Commentary

Fisher Investments Editorial Staff
Behavioral Finance, Forecasting

The Missing Lesson: Unfriend the Trend

By, 06/26/2015
Ratings514.107843

Thursday’s personal finance pages were awash with pundits sharing investing lessons learned (with varying degrees of value). The Wall Street Journal’s Morgan Housel offered up four mostly sensible points. The Motley Fool’s Sean Williams offered 21 occasionally overlapping points that have some real pearls of wisdom. Best of all, US News and World Report’s Catherine Alford offered “12 Money Lessons Your Child Should Know Before Age 12.” (This latter article included the most basic-yet-overlooked lesson of all—the power of compound interest. Many folks older than age 12 could benefit from learning to love compounding.) However, might we suggest a timely 38th lesson? Recent trends do not predict the future. That is a lesson it seems to us many investors—including some professional prognosticators—should probably consider.

Next week, 2015 will reach the halfway mark and, as is customary, Wall Street forecasters are already unveiling their second-half outlooks. Thus far in 2015, US stocks (the S&P 500) have returned a paltry 3.4% including dividends (2.4% without). Global stocks have fared better, rising 5.6% (with net dividends), led by Europe and Japan.

Exhibit 1: Year-to-Date Global Stock Market Returns by Country/Region, in Percentage Points

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Down With the Dow

By, 06/25/2015
Ratings503.99

In the stock market, not all numbers are created equal. Photo by Courtney Keating/Getty Images.

Tuesday evening, Convergex Trading’s Nicholas Colas and Jessica Rabe released an interesting note that caught our eye, highlighting a curiosity in the Dow’s 1.8% return thus far in 2015 (on a price basis). Colas and Rabe point out the year’s modest positive return is accounted for by only two stocks: Goldman Sachs and United Healthcare. That’s it! The other 28 stocks’ returns net to basically zero. They go on to discuss the fact the top 10 Dow stocks dominate the gauge’s return, suggesting whatever big round number you think is next for the Dow, your outlook better hinge on the top 10 stocks. While they don’t come right out and say it, this echoes a point we’ve long made here: Narrow, price-weighted gauges like the Dow are fatally flawed. The Dow simply does not reflect the US stock market, and investors would be well served to set it aside in favor of broader, market-cap weighted indexes.

Commentary

Elisabeth Dellinger
Into Perspective

Divestment and Rational Expectations

By, 06/24/2015
Ratings664.113636

Genocide in South Sudan. Ethnic cleansing in Myanmar. Political prisoners and purges in China, Iran and Venezuela. Continued Russian attacks in Ukraine. Human trafficking in Africa and Asia. Our world is sadly never free from state-sponsored atrocities. As we often remind readers, markets are cold-hearted and often rise in the face of localized human suffering. But people aren’t cold-hearted! Many investors care deeply about human rights and other social issues. So what is a warm-hearted investor to do about companies that run afoul of their convictions and values?

Ultimately, it is a personal choice. I’m not here to tell you how to think or what to do. But one tactic championed by pundits, activists and advocates these days—divestment—is cloaked in myth. Understanding what divesting does—and doesn’t—do can help make investors make more educated decisions.

Divestment, as the name implies, means not investing in any companies that are involved—directly or indirectly—in situations or activities you don’t support. That might include Energy companies drilling for oil in South Sudan if you feel passionately about ending genocide. High-tech companies manufacturing in Malaysia, if human trafficking is your issue. Industrials and banks investing in Myanmar’s burgeoning infrastructure development, if the strife faced by the Rohingya Muslims is your cause. Any Energy firm drilling for fossil fuels, if you’re gunning for a green world.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective, Across the Atlantic

User’s Guide to a Critical Week for the Euro(TM)

By, 06/23/2015
Ratings433.837209

Hello, readers, and welcome to a new Critical Week for the EuroTM![i] It will have rumors, summits and deadlines galore.[ii] Sensationalism and hyperbole will rule the headlines. Things will sound scary and crazy. If markets don’t wobble, headlines will warn stocks are complacent and ignoring huge risk. If markets do wobble, headlines will warn the endgame is finally coming. If you are into political theater, it will be entertaining as all get out. If you are into wordplay, you will giggle over the Grexhaustion, Grexcitement[iii], Grexit and Graccident and sigh over the dra(ch)ma and rumors of drachmail.[iv] If you are trying to ignore the spectacle and figure out what it all means for your investments, you might well find the cacophony confusing and contradictory. So here is our attempt at a rational rundown of what’s at stake, what’s coming up and why the outcome probably doesn’t mean much for global markets, regardless of what that outcome is.

