Commentary

Fisher Investments Editorial Staff
Into Perspective

Greek Stocks Take a Dive, Teach a Lesson

By, 08/04/2015
Ratings113.318182

Editor’s Note: MarketMinder does not recommend individual securities. The below are simply examples of a broader theme we wish to highlight.

The Athens Stock Exchange reopened after five weeks on Monday, and Greek stocks promptly suffered their worst selloff in history, opening down about -23% from June 26’s close before regaining some ground to finish -16.2% lower. There are some fairly obvious lessons to draw from this—Greece is still in turmoil, investors are still concerned, “Grexit” remains a risk, political uncertainty abounds. But another, less discussed lesson is probably more useful for investors globally: Markets are pretty darned efficient. If ever you’ve doubted markets’ ability to quickly discount widely discussed events and information, a quick comparison between the ATHEX composite and a globally traded ETF of Greek stocks should restore your faith.

A lot has happened since Greek officials closed the Athens exchange on June 29, three days after Prime Minister Alexis Tsipras called a referendum on the EU/ECB/IMF “troika’s” bailout terms, giving Greek stocks a boatload to price in once they reopened—good (a new bailout deal and bridge financing), bad (heavy economic damage and a near-collapse of the government) and weird (Google “Yanis Varoufakis, Plan B, hack”). Yet investors didn’t have to spend five weeks wondering where Greek stocks would be once the dust settled. They had a handy real-time tracker, courtesy of the Global X FTSE Greece 20 ETF—GREK—which trades on the New York Stock Exchange but includes 20 Athens-listed companies. GREK kept trading the last five weeks, pricing in Greece’s soap opera real time. So while the ATHEX looked like this:

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Investor Sentiment

Britain’s Boom Can Still Zoom

By, 07/29/2015
Ratings444.193182

The UK economy sped up in Q2, with GDP growing 0.7% q/q (2.8% annualized), powered by the mighty service sector and a North Sea oil rebound. Per-capita GDP surpassed its pre-recession peak, a nice (though backward-looking and arbitrary) confirmation of how far the UK has come since the crisis’s depths. All in all, the UK’s run as one of the developed world’s strongest economies continues. But someone apparently forgot to tell UK stocks, which trail most of the developed world and are roughly flat year to date. Some fret this is a sign of things to come, but stocks and the economy aren’t joined at the hip.[i] We suspect UK stocks are simply enduring a sentiment-driven wobble, and we think they’ll resume reflecting the isle’s strong fundamentals soon enough.

Economic fundamentals matter to stocks, but so do politics and sentiment. In the short run, sentiment can easily overpower long-term drivers. This is why bull markets have corrections. The UK’s economic and political drivers still look strong. Data and leading indicators remain largely upbeat, and Conservative Party infighting should promote gridlock, easing the risk of radical legislation—something stocks prefer. But sentiment is rocky these days. Investors worldwide are skittish over Greece and China, where domestic markets resumed sliding Monday. UK investors are further bogged down with rumblings over the Labour Party’s leadership contest and the eventual referendum on EU membership, which gave “Brexit” fears a jolt.

Neither issue is terribly relevant for stocks at the moment. The EU referendum is at least a year or two away, and PM David Cameron hasn’t even started renegotiating the UK’s role in the EU yet—and a new deal is a prerequisite for the referendum. Stocks move on probabilities, not possibilities, and the likelihood of “Brexit” is impossible to handicap for now. As for Labour leadership, euroskeptic leftist Jeremy Corbyn might have a whopping poll lead, but we’re skeptical UK polling has improved much since May’s election, and regardless of who leads Labour for now, the next election is five years away. Stocks don’t look that far out, and we rather doubt the UK goes all Syriza between now and then. But sentiment is tricky sometimes, and nervous headlines can weigh on stocks in the short term.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Plan B or B-Movie?

By, 07/28/2015
Ratings294.172414

Greek PM Alexis Tsipras and former Finance Minister Yanis Varoufakis, in happier times. Photo by Kostas Tsironis/Bloomberg via Getty Images.

