non-existent, warned that the favorable financial conditions keeping markets calm were set to turn.
That's certainly what investors saw in February, when the stock market had its first 10%-plus correction in two years as volatility spiked and moderate wage growth raised fears of inflation and higher interest rates.
Just before that, relentless buying from retail and institutional investors alike struck Wilson as euphoria, the stage that marks the beginning of the end of a bull market.
"With volatility now much higher, we think that a return to those levels of exuberance is very unlikely," Wilson said. "This leaves us with forward earnings estimates which are still likely to rise from here, at least for the next few quarters."
Still in a secular bull market
It's always hard to time market cycles. An investor who pulls out too early would miss out on what's historically the strongest period of the bull market — right before the peak. Also, it's commonplace for bull markets to be interrupted by big drawdowns.
It's why Wilson stressed that although we're seeing a cyclical top for US stocks, we're still in the middle of a secular bull market.
"Whenever one invokes the words 'late-cycle' or 'end of the cycle', the natural response is to want to sell everything, especially since memories of the 2008-09 or 2000-02 corrections are still vivid," Wilson said.
"Instead, we envision a 1-2-year consolidation with 10-20% price swings and concentrated pain in certain sectors that are either overbought, expensive or fundamentally challenged. This will not be the wipe-out scenario that some of the perma-bears out there have been warning about for the past eight years."
Wilson and his team included a checklist of signs that this phase of bull market is topping out. As seen below, they've ticked seven out of 10 conditions.
"We remain confident that our fundamental signals will happen later this year," Wilson said.
SEE ALSO: The volatility that rocked stocks was just the beginning — and 2 markets are at the epicenter of impending chaos, SocGen says
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- Tesla's stock has been remarkably resilient in recent days even as negative headwinds continue to pile up.
- Still, traders are paying close to the highest premium on record to protect against a big drop in the company's stock, indicating that worries linger under the surface.
- Follow Tesla's stock price here.
Based on how Tesla's stock has reacted to the past week's events, one might think it's downright invincible at this point.
Take Tuesday's price action for instance. Following an announcement that the company would temporarily suspend its Model 3 assembly line, Tesla's stock actually rose as much as 0.3% intraday before finishing the day 1.2% lower.
Then, on Wednesday, following reports that CEO Elon Musk wrote a letter to employees raising the company's Model 3 production target, the stock climbed more than 4% at one point.
Considering Tesla has drawn the ire of investors by repeatedly moving the goalposts for production estimates — which they've also missed on multiple occasions — the gain shows traders are still more than willing to take Musk's word for it, further reinforcing the company's air of invincibility.
But one statistic suggests Tesla investors are actually bracing for the worst. In fact, they're more worried than they've ever been.
As this chart shows, traders are paying close to the highest premium on record to protect against a 10% decline in Tesla's stock over the next month, relative to wagers on a 10% gain. The measure — known as skew — hit a peak in early April and has stayed elevated ever since.
Despite the resilience of Tesla's stock in recent days, it's not altogether surprising that traders are paying up for downside protection when you consider the many headwinds that have rocked the company in recent months.
Those hurdles include an an ongoing government investigation into a fatal Model X crash in California and a downgrade from Moody's. More recently, a report from the Center for Investigative Reporting out Monday said Tesla deliberately concealed serious injuries from public reports to boost its safety statistics.
And while those issues combined to drag Tesla shares down 16% over a series of weeks, 71% of Wall Street analysts covering the company still have either a "buy" or "neutral" rating on the stock. This once again reaffirms the idea that despite its myriad woes, Tesla can do no wrong in the eyes of many.
One last caveat that must be mentioned is the propensity for investors to short large technology companies as a proxy for a broader market hedge. Tesla in particular is a lightning rod for this strategy, due to the outsized returns generated by shorting it, according to financial analytics firm S3 Partners.
In fact, from March 19 through March 31, shorting Tesla yielded a whopping 16.7%, almost four times more than a strategy that involves shorting exchange-traded funds tracking the benchmark S&P 500.
At this point, it's anyone's guess what the next month will hold for Tesla. But regardless of what happens, if things end up going awry for the heavily scrutinized company, traders seem ready for it.
SEE ALSO: An unconventional hedge has been creating 'turbo-charged' returns for worried stock traders
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- With its $55 million opening-weekend take in China, Dwayne Johnson's latest movie, "Rampage," is further evidence he's one of the few actors who can bring in major coin across the world.
- But his dominance in China, the world's second-largest movie market, has been years in the making.
For many studio heads these days, glancing at how their latest movie did in China is in some ways more important than seeing how it did in North America. That is because things are changing drastically for an industry in which the domestic box office had been considered the true indicator of a movie's worth for over a century.
Since the early 2000s, the movie market in China has gone from almost nonexistent to second behind only the US. And it could become No. 1 by 2020, as movie theaters continue to be built at a hurried pace to feed the interest of not just the Hollywood titles but those made by the country's burgeoning homegrown production industry.
Everyone in Hollywood is trying to figure out how to navigate this sea change. Which stories work best? Which are duds? And which movie stars can rake in the cash?
That last one has become an easy answer: Dwayne "The Rock" Johnson.
His latest CGI (and testosterone) heavy blockbuster, "Rampage," won the US box office over the weekend with a $35.8 million take for its studio Warner Bros. But what the movie did in China has the studio ecstatic, as it took in $55.2 million there as part of a $115.7 million international gross.
But this is far from an overnight success. The Rock has been big in China for a while.
Dominance years in the making
Johnson's elevation to a global box-office draw came when he joined the "Fast and the Furious" franchise with 2011's "Fast Five." But his potential worth in China expanded dramatically over the next few years.
In 2013, "Fast & Furious 6" became the first movie in the Universal franchise to play in China (though years' worth of bootlegs of the previous movies were undoubtedly floating around the country). It took in a respectable $66.5 million there. But when "Furious 7" played there in 2015, it went gangbusters, taking in $391 million in China. A few months later, Johnson showed he didn't need the "Fast" fam to make it in China, where "San Andreas" went on to earn $103.2 million.
