Commentary

Fisher Investments Editorial Staff

A Q&A On Recent Volatility

By, 04/15/2014
Ratings663.969697

Fact: Volatility can be pretty, well, volatile sometimes. It’s also a normal, healthy feature of any bull market—dips and dives help keep sentiment in check. They keep fear alive, lowering expectations and extending the proverbial wall of worry. The market’s recent (and ongoing) gyrations are just normal—the price we pay for getting market-like long-term growth over time.

Most headlines won’t tell you this. In our daily survey of the more than 100 worldwide websites, pundits’ and economists’ blogs we cover, we’ve seen precious few (if any) outlets putting stocks’ recent ride in perspective. Some wonder when and whether technical indicators will tell us to brace for a bear. Others warn it’s 2000 all over again, with bursting bubbles in Biotech and social media about to take down the world. A handful look at sliding “momentum” stocks (whatever that means) and wonder whether they’ll rebound or another category will take their place atop the leaderboard. Most are written in such hyperbolic tone that you’d never know the S&P 500 was down only 3.9% since its April 2 peak as of Monday’s close. Or that for every person “dumping” formerly high-flying stocks, someone else is eagerly snapping them up.

Yes, having a little perspective can make all the difference. So without further ado, we give you the MarketMinder view on the current slide.

Commentary

Fisher Investments Editorial Staff

Greece Makes a Comeback

By, 04/14/2014
Ratings74.714286

A brand new security took markets by storm last week—and we aren’t talking about some hot IPO. Nope, we’re talking about the first new Greek long-term bond since pre-bailout times. On Thursday, Greece put a little over €3 billion in five-year bonds on the auction block—and demand was sky-high. Sure, it’s just one bond—but the clamor speaks to just how far Greece has come. Investors’ confidence, so shattered during the sovereign debt crisis, has firmed up, putting to rest fears of the eurozone’s untimely collapse.

To say Greece has had a long, hard road is an understatement. Its first bailout came in 2010, but its economy started to tank in 2008. What happened after is a true Greek tragedy. A quarter of its economy wiped out during six years of full on depression. Borrowing costs soaring above 30%. Two bailouts. Two defaults. Massive job losses. Political turmoil, complete with a violent fascist uprising courtesy of the neo-Nazi Golden Dawn party. Even one year ago, it seemed the troubles would never end. Leaders were mulling a third default. EU officials said the country still had to make tough adjustments. 10-year yields were still double digits. At the end of 2013, when Greece’s Prime Minister said his country would exit its bailout plan on schedule in 2014, most thought he was nuts. But, as the old proverb goes, it’s often darkest just before the dawn.

The first rays of sunlight appeared in January, when Greece’s manufacturing PMI showed growth for the first time in 53 months. Public finances showed signs of improvement, with officials tipping a primary budget surplus for 2013, and that bailout exit suddenly didn’t seem so crazy. Early this week, Greece auctioned off €1.3 billion in short-term bonds at 3.01%—more than half a point lower than last month’s sale.

Commentary

Elisabeth Dellinger
Media Hype/Myths, Into Perspective

Too Big to Fail: Money Management Edition

By, 04/11/2014
Ratings273.537037

Are too-big-to-fail money managers a risk to the global financial system?

The Bank of England’s financial stability watchdog, Andy Haldane, seems to think so. In a recent speech at the London Business School, he warned the crowd the mutual fund and asset management industries are increasingly “run-prone”—funds and firms are getting too big, owning too many assets, and if investors lose confidence in the managers and exit en masse, it could trigger huge asset fire sales, causing a vicious circle of failing funds and falling markets. If a fund were big enough, even something as innocuous as rebalancing could launch a panic!  

He isn’t the only one saying this. In January, the global Financial Stability Board (FSB)—regulatory chiefs from around the world—released a consultation paper on identifying and regulating globally systemically important non-bank non-insurance financial institutions. Translated from Bureaucratese, that means too-big-to-fail investment firms. These are firms whose failure, regulators believe, “would cause significant disruption to the global financial system and economic activity”—liquidation of assets could “impact asset prices and thereby could significantly disrupt trading or funding in key financial markets, potentially provoking losses for other firms with similar holdings.”