As best as we can tell, here is where things stand now, at 1:10 PM Pacific Daylight Time on June 22.[v] Greece’s bailout extension expires next Tuesday, June 30. If Greece and creditors agree on reforms by then, they get the €7.2 billion left in the bailout. No deal, no money, and Greece faces almost certain bankruptcy. For now, they seem to be inching toward a deal. After promising to say “the big no” to more austerity last week, Greek PM Alexis Tsipras and his team of negotiators submitted a new reform proposal that made a “potentially major concession on pensions” late Sunday (or early Monday, depending on the source). The ever-leaky unnamed sources familiar with talks said that concession is eliminating early retirement next year, replacing the planned gradual phase-out. Tax concessions reportedly include doubling VAT on hotels and hiking taxes on business profits over €500,000 annually and annual incomes over €30,000. The goal here is to close a €900 million budget gap between Greece’s earlier proposals and creditors’ demands, and Athens estimates their plan will hit fairly close to creditors’ target. Jeroen Dijsselbloem, head of the Eurogroup (the official name for the gang of eurozone finance ministers), called it “a welcome step in a positive direction” and “an opportunity to get that deal later this week.”

Temper your enthusiasm, though, because there is a lot of ground to cover, and not everyone shares Dijsselbloem’s optimism. Entering Monday’s Eurogroup meeting, the German, Irish and Finnish finance ministers threw cold water on hopes of a deal in the near future. Dijsselbloem warned they’d all “really need to look at the specifics to see whether it adds up in fiscal terms.” The Eurogroup meeting wrapped with no announcements or fanfare. The emergency eurozone leaders’ summit held Monday was similarly inconclusive—partly because Greece evidently submitted two versions of its plan, partly because no one had enough time to read the whole shebang before they all sat down.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Efficient, Not Complacent

By, 06/22/2015
Ratings264.615385

Are investors sleepwalking their way to disaster? Some say so, with global stocks once again flirting with all-time highs in the face of what many believe are big, bad negatives. The Greek debacle. Looming Fed rate hikes. China slowdown. They suggest investors are being too complacent, ignoring big risks—cause for alarm. But are markets really ignoring these things? Or are they instead doing what markets regularly do—efficiently discounting widely known information and moving on what is most likely over the mid-to-longer term. 

Stocks, like all highly liquid markets, are forward-looking and efficient. Today’s big news is near-always already reflected in stock prices, regardless of when “today” is or what the “big news” entails. Stocks usually aren’t concerned with the right now. They’re concerned with the foreseeable future. While sentiment can swing stocks in the short term, in our experience, stocks don’t move on fundamental events that occur within the next three months or beyond the next 30 or so. Instead, they weigh—and move on—what is likeliest to occur between the next 3 and the next 30 months, focusing most on the next 12-18 months. While investors and headlines obsess over the day’s headlines, markets look beyond the myopia and, usually, move on the things few talk about.

The existence of negatives—real or perceived—is typical in bull markets. The world is never pristine and needn’t be for stocks to rise. Consider the present bull market: It wasn’t born when some sounded the All Clear to Buy Stocks Again siren. It was born in early 2009, when the world economy was in rough shape but less bad than most headlines and investors feared. Folks feared Great Depression Part Deux, which became priced into markets, and, when it didn’t come, stocks surged on positive surprise. Most often, markets weigh positives versus negatives, then compare the balance to sentiment—this is what good old Ben Graham meant when saying markets are weighing machines in the long run. If the positives outweigh the negatives over the foreseeable future, that is often good enough for stocks.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Developed Markets

Greece Is the Word, Not the World

By, 06/19/2015
Ratings264.25

With most eyes focused elsewhere (ahem, Greece), investors might have overlooked some tidbits of data confirming the global economy continues plowing forward, undeterred by the Hellenic Republic’s drama. Most of these numbers didn’t make the front page, but they suggest the bull stands on a firm economic ground—and this doesn’t look likely to change in the near future.