So Greece’s creditors are back in Athens to hash out bailout 3.0, and if the world were a boring place, the biggest headline would be that the EU/IMF/ECB “troika” added a fourth member—the European Stability Mechanism (ESM)—and therefore got a new name, the “quadriga.” But the world is not a boring place, and Monday’s Greek headlines read like a bad political thriller, full of intrigue and b-movie plot twists as details of Syriza rebels’ shenanigans emerged. Former Energy Minister Panayotis Lafazanis apparently wanted to raid the national mint, seize the central bank, arrest central bank Governor Yannis Stournaras and pivot toward Russia. Former Finance Minister Yanis Varoufakis hacked the general secretary of public revenues (GDDE, basically Greece’s IRS) in order to create a “Plan B” financial system in case of “Grexit.” And had revealed his plot to 84 financial industry bigwigs during a recorded conference call. Which inevitably leaked. Now opposition leaders are calling for his head, GDDE has launched an investigation, criminal charges might loom, and Syriza is hanging by a thread. With chaos mounting, early elections looking increasingly likely and quadriga officials overall pessimistic, this seems like a good time for a public service announcement: Greece’s third bailout is far from a done deal, and Grexit brinksmanship could easily return. However, Greece is just as much of a sideshow for global stocks today as it was two weeks ago, two months ago and yes, two years ago. We suggest steeling yourself against the noise in advance.

Commentary

Fisher Investments Editorial Staff
Taxes, Politics

A Presidential Candidate Has Thoughts on Capital Gains

By, 07/27/2015
Ratings534.386793

Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks favor neither party, and partisan ideology invites bias—dangerous in investing.

Last Friday, presidential hopeful Hillary Clinton announced her plan to fix “quarterly capitalism”—short-term thinking in board rooms and on Wall Street—and promote long-term investment. The reform’s centerpiece: raising high earners’ capital gains taxes on stocks sold between one and six years after purchase, theoretically giving firms more incentive to invest in the future instead of buying back stock to pacify short-term focused shareholders. The proposal has inspired debate, and we suspect it is only the first of many tax proposals we’ll hear throughout 2016’s campaign. Cutting through the noise and sociology to take an objective look at market impact is often difficult, but for investors, it is crucial—bias is deadly. So, setting aside ideology and partisan tilt, what should investors make of Clinton’s proposal? In short, we wouldn’t cheer or fear it. Not only is it way too early to handicap whether it becomes law, but tax changes have little relationship with market returns, and the potential impact on company behavior seems negligible. 

Clinton’s plan is the latest salvo in the buybacks vs. capex debate. A growing school of thought argues “shareholder capitalism” makes firms too focused on one quarter’s earnings, doing their utmost to boost the bottom line and satisfy shareholders with itchy trigger fingers. Many blame this for the rise in stock buybacks, arguing rewarding shareholders discourages R&D investment and other long-term endeavors, putting America’s economic dynamism (not to mention productivity, wages and hiring) at risk in the long run.

Commentary

Fisher Investments Editorial Staff
Trade, Developed Markets

Japan: Rising Sun or False Dawn?

By, 07/24/2015
Ratings243.9375

Japan’s trade deficit narrowed in June, with exports jumping 9.5% y/y, the fastest rate in five months—causing some to cheer. But factoring out the weak yen, export volumes stagnated, which may turn those smiles upside down. This pretty much exemplifies Japan’s recent economic and political developments: On the surface, things appear better. Underneath, troubles remain. These trade data, combined with other recent weak economic data and middling economic reform progress, suggest reality isn’t likely to live up to investor optimism. With little fundamental support, Japan’s year-to-date outperformance is likely a mirage, and in our view, other regions of the world look more attractive for the foreseeable future.

What’s behind the values/volumes disconnect? Currency conversion. The yen weakened considerably over the last year, largely due to the Bank of Japan’s alleged monetary “stimulus.” When Japanese firms convert revenues earned abroad back to yen, they get a bump up. Export growth (in value terms) can boost some export-oriented firms’ profits.

However, don’t overstate this benefit. The weak yen makes imported goods more expensive, and many Japanese manufacturers import raw materials and components, including energy. Just as the strong dollar doesn’t doom US profits, the weak yen is not a panacea ensuring big gains in Japanese firms’ earnings. Iffy profit growth the last few years further illustrates this.[i] (Exhibit 1) Many investors underappreciate the offsetting effects of a weak or strong currency.

Commentary

Fisher Investments Editorial Staff
Commodities

How Silver Lost Its Shine

By, 07/23/2015
Ratings983.903061

Photo by Chris Ratcliffe, Bloomberg Finance/Getty Images.

With all eyes on gold lately, some may wonder about silver. The story here, folks, is the same: Silver is oversupplied relative to demand, and it has paid the price. The silver craze was a short-lived bubble that burst four years ago and has continued deflating since.

