Commentary

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Dissecting Three Media Themes on Oil

By, 12/19/2014
Ratings383.947368


Oil's all the rage in the media, but it doesn't take much to drill holes in their theories. Photo by Seth Joel/Getty Images.

Since peaking in June, US and global oil price benchmarks have nearly halved. West Texas Intermediate crude is down 47%. Brent 48%.

At the risk of stating the obvious, that is a substantial decline—catching many eyeballs in the process and spurring a wide range of theories regarding what the drop means for the US economy. Most are overstated, speculation or simply incorrect. Here are the top three misperceptions underlying much of the media chatter on the subject[i]. Being aware of these themes can help you sift through the noise.[ii]

Commentary

Fisher Investments Editorial Staff
Behavioral Finance, Media Hype/Myths

Vexing Volatility

By, 12/18/2014

December began placidly enough. The S&P 500 rose a hair in the first week. Global stocks fell a smidge. Emerging Markets (EM) stocks were flat. Brent crude oil was down, but West Texas Intermediate (WTI) crude was flattish. Then volatility—in both directions—jumped. Through Thursday, Brent and WTI oil prices are down -20% and -18%, respectively.[i] The Russian ruble, which hasn’t been so hot all year, fell -32% more against the dollar in the month through Tuesday, before bouncing back some.[ii] Greek stocks (as measured by the Athex) swung from a 7% gain at the end of December’s first week to a -15% loss, before rebounding some the last two days.[iii] Chinese equities sold off big. EM, global and US stocks sold off, falling 9.4%, 4.8% and 4.5%, respectively, through the recent low on Tuesday.[iv] The market volatility index known as the VIX surged, which also means the (bizarre) VIX of VIX surged. Then stocks bounced back big, with two major rallies back-to-back—which, in typical arbitrary form, the media dubbed the “two biggest up days since 2011.” That kind of sharp swinging can be tough to stomach. Especially when many headlines point to the more extreme swings (even if they’re narrow like Greece) and fret it  foreshadows what lies ahead for stocks broadly. However, we believe now is a time to steel your nerve. Markets could always get bouncier. There is no predicting what volatility will or won’t do. But reacting to volatility is a common investor mistake. Volatility doesn’t predict, and it isn’t contagious.

The presumption volatile oil prices, currencies or far-flung indexes are a prelude to volatility elsewhere operates on the notion broad, global markets are unaware of volatility elsewhere. However, equity markets—and the billions of investors trading in equity markets—don’t operate from so different a script from bond or commodity markets. Markets, folks, are markets. If most bond or commodity investors know something, equity investors likely know it, too. You can see this in how oil prices, Energy stocks and Energy bonds are all moving in the same direction. Concurrently! That’s markets near-simultaneously moving on this widely known information. If a market doesn’t reflect big volatility from another market, that isn’t necessarily a sign of complacency. It’s a sign the broad market impact may not be there. Perhaps it’s sector, country or company specific. Heck, gold has been in a bear market since 2011. It’s a commodity. Its volatility hasn’t been mirrored elsewhere. Same with iron ore. And copper. And natural gas, earlier in this cycle. Greek stocks fell massively through June 2012. Global stocks rose. EM stocks have been really bouncy and overall lackluster since 2011. Global stocks have been booming with relatively little volatility. There is no sign volatility is contagious.

And in markets, volatility doesn’t presage more to come. Stock markets—or any market—aren’t serially correlated. Volatile times don’t necessarily mean more volatile times ahead, and less volatile times don’t mean tranquil markets ahead. If that were the case, December wouldn’t look like it has thus far. Volatile markets also don’t mean smooth sailing ahead, and vice versa. That’s a reversion to the mean argument, which also presumes the past predicts future volatility. It’s inconvenient, but volatility is totally, completely random. And volatile. You cannot use volatility to predict anything about future volatility or market direction.

Commentary

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

The Red Scare

By, 12/17/2014
Ratings224.613636

Russia is a mess. The ruble is in free fall. Russian stocks are sagging. Inflation is surging. The central bank is projecting a nasty 2015 recession. Russian “President” (read: dictator; strongman; would-be tsar) Vladimir Putin—fresh off being named Russia’s “Man of the Year” for the 15th consecutive year and finishing second to Janet Yellen in a poll seeking to identify the “Most Important Person to 2014 Capital Markets”—says a downturn is looming but will only last two years. While Russia likely has a tough time in the near future, this isn’t 1998. And, 1998 or no, we don’t see this as a real global economic threat.  