Let’s start with retail sales, which rose and beat expectations in America and Britain last month. While retail sales have limitations, they indicate consumer spending—a large component of economic activity—is doing just fine. US sales jumped up 1.2% m/m (2.7% y/y), prompting relief that consumers were “finally” spending their gasoline savings after months of lackluster retail results—with almost no discussion of the fact that retail sales largely omits the service sector (where most consumer spending happens). In the UK, headlines were more optimistic about the 0.2% m/m (4.6% y/y) rise, even though it was slower than April’s 0.9% m/m—they simply concluded consumers were spending their extra cash on services, not gadgets and baubles. Which seems about right to us, considering the UK’s retail sales gauge excludes food service, making it even narrower than the US’s gauge. Full consumer spending is what matters, and retail sales won’t tell you much about that, whether it’s the US’s jump or the UK’s slowdown. Plus, it was always presumptuous to say falling oil and gas prices are big economic stimulus. Sure, they help consumers, but folks always had three choices when it comes to their gas savings: save, pay down debt or shop. 

The week’s industrial production data were less rosy, but we wouldn’t make much of it—the developed world’s factories haven’t led this expansion. In the UK, April industrial production rose 0.4% m/m (1.2% y/y)—its third straight monthly rise—but mining and quarrying drove the increase. The narrower manufacturing gauge, which better reflects UK factories, contracted -0.4% m/m. Manufacturing also contracted -0.2% m/m in the US in May while industrial production missed expectations—dropping -0.2% m/m. Eurozone industrial output ticked up on a monthly basis in April—0.1% from March’s -0.4%--though the year-over-year number was lower (0.8% vs. 2.1%). Some good, some meh, but all consistent with the trends we’ve seen throughout this expansion—choppy, uneven growth. The month-to-month bumpiness in industrial and manufacturing output hasn’t prevented these regions’ economies from growing overall. We don’t see much (if any) evidence today’s wobbles are different than past wobbles.

Commentary

Fisher Investments Editorial Staff
Into Perspective

While Greece Was Reeling

By, 06/18/2015
Ratings564.321429

For such a small country, Greece sure has hogged a lot of headlines this week. We’re complicit, adding to the headline count yesterday and devoting five of Wednesday’s 11 story blurbs to the Hellenic Republic. It’s a fascinating topic and changes by the moment. But it is a big world, and a lot of non-Greek things have happened this week—things we reckon investors might like to know about. So here is a rundown of news you might have missed amid the Greek news deluge.

The Fed Didn’t Raise Interest Rates

Ok, this one you probably saw. No big changes, no new forward guidance—just acknowledgment that growth has picked up since Q1, which most already suspected. The legendary “dot plot” of Fed people’s interest rate forecasts showed they expect rates to rise more gradually than they anticipated three months ago. In her post-game presser, Chair Janet Yellen urged people to stop focusing on the timing of the first hike and think more about the pace of the overall tightening cycle—then told everyone not to read into the dot plots and reminded us it’s all data-dependent. “It’s data-dependent” is the rough translation of approximately half her answers, which seems like appropriate use of non-committal Fedspeak. Though she did slip once when discussing the eventual first hike, ruminating on the relative unimportance of the timing “whether it is September or December or March,” which most assume means no hike in July.[i] And she made an odd reference to the Fed's desire to raise rates “gradually,” which she helpfully (?) clarified as about one percentage point per year, or a quarter-point every other meeting. We suggest you not take that to the bank, given how her previous attempts at clarity, specificity and transparency have fizzled—she always seems to move the goalposts. Maybe the Fed indeed “wants” to follow this schedule, but wanting doesn’t mean they will. Like the San Francisco Fed’s t-shirt says, it’s all data-dependent[ii].

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths, Into Perspective

Greece Is Still the Word

By, 06/17/2015
Ratings244.520833

Greece's Parliament is having a rough week. Photo by Milos Bicanski/Getty Images.