Commentary

Elisabeth Dellinger
Currencies

The Common Currency: Cure or Curse?

By, 07/22/2015
Ratings574.140351

This is a banknote, not a shackle. Photo by Banar Fil Ardhi/EyeEm via Getty Images.

Here, as best as I can sum up, is the popular argument against the euro: It is a straitjacket on southern Europe, robbing countries of monetary policy and forcing them to tackle debt through austerity instead of currency devaluations, dooming Greece (et al) to perpetual fiscal contraction, high unemployment and stagnation. Snazzy-looking charts try to prove the point by comparing GDP growth in euro and non-euro European nations since 2007, with euro-users losing. Pundits and politicians galore argue Greece’s ticket to happiness is a one-way ride on the drachma express. And maybe for Greece in the here and now that’s true, especially if “Grexit” took the path outlined by German Finance Minister Wolfgang Schäuble last week.[i] But the euro itself isn’t the root of economic evil, nor is it destined to fail. It is simply incomplete. Its benefits are many, and while it might take the eurozone years to decide what it wants to be when it grows up, countries in the bloc can do just fine in the meantime—with many opportunities for investors.

Commentary

Fisher Investments Editorial Staff
Commodities

Gold: The Pyrrhic Hedge

By, 07/22/2015
Ratings824.067073

Gold is down.

Yes, we know, you don’t need to come here to find that pithy, to-the-point observation. That is all over the news, triggering a wide array of ruminations about what it all means. But the thing we find striking is that the media seems to think this is new, surprising, big news. It is none of those, of course, and we continue to believe gold has little-to-no place in a long-term investor’s diverse portfolio.

For years, gold has been a hot topic among investors. Newsletter writers hock it. Pundits and commentators speculate wildly on how high it will rise. Some even try to divine the true size of China’s unpublished gold holdings (in metric tonnes, of course). Yet for all the talk since 2009, owning gold versus stocks during this bull market has most often been the wrong move. That’s right, gold—something we’re often told has an inherent value[i]—hasn’t added value during most of this bull market.

Commentary

Fisher Investments Editorial Staff
Others

An Earnings Season Replay?

By, 07/20/2015
Ratings503.73

It appears analysts have been slow to react to the lesson economics taught them just a few months back: The strong dollar may ding revenues, but it has some pretty big bottom line benefits, too. This was the lesson taught in Q1, when S&P 500 earnings handily beat too-dour expectations. It’s early, but with about 12% of S&P 500 companies having reported for Q2, the same is happening. Thus far, Q2’s earnings reality suggests profit expectations remain too low, possibly setting up more positive surprises going forward.

At the end of Q1, just before firms began reporting earnings for the quarter, analysts were dour, expecting S&P 500 profits to drop -4.6% y/y—down from +4.1% projections as the quarter began. The dour outlook was largely based on the strong US dollar, which many feared would materially dent both the quantity and value of US exports. A strong dollar makes US goods more expensive to foreigners, causing some to choose cheaper alternatives. And if US firms don’t adjust prices, a stronger dollar means lower revenues after conversion.

Yet the expected decline didn’t come—earnings ended up growing +0.8% y/y (+8.6% excluding the Energy sector). It appears analysts didn’t quite account for the fact the strong dollar means firms’ foreign-sourced input costs fall, too: labor, raw materials, components and transportation. In addition, while many fixate on weak oil prices’ potential impact on consumers, they miss the direct positive impact on producers’ profits—lower energy and shipping costs are an immediate boon for profits. All simple “on the one hand, on the other hand” economics Harry Truman probably would have hated.[i]

Commentary

Fisher Investments Editorial Staff
Into Perspective, Across the Atlantic

Greece Gets Some Euros

By, 07/17/2015
Ratings314.193548

The deal everyone seems to hate is a step closer to becoming reality: Greece seems to have secured a short-term loan providing three months’ time to haggle over a third bailout. However, we sincerely doubt Greece is all of a sudden fixed and never to return to headlines. So use this opportunity to see that even as close as Greece was to exiting the euro lately, there isn’t evidence Greece poses an actual threat to the global economy.