 The next movie starring Johnson that went to China was the 2016 animated film "Moana" ($32.7 million), and then in 2017 "The Fate of the Furious" found incredible success there with $392.8 million, helping the movie earn $1.2 billion worldwide.
With audiences in China already getting a glimpse of Johnson this year when "Jumanji: Welcome to the Jungle" opened there in January ($78 million), the $55 million "Rampage" opening suggests it doesn't matter whether he's with an ensemble or solo: They want to see Johnson.
"Johnson continues to prove that he is the most bankable star in the world with his growing global appeal," the comScore box-office analyst Paul Dergarabedian told Business Insider. "It's hard to imagine any other star who could have catapulted 'Rampage' to a nearly $150 million worldwide debut."
But in an indication of just how important China is, The Rock made sure to spend some time there before "Rampage" opened.
Mr. Johnson goes to Shanghai
It's pretty standard to tour the globe for publicity on a major Hollywood release, but when you're a huge star like Dwayne Johnson, the hustle can be narrowed down to some key regions. And Warner Bros. made sure one of Johnson's stops was in China.
Johnson went on a promotional tour in Shanghai for "Rampage," his first time visiting the country's largest city, a studio source told Business Insider.
And the way he was treated, he's certain to return.
The movie's press conference in the city was live-streamed through multiple partners across the country, there was a fan screening in Shanghai's biggest theater, and Johnson extended his likability across all ages after he befriended three kids who were dressed as the three monsters from the movie during the press conference (the movie is based on a popular video game in which giant monsters destroy cities).
"Dwayne, or 'Johnson' as they call him in China, was in great spirits and charmed all of the audiences with his signature enthusiasm and humor," the source said.
Along with the $55 million opening weekend, "Rampage" took in $15.7 million on its opening day in China, the third-highest opening day ever for a Warner Bros. movie in the country.
"Dwayne Johnson and giant monsters — that's the perfect recipe for a hit in China these days," Jeff Bock, a senior analyst for Exhibitor Relations, told Business Insider. "In fact, I wouldn't be at all surprised if that was the tipping point for 'Rampage' getting green-lit in the first place."
In an era when the mega movie stars are considered less of a draw than a good superhero movie with "regular" stars, Johnson is showing he's an exception to the trend. He is already a household name in the US, and he's ahead of most stars in conquering China. SEE ALSO: All the Marvel Cinematic Universe details you need to remember before seeing "Avengers: Infinity War"
Join the conversation about this story » NOW WATCH: Dropbox CEO talks about how he went from rejecting Steve Jobs to an $11 billion IPO 
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- The majority of Americans think housing is a good investment, a survey by the New York Federal Reserve showed. But there are interesting differences by region.
- The regions most optimistic on housing are also the most expensive and most competitive for people trying to make that investment.
- It's especially tough in the cheapest end of the market, where demand is strongest.
More than a decade after the housing bust, most Americans agree that a house is a good investment. But there are interesting differences depending on where they live, annual surveys conducted by the New York Federal Reserve show.
Rising home prices have inspired confidence in the housing market, and vice versa. But the West, the region that's most confident in the housing market, has also become the poster child of the new affordability and supply crisis: prices are rising faster than incomes, and there aren't enough affordable houses for young, first-time buyers.
Every year, the New York Fed conducts a survey that poses this hypothetical question: if you had a huge sum of money to invest anywhere, would buying a home in your zip code be a good or bad investment relative to other financial options?
The most recent survey showed nearly two-thirds of people thought housing was a "somewhat good" or a "very good" investment.
But beyond the majority agreement, there were regional differences that serve as a reality check for hopeful homeowners.
"This likely reflects differences in recent home price growth, which has been strongest in the West and weakest in the Northeast (although even there, price growth as measured by CoreLogic averaged a cumulative 19 percent over the last five years)," the New York Fed's Andreas Fuster said in a blog.
"Of course, it is also possible that households' enthusiasm about housing as an investment — despite the negative experience from the 2007-12 drop in house prices — helped sustain the house price recovery post-crisis."
A separate report from the National Association of Realtors released on Wednesday broke down housing affordability across America by assigning a score based on how many homes are accessible in each income percentile. As expected, several cities in California like Los Angeles, San Diego, and San Francisco have the lowest scores. Here, a typical household can only afford 3%-11% of active listings on the market.
By comparison, the typical household in metros with high scores including Youngstown, Ohio and Wiles-Barre, Pennsylvania can afford nearly 75% of homes on the market.
These findings confirm "the lack of entry-level supply is putting affordability pressures on too many buyers – especially those at the lower end of the market, where demand is the strongest," said Lawrence Yun, the NAR's chief economist.
Existing homeowners in the most expensive, most bullish West Coast states can rest easy if their properties aren't hit by another crisis anytime soon. But for those looking forward to investing in a house, it likely won't be an easy purchase. SEE ALSO: One of Trump's biggest accomplishments could make the next recession worse
DON'T MISS: All the crazy things happening in San Francisco because of its out-of-control housing prices
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- As trade war fears and geopolitical tensions swirl, Macquarie says investors are overlooking a major market headwind.
- The firm breaks down the market's true "bogeyman" and offers some trading recommendations for navigating increasingly choppy waters.
With so many countervailing forces whipsawing markets, you can hardly blame investors for overlooking a huge hurdle that's staring them right in the face.
Whether it's fears of a global trade war or escalating geopolitical tensions, recent headlines have been filled with headwinds that appear potentially catastrophic — at least on the surface.
Viktor Shvets, Macquarie's head of global equity strategy, argues that investors should instead focus on a worsening situation that has been flying under the radar.
"The rising 'bogeyman' is the potential for significant liquidity drainage occurring at the time when investors are already on the 'wrong side' of China and eurozone, with a possibility of stronger-than-currently-anticipated reversal of reflationary momentum," Shvets wrote in a note to clients.
