Commentary

Fisher Investments Editorial Staff
Commodities, Reality Check

Don’t Gush Over Oil Stocks

By, 04/24/2015

With the big bull market now more than six years old, some investors seem to be on a quest to find the remaining “cheap” stocks they believe have more upside potential—leading some to home in on Energy stocks, given the sector’s more than -20% decline from late last June through Q1’s close. Now, as we’ve written, there is nothing about allegedly “cheap” stocks that suggests they’ll perform better looking forward. To argue otherwise is to suggest value is a permanently superior style of investing to growth, a fallacy. But also, Energy stocks don’t seem particularly cheap by most measures. We would caution against diving into Energy today—your better prospects, in our view, lie elsewhere.

For one thing, if it’s cheap stocks you seek, Energy doesn’t meet the traditional definition in any meaningful sense. Yes, the sector, as measured by the S&P 500 Energy Sector Index, is down significantly, tied to oil prices’ steep collapse since last year. But earnings have collapsed more. That means traditional valuation measures of the Energy sector have gone up. Exhibit 1 shows the spiking 12-month forward and trailing Energy sector price-to-earnings ratios (P/Es) in the last year. Exhibit 2 shows that on a forward P/E basis, the Energy sector is the most expensive sector of the market. Now, far be it from us to argue valuations predict returns! They don’t! But they are a signpost of sentiment. Take this in concert with recent media claims that Energy is a screaming buy, and positive net inflows into Commodity-oriented ETFs (suggesting folks are acting on this impulse), and there doesn’t seem to be much suggesting oil stocks are super cheap.

Exhibit 1: Energy Sector Forward and Trailing P/Es

Commentary

Fisher Investments Editorial Staff
Trade

Will Free Trade Ring the Pacific?

By, 04/23/2015

Shinzo Abe goes to Washington next week, and the White House wants to give him a shiny welcome gift: clear passage through Congress for the Trans-Pacific Partnership (TPP), a 12-nation trade deal including the US and Japan—a deal Abe and US trade reps say is close to done. But the home stretch won’t be easy, even with pro-TPP legislation clearing committee votes in both chambers of Congress this week. Many barriers remain, and while a signed, sealed and delivered TPP would be great for global markets, we’re skeptical it happens any time soon.

One hurdle is that aforementioned legislation: Trade Promotion Authority (TPA). The Obama Administration and other TPP partners are pushing for this, which would allow the White House to submit trade deals to Congress for an up-and-down vote, no amendments allowed. TPA isn’t new: Prior administrations have enjoyed it, but it lapsed in 2007, and renewal wasn’t universally popular in prior Congresses. Some argue it obliterates Congress’s influence over trade, though this seems more like political rhetoric than reality. TPA gives Congress the ability to set objectives for trade negotiators, who then hash out lawmakers’ agenda with the other parties to the deal before finalizing it. Accounting for Congress’s wish list before finalizing the deal, not afterward, would be a positive, as it would greatly improve trade deals’ chances of ratification. If Congress sought to amend completed deals, trade reps would have to go back to the negotiating table and get everyone else to ok Congress’s requests. Congress’s objections and requested amendments to the US/Korea free trade agreement, signed in 2007, stalled the final deal until 2010. For a multiparty deal like TPP, that would basically be a death sentence.

So it’s nice and noteworthy that TPA bills cleared committee votes and will soon hit the House and Senate floors. But it won’t be smooth sailing from here. Lawmakers in both chambers aim to tack on riders that would lace free trade with protectionism, potentially torpedoing a deal. The big bugaboo is currency manipulation—politicians’ favorite bogeyman for years. Some argue certain countries artificially depress their currencies to boost auto and other exports to the US, claiming this gives their producers an unfair advantage akin to subsidies.[i] So they want language directing trade agreements to include “enforceable currency language necessary to ensure that foreign competitors don’t use their exchange rates to subsidize exports.”[ii] Bipartisan groups proposed amendments to the Senate and House bills Wednesday and Thursday, though both were defeated. House reps also proposed a full alternate bill with currency and other provisions at Thursday’s Ways and Means Committee session, though it didn’t get a vote.  However, this isn’t the last we’ve heard. Sponsors promise to resurrect the issue when the bills hit the full House and Senate floors, and debate could be bumpy. If currency amendments make it in, TPP’s chances at becoming reality fall.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Retirees Will Need Some Income

By, 04/22/2015
Ratings294.431035

A third of Americans have almost no retirement savings. Workers need a “reality check.” They’re also “deluded[i]. All these dire conclusions (and more!) stem from a recent retirement survey. For the concerned, the media has two popular suggestions: save more or work longer. But in our view, these well-intended instructions overlook a key determinant of whether you really have enough for retirement: the size and impact of your future withdrawals and expenditures. Planning for your future cash flow needs will help set realistic expectations about what your retirement portfolio can provide, decreasing the likelihood of nasty surprises. Like running out of money.