Overnight Wednesday, Greek Prime Minister Alexis Tsipras managed to cobble together support from 229 of Parliament’s 300 members and pass the tough austerity measures required by the EU, IMF and ECB (the troika) as a precondition for a potential third bailout. To say this wasn’t exactly a broadly popular move is quite an understatement indeed. Violent protests erupted in front of Parliament. Thirty-two Syriza MPs voted “no,”[i] six abstained and one boycotted, leaving Tsipras with just 124 votes from his own coalition. Greek parliamentary procedures stipulate a government must secure at least 121 votes from its own bloc on major legislation to prove it hasn’t lost its mandate, so Tsipras was just four rebels away from a confidence vote. Many of the rebel MPs say they still support Tsipras and the government despite their rejection of bailout terms, and with a cabinet reshuffle underway, Tsipras should be able to hang on for the near term, but many suspect he’ll be forced to hold early elections sooner rather than later.

Meanwhile, the EU agreed in principle to provide Athens a €7.16 billion bridge loan from the European Financial Stabilization Mechanism (EFSM)—the EU’s (not eurozone’s) temporary bailout fund designed on the fly in 2010 to deal with Greece, Portugal and Ireland. As an arm of the EU, this fund includes contributions from non-eurozone nations like Britain and Denmark, both of which have ongoing notable anti-Brussels movements. This was thought to be a hurdle initially, but the eurozone effectively guaranteed non-euro countries they won’t be exposed to loss, winning their support.

Commentary

Fisher Investments Editorial Staff
Commodities

How Silver Lost Its Shine

By, 07/23/2015
Ratings983.903061

Photo by Chris Ratcliffe, Bloomberg Finance/Getty Images.

With all eyes on gold lately, some may wonder about silver. The story here, folks, is the same: Silver is oversupplied relative to demand, and it has paid the price. The silver craze was a short-lived bubble that burst four years ago and has continued deflating since.

Commentary

Elisabeth Dellinger
Currencies

The Common Currency: Cure or Curse?

By, 07/22/2015
Ratings574.140351

This is a banknote, not a shackle. Photo by Banar Fil Ardhi/EyeEm via Getty Images.

Here, as best as I can sum up, is the popular argument against the euro: It is a straitjacket on southern Europe, robbing countries of monetary policy and forcing them to tackle debt through austerity instead of currency devaluations, dooming Greece (et al) to perpetual fiscal contraction, high unemployment and stagnation. Snazzy-looking charts try to prove the point by comparing GDP growth in euro and non-euro European nations since 2007, with euro-users losing. Pundits and politicians galore argue Greece’s ticket to happiness is a one-way ride on the drachma express. And maybe for Greece in the here and now that’s true, especially if “Grexit” took the path outlined by German Finance Minister Wolfgang Schäuble last week.[i] But the euro itself isn’t the root of economic evil, nor is it destined to fail. It is simply incomplete. Its benefits are many, and while it might take the eurozone years to decide what it wants to be when it grows up, countries in the bloc can do just fine in the meantime—with many opportunities for investors.

Commentary

Fisher Investments Editorial Staff
Commodities

Gold: The Pyrrhic Hedge

By, 07/22/2015
Ratings824.067073

Gold is down.

Yes, we know, you don’t need to come here to find that pithy, to-the-point observation. That is all over the news, triggering a wide array of ruminations about what it all means. But the thing we find striking is that the media seems to think this is new, surprising, big news. It is none of those, of course, and we continue to believe gold has little-to-no place in a long-term investor’s diverse portfolio.

For years, gold has been a hot topic among investors. Newsletter writers hock it. Pundits and commentators speculate wildly on how high it will rise. Some even try to divine the true size of China’s unpublished gold holdings (in metric tonnes, of course). Yet for all the talk since 2009, owning gold versus stocks during this bull market has most often been the wrong move. That’s right, gold—something we’re often told has an inherent value[i]—hasn’t added value during most of this bull market.

Commentary

Fisher Investments Editorial Staff
Others

An Earnings Season Replay?

By, 07/20/2015
Ratings503.73

It appears analysts have been slow to react to the lesson economics taught them just a few months back: The strong dollar may ding revenues, but it has some pretty big bottom line benefits, too. This was the lesson taught in Q1, when S&P 500 earnings handily beat too-dour expectations. It’s early, but with about 12% of S&P 500 companies having reported for Q2, the same is happening. Thus far, Q2’s earnings reality suggests profit expectations remain too low, possibly setting up more positive surprises going forward.

At the end of Q1, just before firms began reporting earnings for the quarter, analysts were dour, expecting S&P 500 profits to drop -4.6% y/y—down from +4.1% projections as the quarter began. The dour outlook was largely based on the strong US dollar, which many feared would materially dent both the quantity and value of US exports. A strong dollar makes US goods more expensive to foreigners, causing some to choose cheaper alternatives. And if US firms don’t adjust prices, a stronger dollar means lower revenues after conversion.