Here is the Reader’s Digest version of the ruble’s woes. At 2014’s start, one dollar would buy you 33 rubles, hovering around that mark until late June—not coincidentally at Brent Crude’s high for the year. As oil prices began falling in late June, the ruble started weakening (Exhibit 1). Falling oil prices aren’t good for an oil-dependent economy.

Exhibit 1: Brent Crude Price and Russian Ruble in 2014

Commentary

Elisabeth Dellinger
Monetary Policy, Media Hype/Myths, Reality Check, Interest Rates

Considerable Wrangling Over Considerable Time

By, 12/17/2014
Ratings284.589286

“‘Considerable time’ is about yea big, so you know, we’ll hike in about 12 inches worth of time,” is not what Janet Yellen said at this moment in today’s press conference. Photo by Alex Wong/Getty Images.

It’s Fed Day, folks, and after months of speculating, the FOMC finally removed the phrase “considerable time” from sentence four of its policy statement’s paragraph on interest rates … and moved it to sentence five. (Then they gave you some wishy-washy econo-gobbledygook that Harry Truman would hate.) Instead of pledging to keep the fed-funds target rate near zero for a “considerable time” after quantitative easing ended, they believe they “can be patient,” which they say is “consistent” with that previous “considerable time” thing. Whew! Stocks jumped and headlines went into speculative overdrive, but we wouldn’t make much of it at all—it’s just evidence Fed head Janet Yellen is getting good at using a lot of words to say a lot of nothing, just like her predecessors. None of it tells us when rates will rise.

Commentary

Fisher Investments Editorial Staff
Politics, Media Hype/Myths, Reality Check, Developed Markets

Now What?

By, 12/16/2014
Ratings164.71875


Shinzo Abe is all smiles after his party's latest landslide win. Photo by Bloomberg/Getty Images.

Japan hit the polls Sunday, and the results were a decisive boost … for the Japan Communist Party, which jumped from eight seats to 21. Oh, and Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and partner New Komeito maintained their supermajority. This, we are told, gives Abe’s “Abenomics” reform agenda a “second wind.” Abe vowed to “push ahead” and “give top priority to the economy and bring the warm winds of economic recovery all over the country.” And even though Japanese stocks fell Monday, closing at a one-month low, optimists say it’s only because global growth jitters just barely, temporarily outweighed investors’ election cheer. As ever, we’re skeptical. Talk is cheap, and nothing has fundamentally changed on Japan’s political scene. Japanese stocks might get a temporary sentiment-driven boost as hopes for change resurge, but it seems highly unlikely Abe can deliver enough to meet investors’ high expectations. Longer term, we still think investors are best off outside Japan.

Before the election, Abe’s coalition had a 67.7% majority. Post-election, they’re up to 68.6%—they gained one seat while the lower house shrunk from 480 seats to 475. So for them, this election confirmed the status quo. For all the talk of the contest being a referendum on Abenomics, Abe’s stump speech looked a lot like his first two years in office: lots of general pledges to revive the economy, few (if any) specifics. No proposed legislation to cut agricultural tariffs, complete free trade deals or overhaul the feudal labor code. The Trans-Pacific Partnership—a multination free trade deal-in-progress—which was a cornerstone of his 2012 campaign, barely got a mention. Taxes got some attention, as Abe reiterated plans to delay next October’s sales tax hike and bring the corporate tax rate below 30% within a few years, but those are a drop in the bucket. More competitive corporate taxes would be a positive, but they’re far off, not yet law, and only a small step to improving Japan’s economic structure.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Hey, Hey, USA Stocks All the Way?

By, 12/15/2014
Ratings304.166667

Since 2010, US stocks have overall led foreign, at times by a fairly wide margin. And, as is relatively predictable, a common media theme has popped up—especially, and oddly, among some of the scions of allegedly passive investing—that you should shun foreign stocks and gooooooooooo USA! We love America, too! Apple pie! Football (the ovally kind)! But in our view, the notion American stocks—or any region or country’s stocks—are permanently superior falls prey to both recency and home-country bias. US stocks won’t outperform forever—as it always has, leadership will rotate. Thus, the added diversification global investing brings can be a significant benefit for investors over the longer term.