Welcome, folks, to another critical week for the euro![i] In this week’s installment, Greece is on the “brink of disaster.” Eurozone officials have urged Greece to prepare for a “state of emergency if the government defaults, runs out of cash and stops paying civil servants. Greek PM Alexis Tsipras said the IMF bears “criminal responsibility” for the hardships wrought by austerity. Talks collapsed after creditors gave their allegedly final “take it or leave it” offer. Eurozone finance ministers meet for more talks Thursday , but German Finance Minister Wolfgang Schäuble said  not to expect much. Greek officials warned they lack cash to pay the IMF by month’s end, while Greece’s central bank warned the nation could leave the eurozone and even the EU—but said only a “little ground” separates Greece and creditors. Then again, Tsipras warned Parliament Wednesday even that “little ground” might be an uncrossable pit and he “will assume the responsibility to say ‘the great no’ to a continuation” of austerity. Fin Min Yanis Varoufakis looked on while sitting cross-legged on the chamber’s floor, head in hands. It is all increasingly bizarre and ever-more impossible to handicap. Will they kick the can? Give Greece just enough cash to get through this month or next? Or will we have default, capital controls and panic on the streets of Athens? No one can know, and we hope for the best for all involved. But as far as cold-hearted markets are concerned, the risks for global investors remain low regardless of what happens. Default and Grexit would probably make life even harder for Greeks in the near term, but probably not for markets globally. All signs indicate the risk of contagion remains minimal.

Commentary

Fisher Investments Editorial Staff
Inflation

Deflating Inflation Stats’ Importance

By, 06/17/2015

Here is some free advice: Take inflation data with a grain of salt these next several months.

You won’t get that advice from ECB head Mario Draghi, who’s engaged in an extended round of spiking the football after pundits lauded his quantitative easing (QE) program for May’s eurozone inflation uptick. Similarly, media hailed May’s uptick in British inflation which, exhale, alleviated the first ever deflationary read.

These are just the latest in a series of sketchy inflation interpretations made during this bull. Way back in 2009, folks figured the financial crisis would drive deep deflation. A few readings aside, those fears proved false. What followed was an alternating series of hot inflation and deep deflation fears, culminating most recently in early 2015’s fears the eurozone would slide into a deflationary spiral. This was how Draghi sealed the deal on QE, despite the fact it hasn’t been proven to stoke inflation anywhere else. Yet QE isn’t responsible for the eurozone’s inflation uptick. Math and oil prices are.

Commentary

Elisabeth Dellinger
Into Perspective

Thank Some Angry English Barons for Your Portfolio

By, 06/15/2015
Ratings604.383333

One of the remaining Magna Carta manuscripts from 1215, displayed at the British Library. Photo by Dan Kitwood/Getty Images.

800 years ago today, a bunch of brassed-off English barons and King John signed their names to the words that would forever change the world: “There shall be standard measures of wine, ale, and corn (the London quarter), throughout the kingdom.”

Commentary

Fisher Investments Editorial Staff
Into Perspective, Developed Markets

Greece Is the Word, Not the World

By, 06/19/2015
Ratings264.25

With most eyes focused elsewhere (ahem, Greece), investors might have overlooked some tidbits of data confirming the global economy continues plowing forward, undeterred by the Hellenic Republic’s drama. Most of these numbers didn’t make the front page, but they suggest the bull stands on a firm economic ground—and this doesn’t look likely to change in the near future.

Let’s start with retail sales, which rose and beat expectations in America and Britain last month. While retail sales have limitations, they indicate consumer spending—a large component of economic activity—is doing just fine. US sales jumped up 1.2% m/m (2.7% y/y), prompting relief that consumers were “finally” spending their gasoline savings after months of lackluster retail results—with almost no discussion of the fact that retail sales largely omits the service sector (where most consumer spending happens). In the UK, headlines were more optimistic about the 0.2% m/m (4.6% y/y) rise, even though it was slower than April’s 0.9% m/m—they simply concluded consumers were spending their extra cash on services, not gadgets and baubles. Which seems about right to us, considering the UK’s retail sales gauge excludes food service, making it even narrower than the US’s gauge. Full consumer spending is what matters, and retail sales won’t tell you much about that, whether it’s the US’s jump or the UK’s slowdown. Plus, it was always presumptuous to say falling oil and gas prices are big economic stimulus. Sure, they help consumers, but folks always had three choices when it comes to their gas savings: save, pay down debt or shop. 