If these concerns sound familiar, that's because the so-called liquidity drainage cited by Shvets was a major worry for investors before the specter of a trade war loomed. He views it as a byproduct of the Federal Reserve's monetary-tightening process, which has already begun and will continue in earnest. According to Shvets, the Fed isn't keeping an eye on liquidity and appears on track for a policy error.
But that's not all. Shvets is also perturbed by the US seemingly being on the "wrong side" of China and the eurozone. No, he isn't referring to the brewing trade war — he means reflationary momentum is slowing in both places and bleeding into the global market.
The chart below highlights the ongoing tightening of credit conditions, which Shvets says complements the idea that liquidity is "already starting to drain."
So with all this in mind, what's an investor to do? Shvets has some positioning ideas.
He says traders should focus on investment factors like quality, sustainability, and thematic approaches. He also recommends they adopt a "hedgehog" strategy that involves staying a singular course, rather than flitting from one idea to the next in pursuit of meaningful patterns that might not exist.
As for specific geographical allocations, Shvets likes northeast Asia, and he says Macquarie has overweight positions in China, Korea, India, and Taiwan.
"We maintain our long-held view that there are no longer any 'safe places' and that value morphed from long-term strategy to short-term trading opportunity," he said. SEE ALSO: An overlooked corner of the market has been quietly crushing it — and Bank of America has 2 trades to capitalize on more strength
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
NEW YORK (Reuters) - The U.S. Commerce Department has granted ZTE Corp's request to submit more evidence after the agency banned American companies from selling to the Chinese technology firm, a senior Commerce official said on Saturday. 
- The $1.5 trillion tax law signed by President Donald Trump last year could worsen the next recession, according to economists and strategists at Morgan Stanley.
- In a report on Tuesday, they likened the boost from the tax overhaul to a "happy hour" after which the economy would be vulnerable to a painful hangover.
- Financial markets have already priced in much of the boost from tax cuts, they said.
Enjoy the tax cuts now, but brace for the next time the economy goes bust.
According to Morgan Stanley, the $1.5 trillion tax law signed by President Donald Trump last year could make the next recession worse than it would have been without the tax cuts.
It's not all downhill from here: Americans have extra income to spend, and that's good for them and for the economy.
"But, beyond that, positives become less reliable, and, in our view, downsides are less discussed," a team of strategists and economists including Michael Zezas said in a note on Tuesday.
"While this policy supports growth in the near term, it may worsen the next downturn while limiting the fiscal reaction to it. Even if those concerns are unfounded, we think much of fiscal stimulus' 'good news' is already in the price of key markets."
To that end, it's not really "morning in America," as Ronald Reagan's 1984 reelection ad campaign declared. Rather, it's "happy hour in America," Morgan Stanley said.
The analysts offered three reasons the US economy was vulnerable to a painful hangover. First, the stock market, a forward-looking gauge of value, already surged some 20% last year as the Tax Cuts and Jobs Act moved closer to Trump's desk. Bond yields also rose. To Morgan Stanley, this suggests investors have already priced in the benefits of fiscal stimulus.
Their second reason is that many provisions in the tax act are not permanent; for example, personal tax cuts expire in 2025.
And finally, fiscal stimulus was passed when the economy was robust, meaning it may be harder to use the same tool to fight the next downturn. Republicans may find it politically difficult, Morgan Stanley said, to further expand the budget deficit after compromising this time around to pass the biggest tax overhaul in 30 years.
That means investors should factor in the risk that the next recession is not "shallow and short" — an opinion Morgan Stanley says it's not hearing from many clients.
"We advocate a focus on sector and stock-specific alpha as these late-cycle dynamics portend narrowing markets and a cyclical top for equities later this year, in our view," the firm said. "In Treasuries, we see the curve continuing to flatten on Fed hikes, and yield downside as the year progresses and the economic outlook becomes more mixed." SEE ALSO: MORGAN STANLEY: We’re already seeing the 'true tell' of the start of a bear market
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- An overlooked area of the market has been outperforming, sporting the only positive information ratio out of all major asset classes since the start of 2018.
- Bank of America Merrill Lynch sees the group continuing to outperform, and it offers two trade recommendations for investors seeking to capitalize.
Both equity and bond investors have had a rough go of it over the past several weeks as volatility has reentered the market, whipping up price swings and making life difficult for speculators.
But under the surface, away from the flashy headlines that regularly grace financial news sites, one asset class has been grinding out positive returns in relative anonymity.
 As the chart to the right shows, commodities are the only major group to generate a so-called information ratio — defined as the active return over a relevant benchmark — of more than zero this year.
It's not a fluke, Bank of America Merrill Lynch says.
"As bond and equity markets continue to suffer the consequences of tighter monetary policy and the normalization of interest rates, rising inflationary pressures across the economy (which will in turn force the Fed to continue to tighten policy) are acting as a tailwind for the commodity complex," William Chan, a derivatives strategist at BAML, wrote in a client note. "This nascent outperformance of commodities may prove to have more legs."
In a cruel twist of fate, the elements Chan mentions as supporting commodities — higher inflation and rate hikes — are among the biggest fears for stock and bond investors. And this dynamic has manifested itself in what BAML calls a "record disconnect in cross-asset risk pricing."
It is specifically referring to global equity hedges sitting close to their most expensive levels in more than 10 years — a development that stands in direct contrast to other asset classes and even other stock markets (most notably Europe).
So now that you're armed with all of this information, how can you use it to profit? BAML has two specific trades in mind:
1) Buy $14/$15 call spreads expiring in July 2018 on the United States Oil Fund (USO)
BAML cites its own commodity strategy team, which last week raised its second-quarter target to $80 a barrel for Brent and to $76 a barrel for West Texas Intermediate in the wake of escalating geopolitical risks and more likely cooperation between Russia and the OPEC cartel of oil producers.
"We think call spreads on USO set up well with 3M ATMf implied vol currently in the 14th percentile over the past 3 years but 3M ATMf-110% call skew near the most inverted levels on record," Chan said.