Commentary

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

When the Growing Gets Tough

By, 04/11/2014
Ratings144.535714

Amidst trade wobbles, Chinese Premier Li Keqiang focuses on future growth. Source: Lintao Zhang, Getty Images.

About a month after slowing retail sales and industrial production added to China’s great wall of worry, poor trade data refreshed fears China’s hard landing is nigh. We won’t sugarcoat things: Falling exports and imports probably do indicate China is weakening some, but it’s likely a side effect of officials’ efforts to reengineer and open the economy. Growing pains aren’t pleasant, but they aren’t a crash.

Commentary

Fisher Investments Editorial Staff

Euro Politicos

By, 04/10/2014
Ratings433.744186

Structural reforms in Italy? Pro-business policies in France? Ask any investor if these were likely a year ago, they’d almost surely have said no. Italy is gridlocked! France’s President is a Socialist! But reality often enjoys taking an ironic turn. Italy’s firebrand new Prime Minister is shaking things up with a new reform-minded budget, and France’s new cabinet is continuing President François Hollande’s drive toward moderation. How far either initiative gets remains to be seen—it’s politics, after all!—but both illustrate how investors operating on political biases and assumptions alone often end up blindsided by a better-than-expected reality. 

Our tale begins in Italy, where new PM Matteo Renzi has promised ambitious economic reforms since his February appointment. But save for some local government bloat-trimming and the 151 ministerial luxury cars hawked on eBay, it was all talk until Tuesday’s three-year budget agreement. Considering Renzi has spent months calling for looser fiscal policy to boost growth and famously called the EU’s budget stability pact a “stupidity pact,” most expected some growth spending plans. But Renzi took a different tack. Along with €7 billion in tax cuts for lower-income workers—the largest tax cuts in two decades—came €5 billion in spending cuts to reduce Italy’s public debt and comply with the EU’s 3% debt-to-GDP limit. And topping it off was acknowledgment 2014 growth will likely slow from initial projections of 1.0% to just 0.8% as a result.

Counter-intuitively, this is an encouraging sign. It indicates Renzi is in it for the long-haul, resisting the urge for a short-term fix in order to undertake structural reforms—and accepting slightly slower growth in the near term as a tradeoff for building a foundation for more sustainable growth. Renzi’s proposals probably aren’t big enough to bring about some earthshattering changes that turn Italy into, say Germany, and it’s a three-year plan. But hey! You’ve got to start somewhere. The same goes for the labor reform efforts Renzi launched last week, which includes plans to revamp the unemployment welfare scheme, improve employment agencies and establish a new employment contract that eases some of the restrictions on employers. Here, too, it’ll be a slow-go. Renzi estimates it’ll take up to a year to pass the legislation given the many vested interests in the way. But if politicians see things through, Italy would benefit over time.

Commentary

Fisher Investments Editorial Staff

Popping Tech Bubble Fears

By, 04/09/2014
Ratings613.639344

Have you heard? The Tech party is over—get out before those out-of-touch valuations fall to earth and that frothy IPO scene dries up!  At least, that’s the impression you’ll likely get from headlines bemoaning the Technology sector’s recent slide. In our view, though, it seems a big stretch to interpret the sentiment-driven wobbles typical of bull markets as a bubble bursting. Yes, sector-specific volatility is as normal in a bull as broad market gyrations, and while Tech could very well wobble a while longer, the sector’s long-term prospects still look strong.

Many observers see Tech’s slide as confirmation their long-running “Tech Bubble 2.0” fears are right. Some point to companies with super high valuations getting punished, while others highlight weakness in some formerly high-flying recent IPOs. However, the sector hasn’t exactly been partying like it’s 1999. IPOs are more plentiful than in recent years, but investors aren’t bidding them up with reckless abandon—today’s first-day median returns are less than a third of what they were 15 years ago. Lofty valuations for a handful of companies might be a sign sentiment toward some firms is on the high side, but it’s difficult to argue the entire Tech sector is riding high on euphoria. Exhibit A: the near-consensus belief Tech’s recent slide is the beginning of a popping bubble. In 2000’s euphoric environment, most pundits deemed every pullback a buying opportunity. Even as Tech slid right down the slope of hope, many believed the “new economy” couldn’t stay down. Today, we see the opposite—a sign of lingering investor pessimism, not euphoria.