Many folks approach retirement by asking, what percentage of my current salary will I need to replace? That percentage is usually less than 100, as most envision costs falling in retirement—the kids are grown, big loan obligations are almost complete, they aren’t commuting anymore and life gets simpler. A majority of workers surveyed believe they can live off of 70% of their pre-retirement income. Yet some warn folks are vastly underestimating their future expenses. Who’s right? Well, it depends—everyone’s situation is unique. There is no one cookie-cutter salary replacement ratio that will work for everyone. Consider another of the survey’s findings: Among retirees, 20% are currently providing financial support to a relative or friend. In this group, 58% is going to children over 18; 24% to grandchildren; 10% to children under 18; and 5% to parents or in-laws. Financially supporting a parent versus a grandchild is vastly different—just consider the time horizons and expenses. We suggest thinking not about an arbitrary number, but rather, what are your personal expenses going to be? Then you can design a plan to meet your needs.

Targeting a set percentage of your final salary ignores a key fact: Your expenses will likely change throughout retirement. Health care spending—which includes hospital services, medical care and drugs—tends to increase as folks grow older, for example. Also, many retirees help out with their grandchildren’s education. Retirees planning for these and other costs should consider how the rate of inflation has impacted certain goods and services compared to others. Since 1990, CPI, a broad inflation gauge, has risen 87%[ii]—housing[iii] (88%) and electricity (80%)[iv] rose at similar rates. But college tuition (357%), hospital services (344%) and pharmaceuticals (173%) all greatly exceed those figures.[v] To highlight how personal situations differ, consider the following scenarios: A 60-year old couple living in San Francisco, California and supporting one child in college faces the Bay Area’s high-priced housing and rising tuition costs. On the other hand, a 60-year old single retiree in Peoria, Illinois may not be dealing with a hot property market, but rising health care and medical expenses instead. Now, this doesn’t mean all retirees’ expenses are going to be higher than they think. If you’ve accounted for inflation all your life but end up with mostly fixed costs in retirement, you may have overshot—a nice problem to have! But everyone’s expenses are going to be different.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Happy Birthday, Moore’s Law—Pearls of Wisdom for Investors

By, 04/21/2015
Ratings414.670732

Microprocessors are much smaller than the 1971 model, above. Photo by Keystone/Getty Images.

Editor’s Note: Fisher Investments’ MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.

Commentary

Fisher Investments Editorial Staff
Trade

A Slightly Less Bumpy US / China Trade Relationship?

By, 04/20/2015
Ratings34.333333

Last week ,  China rattled investors by restricting margin lending and permitting more short selling, moves which some suggest are designed to cool a local stock market that has more than doubled over the last year. The Middle Kingdom followed up this week with a cut to banks’ reserve requirement ratios, freeing up more bank deposits for lending. Most pixels spilled in the press lately deal with one of the two, some tying them together. Some plausibly surmise their aim was more monetary stimulus, but not stimulus for financial markets. With all that said, we think hype over both is misplaced, and another story, which garnered much less attention, is a bigger deal: China just reduced the likelihood of a trade war between the world’s two largest economies.

Recently, China suspended plans requiring Tech firms (many of them US-based) who supply Chinese banks, universities, state-owned entities and government agencies to disclose their software codes to Chinese authorities. The now-shelved rule stemmed largely from 2013’s Edward Snowden affair, in which Snowden, a former US National Security Agency (NSA) contractor, revealed US intelligence agencies spied on many foreign countries (including China) using programs embedded in US tech exports. China positioned the rule as a response to national security concerns, claiming Chinese authorities’ review aimed to ensure the equipment isn’t carrying the NSA’s “bugs.”