The week’s industrial production data were less rosy, but we wouldn’t make much of it—the developed world’s factories haven’t led this expansion. In the UK, April industrial production rose 0.4% m/m (1.2% y/y)—its third straight monthly rise—but mining and quarrying drove the increase. The narrower manufacturing gauge, which better reflects UK factories, contracted -0.4% m/m. Manufacturing also contracted -0.2% m/m in the US in May while industrial production missed expectations—dropping -0.2% m/m. Eurozone industrial output ticked up on a monthly basis in April—0.1% from March’s -0.4%--though the year-over-year number was lower (0.8% vs. 2.1%). Some good, some meh, but all consistent with the trends we’ve seen throughout this expansion—choppy, uneven growth. The month-to-month bumpiness in industrial and manufacturing output hasn’t prevented these regions’ economies from growing overall. We don’t see much (if any) evidence today’s wobbles are different than past wobbles.

Commentary

Fisher Investments Editorial Staff
Into Perspective

While Greece Was Reeling

By, 06/18/2015
Ratings564.321429

For such a small country, Greece sure has hogged a lot of headlines this week. We’re complicit, adding to the headline count yesterday and devoting five of Wednesday’s 11 story blurbs to the Hellenic Republic. It’s a fascinating topic and changes by the moment. But it is a big world, and a lot of non-Greek things have happened this week—things we reckon investors might like to know about. So here is a rundown of news you might have missed amid the Greek news deluge.

The Fed Didn’t Raise Interest Rates

Ok, this one you probably saw. No big changes, no new forward guidance—just acknowledgment that growth has picked up since Q1, which most already suspected. The legendary “dot plot” of Fed people’s interest rate forecasts showed they expect rates to rise more gradually than they anticipated three months ago. In her post-game presser, Chair Janet Yellen urged people to stop focusing on the timing of the first hike and think more about the pace of the overall tightening cycle—then told everyone not to read into the dot plots and reminded us it’s all data-dependent. “It’s data-dependent” is the rough translation of approximately half her answers, which seems like appropriate use of non-committal Fedspeak. Though she did slip once when discussing the eventual first hike, ruminating on the relative unimportance of the timing “whether it is September or December or March,” which most assume means no hike in July.[i] And she made an odd reference to the Fed's desire to raise rates “gradually,” which she helpfully (?) clarified as about one percentage point per year, or a quarter-point every other meeting. We suggest you not take that to the bank, given how her previous attempts at clarity, specificity and transparency have fizzled—she always seems to move the goalposts. Maybe the Fed indeed “wants” to follow this schedule, but wanting doesn’t mean they will. Like the San Francisco Fed’s t-shirt says, it’s all data-dependent[ii].

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths, Into Perspective

Greece Is Still the Word

By, 06/17/2015
Ratings244.520833

Greece's Parliament is having a rough week. Photo by Milos Bicanski/Getty Images.

Welcome, folks, to another critical week for the euro![i] In this week’s installment, Greece is on the “brink of disaster.” Eurozone officials have urged Greece to prepare for a “state of emergency if the government defaults, runs out of cash and stops paying civil servants. Greek PM Alexis Tsipras said the IMF bears “criminal responsibility” for the hardships wrought by austerity. Talks collapsed after creditors gave their allegedly final “take it or leave it” offer. Eurozone finance ministers meet for more talks Thursday , but German Finance Minister Wolfgang Schäuble said  not to expect much. Greek officials warned they lack cash to pay the IMF by month’s end, while Greece’s central bank warned the nation could leave the eurozone and even the EU—but said only a “little ground” separates Greece and creditors. Then again, Tsipras warned Parliament Wednesday even that “little ground” might be an uncrossable pit and he “will assume the responsibility to say ‘the great no’ to a continuation” of austerity. Fin Min Yanis Varoufakis looked on while sitting cross-legged on the chamber’s floor, head in hands. It is all increasingly bizarre and ever-more impossible to handicap. Will they kick the can? Give Greece just enough cash to get through this month or next? Or will we have default, capital controls and panic on the streets of Athens? No one can know, and we hope for the best for all involved. But as far as cold-hearted markets are concerned, the risks for global investors remain low regardless of what happens. Default and Grexit would probably make life even harder for Greeks in the near term, but probably not for markets globally. All signs indicate the risk of contagion remains minimal.