In our view, Tech’s pullback is just normal, sentiment-driven volatility—typical of healthy bull markets. Pullbacks help keep sentiment in check, lowering expectations and extending the proverbial wall of worry. And in our view, Tech has plenty of reasons to keep on climbing. The explosive adoption of mobile and cloud computing is driving demand for a whole host of gadgets, equipment, components and services. Continued Emerging Markets growth is opening up new markets and driving Tech demand growth globally. US firms are launching long-delayed IT systems and software upgrades—business investment in these areas hit all-time highs in Q4 2013.Larger tech companies also tend to have strong balance sheets with healthy cash balances, allowing them to continue to develop and grow.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Media Hype/Myths

Beating the Earnings Blahs

By, 04/08/2014
Ratings614.319672

Spring may be here, but headlines are warning investors to brace for a nasty storm: Q1 earnings season. Most expect it to be a stinker, with consensus forecasts for a -1.4% drop in aggregate S&P 500 earnings from Q1 2013. Some say the expected weakness is a blip, with stronger earnings growth on tap in 2014’s second half; others claim it’s a sign firms can no longer offset weak revenues by cutting costs. While we side more with the optimists, we take a different view overall: Expectations are just expectations. Reality isn’t guaranteed to follow, and even if earnings are weaker, it doesn’t mean the bull must end.

Weak forecasts are nothing new. For most of this bull market, analysts’ expectations have started the quarter reasonably positive, then fallen steadily as firms lower their guidance, reaching rock-bottom levels just before companies start announcing. But once earnings season begins, a funny thing usually happens: Firms broadly beat expectations, and the final tally ends up higher than most anticipated. Those lower expectations, so widely feared before companies report, end up creating a positive surprise down the road.

This is largely why companies lower their guidance. Think about the typical headline on a company’s earnings results: “Company X Earnings Beat on A, B and C!” or “Company Y in Earnings Miss on D and F!” The actual direction of earnings is rarely mentioned—the headline win or loss gets all the attention and, by extension, is what influences investor sentiment. So companies are incentivized to set expectations as low as possible, simply to raise the likelihood they beat. That’s how you regularly get over two-thirds of companies beating expectations every quarter. They purposefully set the bar low for themselves.

Commentary

Fisher Investments Editorial Staff

A Not-So-Jobless Recovery

By, 04/07/2014
Ratings213.761905

A certain milestone occurred in March—and we’re not talking about the “Oscar Selfie” breaking all manner of Twitter records. This one is far more meaningful: US private sector employment hit a new all-time-high. Yes, the “jobless recovery” isn’t jobless! It’s a welcome development, and while it doesn’t tell you where the economy goes from here—employment is a late-lagging indicator—it should boost folks’ confidence, helping overall investor sentiment shift into optimism.

Private payrolls have had a long journey back from their February 2010 low. It has taken 74 months and nearly 9 million jobs.[i] The slow speed compared to previous expansions is a large reason why the notion of a “jobless recovery” developed and has persisted for years. It took only 54 months for private employment to rebound from the tech bubble’s aftermath and 37 months after the 1990-1991 recession. This cycle’s 74 months are the longest recovery since 1948.[ii] Even though private payrolls have steadily grown over this period, the high benchmark made improvement seem lackluster.

