Ever wonder why Congress has an approval rating of 13%? Don’t. By all appearance the number is between 12 and 14 points too high. To wit: The U.S. House actually passed a bill last Thursday that would actually allow the nation’s smallest public companies to offer stock without getting approval from the SEC. The nation’s largest companies, of course, can only dream of such thoughtful lawmaker deliberation.

Microcap stock fraud has been estimated to run into the billions of dollars a year

 Under the proposed legislation, certain microcap and penny stocks, which the SEC defines as companies valued at less than $300 million, could use a regulatory shortcut known as a “shelf offering” to gin up their shares on a rolling basis. In effect, there would be no SEC review for the issuance of some of the riskiest securities at which individual investors can throw their money.

“Dump and dilute” schemes are when companies repeatedly issue shares for no reason other than taking investors’ money

Supporters state the obvious when they say the bill will let smaller companies use a fundraising tool heretofore restricted to bigger companies. What they don’t say is it would open the door to more stock scams. Fact is, microcaps have always been vulnerable to fraud because the shares trade infrequently and their price can be moved by stock promoters who sell the shares between themselves. There’s a reason the SEC maintains a task force that targets fraudulent offerings by microcap companies.

“Pump and dump” schemes involve the use of false or misleading statements to hype stocks

 Meanwhile, Wells Fargo announced on the same day it’s been slapped with a $185 million fine and has terminated roughly 5,300 employees for “widespread illegal” sales practices. The bureaucrats must think they’re leveling a sinking playing field.

What the markets have been doing…

After a month’s worth of relatively stable stock prices, volatility finally returned to the marketplace. The most notable action occurred Friday, where a sharp sell-off pushed the big indexes to their largest weekly swing since the start of the year. The trading week was, of course, shortened for the Labor Day holiday on Monday.

Behind the market’s unsteadiness across the two-week stretch were concerns over the Fed’s interest rate plans. Earlier optimism about the prospect of lower rates eventually gave way to concerns about the opposite. While there was obvious disappointment in Europe’s refusal to ease monetary policy, it was a speech from one of the Fed’s advocates for low rates, in which he conceded that “a reasonable case” could be made for higher rates, that pushed investors to the sell side at period’s end.

 

Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 18085.45 -(309.95) +3.79%
S&P 500 2169.04 -(41.23) +4.10%
NASDAQ 5125.91 -(93.01) +2.37%

As stocks sank, Treasury yields jumped on expectations for higher rates, with the yield on the 10-year Treasury note reaching its highest level since June. Demand for investment-grade corporates and high-yields, meanwhile, continued to be strong amongst a slug of new issues. Tax-frees fared well, with demand keeping up with strong issuance.

 

Fixed Income Yield Two-Week Yield Change
2-Year Treasury
0.80%
-(0.01)%
10-Year Treasury 1.56% +0.17%
30-Year Treasury 2.45% +0.24%
30-Year Municipal Bonds 2.26% +0.09%

Diminished credit risk or minimum sales quotas?…

Something’s helping lift bank stock prices out of the ditch.

Quote of the Week…

“Customers demand their purchases arrive faster and faster each year.

 Brian Lemerise, president of Quiet Logistics, on competition already heating up for workers needed to make online holiday orders arrive on time

Number of the Week…

$10 million

 The amount of investible assets one needs to qualify as a J.P. Morgan Chase client after the private bank’s recent decision to double its minimum.

What Fund Architects has been doing…

The Fund Architect strategy is to position the Portfolios in the most attractive sectors we can identify on the first of every month and let those positions run for the period. That’s not to say the Investment Committee isn’t watching the markets for any extraordinary event that might necessitate an unscheduled trade. And given all the pent-up concerns around what the Fed will or won’t do next, we’ve been watching closely.

Our equity portfolio began this period positioned in large-cap equities and global technology stocks, which means we’re essentially unhedged against any big market decline. Our consideration here at mid-month was to move a portion of those investments to cash to anticipate a bad reaction to whatever the Fed does. Our decision was to hold fast to the Portfolio’s positioning. There’s nothing we can see in potential Fed behavior that will have anything other than a short-term effect on the markets. Not enough, anyhow, to override the process.

The path to our next trading cycle is likely to be bumpy, but we’re confident enough in the strategy to “let it ride.”


The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.

 

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