Surrendering source codes is a deal-breaker for tech firms. Source code is the secret sauce—the backbone of any software program—and kept under lock and key. Someone who obtains it can easily clone the program and profit off piracy. China has long sought to boost its domestic Tech sector, and the country is not known for having ironclad intellectual property laws. Companies handing over code could lead to unstoppable copyright violation, and understandably so. Had China implemented this mandate, billions worth of US equipment trade could have ceased. That would have raised the risk of US retaliation and, if left unchecked, a full-blown trade war.

Commentary

Todd Bliman
Currencies, Into Perspective, Media Hype/Myths, The Global View

3 Reasons the Dollar’s Reserve Currency Status Shouldn’t Worry You—in Charts!

By, 04/17/2015
Ratings564.4375

The dollar is up 14.2% against a broad basket of 26 world currencies weighted by American trade since last June 30.[i] Bond yields are down significantly since the tapering of quantitative easing (QE) was announced in December 2013. IMF data show the dollar’s share of foreign currency reserves rose last year, adding to its position as the world’s leading reserve currency. America’s economy is growing apace and there is no sign, according to The Conference Board’s Leading Economic Index, that will change soon. Take all these factoids and combine them, and you’d probably think few would fear the dollar losing its status as the world’s primary reserve currency. Yet they persist! Some oddly suggest the news China will launch its own mini-World Bank, the Asian Infrastructure Investment Bank, means the dollar’s days are numbered.[ii] Here is the thing though: These fears were overwrought from moment one, and they are even more so now.

As I’ll show, there are three major reasons why. But before I get started, it may be helpful to cut right to the chase and explain what the dollar-won’t-be-primary-reserve-currency fear actually is: Debt doom.

Behind nearly all these fears lies the misperception that America’s debt is unaffordable, absent some artificial force. For many, the artificial force is widespread use of the dollar as the world’s reserve currency—it’s the most-used, with a 62% share of global forex reserves at 2014’s end. Some presume so many nations buying and holding dollar-denominated assets artificially depresses US government bond yields, and if the dollar were the primary reserve asset no more, that force depressing rates goes poof. Rates skyrocket. Government struggles to make interest payments. It defaults. Doom ensues.

Commentary

Fisher Investments Editorial Staff
Currencies

As Goes Switzerland…?

By, 04/17/2015

Here is a question worth weighing these days: If a strong currency is so devastating to stocks and economies—as many allege—why did stocks in a tiny, export-heavy economy not succumb to a nearly 20% shock appreciation?

Let’s back up. Three months ago this week, the Swiss National Bank (SNB) issued this statement:

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro.

Commentary

Fisher Investments Editorial Staff
The Advisor's Corner

Be-Labor-ing the Fiduciary Standard

By, 04/16/2015
Ratings274.351852

The Department of Labor (DOL) released its long-awaited rules for investment professionals advising on retirement accounts Tuesday, and after five years, we finally know what their idea of a fiduciary standard looks like. And it is … not much different than the old guard, just with reams of added paperwork. The DOL’s promo materials boast they’ll “protect investors from backdoor payments and hidden fees in retirement investing advice,” but that seems a tad too optimistic. We read through all the legalese and loopholes, and in our view, the proposed rules don’t ensure clients’ interests always come first—and they probably won’t improve the quality of advice.

The DOL’s proposal (which is still pending public comment and perhaps some last-minute tweaks) would basically expand ERISA duties of care to all brokers, registered investment advisers (RIAs), insurance brokers and other investment professionals advising on retirement accounts—but with a few small tweaks to, as the DOL’s FAQ put it, continue “to allow for common forms of compensation.” That is your first clue this standard is not quite all it’s cracked up to be. You see, the DOL’s primary beef is with high “hidden” commissions, like backdoor compensation for recommending certain products over others, revenue sharing agreements with mutual fund companies and incentives for selling proprietary products. But these are not banned. Nor are plain vanilla trading commissions. Nor are sales of high-fee products when a similar product with lower fees exists. All those are still legal! As long as the broker selling those products jumps through a few extra hoops: They must agree in writing to act in the client’s best interests, disclose all potential conflicts of interest prominently in writing and on a dedicated website, and describe the policies and procedures in place to mitigate those conflicts. There are also exemptions for principal transactions (where brokers sell products out of their firm’s inventory) and instances where brokers are just executing transactions without giving advice.