However, the lag wasn’t a function of private sector weakness. The US also happened to lose far more private sector jobs during the last recession. Not only did the private sector shed 8.8 million jobs, but those lost jobs amounted to a -7.6% drop in private sector employment—the second-biggest drop since data began in the 1930s, with only the 1945 recession edging it out at -8.7%. Private payrolls fell only -3.0% during the tech bubble and -1.9% in the 1990 recession. In the 1970s recession—widely remembered as one of the US’s most painful—private employment fell -4.2%.[iii] With such a big drop, and the slowest economic growth since World War II, it was largely a given that we’d see the slowest trough-to-peak private-sector jobs recovery.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment, US Economy

Data Galore, Switching Sentiment

By, 04/04/2014
Ratings374.121622

While hotter topics hogged headlines, many data-focused news stories more pertinent to the global economy and bull market were quietly published this week. We can sum the reactions in a word: “Meh.” Most releases were second or third-page news at best. Those who did bother reporting pointed out positives and negatives near-equally, but neither angle dominated. Maybe folks were too distracted by the high frequency hysteria drumbeat to care. Or maybe they just think the data need to thaw from the polar vortex a bit further to indicate much. But fundamentally, these data show expansion continues. That the widespread take didn’t involve much handwringing or celebrating indicates investor sentiment’s slow switch from skepticism to optimism continues.

Over the last few days, governments and other global sources have dumped data galore—we rounded them up for your enjoyment: In the US, February trade data showed falling exports (-1.1% m/m; +1.9% y/y) and rising imports (+0.4% m/m; +1.1% y/y). US factory orders rose +1.6% m/m in February on aircraft and auto demand after two months of decline. Bank lending improved, rising +2.5% in Q1 (through the third week of March). Under the hood, lending rose from +2.0% m/m in January to +2.5% in February to a relatively hot +3.4% growth in most of March, with business lending up +9.7% y/y in 2014’s first 12 weeks. March’s Purchasing Managers Indexes (PMI) were strong: Manufacturing read 53.7 and services 53.1 (readings over 50 indicate growth). Both saw rising new orders (55.1 and 53.4) and healthy production (55.9 and 53.5). Across the pond, UK PMIs all showed slower but still-steady growth, reading 57.6 (services), 62.5 (construction) and 55.3 (manufacturing). The eurozone’s composite PMIs slowed slightly, too (53.1), but underlying data were broadly positive with services hitting 52.2 and manufacturing  53.0. Manufacturing output (55.6) and new orders (54.3) remained quite strong—all countries but Greece showed growth. In services, all but Italy grew, as new business and business activity increased.

On balance, the data were good—just what we’d expect in a maturing global bull. No expansion brings consistent acceleration. More interesting, though: There was little accompanying hyperbole, positive or negative. Any “it’s good!” or “watch out!” sentiment was offset with an explanation or a counterpoint.

Commentary

Fisher Investments Editorial Staff

How Now, Dow Theory

By, 04/03/2014
Ratings1873.601604

Like Punxsutawney Phil, Dow Theory is an old-timey tradition lacking inherent predictive power. Source: Ron Ploucha/Getty Images.

Have you ever wished for a clear-cut market timing signal? Maybe a Punxsutawney Phil for stock markets? You aren’t alone. Even though no such signal exists, any time a purported technical indicator flashes, folks perk up. This time it’s Dow Theory, which adherents say is on the verge of signaling a big bull. Sounds great! But like all technical indicators, Dow Theory is flawed—underpinned by fallacies galore—and not a reliable market predictor.

Commentary

Fisher Investments Editorial Staff

Popping Tech Bubble Fears

By, 04/09/2014
Ratings613.639344

Have you heard? The Tech party is over—get out before those out-of-touch valuations fall to earth and that frothy IPO scene dries up!  At least, that’s the impression you’ll likely get from headlines bemoaning the Technology sector’s recent slide. In our view, though, it seems a big stretch to interpret the sentiment-driven wobbles typical of bull markets as a bubble bursting. Yes, sector-specific volatility is as normal in a bull as broad market gyrations, and while Tech could very well wobble a while longer, the sector’s long-term prospects still look strong.

Many observers see Tech’s slide as confirmation their long-running “Tech Bubble 2.0” fears are right. Some point to companies with super high valuations getting punished, while others highlight weakness in some formerly high-flying recent IPOs. However, the sector hasn’t exactly been partying like it’s 1999. IPOs are more plentiful than in recent years, but investors aren’t bidding them up with reckless abandon—today’s first-day median returns are less than a third of what they were 15 years ago. Lofty valuations for a handful of companies might be a sign sentiment toward some firms is on the high side, but it’s difficult to argue the entire Tech sector is riding high on euphoria. Exhibit A: the near-consensus belief Tech’s recent slide is the beginning of a popping bubble. In 2000’s euphoric environment, most pundits deemed every pullback a buying opportunity. Even as Tech slid right down the slope of hope, many believed the “new economy” couldn’t stay down. Today, we see the opposite—a sign of lingering investor pessimism, not euphoria.