Yet the expected decline didn’t come—earnings ended up growing +0.8% y/y (+8.6% excluding the Energy sector). It appears analysts didn’t quite account for the fact the strong dollar means firms’ foreign-sourced input costs fall, too: labor, raw materials, components and transportation. In addition, while many fixate on weak oil prices’ potential impact on consumers, they miss the direct positive impact on producers’ profits—lower energy and shipping costs are an immediate boon for profits. All simple “on the one hand, on the other hand” economics Harry Truman probably would have hated.[i]

Commentary

Fisher Investments Editorial Staff
Into Perspective, Across the Atlantic

Greece Gets Some Euros

By, 07/17/2015
Ratings314.193548

The deal everyone seems to hate is a step closer to becoming reality: Greece seems to have secured a short-term loan providing three months’ time to haggle over a third bailout. However, we sincerely doubt Greece is all of a sudden fixed and never to return to headlines. So use this opportunity to see that even as close as Greece was to exiting the euro lately, there isn’t evidence Greece poses an actual threat to the global economy.

Overnight Wednesday, Greek Prime Minister Alexis Tsipras managed to cobble together support from 229 of Parliament’s 300 members and pass the tough austerity measures required by the EU, IMF and ECB (the troika) as a precondition for a potential third bailout. To say this wasn’t exactly a broadly popular move is quite an understatement indeed. Violent protests erupted in front of Parliament. Thirty-two Syriza MPs voted “no,”[i] six abstained and one boycotted, leaving Tsipras with just 124 votes from his own coalition. Greek parliamentary procedures stipulate a government must secure at least 121 votes from its own bloc on major legislation to prove it hasn’t lost its mandate, so Tsipras was just four rebels away from a confidence vote. Many of the rebel MPs say they still support Tsipras and the government despite their rejection of bailout terms, and with a cabinet reshuffle underway, Tsipras should be able to hang on for the near term, but many suspect he’ll be forced to hold early elections sooner rather than later.

Meanwhile, the EU agreed in principle to provide Athens a €7.16 billion bridge loan from the European Financial Stabilization Mechanism (EFSM)—the EU’s (not eurozone’s) temporary bailout fund designed on the fly in 2010 to deal with Greece, Portugal and Ireland. As an arm of the EU, this fund includes contributions from non-eurozone nations like Britain and Denmark, both of which have ongoing notable anti-Brussels movements. This was thought to be a hurdle initially, but the eurozone effectively guaranteed non-euro countries they won’t be exposed to loss, winning their support.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, GDP, Into Perspective

China Hits the Target

By, 07/16/2015
Ratings404.4625

Chinese GDP officially grew 7.0% y/y in Q2, matching Q1’s pace and the government’s target and beating expectations for 6.9%. But the good news hasn’t quieted those long-running “hard landing” fears. They just morphed again, this time into jitters over how mainland stocks’ crash will impact China’s economy from here on. Wild Chinese markets or no, we wouldn’t be surprised if China’s economy continued its modest slowdown for the foreseeable future, but a hard landing still appears highly unlikely—we think investors can still expect China to contribute meaningfully to global growth.

China skeptics claim the trouble in A-shares (which we discussed here) could hurt economic activity on two fronts: financial services and consumer spending. The consumer spending fears center on the supposed “wealth effect”—the belief rising stock markets make folks feel wealthier, driving spending higher, while falling markets make folks feel less rich and thus inspire them to tighten the purse strings. The financial services angle is a little more straightforward: Trading volumes jumped during the mania, boosting financial firms’ growth, and falling back to more normal trading volumes could drive a setback in the industry, hurting China’s service sector—the sector officials are counting on to offset the continued slowdown in heavy industry. There is probably a kernel of truth here, though the impact likely isn’t as great as feared. The consumer spending angle, however, doesn’t wash.

Industry-level data for China’s Q2 GDP aren’t yet available, but analysts crunched the numbers for Q1 and found financial services contributed 1.3 percentage points to China’s 7.0% headline growth rate, way up from its 0.7 percentage-point contribution in all of 2014 (when China grew 7.4%). Considering service sector growth accelerated sharply from 7.9% y/y in Q1 to 8.4% in Q2—and millions of investors reportedly opened brokerage accounts in the quarter—many suspect financial services drove the acceleration. Fair enough, and probably fair to assume things ease off a bit when the frenzy dies down (as we write, many companies’ shares remain halted, so activity is slowing). But the broader impact seems limited. As of 2014’s end, the financial industry comprised just 5.3% of Chinese GDP—about even with real estate, and smaller than retail/wholesale trade and (by a mile) heavy industry. Property sales have picked up lately, and a continued rebound there could help offset any potential iffiness in finance.