In other words, it’s a watered-down version of major investment advisory standards. It’s weaker than the SEC’s fiduciary standard for RIAs (which the SEC is considering expanding to brokers, too). It’s a toothless version of the UK’s Retail Distribution Review (RDR), which outright banned Britain’s version of revenue sharing (called trail commissions and paid directly from the fund to the adviser, not his/her firm) and forced all advisers to charge itemized flat or percentage-based fees. It is essentially a ream of forms, disclosures and a website—paperwork—that doesn’t really change the products sold or advice rendered. It doesn’t guarantee investors’ interests will come first. If anything, it seems designed to enable the status quo—it adds a veneer of client-friendliness while giving brokers the tools to justify current actions. It doesn’t prevent insurance brokers from selling variable annuities in IRAs—they just have to rationalize it. (Which is also not a change.) Nor does it prevent brokers from basing recommendations on Wall Street mythology, age or risk-tolerance surveys—they just have to rationalize it. It doesn’t prevent brokers from selling proprietary products only, limiting clients’ investment options—they just have to rationalize it. It doesn’t require advisers and brokers to objectively analyze all potential investment options for their clients—as long as they can rationalize whatever they pick. It doesn’t improve the quality of funds that are recommended. Even if it didn’t have the high-fee loopholes, lower-cost products aren’t always superior—fees aren’t the only determinant of returns. It doesn’t address how we got here in the first place: the blurring of the line between investment sales and service. If anything, it blurs the line further, promoting confusion. Not to pooh-pooh disclosure—transparency and sunlight are always good—but disclosures are often long tomes written in legalese. Few folks read them, fewer still may understand them. The website aspect is intriguing, but its efficacy is untested. Overall, it seems like a green light for brokers and advisers to keep doing what they’re doing—as long as they can rationalize it if the DOL comes a-knockin’. That last bit is subjective, folks—rationales are based on opinion, experience and knowledge. Expertise matters.  

Commentary

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

QuitE Wrong

By, 04/15/2015
Ratings214.476191

ECB chief Mario Draghi, before the party started. Photo by Martin Leissl/Bloomberg via Getty Images.

So the eurozone economy is turning up, and the media is praising the ECB’s quantitative easing (QE) program for “bearing fruit already.” So is ECB chief Mario Draghi, though it wasn’t he who threw the confetti at the ECB’s presser Wednesday. Even though the ECB has been buying government bonds for all of five weeks. And the eurozone started accelerating months ago. And evidence worldwide shows QE depresses more than it stimulates. That folks are so quick to credit QE and overlook months of improvement shows how, despite improving sentiment, most still underrate the currency union’s economic health.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics, Into Perspective

British Gridlock Isn’t Bearish

By, 04/14/2015
Ratings184.388889

Britain’s election is 23 days away, and pundits near-universally agree it will spell disaster for UK markets. One analyst warns of a “Lehman moment” for the pound if no one wins.[i] Another says election uncertainty is shrinking foreign demand for UK bonds, and fractured politics could cost the UK billions in foreign investment. Worst of all, several warn a hung Parliament could raise the risk of a second contest this year—and trigger a repeat of 1974, when UK stocks plunged nearly 48% between elections in February and October.[ii] Please allow us to put that one to bed: Today is nothing like the early 1970s. Electoral jitters could drive volatility in the vote’s run-up or aftermath, but this shouldn’t cause a bear market in Britain or the world.

There is nothing inherently bearish about a hung Parliament (one in which no party has an absolute majority, for yanks), whether it yields a functioning coalition or a shaky minority government. Britain’s history with hung Parliaments is very limited, but bull markets have coincided with two of three. Britain has had a coalition since May 2010, and UK stocks have done fine—since the 5/6/2010 election, they’re up 60% in sterling and 56% in dollars.[iii] UK stocks also rose while a minority government presided from March 1977 – March 1979—a period that included the severe labor unrest known as the Winter of Discontent. Hung parliaments mean gridlock, which—contrary to widespread belief—doesn’t create uncertainty. It actually reduces the risk of radical new laws, a major source of uncertainty. Considering most fret radical change from both major parties (price controls and England-to-Scotland redistribution from Labour, EU exit from the Conservatives), gridlock should bring relief. Britain is one of the world’s most competitive economies, and its growth rate is among the developed world’s highest. If Parliament has a low likelihood of messing that up, as it would with a minority or coalition government, investors have little or no reason to shun UK stocks.

“Yah, but 1974.” That’s when an election on February 28 ousted Edward Heath’s Conservative government as Labour won the most seats—but fell 33 shy of a majority. Labour led a minority government for seven months, before Prime Minister Harold Wilson called a snap election for October 10, which yielded Labour a three-seat majority. In between the contests, UK stocks plunged.