2) Buy SPDR Energy Select Sector ETF (XLE) outperformance calls versus the S&P 500
BAML notes that the performance of energy stocks relative to the S&P 500 is usually positively correlated to the price of oil, so this strategy matches the firm's bullish energy outlook.
"We favor outperformance calls, as the max loss is limited to the upfront premium paid and the rewards vs. risk is more asymmetric." SEE ALSO: The market's most outspoken bear sees recent turbulence fueling his forecast of a 60% stock drop — and says it's too late to get out
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- For the duration of the nine-year bull market, US stocks have been aided by a so-called secret medication that has helped them recover.
- The Leuthold Group argues this backstop has disappeared, leaving the market particularly vulnerable to weakness.
When stocks get whacked, so do bond yields. Or at least they're supposed to.
That has been the case for eight of the past nine 10% stock corrections, which have been accompanied by bond-yield declines of 50 to 150 basis points, according to data compiled by The Leuthold Group.
It's the one outlier — which just so happens to be the most recent instance — that has the firm worried. Since the stock market peaked on January 28, 10-year Treasury yields have actually increased by 10 basis points, Leuthold points out. That's despite the sharp correction that rocked all major indexes in the interim, reaching its darkest depths in early February.
Leuthold sees this as a highly alarming development. It says the corresponding drop in bond yields has actually been instrumental in aiding past correction recoveries.
"To some extent, these corrections proved self-medication," Doug Ramsey, Leuthold's chief investment officer, wrote in a client note. "Falling stock prices forced yields to decline, providing another dose of stimulus to the economy while at the same time reducing an already-low hurdle rate for investors."
The relationship between stocks and bonds that has so piqued Leuthold's interest is a crucial yet overlooked one. And the firm's findings so far in 2018 have been prescient.
In a report from early February — right before US stocks hit their year-to-date low — the firm warned that the speed of credit deterioration had flashed a sell signal. Given how accurate that ended up being, investors would be wise to heed its warning.
But that's not to say the nine-year equity bull market is headed for an imminent demise. There are still plenty of catalysts underpinning further strength, most notably continued corporate profit growth, and recent headwinds have been minimized.
What Leuthold is saying is that the market's ability to recover from a meltdown is severely hampered without the baked-in backstop of lower bond yields. Whether it actually does fall off a cliff is another story entirely.
"We're not arguing the market can't bottom without the drug of lower yields — and indeed the slack in the economy that allowed yields to drop no longer exists," Ramsey said. "Just beware that the bull's secret medication for longevity is not currently available. And a bull that's 'off its meds' sometimes exhibits not only change in character, but a change in species as well." SEE ALSO: Forget a trade war — there's a more threatening 'bogeyman' that should have traders very scared
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- Tiger Global Management led a $17 million Series A round in Green Bits, a software platform for cannabis dispensaries.
- It's one of the largest Series A rounds for a cannabis tech company to date.
- Tiger Global's participation in the round is a sign that big money is starting to take the emerging sector seriously.
Big money is getting into the booming cannabis tech sector.
Tiger Global Management, a New York City-based investment firm that manages $22 billion, led a $17 million investment into Green Bits, a software platform for marijuana dispensaries.
It's a sign that mainstream investors are starting to take the emerging sector — which analysts say could generate $75 billion in sales by 2030 — seriously.
Casa Verde Capital, a Los Angeles-based venture fund that focuses on the "ancillary" side of the cannabis industry (that is, tech companies that provide software or payroll services to the cannabis industry but don't actually handle marijuana), also participated in the round.
Tiger Global declined to comment for the story. However, Karan Wadhera, the managing partner of Casa Verde, told Business Insider his firm has recieved a lot of interest from large institutional investors over the last quarter.
"I think this is a testament to both the size and pace of growth in the cannabis industry," Wadhera said. "Six months ago, many top VCs would not be ready to entertain a conversation on cannabis. Now we're seeing firms like Tiger Global ready to invest."
While many VC funds may want to invest in the cannabis industry, their limited partners — typically large, institutional pension funds or insurance companies — don't want to take on the risk as cannabis is considered an illegal, Schedule I drug by the US federal government.
Big money is coming for cannabis tech
Cannabis is legal in 9 states and Washington D.C., though institutional investors have generally been averse to putting money into the space. The rules in the cannabis industry, similar to other emerging sectors like cryptocurrencies, are fluid and constantly changing. Firms that invest in these nascent spaces risk bringing unwanted scrutiny from regulators.
Tiger Global's move to lead a Series A round into a cannabis tech company is a sign that this is beginning to shift. It's likely that bigger hedge funds and investment firms will start investing in cannabis tech companies that don't touch the plant directly and therefore don't come into conflict with federal law, like Green Bits.
Recent political developments, like President Donald Trump assuring Colorado Sen. Cory Gardner that he would support legislation protecting state's rights to legalize marijuana, have served to "de-risk the industry," Vahan Ajamian, an analyst at Beacon Securities said in a note.
Congress is also working to come up with more coherent rules for banking in the cannabis industry and for resolving federal-state conflicts, despite Attorney General Jeff Sessions' opposition to legalization.
"The US cannabis sector will have another year under its belt with no material negative federal developments – and potentially positive ones, providing investors with increased comfort," Ajamian wrote.
The lack of institutional players in the cannabis industry has provided an opening for firms like Casa Verde, as well as a host of other hedge and venture funds that invest solely in cannabis tech companies and understand the complicated regulations involved in the space.
Green Bits wants to be in 'every state' that has legalized cannabis
The Series A round led by Tiger Global brings Green Bits total raised to $19.3 million, which the company hopes to use to expand into new markets.
Ben Curren, Green Bits' CEO, told Business Insider that Wadhera made the introduction to Tiger Global after Casa Verde invested in Green Bits last summer.
"They were really comfortable investing in us because we're really a tech company, like any other they've dealt with before," Curren said. Tiger Global has made a number of venture investments in established tech companies, including Spotify and Wealthfront, according to CrunchBase.