Domestic and foreign stocks come into and out of favor—no one category is best for all time. As Exhibit 1 shows, domestic stocks lead in some years, foreign in others. Recency bias[i] drives many folks to forget this. After all, many remember the whopper 1980s bull market but don’t realize it was much whoppier(?) for foreign than US stocks. The 1990s were US-dominated, true enough. The truncated 2000s bull? Foreign. Heck, in the latter part of the 2000s bull market, the common claim was you needed foreign  to get good returns . (The same allegedly passive investing scion even suggested owning some.[ii]) Some folks theorized foreign was superior after the global financial crisis, based on some weird notions about unemployment. Interestingly, US stocks took the lead shortly after.

Exhibit 1: US vs. Foreign Stock Performance by Calendar Year

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Commodities

Debunking the Junk Funk

By, 12/12/2014
Ratings84.625

Does junk bonds’ funk mean stocks are sunk? Some suspect so, as the US high yield corporate debt (i.e. junk bonds) market’s recent sell-off has prompted speculation other assets—namely stocks—are about to go on a bumpy ride. Folks fret bonds are sending a warning signal that stocks are turning a blasé eye toward. However, we don’t believe bond markets possess any special insight over equity markets—both look forward and discount widely known information. Though short-term volatility can hit any sector, region and/or market for any (or no) reason, in this case, one fundamental driver seems to be behind junk bonds’ bumps: falling energy prices. While those may hit some individual firms, we don’t think the macroeconomic or broad market impact is big enough to end the bull market. Or even totally negative.  

Junk bonds have had a nice run since the financial crisis ended, with one gauge—the Barclays US High Yield Index—rising more than 160% from its 2008 low through the end of 2013. 2014 was off to another nice start, adding 5.7% through September 1. But since then, junk bonds have hit some tougher sledding, falling 4% through December 11, with most of the decline coming recently. Here is a chart.

Exhibit 1: Barclays US High Yield Index YTD

Commentary

Fisher Investments Editorial Staff
Others

The Fed Taketh, Congress Giveth?

By, 12/11/2014
Ratings144.428571

Bank rule changes have popped up from both ends of the National Mall in Washington, DC in recent days, arguably cutting in opposing directions. On one end, Congress, in its zeal to get out of town for the holiday break, duct-taped a tiny Dodd-Frank amendment into a massive bill seeking to keep government from shutting down (entertainingly dubbed the “cromnibus—continuing resolution and omnibus bill”). On the other, the Fed continued its quest to make the biggest banks (again) boost capital. Both grabbed a bunch of headlines and even some punditry flak. But these are both widely expected moves—not surprises for good or ill. They may create some winners and losers, but they don’t create big headwinds for Financials stocks or markets overall.

First, the Dodd-Frank amendment—your typical “we can’t ever pass this on its own, so we’ll duct-tape it to something essential and see what happens” rider. The amendment would water down a Dodd-Frank provision requiring banks to push some derivatives trading to non-FDIC-insured units. The logic underpinning the rule goes like this: Derivatives are “risky,” some institutions that received bailouts in 2008 had some derivatives blow up, and moving them out of government-insured units keeps taxpayers off the hook for banks’ risky behavior. Banks have long hated this, arguing it impedes flexibility and jacks up operating costs unnecessarily—and decreases oversight (and therefore increases risk) since non-FDIC-insured units get fewer government eyeballs.

Ergo, the rider to water it down. Banks are happy. Politicians and pundits seeking to prevent another 2008 less so. In our view, the change is really a whole lot of nothing. It probably does reduce banks’ costs incrementally, but the added flexibility is likely overstated. Most swaps (almost 95%) were still allowed to stay in-house—interest rate swaps, foreign exchange and cleared credit derivatives were never pushed out. All things banks use for hedging normal operations. Only equity and commodities derivatives, uncleared credit default swaps and so-called structured finance swaps had to move. Under the proposed change, only structured swaps used for hedging and risk management get a reprieve. Which seems logical and incremental—the net notional value outstanding is tiny. Plus, all that shifting doesn’t change much from a bailout standpoint. Non-bank subsidiaries could still get government support if the Fed deems necessary for the good of mankind. Besides, the push to move certain activities to a subsidiary as a protective move is untested theory that largely presumes a parent company would be totally unaffected by the goings on. So this is the elimination of a rule that wouldn’t have much impacted 2008 anyway.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Politics

The Greek Gambit, Redux

By, 12/10/2014
Ratings384.342105

Is the euro crisis back?