Commentary

Fisher Investments Editorial Staff
Inflation

Deflating Inflation Stats’ Importance

By, 06/17/2015

Here is some free advice: Take inflation data with a grain of salt these next several months.

You won’t get that advice from ECB head Mario Draghi, who’s engaged in an extended round of spiking the football after pundits lauded his quantitative easing (QE) program for May’s eurozone inflation uptick. Similarly, media hailed May’s uptick in British inflation which, exhale, alleviated the first ever deflationary read.

These are just the latest in a series of sketchy inflation interpretations made during this bull. Way back in 2009, folks figured the financial crisis would drive deep deflation. A few readings aside, those fears proved false. What followed was an alternating series of hot inflation and deep deflation fears, culminating most recently in early 2015’s fears the eurozone would slide into a deflationary spiral. This was how Draghi sealed the deal on QE, despite the fact it hasn’t been proven to stoke inflation anywhere else. Yet QE isn’t responsible for the eurozone’s inflation uptick. Math and oil prices are.

Commentary

Elisabeth Dellinger
Into Perspective

Thank Some Angry English Barons for Your Portfolio

By, 06/15/2015
Ratings604.383333

One of the remaining Magna Carta manuscripts from 1215, displayed at the British Library. Photo by Dan Kitwood/Getty Images.

800 years ago today, a bunch of brassed-off English barons and King John signed their names to the words that would forever change the world: “There shall be standard measures of wine, ale, and corn (the London quarter), throughout the kingdom.”

Commentary

Fisher Investments Editorial Staff
Deficits, Politics

Balanced Budgets and a Surplus of Sociology

By, 06/15/2015
Ratings94.111111

Goodbye to budget deficits! George Osborne, the UK Chancellor of the Exchequer, has vowed to outlaw UK budget deficits during economic expansions, calling this a positive step toward reducing the UK’s growing debt and ensuring fiscal responsibility. Sounds sensible to many, we’re sure! However, government deficits and debt are not the economic scourge some believe, and a balanced budget rule isn’t an automatic positive. It could introduce negatives downstream and, if a rule had teeth, it could be the sort of extreme legislation stocks might not like. On the bright side, Parliamentary quirks and gridlock mean a strict rule likely won’t come to pass.

Osborne’s exact proposal, revealed at his annual speech to financial bigwigs, was to “entrench a new settlement” whereby “in normal times, governments to the left as well as to the right should run a budget surplus to bear down on debt and prepare for an uncertain future. In the Budget, we will bring forward this strong new fiscal framework to entrench this permanent commitment to that surplus.” In this context, “normal” most often means a growing economy, and “abnormal” a recession. The Office for Budget Responsibility (OBR, the UK’s Congressional Budget Office for you yanks) would be Ye Olde Official Arbiter of Abnormality. In principle, then, the proposal would require the UK to run a balanced budget most of the time—at least, as far as we can tell from Osborne’s speech. The specifics won’t be out until July 8, when Osborne releases the summer Budget.

This issue is mostly sociological. As several commentators have noted, a Parliamentary vote for perma-surplus would make the Labour Party’s traditional agenda logistically difficult. An election manifesto resembling this year’s would attract a chorus of “yah, but what about the balanced budget rule?” (We reckon the answer would be “we’ll amend it,” but anyway.) Scoring points with voters is probably another goal, considering deficits have been a hot-button issue in the UK for years. After the global recession, UK budget deficits soared to over 10% of GDP, the highest in decades. As in America, this spike in deficits led to a great deal of British handwringing. It was one of the central campaign issues in 2010, when Labour and the Conservatives offered voters dueling deficit reduction plans. When the Conservatives and Liberal Democrats emerged from that contest with a coalition government, fiscal responsibility (deficit and debt reduction) was their government’s central tenet.

Research Analysis

Akash Patel
Into Perspective

Heating Up—A Look at UK Housing

By, 11/27/2013
Ratings124.041667

Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?

Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.

While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings833.885542

With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.

MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).

To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).

Research Analysis

Elisabeth Dellinger
Reality Check

Inside Indian Taper Terror

By, 11/08/2013
Ratings174.294117

When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.

The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.