Curren, like the rest of Green Bits' management team, is a seasoned tech executive. He founded and sold a startup to GoDaddy before starting Green Bits with his own money to capitalize on the cannabis space.
Green Bits, headquartered in San Jose, California, plans to use the financing to get their software platform into more dispensaries in states where marijuana is legal, Curren said.
The company's point-of-sale system, which helps dispensaries comply with regulations and drive sales, is already in over 1,000 dispensaries in legal states, Curren said, and he wants to expand Green Bits' business into payments.
Most dispensaries don't allow customers to charge their purchase to their credit card, as most big banks refuse to do business with cannabis dispensaries because of cannabis' federal status.
"We're trying to get Visa and Mastercard in dispensaries," Curren said, adding that his vision for the product would look something like Square, the credit-card processing company.
"We've aligned with some good partners, but it's going to take a couple steps to get there," Curren said.
Green Bits already processes more than $2.2 billion in sales annually through its point-of-sale system, Curren told Business Insider. Like many cannabis companies, Green Bits is setting its sites on dominating California and the potentially lucrative East Coast as more state markets, like Massachusetts and New York, open up.
"Our goal is to be in every state that has legalized cannabis in some way," Curren said. With an investor like Tiger Global, that goal may not be so far away.
Read more of our cannabis industry coverage:
SEE ALSO: The rising stars of marijuana's investment scene that everyone from Wall Street to Silicon Valley should know
Join the conversation about this story » NOW WATCH: What will happen when Earth's north and south poles flip 
When stocks trade too similarly, it's tougher for stock pickers to profit from unique opportunities.
The average three-month stock correlation on the S&P 500, a gauge of how uniformly stocks on the index trade, jumped from 9% in January to 52% last week. That was the largest and fastest increase outside 1987, according to David Kostin, Goldman Sachs' chief US equity strategist.
But there's some good news for stock pickers: Kostin expects correlations to fall, as regulation on tech companies and other policy risks create more individualized opportunities.
"We expect correlations for these stocks would likely revert to historical averages and present potential buying opportunities given their underperformance since March," Kostin said.
The list below highlights 21 buy-rated stocks that Kostin says are more likely to have heightened responses to individual news and offer the best opportunities for stock pickers to beat their benchmarks.
"Consumer Discretionary and Health Care currently offer the best stock-picking opportunities," Kostin said. SEE ALSO: GOLDMAN SACHS: Tech stocks face a looming risk that would make them less appealing
MGM Resorts International
Ticker: MGM
Sector: Consumer Discretionary
Market cap: $19 billion
Upside to Goldman Sachs' target: 28%
Amazon
Ticker: AMZN
Sector: Consumer discretionary
Market cap: $691 billion
Upside to Goldman Sachs' target: 28%
Nucor Corp.
Ticker: NUE
Sector: Materials
Market cap: $19 billion
Upside to Goldman Sachs' target: 28%
See the rest of the story at Business Insider
- Bank of America Merrill Lynch's fund-manager survey shows a handful of statistics suggesting bullish sentiment has been tempered.
- Yet the stock market continues to climb higher, and BAML sees two reasons investors are so reluctant to throw in the towel.
As the stock market has shaken off recent turbulence and continued its long-running chug higher, some shifts have occurred under the surface that suggest investors aren't as confident as they seem.
For one, cash holdings jumped to 5% from 4.6%, according to Bank of America Merrill Lynch's latest monthly fund-manager survey, which includes 216 panelists who manage $646 billion. That risk-averse behavior has also been accompanied by equity hedging levels hitting 18-month highs.
Further, a record number of BAML's survey respondents said companies were excessively levered.
That would all suggest the stock market is heading for some sort of bearish reckoning — the type that transpires when investor sentiment rolls over and traders flee to safety.
Not so fast, says BAML, which sees two main drivers keeping equity demand afloat.
The first is extremely straightforward: Fund managers simply don't see an imminent catalyst threatening stocks. Just 13% see recession as likely, while only 18% think the nine-year bull market has peaked. As BAML's chief investment strategist, Michael Hartnett, puts it, a "true bull capitulation is absent."
Second, BAML argues fund managers don't have a favorable alternative. When it comes to investing in bonds over stocks, the firm says 10-year Treasury yields will have to hit 3.5% before such a strategy becomes truly enticing. As of Tuesday morning, that yield was at 2.83%.
Still, if the past few months have been any indication, stock market conditions can flip at a moment's notice. One potential catalyst is earnings season, which has historically dictated short-term equity fluctuations. While large Wall Street banks have largely exceeded analyst forecasts, BAML's survey shows global growth and profit expectations are at 18-month lows.
If the companies set to report in the coming weeks miss the mark, it's possible that uneasy market bulls will take even more drastic steps toward scaling back risk holdings. After all, if the survey is any indication, they're already headed in that direction. SEE ALSO: BANK OF AMERICA: A wildly successful stock-trading strategy is no longer working — and it signals that a bubble has burst
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
WASHINGTON (Reuters) - A telecommunications standards organization - GSMA - said on Saturday it is delaying implementation of a new cellphone technology due to a U.S. government probe of alleged coordination between the group, AT&T Inc and Verizon Communications Inc to hinder consumers from easily switching wireless carriers. 
- One of the lessons of the dot-com bust was that services that seem too good to be true probably are.
- Since it dropped its price to $10 a month, MoviePass, the subscription movie ticket service, has seemed to be just that — too good to be true.
- Executives insisted the service was rationally priced and the company was developing a valuable asset in its large and growing subscriber base.
- But documents released showed the company is doing just what skeptics suspected — losing gobs of money.
Of all the companies that came and went in the dot-com boom and bust, the one I most regret not using before it died was Kozmo.com.
Kozmo was essentially an online convenience store. At just about any hour, you could place an order for whatever it was you were in need of at that moment, and the company would deliver it — quickly and for free.
Because it didn't have a minimum order size, you could get away with ordering a single candy bar or a pack of gum. A buddy of mine, after getting a song stuck in his head, would go on Kozmo and order a single CD to be delivered to his house.