Did it ever leave?

Those were two common sentiments in the press Tuesday in the wake of a broad selloff across the continent, with Greek political drama seemingly at the nexus. The Athex Composite (a capitalization-weighted gauge of 60 stocks listed on the Athens Exchange) closed the day down nearly -13%—that is not a typo; there is no missing decimal point. Many headlines shouted over what amounts to the index’s biggest single down day since 1987, which is really saying something for Greece, considering the harrowing -91% (also not a typo) bear market in the Athex from October 31, 2007 through June 5, 2012. The big volatility seems to have stoked fears of a renewed eurozone crisis, with potential global implications. In our view, though, there is little evidence substantiating the fear.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Currencies, Media Hype/Myths

Some Solace From a Quantum of Fear

By, 12/09/2014
Ratings353.685714

The most powerful, destructive piece of paper in the world? Photo by Elisabeth Dellinger. And that is her money, so keep your grubby mitts off it.

Here is example #3934823895 of why jargon is evil: “This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets.” We pulled the sentence from the Bank for International Settlements’ latest quarterly report, where it was tucked at the end of a passage droning on about monetary policy, volatile markets and the strengthening dollar. These all imply “more than a quantum of fragility” in markets today. And we don’t know what that means! Because definitions of “quantum” as a noun include all of the following:

Commentary

Fisher Investments Editorial Staff
Personal Finance

Hey, Hey, USA Stocks All the Way?

By, 12/15/2014
Ratings304.166667

Since 2010, US stocks have overall led foreign, at times by a fairly wide margin. And, as is relatively predictable, a common media theme has popped up—especially, and oddly, among some of the scions of allegedly passive investing—that you should shun foreign stocks and gooooooooooo USA! We love America, too! Apple pie! Football (the ovally kind)! But in our view, the notion American stocks—or any region or country’s stocks—are permanently superior falls prey to both recency and home-country bias. US stocks won’t outperform forever—as it always has, leadership will rotate. Thus, the added diversification global investing brings can be a significant benefit for investors over the longer term.

Domestic and foreign stocks come into and out of favor—no one category is best for all time. As Exhibit 1 shows, domestic stocks lead in some years, foreign in others. Recency bias[i] drives many folks to forget this. After all, many remember the whopper 1980s bull market but don’t realize it was much whoppier(?) for foreign than US stocks. The 1990s were US-dominated, true enough. The truncated 2000s bull? Foreign. Heck, in the latter part of the 2000s bull market, the common claim was you needed foreign  to get good returns . (The same allegedly passive investing scion even suggested owning some.[ii]) Some folks theorized foreign was superior after the global financial crisis, based on some weird notions about unemployment. Interestingly, US stocks took the lead shortly after.

Exhibit 1: US vs. Foreign Stock Performance by Calendar Year

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Commodities

Debunking the Junk Funk

By, 12/12/2014
Ratings84.625

Does junk bonds’ funk mean stocks are sunk? Some suspect so, as the US high yield corporate debt (i.e. junk bonds) market’s recent sell-off has prompted speculation other assets—namely stocks—are about to go on a bumpy ride. Folks fret bonds are sending a warning signal that stocks are turning a blasé eye toward. However, we don’t believe bond markets possess any special insight over equity markets—both look forward and discount widely known information. Though short-term volatility can hit any sector, region and/or market for any (or no) reason, in this case, one fundamental driver seems to be behind junk bonds’ bumps: falling energy prices. While those may hit some individual firms, we don’t think the macroeconomic or broad market impact is big enough to end the bull market. Or even totally negative.  

