Fisher Investments Editorial Staff
Into Perspective, The Global View

Around the World in Five Stories

By, 12/31/2015
Ratings713.950704

As 2015 comes to an end, the financial media seems to have run into a bit of a lull. The Fed has hiked, and “experts” aren’t predicting the next one until March, at the earliest. Two GOP candidates for President dropped out in the past 10 days,[i] but the election process remains in the “silly season”—the first primary isn’t for another month.  No new news from Greece. And commentary about the latest Star Wars movie seems to dominate “Most Viewed” sections. However, here are several stories we found interesting, and while they may not dominate headlines, it is worth assessing their capital markets impact (or lack thereof).

IPO, Where’d Ya Go?

Remember when folks worried some high-flying IPOs were a sign stocks were partying like it’s 1999 (literally) and on the verge of bubbling over? Well, IPOs came to a crawl in December, and for that “bubbly” tech sector, 2015 will mark a six-year low in IPO activity. Some speculate why companies haven’t been going the IPO route. Are they getting private funding instead? Or has the year’s market volatility spooked them? Regardless of the reasons, the slow 2015 counters worries about frothiness in publicly traded tech or the broader market. According to Renaissance Capital, 60 IPOs have withdrawn—the highest number since 2012—with some delaying until perhaps next year. Today’s IPOs aren’t primarily coming from just one sector, either. And most importantly, the companies going public recently are overall more established, with business plans and established revenue streams—many have been profitable before IPOing.

Compare that to the late-1999/2000 Tech Bubble, when immature companies with little more than an idea were getting sky-high valuations—and euphoric, greedy investors piled in, ignoring that many of these firms were operating deep in the red while quickly burning through cash on hand. The market environment then and now are quite different, and with sentiment today still far from euphoric, the bull still looks like it has room to run.

Puerto Rico Scours the Couch Cushions

We were all set to talk about how Puerto Rico may miss a payment to bondholders in January, officially defaulting, and explain why the broader market impact remains limited. But late Wednesday, officials found enough in the sofa cushions to cover all but about $174 million in bond payments due January 1.[ii] General obligation bonds will be paid in full. The missed payments on other, lower-grade bonds is still technically a default, but a much smaller one than widely feared. While this grants Puerto Rico a temporary reprieve, officials had to raid cash reserves to do it, and the island’s race to restructure debt and find some help in Washington, D.C. continues.

Yet, while trying for the people of Puerto Rico, the island’s economic struggles aren’t anything new to markets—the territory has long struggled with various structural issues that have sapped its economic competitiveness. And despite Puerto Rico’s clamors for help (e.g., being allowed to declare Chapter 9 bankruptcy), there is no quick fix. With Congress dithering on whether to assist or not, legislative change won’t be immediate, so help isn’t coming any time soon. But for investors, Puerto Rico’s current issues are problematic only if you have a significant portfolio overweight to Puerto Rican debt—the island’s bonds have struggled, but broader muni markets have held up largely fine. Though some investors prefer the island’s debt because of its special tax status (exempt from federal, state and local tax), overloading on any one asset neglects diversification—always a big investment risk.   

The Grinch Didn’t Steal Christmas

According to some early numbers, retail sales rose big compared to the same timeframe last year—a sign worries about holiday spending were overwrought. MasterCard’s tally of retail sales (excluding gas and autos) rose 7.9% between Black Friday and Christmas Eve this year compared to the same period in 2014. Other interesting stats include online sales up 20% from last year, another indication of online shopping’s growing prominence. Furniture sales were also higher, as were apparel sales—despite concerns that “unseasonably warm weather”[iii] would dissuade consumers from buying winter gear. While we won’t know the final December numbers until January, reports like these suggest initial estimates fretting a weak holiday spending period seem a bit off. For stocks, this disconnect between dour perception and a better-than-expected reality is bullish.

The UK Will Weather the Storm

The UK has been slammed by heavy rains, causing severe flooding in the north of England—and some estimate the total cost would top £5 billion ($7.4 billion). With Storm Frank now bearing down on the UK, the flooding has prompted a number of issues, from criticism of the government’s response to questions about the Prime Minister’s choice of footwear when surveying the damage. While the natural disaster is certainly tragic for those impacted, the UK’s floods shouldn’t submerge its economy.

Natural disasters do have an economic impact. Property destruction always does. But it doesn’t inherently halt or spur (via spending on reconstruction) growth as many suspect—it just redirects economic activity, creating winners and losers. This isn’t to say the challenges facing certain regions are insignificant. But consider, neither Hurricane Katrina, which caused more than $100 billion in damage, nor Superstorm Sandy’s $50 billion bill derailed the US economy. While natural disasters certainly disrupt regular economic activity—and cause a temporary boost during rebuilds—these tend to offset over time. So while we wish those afflicted by the floods a speedy recovery, the macroeconomic fallout here is limited.      

Oil Slides Further Down the Slope of Hope

After Tuesday’s anticipation of a bullish oil inventory report—many predicted stockpiles would fall—reality surprised, showing that crude inventories rose by 2.6 million barrels for the week ending December 25. Lots of Energy sector observers continue looking for signs oil supply will level off, but considering the state of the current supply glut, this looks unlikely any time soon. Global production continues apace. OPEC—led by Saudi Arabia—refuses to compromise its market share by pumping less oil. US producers have found ways to maintain output more efficiently, allowing them to recoup some costs as prices have fallen. And commodity-dependent economies—like Russia's—need oil revenues to sustain spending, so they continue producing, regardless of price. With additional output slated to come online—see Iran—the world remains awash in black gold.

Despite supply well outpacing demand, lots of folks still keep trying to call oil’s bottom with an eye toward snapping up bargains. Sentiment still seems far too optimistic and removed from reality. The time to be greedy is when others are fearful, and few fear future troubles in Energy stocks. In our view, oil’s headwinds aren’t likely to abate any time soon—now isn’t the time to play the Energy sector.

 

[i] Bringing the Republicans to 12 candidates—a full NBA roster!

[ii] Technically January 1, but really January 4 since January 1 is a holiday.

[iii] We presume this to be outside the Bay Area.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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