The service was so amazing at the time, it sounded too good to be true.
And, of course, it was.
It turned out that once you factored in delivery costs, Kozmo was losing money on every sale. Its net loss in 1999, the last year it publicly disclosed, was $29 million which was 8 times the size of its meager total revenue for that year. By the time Kozmo shut down in 2001 — four years after it launched — it had burned through $250 million in venture capital funding and had little left to show for it.
The lessons of Kozmo and other, similar dot-com busts have kept coming back to me repeatedly in recent months, particularly as the craze over MoviePass continues.
MoviePass has been a big hit with consumers — but that's its problem
By now, you've probably heard about MoviePass. It's the company that offers a subscription service that allows you to attend one movie each day in the theaters for only $10 a month.
MoviePass has actually been around since 2011, but barely made a stir with the general public until it cut its rates to the $10 price in August. Since then, its service has taken off, hitting 1 million subscribers before the end of last year and 2 million by February. Just by itself, MoviePass bought 1 million tickets to "Black Panther" for subscribers.
But ever since MoviePass made a splash by announcing its $10 a month plan, I've thought there was something very Kozmo-like about it. The company's service sounded just too good to be true.
 The average price of a single movie ticket was almost $9 last year, according to the National Association of Theatre Owners. At that price, MoviePass subscribers starts saving money by using the service with the second movie they see each month. Each movie they see after that each month is essentially free.
Things are even better for customers in areas such as New York and San Francisco, where ticket prices are generally significantly more than the average, and often top $10. Subscribers in those areas can often save money on the very first movie ticket they buy each month if they use MoviePass. And if customers signed up for the annual plan that MoviePass temporarily offered — which averaged about $7.50 a month — they can save even more money.
That's a great deal for consumers. But it's a recipe for disaster for a company. The whole thinking behind MoviePass is to encourage consumers to get back into the habit of watching movies in theaters. But it loses money on anyone who sees more than one movie in a month. And the customers that use the service the most are the ones that cost the company the most money.
MoviePass has been publicly dismissing concerns
MoviePass CEO Mitch Lowe, a former Netflix executive, has been shrugging off these concerns. Instead of the price being irrationally low, Lowe has argued that the service is priced just right. The average casual moviegoer only sees about one movie a month, meaning that the service is priced at around breakeven for them and for the company.
Meanwhile, MoviePass is building up a valuable asset in the form of its large and growing subscriber base, Lowe has argued. Theaters and other companies will pay to advertise to them, he's predicted. And theater chains will end up offering the company discounted tickets and a cut of concession sales, figuring that MoviePass is helping to bring in more viewers to their venues than they'd otherwise have, he's said.
That's a nice dream, but as MoviePass' parent company made clear this week, its reality is much closer to what I believed it to be — MoviePass is losing money hand over fist.
But the company's business model looks a lot like a dot-com bust
The company's annual report indicates that MoviePass is spending far more money buying tickets than it's getting in subscription revenues, a business model that Kozmo would have been familiar with.
Thanks to that, as Business Insider reported, MoviePass has been burning through about $20 million a month since September. Just between December 19 and February 20, parent company Helios and Matheson, which only took control of MoviePass on December 11, advanced MoviePass nearly $56 million to support its operations, Helios disclosed in its annual report this week. Helios gave MoviePass another $35 million between March 1 and April 12.
In fact, MoviePass is burning through money so quickly that Helios had to go to the public markets to raise more funds. And even after raising $30 million this week, it warned investors that it would need to keep raising money.
MoviePass has become such an albatross for Helios that the company's auditors issued a warning in its annual report that there was substantial doubt it would remain in business over the next year.
That too was familiar. We saw a lot of similar "going concern" warnings during the dot-com bust.
Maybe I'm wrong. Maybe Lowe and MoviePass will pull this out. Maybe the company won't be our era's version of Kozmo.
But right now, I feel like I've seen this movie before, and I know the ending. SEE ALSO: A Wall Street analyst thinks he's figured out the real price Netflix would need to charge to break even — and he says it would destroy the company's growth
Join the conversation about this story » NOW WATCH: How does MoviePass make money? 
- UBS used estimates of how county-level unemployment has changed in the last years to illustrate broader trends in the economy.
- Unemployment trends in counties dependent on the oil industry provide an interesting view on the state of the energy market over the last several years.
- Improving unemployment rates in industrial areas suggest a possible boom in manufacturing investment in the near future.
Even in a global economy, what happens at the local level can be important.
A UBS team led by economist Seth Carpenter analyzed year-over-year changes in US county-level unemployment rates and saw that they illustrated some bigger patterns in the national and global economies. "The data cannot be used in isolation, but when combined with knowledge of the geographic distribution of economic activity in the US, the data can identify shifts in industrial activity and identify new trends," Carpenter wrote in a recent note to clients.
The report focused on how local unemployment rates changed between subsequent Februarys, based on data from the Bureau of Labor Statistics. Business Insider took a similar look at the Bureau's Local Area Unemployment Statistics estimates to illustrate how the unemployment rate has changed between February 2017 and February 2018 in each of the 3,142 US counties and county equivalents:
Most counties saw an improvement in their unemployment rates over the year, as can be seen in the large swaths of blue, indicating lower rates in February 2018 than in February 2017.
The UBS team showed how this kind of analysis can illustrate patterns in different sectors of the economy. Much of the last four years of the rise, fall, and recovery in the US oil industry appear in the unemployment estimates in the parts of the country where the oil industry is dominant, as circled in the following graphic from UBS:
The February 2016 map shows a big increase in unemployment in shale-heavy regions, reflecting the prior year of falling oil prices. By February 2018, prices had significantly recovered, and UBS observed that unemployment rates dropped across many of those regions.
Carpenter noted that this county-level data provides a strong signal about a bigger macroeconomic phenomenon: "Using the four maps in succession identifies both the timing of the economic ups and downs in the energy sector and the regions where that stress was occurring. Had we not already known about the changes in energy production, the specificity of the regions would have allowed us, in most cases, to drill down at the micro level and identify the sources of the change."