Junk bonds have had a nice run since the financial crisis ended, with one gauge—the Barclays US High Yield Index—rising more than 160% from its 2008 low through the end of 2013. 2014 was off to another nice start, adding 5.7% through September 1. But since then, junk bonds have hit some tougher sledding, falling 4% through December 11, with most of the decline coming recently. Here is a chart.

Exhibit 1: Barclays US High Yield Index YTD

Commentary

Fisher Investments Editorial Staff
Others

The Fed Taketh, Congress Giveth?

By, 12/11/2014
Ratings144.428571

Bank rule changes have popped up from both ends of the National Mall in Washington, DC in recent days, arguably cutting in opposing directions. On one end, Congress, in its zeal to get out of town for the holiday break, duct-taped a tiny Dodd-Frank amendment into a massive bill seeking to keep government from shutting down (entertainingly dubbed the “cromnibus—continuing resolution and omnibus bill”). On the other, the Fed continued its quest to make the biggest banks (again) boost capital. Both grabbed a bunch of headlines and even some punditry flak. But these are both widely expected moves—not surprises for good or ill. They may create some winners and losers, but they don’t create big headwinds for Financials stocks or markets overall.

First, the Dodd-Frank amendment—your typical “we can’t ever pass this on its own, so we’ll duct-tape it to something essential and see what happens” rider. The amendment would water down a Dodd-Frank provision requiring banks to push some derivatives trading to non-FDIC-insured units. The logic underpinning the rule goes like this: Derivatives are “risky,” some institutions that received bailouts in 2008 had some derivatives blow up, and moving them out of government-insured units keeps taxpayers off the hook for banks’ risky behavior. Banks have long hated this, arguing it impedes flexibility and jacks up operating costs unnecessarily—and decreases oversight (and therefore increases risk) since non-FDIC-insured units get fewer government eyeballs.

Ergo, the rider to water it down. Banks are happy. Politicians and pundits seeking to prevent another 2008 less so. In our view, the change is really a whole lot of nothing. It probably does reduce banks’ costs incrementally, but the added flexibility is likely overstated. Most swaps (almost 95%) were still allowed to stay in-house—interest rate swaps, foreign exchange and cleared credit derivatives were never pushed out. All things banks use for hedging normal operations. Only equity and commodities derivatives, uncleared credit default swaps and so-called structured finance swaps had to move. Under the proposed change, only structured swaps used for hedging and risk management get a reprieve. Which seems logical and incremental—the net notional value outstanding is tiny. Plus, all that shifting doesn’t change much from a bailout standpoint. Non-bank subsidiaries could still get government support if the Fed deems necessary for the good of mankind. Besides, the push to move certain activities to a subsidiary as a protective move is untested theory that largely presumes a parent company would be totally unaffected by the goings on. So this is the elimination of a rule that wouldn’t have much impacted 2008 anyway.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Politics

The Greek Gambit, Redux

By, 12/10/2014
Ratings384.342105

Is the euro crisis back?

Did it ever leave?

Those were two common sentiments in the press Tuesday in the wake of a broad selloff across the continent, with Greek political drama seemingly at the nexus. The Athex Composite (a capitalization-weighted gauge of 60 stocks listed on the Athens Exchange) closed the day down nearly -13%—that is not a typo; there is no missing decimal point. Many headlines shouted over what amounts to the index’s biggest single down day since 1987, which is really saying something for Greece, considering the harrowing -91% (also not a typo) bear market in the Athex from October 31, 2007 through June 5, 2012. The big volatility seems to have stoked fears of a renewed eurozone crisis, with potential global implications. In our view, though, there is little evidence substantiating the fear.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Currencies, Media Hype/Myths

Some Solace From a Quantum of Fear

By, 12/09/2014
Ratings353.685714

The most powerful, destructive piece of paper in the world? Photo by Elisabeth Dellinger. And that is her money, so keep your grubby mitts off it.