Commentary

Todd Bliman
Currencies, Into Perspective, Media Hype/Myths, The Global View

3 Reasons the Dollar’s Reserve Currency Status Shouldn’t Worry You—in Charts!

By, 04/17/2015
Ratings564.4375

The dollar is up 14.2% against a broad basket of 26 world currencies weighted by American trade since last June 30.[i] Bond yields are down significantly since the tapering of quantitative easing (QE) was announced in December 2013. IMF data show the dollar’s share of foreign currency reserves rose last year, adding to its position as the world’s leading reserve currency. America’s economy is growing apace and there is no sign, according to The Conference Board’s Leading Economic Index, that will change soon. Take all these factoids and combine them, and you’d probably think few would fear the dollar losing its status as the world’s primary reserve currency. Yet they persist! Some oddly suggest the news China will launch its own mini-World Bank, the Asian Infrastructure Investment Bank, means the dollar’s days are numbered.[ii] Here is the thing though: These fears were overwrought from moment one, and they are even more so now.

As I’ll show, there are three major reasons why. But before I get started, it may be helpful to cut right to the chase and explain what the dollar-won’t-be-primary-reserve-currency fear actually is: Debt doom.

Behind nearly all these fears lies the misperception that America’s debt is unaffordable, absent some artificial force. For many, the artificial force is widespread use of the dollar as the world’s reserve currency—it’s the most-used, with a 62% share of global forex reserves at 2014’s end. Some presume so many nations buying and holding dollar-denominated assets artificially depresses US government bond yields, and if the dollar were the primary reserve asset no more, that force depressing rates goes poof. Rates skyrocket. Government struggles to make interest payments. It defaults. Doom ensues.

Commentary

Fisher Investments Editorial Staff
Currencies

As Goes Switzerland…?

By, 04/17/2015

Here is a question worth weighing these days: If a strong currency is so devastating to stocks and economies—as many allege—why did stocks in a tiny, export-heavy economy not succumb to a nearly 20% shock appreciation?

Let’s back up. Three months ago this week, the Swiss National Bank (SNB) issued this statement:

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro.

Commentary

Fisher Investments Editorial Staff
The Advisor's Corner

Be-Labor-ing the Fiduciary Standard

By, 04/16/2015
Ratings274.351852

The Department of Labor (DOL) released its long-awaited rules for investment professionals advising on retirement accounts Tuesday, and after five years, we finally know what their idea of a fiduciary standard looks like. And it is … not much different than the old guard, just with reams of added paperwork. The DOL’s promo materials boast they’ll “protect investors from backdoor payments and hidden fees in retirement investing advice,” but that seems a tad too optimistic. We read through all the legalese and loopholes, and in our view, the proposed rules don’t ensure clients’ interests always come first—and they probably won’t improve the quality of advice.

The DOL’s proposal (which is still pending public comment and perhaps some last-minute tweaks) would basically expand ERISA duties of care to all brokers, registered investment advisers (RIAs), insurance brokers and other investment professionals advising on retirement accounts—but with a few small tweaks to, as the DOL’s FAQ put it, continue “to allow for common forms of compensation.” That is your first clue this standard is not quite all it’s cracked up to be. You see, the DOL’s primary beef is with high “hidden” commissions, like backdoor compensation for recommending certain products over others, revenue sharing agreements with mutual fund companies and incentives for selling proprietary products. But these are not banned. Nor are plain vanilla trading commissions. Nor are sales of high-fee products when a similar product with lower fees exists. All those are still legal! As long as the broker selling those products jumps through a few extra hoops: They must agree in writing to act in the client’s best interests, disclose all potential conflicts of interest prominently in writing and on a dedicated website, and describe the policies and procedures in place to mitigate those conflicts. There are also exemptions for principal transactions (where brokers sell products out of their firm’s inventory) and instances where brokers are just executing transactions without giving advice.