The researchers conclude by observing that falling unemployment rates in industrial areas stretching from the "rust belt" counties of the Midwest through the more recently industrialized parts of the inland Southeast suggest a possible uptick in manufacturing investment, although more information is likely to be needed to confirm that optimism. SEE ALSO: Every US state economy ranked from worst to best
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
ZURICH/MOSCOW - Assets totaling between $1.5 billion and $2 billion have been frozen as a result of sanctions imposed on Russian oligarch Viktor Vekselberg and his Renova Group conglomerate, two sources close to the matter told Reuters on Saturday. 
- Bank of America Merrill Lynch sees the tech industry facing some considerable headwinds going forward, and thinks investors should reduce exposure to the sector.
- Michael Hartnett, the firm's chief investment strategist, provides 10 reasons why.
They say all good things must come to an end. And a version of that is playing out in the stock market as the once invincible tech sector suddenly looks vulnerable.
That's according to Bank of America Merrill Lynch, which says global investors should be looking to cut back their allocations to tech.
From a broad industry perspective, tech's growth, power, and visibility make it "extremely vulnerable to increased regulation and taxation, most especially if recession wrecks government finances," the firm's chief investment strategist, Michael Hartnett, wrote in a recent note to clients.
And while he's not yet calling for a full market collapse, Hartnett also forecasts some pain stemming from a "full bull detox," or a reversal of the risk-seeking behavior that has characterized it for so long.
It's all part of what he sees as a major shift occurring in markets. And for tech specifically, he sees 10 major headwinds facing the industry that he says should prompt traders to scale back exposure. Here they are (all quotes attributable to Hartnett):
- Excess returns and high valuations — "US tech is best performing sector in QE era, up annualized 20%; ex-tech the S&P 500 would be 2,000 not 2,600 today." Put simply, Hartnett is arguing tech has peaked, and has nowhere to go but down.
- "Bubbly" prices — "US internet commerce stocks soared 624% in 7 years at their peak, 3rd largest bubble of past 40 years."
- "Fat" market caps — "US tech market cap ($6.4tn) exceeds that of Eurozone ($5.0tn); FAAMG+BAT market cap of $4.9tn exceeds Emerging Markets ($4.6tn ex-BAT); Facebook’s (25k employees) market cap > MSCI India (1.3bn people)."
- Earnings hubris — "Tech & ecommerce companies currently account for almost 1/4 of US EPS; this level that is rarely exceeded, and often associated with bubble peaks."
- Politics — "Privacy becoming policy issue as equivalent to entire global population searches Google every 2 days; last year 1579 “data breaches” exposed 179 million records of personal names plus financial or medical data; pending US & EU regulation threaten 4% of tech revenue."
- Wage disruption — "IMF says 50% of the decline in labor’s share of income is attributable to technology (25% due to globalization); number of global industrial robots by 2020 will be 3.1 million (was 1 million in 2010)."
- Tech is cash-rich, tax-light — "Sector has $740bn of cash overseas (larger than all other sectors put together ($510bn); effective rate of tax on US tech companies is 16.9%, lower than the 19.3% paid across the S&P 500." Hartnett's argument is that this makes them more vulnerable, should these advantages dissipate.
- Tech is the most lightly regulated sector — "Just 27K regulations for tech; by comparison manufacturing regulated by 215K rules, financial sector by 128K."
- Tech is particularly exposed to trade developments — "US tech has highest foreign sales exposure (58%) of all US sectors."
- "Occupy Silicon Valley" — "Tobacco (1992), financial (2010), biotech (2015) industries illustrate how waves of regulation can lead to investment underperformance."
SEE ALSO: BANK OF AMERICA: A wildly successful stock-trading strategy is no longer working — and it signals that a bubble has burst
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
- Tesla has been drowning in negative news of late.
- Meanwhile, the troubled launch of its Model 3 is finally getting on track.
- Conservatively, Tesla could achieve an annual production rate of over 100,000 Model 3's.
Despite all the bad news from the past 10 months, the Tesla Model 3 is poised to be a huge success.
The car is a classic example of missing the forest for the trees. Yes, the Model 3's rollout has been an epic fail, and Tesla CEO Elon Musk looks sort of deluded in his production targets (20,000 vehicles by the end of 2017, versus a reality of barely 2,000).
But now we have one critical new fact to accompany an old fact. The new fact is that Tesla is nearing 2,500 in weekly Model 3 production. That's a milestone and proof that the company can build over 100,000 Model 3's in a 12-month period.
The old fact is the estimated 400,000 pre-order that have been booked for the car. That's a debated number, but Tesla says it's remained stable through the Model 3's production ramp, so we can both give the carmaker the benefit of the doubt and note that even if that number plummeted, it would still be unprecedented in the auto industry. Nobody has ever logged that many advance orders for a vehicle.
(I could point out that nobody needs to, which would be churlish, but accurate. For example, if Ford figured there's annual demand for around a million new F-150 pickups, following a 2014 redesign, then the automaker just builds a million trucks into that demand — and nobody has to wait years for a new F-150, because they can just run down to the dealership on Saturday morning and drive home with a new truck on Saturday afternoon.)
The Model 3 is finally getting on track
The Kremlinology around Tesla interprets that Model 3 as a costly disaster, and it might turn out to be just that; no one is sure if Tesla will be able to make a profit on a low-priced, mid-sized all-electric sedan, given its messy capital structure (Tesla has shown itself to be far better at losing billions than making them).
But objectively, the Model 3 is slowly getting on track. This was inevitable: Tesla might be bad at mass-producing cars, but it has achieved a reliable 100,000-unit annual run rate with its Model S and Model X vehicles, so the fits and starts of "production hell" for the Model 3 are in the process of being overcome, and wouldn't you know it! Tesla is rolling over 2,000 Model 3's a week.
