|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Scott Botterman.
|By Fisher Investments Editorial Staff, 10/11/2016|
MarketMinder’s editorial staff sits down with Fisher Investments Capital Markets Analyst Austin Fraser.
Pundits have taken to calling the Bank of Japan’s latest policy trick—negative interest rates on central bank deposits—a Jedi Mind Trick. But BoJ Governor Haruhiko Kuroda seems to have a different pop cultural inspiration when he stated last year: “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it.’ Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.”
Trouble is, in Peter Pan, flying also required magic fairy dust, and neither quantitative easing (QE) nor negative interest rates qualify. They’re more like forcing banks to walk the plank.
The BoJ’s massive QE program, now coupled with negative interest rates on new excess reserves, has pushed Japanese yields negative all the way out to 10-year maturities. Negative yields are intended to make Japanese Government Bonds (JGBs) unattractive—effectively a “tax” on savers (lenders)—promoting consumption or investment in higher yielding or riskier assets. Yet in the short term, it has done the opposite.
Stop me if you’ve heard this one: China is slowing, and that spells trouble for the world economy. I’m going to go ahead and presume the vast, vast, majority of readers are familiar: A slowdown in Chinese economic activity has been feared for years and was an enduring concern in 2015. Investor anxiety surrounding the world’s second-largest economy was widely blamed for a mid-year global equity market correction. But in an interesting twist, while China slowed, the eurozone—which many consider an economic quagmire to this day—sped. And, given the eurozone’s larger aggregate GDP, the acceleration has more than made up for a slower China in the last two years.
Fears of a seemingly unending European malaise the last several years suddenly faded this summer as China’s fast growth slowed. Facts were inconvenient— it didn’t seem to matter much that:
1. The slowing was largely government-orchestrated and has been occurring for years.
Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.
Are drug prices running rampant? After The New York Times reported on Sunday that a small private Pharmaceuticals firm, Turing Pharmaceuticals, jacked up the price of a 62-year-old drug by 5,000-ish percent, that question has sparked a media firestorm.[i] Monday, partly in reaction to the news, Democratic Presidential front-runner Hillary Clinton fueled further debate by vowing to “deal with skyrocketing out-of-pocket health costs and particularly, runaway prescription drug prices.” All week, media articles aplenty have focused on the issue and wondered whether Federal price controls are necessary to put a lid on the rise. But whatever your opinion of the sociological merits of this plan or drug prices, price controls in general have a long history of causing more harmful unintended consequences—including dinging stock prices—than any positive they may bring. That being said, pharmaceutical price controls seem unlikely to come to fruition any time soon.
For those interested in the details of Mrs. Clinton’s plan, here are the major proposals:
Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year, it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?
Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.
Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.
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|By Suzanne Woolley, Bloomberg, 10/26/2016|
MarketMinder's View: Maybe so, maybe not. Thing is, nothing in here is as ironclad predictive as it seems. For one, the report underpinning this article (which could also be seen as marketing material for alternative investment strategies and so-called smart beta) hinges on two things that are of dubious value in predicting future returns: The presently low interest rate environment squelching bond returns, and a high Shiller P/E ratio (cyclically adjusted price-to-earnings ratio, or CAPE) suggesting stocks won’t offset with good returns. Presently low interest rates may weigh on some bond returns. After all, yield is one component of return, and if rates rise, bond prices will fall. But realistically, rates move in cycles. Have during the last 30 years, and probably will over the next 10. That means returns may occasionally suffer, but are unlikely to do so persistently over a decade. Bond types chosen will also affect returns over this span. As for stocks, the CAPE is powerless in predicting short- or long-term returns. It compares oddly inflation-adjusted earnings smoothed over the last decade to stock prices. That means the financial crisis is still sending valuations up today, and we are quite sure earnings from ’08 have zero bearing on returns from 2016 – 2026. What does have bearing is equity supply, and this—like every other long-term outlook we are aware of—makes no attempt to forecast that. Now, we aren’t suggesting you save less. Go ahead and save more. Just don’t buy into the long-term gloom this is suggesting.