Here is example #3934823895 of why jargon is evil: “This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets.” We pulled the sentence from the Bank for International Settlements’ latest quarterly report, where it was tucked at the end of a passage droning on about monetary policy, volatile markets and the strengthening dollar. These all imply “more than a quantum of fragility” in markets today. And we don’t know what that means! Because definitions of “quantum” as a noun include all of the following:

Commentary

Fisher Investments Editorial Staff
US Economy

Now Hiring: Reasons to Be Optimistic

By, 12/08/2014
Ratings284.339286

All eyeballs seemed glued on the US Bureau of Labor Statistics (BLS) last Friday, eagerly awaiting the November US Employment Situation Report, more commonly known as “The Unemployment Report.” Financial media had countdown clocks ticking away the seconds to 8:30 a.m. (EST), when the data are publicly released. TV networks had a guessing game of folks staking out numbers, with most basing their guesses loosely on the consensus estimate that nonfarm payrolls would rise by 230,000 new jobs. But when the number hit, it blew them all away: 321,000 new jobs in November , the  record 50th straight month of growth. The unemployment rate held steady at its postwar average, 5.8%. Media reaction was uncharacteristically sunny: The recovery is finally hitting home! Growth is finally showing up in the “real economy,” a newfangled ray of sunshine for Main Street. And hey, it is positive news! But the cheery reaction seems to treat the good news as if it’s, well, new. Yet these late-lagging data points merely confirm what we’ve long suggested: The US economy is far stronger than most folks appreciate. For investors, basing a rosier outlook on lagging indicators like job growth isn’t so sensible, but more forward-looking and coincident data suggest a positive outlook is justified either way.

As we’ve said before, employment tends to lag broader economic growth —in some cases by many months . It can be dangerous for investors to track the labor market closely. Stocks look forward, and if your outlook hinges on lagging indicators, you could miss cyclical changes. But beyond the jobs report, other recent data support the notion the US is growing nicely. See both exports and imports rising (1.2% m/m and 0.9% m/m, respectively) in October. Headlines cheered a falling trade deficit (something that isn’t a threat), but we’d suggest the real applause should be for rising total trade (exports plus imports). Rising total trade shows healthy demand for our exports abroad, and healthy demand in general at home. Elsewhere, the Institute for Supply Management’s (ISM) November purchasing managers’ indexes (PMI) for manufacturing and services showed continued expansion. Manufacturing hit 58.7, a bit lower from October’s 59 reading but still well above 50[i]. Services rose to 59.3, above the prior month’s level of 57.1. October consumer spending ticked up 0.2% m/m, extending its long-term rise. And none of this is new, as Exhibits 1 through 5 show.

Exhibit 1: US Total Trade

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.

Research Analysis

Christo Barker
US Economy

Let’s Call It FARRP

By, 10/10/2013
Ratings93.777778

While the rest of the country fretted over taper terror, government shutdown and debt ceiling limits, the Federal Reserve tested its Fixed Rate Full-Allotment Reverse-Repo Facility (a mouthful—let’s call it FARRP) for the first time September 24. FARRP allows banks and non-banks, like money market funds and asset managers, to access Fed-held assets—i.e., the long-term securities bought under the Fed’s quantitative easing—via securities dealers’ tri-party repo (and reverse-repo) market for short-term funding. (More on repos to follow.) FARRP aims to address what many feel is a collateral shortage in the non-bank financial system caused by too much QE bond buying concentrating eligible collateral on the Fed’s balance sheet, where it doesn’t circulate freely. As a result, many private sector repo rates turned negative. But, should FARRP be fully implemented, the facility could actually hinder some assets (in this case, high-quality, long-term collateral like bonds) from circulating through the financial system—much like quantitative easing (QE) locked up excess bank reserves. A more effective means of freeing collateral in the repo market is tapering the Fed’s QE.

Repurchase agreements, or repos, are used to generate short-term liquidity to fund other banking or investment activity—a means to move liquidity (cash) from one institution to another. In a repo, one party sells an asset—usually long-term debt—agreeing to repurchase it at a different price later on. A reverse repo is, well, the opposite: One party buys an asset from another, agreeing to sell it back at a different price later. In both cases, the asset acts as collateral for what is effectively the buyer’s loan to the seller, and the repo rate is the difference between the initial and future sales prices, usually expressed as a per annum interest rate. The exchange only lasts a short while—FARRP’s reverse repos are overnight affairs to ensure markets are sufficiently funded. In the test last Tuesday, the private sector tapped the facility for $11.81 billion of collateral—a small, but not insignificant, amount.