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 , FoxBusiness, 08/03/2015

MarketMinder's View: Let’s clear up some misperceptions about the implications of a Puerto Rico default. While it’s true some notable bond mutual funds and hedge funds hold a big chunk of Puerto Rican debt, only a couple of muni bond funds have outsized positions—unless the majority of your portfolio is in Puerto Rican debt, your pain will be limited. Second, many Puerto Rican bonds are insured, which likely means bond insurers work out deals to stave off default for as long as possible. Third, Puerto Rico’s potential fallout on broader markets is limited—its economy is half the size of Detroit, and if Detroit didn’t roil muni markets when it went bankrupt in 2013, we fail to see how Puerto Rico will do so either. Fourth, most of this is old news to markets—Puerto Rican yields have been elevated for a long while (prices fall when yields rise). Though the commonwealth’s issues are real and its struggles will persist, “average Americans” just aren’t likely to get knocked much (if at all) by a Puerto Rico default. For more, see our 7/8/2015 commentary, “Puerto Rico Can’t Afford Its Debt.”

By , The Wall Street Journal, 08/03/2015

MarketMinder's View: While this piece isn’t perfect, it does highlight how Greece’s problems truly are its own and why eurozone contagion fears are overwrought. The eurozone periphery outside Greece—Spain, Portugal, Ireland and Italy—is well on the road to recovery. Ireland and Spain are among the region’s fastest-growing economies, and Irish GDP is back at pre-crisis levels. Portugal and Italy have also resumed growing, albeit at slower rates. Greece, on the other hand, is likely back in recession, the degree of which will be known later this year. With The Conference Board’s Leading Economic Index (LEI) for the eurozone up 0.4% m/m in June, the region’s uneven, choppy growth looks likely to continue, despite Greece’s longstanding struggles.

By , CNN Money, 08/03/2015

MarketMinder's View: We agree with the general tenor of this piece—we’re optimistic about the US economy and market too! But not for the reasons laid out here, which are mostly backward-looking—handy confirmations of what has happened, but not telling about what will happen. For example, employment data tell you what businesses did in the recent past—they tell you nothing about what’s to come. Same with consumer confidence, which only tells you how folks felt at one given moment in the past (and nothing about how they’ll act). If it is data you seek, we suggest looking at The Conference Board’s Leading Economic Index (LEI), which was up 0.6% m/m in June—the 15th monthly rise in the past 16 months—as no US recession began while LEI was high and rising like it is now. And on the last note, while we caution investors from viewing a September Fed rate hike as inevitable, we agree the economy could handle it—and we’d actually prefer if the Fed finally got on with it already.

By , The Wall Street Journal , 08/03/2015

MarketMinder's View: Though the Trans-Pacific Partnership (TPP) is “98% concluded” according to Australia’s trade minister, a major sticking point has soured progress: dairy products. Canada doesn’t want its domestic producers milked by foreign exporters, an argument filled with holes as far as New Zealand is concerned. The disagreement has spilled over to other areas: Japan has suggested New Zealand could be excluded from talks, and the Kiwis, for their part, are annoyed at the Americans for forcing pharmaceutical protections on them while ignoring New Zealand’s dairy interests. Thus, trade officials have ended the current round of negotiations without a clear future meeting set. As disappointing as a lack of a deal may be, this isn’t reason for investors to cry over spilt milk—huge trade deals are notoriously difficult to complete due to all the vested interests at play. If it does become reality, great—markets love more free trade! But if doesn’t, it’s the absence of a positive rather than a real market negative, and the bull won’t cower if the TPP falls through.

Global Market Update

Market Wrap-Up, Friday July 31, 2015

Below is a market summary as of market close Friday, 7/31/2015:

  • Global Equities: MSCI World (+0.3%)
  • US Equities: S&P 500 (-0.2%)
  • UK Equities: MSCI UK (+0.4%)
  • Best Country: Austria (+2.2%)
  • Worst Country: Singapore (-1.0%)
  • Best Sector: Utilities (+1.3%)
  • Worst Sector: Energy (-1.5%)

Bond Yields: 10-year US Treasury yields fell 0.08 percentage point to 2.18%.

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.