|By Staff, EUbusiness, 10/26/2016|
MarketMinder's View: If you’re keen for more details on the EU’s new plan for a “Common Consolidated Corporate Tax Base,” you can find them in the European Commission’s press release here. A lot of it is marketing spin, but buried about halfway down is the new way tax authorities will decide how much of a multinational corporation’s tax base lies in each member-state: They will equally weight how many assets, employees and sales a firm has in each member state, and calculate it as a percentage of the whole. And, answering a key question, they specified that sales will officially take place “on the basis of destination.” In other words, if Jean-Luc buys some books from UK shop Waterstones online and has them shipped to his villa in Nice, the sale officially takes place in France. The other major changes are that R&D investment and equity financing will now be fully tax-deductible across the union. EU officials say the new system will curb tax avoidance, level the playing field, rein in debt and boost investment in the process, which sounds just wonderful! But it’s awfully presumptive. All tax changes create winners and losers, and there just isn’t enough information here yet to assess whether the winners will be in the majority. The devil is in the details, like vague plans for a “single set of rules to decide how a company’s profit will be taxed,” which would effectively centralize policy on tax deductions, depreciation and the like. Member-states would have sovereignty over tax rates, but not incentives, which could reduce competition. Then again, this is only a blueprint, and it’s up to all
28 27 member-state governments to hash out the details. Judging from past efforts, this could take years or never happen, so for now this is all just a lot of speculation—not actionable for investors.
|By Joshua M. Brown , The Reformed Broker, 10/26/2016|
MarketMinder's View: There is no time like the present, particularly when it comes to the power of compounding. This piece ably summarizes Ben Franklin’s wisdom and insight when it comes to savings and investment: Do as much as early and often as possible. It sounds simple, but is too often ignored by too many people, especially, as recent polls show, by younger folk for whom Franklin’s advice would do the most good. Franklin understood that the sooner you let compounding work its magic, the earlier and likelier you’ll reach your financial goals. The article cites Ben Franklin as “America’s Da Vinci,” but from an investment perspective he might be more accurately described as America’s Luca Pacioli, a collaborator of Da Vinci’s, who came up with the Rule of 72 in 1494 (also double entry bookkeeping, but that’s another matter). Divide 72 by an annual rate of return, say 7%, and you’ll double your money in just over 10 years. In another decade, double that again. See how that works? Investing—and staying invested—isn’t that easy of course, but the basic concept is sound. As another luminary once put it: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it.” —Albert Einstein
|By Alison Frankel, Reuters, 10/26/2016|
MarketMinder's View: A very interesting article discussing shifts in the Delaware courts and how they may impact litigation against public firms stemming from mergers. For many years, it was a virtual certainty that plaintiff’s attorneys would file class-action lawsuits against public corporations after a merger completed, usually arguing they violated their duty to shareholders by not seeking competing bids/a higher price/etc., etc., and so forth. Many pundits have long argued these suits are about as frivolous as lawsuits get, and usually do little more than enrich the attorneys after companies settle. But it seems Delaware—home to many major US companies—may be curtailing that. For one: “Chancery Court’s refusal to sign off on six- or seven-figure fees for plaintiffs’ lawyers who negotiated disclosure-only settlements has already sharply reduced the number of M&A challenges filed in Delaware. According to a Cornerstone Research study published this summer, nearly two-thirds of all deals valued at more than $100 million still provoked shareholder litigation, but that’s way down from the 2013 peak of 94 percent….” Moreover, another decision has greatly increased the difficulty of winning such a suit in the state. “The message to plaintiffs’ lawyers, in other words, is that the only way to win an M&A challenge in Delaware is to come up with evidence of serious disclosure violations in a short time frame.” This may drive more to file cases in federal courts, but that standard is tougher, requiring them to prove violation of federal securities law.
Market Wrap-Up, Wednesday, October 26, 2016
Below is a market summary as of market close Wednesday, October 26, 2016:
- Global Equities: MSCI World (-0.1%)
- US Equities: S&P 500 (-0.2%)
- UK Equities: MSCI UK (+0.0%)
- Best Country: Finland (+1.5%)
- Worst Country: Norway (-2.0%)
- Best Sector: Utilities (+0.5%)
- Worst Sector: Health Care (-0.5%)
Bond Yields: 10-year US Treasury yields rose 0.03 percentage point to 1.79%.
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. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.