That's probably sustainable, even if Musk's next target of 5,000 per week by the end of June isn't. What this translates into is roughly 220,000 vehicles produced and delivered in 2018, and that's not crazy far off what BMW sold in the US in 2017, just over 300,000 vehicles. And BMW has a lot more vehicles to sell than Tesla's three.
The bottom line is that Tesla has become the dominant purveyor of luxury all-electric cars, with the Model 3 adding to its lead because the company isn't selling the $35,000 base version, but rather the upmarket premium trim levels at $44,000 (Business Insider recently sampled a $57,500 example).
Time to step back from the hate
So let's take a step back from the negativity that's swirling around Tesla and assess what the company has done with Model 3. First, Tesla has made people want a relatively affordable electric car. There's no meaningful market for electric cars — they make up less than 1% of global sales — so selling over 100,000 a year if there aren't any more major Model 3 delays is quite an achievement.
Second, Tesla has done this with effectively zero advertising. You could argue that the rapturous levels of attention that Musk wrangles from the media represents many millions of dollars in free marketing, but that's a debate for another day.
Third, the car is pretty good. Assuming Tesla's traditional attitude toward fixing absolutely anything that goes wrong with early build vehicle — an infinite warranty for early adopters — most owners are going to be extremely happy with their Model 3's.
In the face of this, who can remain negative? Tesla short sellers, obviously. But also hardcore electric-car haters and people who just don't like Musk. There are reasons to not like him, starting with his flexible relationship with truthfulness and his tendency to didactically scold experienced auto experts when they question his methods.
The larger auto industry, by contrast, loves Musk. His appetite for risk is just what they dream of, so they can follow and chip away at his market share with much more plodding and conservative tactics. Remember, Henry Ford ruled the US auto market for a decade in the early 20th century, before General Motors came along and stole many of his customers, relegating Ford to a permanent second-place position that endures today.
This should actually be a chastening situation for some of the Tesla mega-bulls, who think that the company will take over the world. The car business doesn't work that way, and in any case, Tesla would be destroyed if the entire globe switched over to EVs and Tesla had to spend the money to satisfy that demand. At its current pace, Tesla would require four more factories to build and sell a tenth of what GM did in 2017. And it would be building those factories at 21st-century prices, not at 20th-century costs.
Challenges continue to abound for Tesla, but one thing is now clear: the Model 3 is finally living up to expectations. FOLLOW US: On Facebook for more car and transportation content!
Join the conversation about this story » NOW WATCH: The best and worst things about the Tesla Model 3 
Retailers are filing for bankruptcy at record-high rates as Americans' changing shopping habits, along with years of overly aggressive store growth, continue to shake up the industry.
Just four months into the start of 2018, 11 US retailers have already filed for bankruptcy or announced liquidations.
Here's the retail carnage so far this year: SEE ALSO: Retail bankruptcies just hit an all-time high — and these 18 companies could be the next to default
Nine West
Nine West Holdings filed for bankruptcy in April.
The women's clothing and footwear company said it filed for Chapter 11 bankruptcy protection to help facilitate the sale of its Nine West and Bandolino businesses. The company listed debts of more than $1 billion.
"This is the right step to address our two divergent business profiles," Nine West Holdings' CEO, Ralph Schipani, said in a statement. "Once we complete the reorganization process, our company will have meaningfully reduced debt and interest costs and be well positioned for the future."
Claire's
The jewelry chain Claire's filed for bankruptcy in March. The company said plunging customer traffic to shopping malls led to its decline.
"The retail industry as a whole has been challenged by shifts in consumer purchasing preferences and habits," Claire's said in a bankruptcy filing.
The retailer plans to close 92 stores, most of which are located in malls.
The Walking Company
The shoe seller The Walking Company, which operates 208 stores in the US, filed for Chapter 11 bankruptcy protection in March.
See the rest of the story at Business Insider
Investors and portfolio companies increasingly prefer to arrange meetings directly
- There's been no shortage of news to scare investors this year, from US trade policy to interest rates.
- And now, Goldman Sachs' equity strategists have flagged another source of volatility that's set to be amplified in the coming months.
Nearly halfway into 2018, it's become even clearer that the calm that enveloped the stock market in 2017 was far from normal. US trade policy, inflation fears, and big-tech regulation are just a few of the issues that have rocked markets this year.
Goldman Sachs is now flagging another potential source of volatility on the horizon: the US midterm elections on November 6, when seats in the House of Representatives and Senate will be contested.
"Policy uncertainty and equity volatility usually register above average during midterm election years, rising in particular during the three months ahead of the election," David Kostin, Goldman's chief US equity strategist, said in a note on Thursday.
"US equities typically trade sideways during this period but rally around the election as uncertainty fades. Upcoming elections are one reason to expect that current elevated levels of uncertainty will persist in coming months."
This year, Republicans will contest to hold on to their majority seats in both chambers of Congress. They're looking to avoid what happened to Democrats in 2010, when Republicans took over the House.
Kostin noted prediction market data compiled by PredictIt.org, which suggests that Democrats will win the House, but Republicans will keep their Senate majority, creating a divided government.
"The current political environment suggests that uncertainty and volatility may remain elevated post-election given the likelihood that a divided government leads to an increase in congressional investigations," Kostin said.
While Kostin forecasts more volatile markets leading up to the election, there's much less clarity on where stocks could go after it. S&P 500 returns have varied widely following Democratic victories relative to Republican wins in the House. Also, a minority party has flipped the House in only three out of the last 11 midterm elections, so there's not much historical precedent for what prediction markets are betting on.
And so, Kostin cautioned that investors shouldn't rely on the small sample of sector returns around midterm election years.
"Historical correlations with policy uncertainty may be a more useful guide," he said, adding that defensive sectors tend to outperform when policy uncertainty rises, while tech and financials perform the worst.
Three specific issues will be in focus before and after election day, Kostin said: healthcare costs and drug pricing, government spending, and deregulation. SEE ALSO: GOLDMAN SACHS: Tech stocks face a looming risk that would make them less appealing
Join the conversation about this story » NOW WATCH: Wall Street's biggest bull explains why trade war fears are way overblown 
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