In other words, it’s a watered-down version of major investment advisory standards. It’s weaker than the SEC’s fiduciary standard for RIAs (which the SEC is considering expanding to brokers, too). It’s a toothless version of the UK’s Retail Distribution Review (RDR), which outright banned Britain’s version of revenue sharing (called trail commissions and paid directly from the fund to the adviser, not his/her firm) and forced all advisers to charge itemized flat or percentage-based fees. It is essentially a ream of forms, disclosures and a website—paperwork—that doesn’t really change the products sold or advice rendered. It doesn’t guarantee investors’ interests will come first. If anything, it seems designed to enable the status quo—it adds a veneer of client-friendliness while giving brokers the tools to justify current actions. It doesn’t prevent insurance brokers from selling variable annuities in IRAs—they just have to rationalize it. (Which is also not a change.) Nor does it prevent brokers from basing recommendations on Wall Street mythology, age or risk-tolerance surveys—they just have to rationalize it. It doesn’t prevent brokers from selling proprietary products only, limiting clients’ investment options—they just have to rationalize it. It doesn’t require advisers and brokers to objectively analyze all potential investment options for their clients—as long as they can rationalize whatever they pick. It doesn’t improve the quality of funds that are recommended. Even if it didn’t have the high-fee loopholes, lower-cost products aren’t always superior—fees aren’t the only determinant of returns. It doesn’t address how we got here in the first place: the blurring of the line between investment sales and service. If anything, it blurs the line further, promoting confusion. Not to pooh-pooh disclosure—transparency and sunlight are always good—but disclosures are often long tomes written in legalese. Few folks read them, fewer still may understand them. The website aspect is intriguing, but its efficacy is untested. Overall, it seems like a green light for brokers and advisers to keep doing what they’re doing—as long as they can rationalize it if the DOL comes a-knockin’. That last bit is subjective, folks—rationales are based on opinion, experience and knowledge. Expertise matters.  

Commentary

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

QuitE Wrong

By, 04/15/2015
Ratings214.476191

ECB chief Mario Draghi, before the party started. Photo by Martin Leissl/Bloomberg via Getty Images.

So the eurozone economy is turning up, and the media is praising the ECB’s quantitative easing (QE) program for “bearing fruit already.” So is ECB chief Mario Draghi, though it wasn’t he who threw the confetti at the ECB’s presser Wednesday. Even though the ECB has been buying government bonds for all of five weeks. And the eurozone started accelerating months ago. And evidence worldwide shows QE depresses more than it stimulates. That folks are so quick to credit QE and overlook months of improvement shows how, despite improving sentiment, most still underrate the currency union’s economic health.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics, Into Perspective

British Gridlock Isn’t Bearish

By, 04/14/2015
Ratings184.388889

Britain’s election is 23 days away, and pundits near-universally agree it will spell disaster for UK markets. One analyst warns of a “Lehman moment” for the pound if no one wins.[i] Another says election uncertainty is shrinking foreign demand for UK bonds, and fractured politics could cost the UK billions in foreign investment. Worst of all, several warn a hung Parliament could raise the risk of a second contest this year—and trigger a repeat of 1974, when UK stocks plunged nearly 48% between elections in February and October.[ii] Please allow us to put that one to bed: Today is nothing like the early 1970s. Electoral jitters could drive volatility in the vote’s run-up or aftermath, but this shouldn’t cause a bear market in Britain or the world.

There is nothing inherently bearish about a hung Parliament (one in which no party has an absolute majority, for yanks), whether it yields a functioning coalition or a shaky minority government. Britain’s history with hung Parliaments is very limited, but bull markets have coincided with two of three. Britain has had a coalition since May 2010, and UK stocks have done fine—since the 5/6/2010 election, they’re up 60% in sterling and 56% in dollars.[iii] UK stocks also rose while a minority government presided from March 1977 – March 1979—a period that included the severe labor unrest known as the Winter of Discontent. Hung parliaments mean gridlock, which—contrary to widespread belief—doesn’t create uncertainty. It actually reduces the risk of radical new laws, a major source of uncertainty. Considering most fret radical change from both major parties (price controls and England-to-Scotland redistribution from Labour, EU exit from the Conservatives), gridlock should bring relief. Britain is one of the world’s most competitive economies, and its growth rate is among the developed world’s highest. If Parliament has a low likelihood of messing that up, as it would with a minority or coalition government, investors have little or no reason to shun UK stocks.

“Yah, but 1974.” That’s when an election on February 28 ousted Edward Heath’s Conservative government as Labour won the most seats—but fell 33 shy of a majority. Labour led a minority government for seven months, before Prime Minister Harold Wilson called a snap election for October 10, which yielded Labour a three-seat majority. In between the contests, UK stocks plunged.

