Fisher Investments Editorial Staff
Investor Sentiment

Deconstructing a Wall of Worry

By, 09/14/2010

Story Highlights:

  • Stocks jumped Monday following a combination of bullish headlines.
  • Basel III bank regulations were more benign than many feared.
  • Chinese data released showed broad economic reacceleration in August.
  • Weighing positives and negatives, today's economies and markets are tilted towards continued growth.


Investors were encouraged by a bevy of bullish news Monday morning, and stocks responded with a robust day—the S&P 500 gained 1.1% and overseas markets mostly did quite well.

The first bit of good news came Sunday, as central bankers from around the world met in Switzerland to formally settle details of the Basel III accord on banking regulation. The announcement, over a year in the making, came after weeks of whispers on Wall Street. Debate flew from all corners about how strict the new rules would be. Would many banks have to raise capital? If so, how quickly? Last week's announcement of a common share issuance by Deutsche Bank fueled fears Basel III would require much higher capital ratios, forcing banks to curtail lending.

But in the end, the announcement was more benign than some expected. In short, regulatory capital ratios will increase, but not as much as feared and with a long phase-in period. In 2013, the minimum Tier 1 capital ratio increases to 4.5% with a 2.5% capital conservation buffer (up from 4% currently with no capital conservation buffer), then rises to 6% over time. The 7%-8.5% total reserve requirements were a watered-down result from the earliest proposals and in line with recent expectations. More surprising was the implementation timeframe. Banks were granted a gradual phase-in over eight years to fully meet the criteria. And considering most banks already meet or exceed these capital requirements, this shouldn't be problematic for most institutions. In fact, the announcement could embolden firms with excess capital to increase lending.

The stock market had already largely discounted this widely-known issue, and the rules' release pulled away another layer of uncertainty—a relief to Financials stocks. Finally, Deutsche Bank announced they will acquire Deutsche Postbank, with the majority of the funds raised through last week's share issuance. Deutsche Bank chairman Joseph Ackermann said, "They [Basel capital requirements] are more or less the numbers we expected all along. We do not need the capital [to comply with] the regulatory changes. We're going to raise capital for acquisitions."

While the banking regulation fog was clearing, more bullish news was emanating from the world's second largest economy. China reported 13.9% year-over-year industrial production growth in August—scorching estimates and accelerating from July. Chinese retail sales also accelerated, beating estimates with 18.4% year-over-year growth. Money supply, loan issuance, and fixed asset investment all exceeded estimates as well. In fact, all major Chinese indicators released Monday beat estimates except inflation—the Consumer Price Index increased 3.5% from the prior year as expected. At present, recent fears over China potentially cooling too much seem misplaced. The same could be said of US double-dip fears, PIIGS debt contagion concerns, and many others. Lately, data and announcements have been doing an excellent job of dispelling common fears.

Problems do exist, but with sentiment as dour as it is today, the fear accompanying a perceived problem is often far worse than the problem itself. There will be negatives—some real, some not—but waiting for all negatives to dissipate is waiting for Utopia. Investors should weigh negatives against positives to obtain a truer sense of the global economy. And in comparing the two today, positive factors (like ongoing rapid Emerging Markets  growth) seem to carry real weight, while many of the much-discussed negatives (like fears of an overly onerous Basel III) prove fleeting.

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

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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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