Exhibit 1: Emerging Markets Foreign Equity Inflows

Research Analysis

Brad Pyles

Why This Bull Market Has Room to Run

By, 10/31/2013
Ratings884.102273

With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.

Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.

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What We're Reading

By , The Wall Street Journal, 06/26/2015

MarketMinder's View: China’s domestic or A-share markets have fallen sharply all week, and the typical cheerleading from officials published in Xinhua is conspicuously absent, leading some to fret the government is cooling on promoting stock market investing as an alternative to real estate and dodgy wealth management trusts (basically, securitized loans). But the impact of this is likely very limited. For one, the A-share market is largely off limits to foreign investors, who buy mostly domestic shares listed in Hong Kong (H-shares).  While H-shares have gone up nicely in the last 12 months (~50% at their peak), that is a far cry from A-shares 162% peak gain. Similarly, while A-shares entered Friday down -12%, H-shares were down -2.5%. Domestic Chinese investors may have been swept up in the big returns, but foreigners remain skeptical. And contrary to the article’s assertion that “Regulators are keen, however, not to spark a prolonged fall, which would have repercussions for the broader economy,” A-share markets are notoriously volatile and do not act as much of a forward-looking economic indicator. There have been two bear markets in Chinese A-shares since 2009. The economy has grown at a solid clip throughout, even accelerating during the first, which ran from mid-2009 through mid-2010. A-shares’ big swings don’t have a global reach.

By , Bloomberg, 06/26/2015

MarketMinder's View: Yeah, well, maybe this weekend is “decisive” and maybe it isn't. After all, as has been widely reported, missing Tuesday’s IMF repayment will not qualify as a default, technically. The next payment is due to the ECB by July 20, and it is probably more important. Besides, there is also the distinct possibility the troika kicks the can forward and extends the existing bailout by five months, teeing up a Grerun or Grepeat in the fall. Either way, though, we'd suggest not overthinking this one—there isn't any sign Greece is contagious, and absent that, it should have roughly the market impact of the 2013 Detroit default: minimal.

By , InvestmentNews, 06/26/2015

MarketMinder's View: Well, we aren’t so sure the House and Senate slapping an amendment onto an appropriations bill that hasn’t been voted on by either full chamber is so “unstoppable,” particularly considering the White House backs the DoL proposal and President Obama can simply not sign the law. But either way, we’d suggest most of the claims brought by both sides in favor of and against a broad fiduciary rule are overwrought. The DoL’s rule isn’t “sweeping” at all—it permits all forms of compensation and waters down the SEC’s version. The impact to small account holders is likely nil. And the DoL’s version will do very, very little to better “protect investors.” The fiduciary standard in even the SEC’s form requires advisers to reasonably believe they are putting clients’ interests first. A subjective standard! Investors must do the requisite due diligence to understand the values, structure, experience and expertise of the firm they are working with. There is no shortcut to ensuring the advice you’re getting is adding value.

By , The New York Times, 06/26/2015

MarketMinder's View: This is the second trade-related bill to make its way through the House in recent days, this one expanding the trade-adjustment assistance program, which aims to retrain and compensate American workers deemed displaced by trade. It is likely to become law, as trade-promotion authority already did. However, we’d suggest some of the other nuggets noted in this article—the discussion of currency manipulation and anti-dumping bills—support the notion any deal on the Trans-Pacific Partnership (TPP) still faces a stiff fight. And that assumes the 12 nations in the talks actually come to an agreement. While we would welcome being wrong here (because the TPP would be good for stocks and the economy, in our view), we are skeptical the TPP becomes a reality soon.

Global Market Update

Market Wrap-Up, Friday June 26, 2015

Below is a market summary as of market close Friday, 6/26/2015:

  • Global Equities: MSCI World (-0.3%)
  • US Equities: S&P 500 (-0.0%)
  • UK Equities: MSCI UK (-0.8%)
  • Best Country: Italy (+0.2%)
  • Worst Country: Australia (-2.6%)
  • Best Sector: Consumer Discretionary (+0.1%)
  • Worst Sector: Information Technology (-0.9%)

Bond Yields: 10-year US Treasury yields rose 0.07 percentage point to 2.47%.

Editors' Note: Tracking Stock and Bond Indexes

Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.