Commentary

Fisher Investments Editorial Staff
Personal Finance

The Value of Good Advice

By, 04/13/2015
Ratings653.884615

Last week, New York City officials were shocked to learn they’d spent over $2.5 billion on pension fund management fees over the past decade.[i] They are probably not the only ones who would have sticker shock: According to a new North American Securities Administrators Association (NASAA) survey, one-third of US investors don’t know how much they pay for money management. Older studies suggest up to half say they don’t know or—frighteningly—think they pay zilch. Folks, public service announcement: You can’t know whether you’re receiving good value from an investment manager unless you know how much you’re paying. Though, a full cost/benefit analysis isn’t quite so simple as comparing fees and returns, despite what some suggest—qualitative factors matter, too. 

The performance aspect does matter, of course. Fees can be high for some investment vehicles versus other lower-cost options, and the difference can add up over time. Variable annuities, for example, pile fees on top of fees. Paying for multiple layers of management—like paying an adviser or broker to select funds for you, and then paying fund management costs—can erode returns and stymie progress toward your long-term goals. Understanding who you’re paying and how they’re paid can help you eliminate some perhaps unnecessary drag. Money paid in fees is money that isn’t compounding for you (hence why ensuring you receive performance reports net of fees, not gross, is paramount).

However, in some cases, fees’ impact on returns is not the be-all, end-all. For mutual funds, sure—performance is all you’re paying for, as they don’t provide service, and you’ve presumably done the hard work of picking an asset allocation to reach your long-term goals. But if you’re working with an adviser, service is a big piece of the package. And by service, we don’t just mean helping with operational matters or sending the odd research report (though those are nice)—we mean all the things an adviser does to help ensure you, the investor, get and stay on track to reach your long-term goals.

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 Telegraph, 04/24/2015

MarketMinder's View: Even if all the geopolitical stuff here played out exactly as described (not at all guaranteed, though this also isn’t our forte—we’ll save this hypothesizing and strategerizing for the relevant professionals), it is quite likely not a gigantic economic negative for Britain, America or any other Western nation. Should oil spike to $100 (also not guaranteed—this underestimates US production potential), guess what, we had $100-ish oil for years during this bull market. If going back to an earlier, fine-for-all status quo is the biggest economic threat the West faces, things must be pretty darned good overall.

By , Bloomberg, 04/24/2015

MarketMinder's View: So Q1 US GDP won’t be released until next week, and already folks are ratcheting down estimates for Q2 GDP. Why? Well, March’s core capital goods orders (capital goods orders excluding aircraft and defense) fell -4.6% y/y, the 7th straight drop when measured on a monthly basis. However, manufacturing is a fairly small slice of overall US output relative to services, and the decline seems heavily influenced by oil—machinery orders, which include oil and gas field equipment, tumbled more than 12% y/y. Anyway, this gauge is historically quite volatile and has shown similar weakness during overall expansionary periods before, like in 2012 and 1998. That being said, if economists want to ratchet down their estimates, we say, “Be our guest!” because that just makes it easier for reality to positively surprise them.

By , The New York Times, 04/24/2015

MarketMinder's View: So here is an interesting preview of next week’s US Q1 GDP report that investigates the question: Why has first-quarter US GDP been the weakest quarter not only in this expansion, but  dating back to the 1980s? The answer may be simple: Government math. The seasonal adjustment for GDP isn’t appropriately accounting for wintertime consumption patterns. “If it’s done right, there should be no systematic difference between economic numbers for the first quarter and any other quarter. The problem here is that the seasonally adjusted G.D.P. growth numbers still show a seasonal pattern, in which the first quarter has been weaker than other quarters.” All in all, this is another reason you cannot presume GDP is perfectly equivalent to “the economy.”

By , The Wall Street Journal, 04/24/2015

MarketMinder's View: So let us see if we have this right: Low-low commodity prices, low interest rates and inflation and low wage pressures are a policy maker problem threatening growth? They sound to us like: a) the opposite of what folks usually fear b) a boon for business and industry, and c) a sign of the times sentiment-wise.

Global Market Update

Market Wrap-Up, Thursday April 23, 2015

Below is a market summary as of market close Thursday, 4/23/2015:

  • Global Equities: MSCI World (+0.3%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (+0.6%)
  • Best Country: Norway (+1.6%)
  • Worst Country: New Zealand (-2.3%)
  • Best Sector: Telecommunication Services (+1.4%)
  • Worst Sector: Consumer Staples (0.0%)
  • Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.96%.

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.