FARRP’s first round is scheduled to end January 29, and during that time, non-bank institutions can invest between $500 million and $1 billion each at FARRP’s fixed overnight reverse-repo rates ranging from one to five basis points. A first for repo markets: Normally, repo and reverse-repo rates are free-floating, determined by market forces. Another of FARRP’s differentiating factors is private-sector need will facilitate reverse-repo bids instead of the Fed. Ideally, FARRP’s structure will encourage unproductive collateral to be released back into the system when it’s most needed—and new sources of collateral demand may help ensure this. Swaps, for example, are shifting to collateral-backed exchanges due to Dodd-Frank regulation—meaning more collateral will be needed to back the same amount of trading activity. Collateral requirements for loans will likely also rise.

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What We're Reading

By , CNN Money, 12/19/2014

MarketMinder's View: When the government launched the Troubled Assets Relief Program, or $700 billion bailout, at the height of the financial crisis in October 2008, many folks thought this was money being flushed down the drain; free cash for Wall Street, no strings attached. But the reality is very different, as shown now that the books on TARP are closed. The bank bailout part of TARP turned a nice profit. The automaker part was in the red along with the so-called “homeowner bailout” programs. Now, whatever the gain or loss, we’d suggest that this program didn’t successfully achieve its aim: Stabilizing the financial system. It was a key part of the government’s haphazard response that roiled markets after FAS 157 had spent a year wrecking bank balance sheets unnecessarily. Oh and hey, forget all that rhetoric about “profits for taxpayers” or what have you. We’d suggest holding your breath while waiting for your share of the US government’s $15.3 billion profit from TARP isn’t good for your health.

By , The Wall Street Journal, 12/19/2014

MarketMinder's View: A mish-mosh of misperceptions here. It starts with the suggestion stocks are extremely expensive and bound to fall sooner than later because the cyclically adjusted price-to-earnings ratio (CAPE) is high and stocks bounced back off of recent volatility too fast to become “cheap,” which presumes a) P/Es are predictive b) cheap stocks do better and c) the CAPE shows you stocks are cheap. None of these are accurate. But the advice to avoid the temptation to “do something” because of energy-driven volatility is highly sensible: “The sharp and swift recovery shows the importance of not reacting to every blip in the market.” However, the tail end of the article eschews this advice anew. For more, see our 12/18/2014 commentary, “Vexing Volatility.”

By , Reuters, 12/19/2014

MarketMinder's View: This highlights an excellent point often overlooked amid consternation surrounding China’s recent slowdown: Even at lower growth rates, China still contributes tremendously to global economic activity. What’s arguably more important than a high rate of growth is that China continues growing and gradually shifting its economic focus from an infrastructure-driven economy to one that is more consumer- and services-oriented, as most developed-world economies are. Particularly when the growth rates in question are in the 7% range on the low end—an enviable figure relative to much of the rest of the world.

By , The New York Times, 12/19/2014

MarketMinder's View: This piece confuses correlation with causation, in our view—simply because two events seemingly corresponded in time doesn’t necessarily mean one caused the other absent a logical, causal link. Do markets require sensible regulation? Absolutely. Absent well-reasoned rules of the game, no free market can efficiently operate. However, the key word is “sensible”—and to presume politicians of any stripe are capable of effectively regulating every possible risk out of markets is to give them far too much credit. Rather than blame insufficient regulation for every past downturn, we’d suggest market cycles are far more tied to behavioral psychology and the way our brains have been wired for millennia. As humans, we often allow emotion to drive decisions—which sentences us to periodic irrational exuberance and irrational pessimism, regardless of whether Washington has forbidden it. Finally, we’d note there is more evidence a regulatory change—FAS 157—was at the heart of 2008 than deregulation.

Global Market Update

Market Wrap-Up, Thursday Dec 18 2014

Below is a market summary (as of market close Thursday, 12/18/2014):

  • Global Equities: MSCI World (+2.0%)
  • US Equities: S&P 500 (+2.4%)
  • UK Equities: MSCI UK (+2.0%)
  • Best Country: Norway (+4.9%)
  • Worst Country: Singapore (-0.2%)
  • Best Sector: Information Technology (+2.8%)
  • Worst Sector: Telecommunications (+1.4%)
  • Bond Yields: 10-year US Treasurys rose .07 to 2.21%.

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.