In our view, Tech’s pullback is just normal, sentiment-driven volatility—typical of healthy bull markets. Pullbacks help keep sentiment in check, lowering expectations and extending the proverbial wall of worry. And in our view, Tech has plenty of reasons to keep on climbing. The explosive adoption of mobile and cloud computing is driving demand for a whole host of gadgets, equipment, components and services. Continued Emerging Markets growth is opening up new markets and driving Tech demand growth globally. US firms are launching long-delayed IT systems and software upgrades—business investment in these areas hit all-time highs in Q4 2013.Larger tech companies also tend to have strong balance sheets with healthy cash balances, allowing them to continue to develop and grow.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Media Hype/Myths

Beating the Earnings Blahs

By, 04/08/2014
Ratings614.319672

Spring may be here, but headlines are warning investors to brace for a nasty storm: Q1 earnings season. Most expect it to be a stinker, with consensus forecasts for a -1.4% drop in aggregate S&P 500 earnings from Q1 2013. Some say the expected weakness is a blip, with stronger earnings growth on tap in 2014’s second half; others claim it’s a sign firms can no longer offset weak revenues by cutting costs. While we side more with the optimists, we take a different view overall: Expectations are just expectations. Reality isn’t guaranteed to follow, and even if earnings are weaker, it doesn’t mean the bull must end.

Weak forecasts are nothing new. For most of this bull market, analysts’ expectations have started the quarter reasonably positive, then fallen steadily as firms lower their guidance, reaching rock-bottom levels just before companies start announcing. But once earnings season begins, a funny thing usually happens: Firms broadly beat expectations, and the final tally ends up higher than most anticipated. Those lower expectations, so widely feared before companies report, end up creating a positive surprise down the road.

This is largely why companies lower their guidance. Think about the typical headline on a company’s earnings results: “Company X Earnings Beat on A, B and C!” or “Company Y in Earnings Miss on D and F!” The actual direction of earnings is rarely mentioned—the headline win or loss gets all the attention and, by extension, is what influences investor sentiment. So companies are incentivized to set expectations as low as possible, simply to raise the likelihood they beat. That’s how you regularly get over two-thirds of companies beating expectations every quarter. They purposefully set the bar low for themselves.

Commentary

Fisher Investments Editorial Staff

A Not-So-Jobless Recovery

By, 04/07/2014
Ratings213.761905

A certain milestone occurred in March—and we’re not talking about the “Oscar Selfie” breaking all manner of Twitter records. This one is far more meaningful: US private sector employment hit a new all-time-high. Yes, the “jobless recovery” isn’t jobless! It’s a welcome development, and while it doesn’t tell you where the economy goes from here—employment is a late-lagging indicator—it should boost folks’ confidence, helping overall investor sentiment shift into optimism.

Private payrolls have had a long journey back from their February 2010 low. It has taken 74 months and nearly 9 million jobs.[i] The slow speed compared to previous expansions is a large reason why the notion of a “jobless recovery” developed and has persisted for years. It took only 54 months for private employment to rebound from the tech bubble’s aftermath and 37 months after the 1990-1991 recession. This cycle’s 74 months are the longest recovery since 1948.[ii] Even though private payrolls have steadily grown over this period, the high benchmark made improvement seem lackluster.

However, the lag wasn’t a function of private sector weakness. The US also happened to lose far more private sector jobs during the last recession. Not only did the private sector shed 8.8 million jobs, but those lost jobs amounted to a -7.6% drop in private sector employment—the second-biggest drop since data began in the 1930s, with only the 1945 recession edging it out at -8.7%. Private payrolls fell only -3.0% during the tech bubble and -1.9% in the 1990 recession. In the 1970s recession—widely remembered as one of the US’s most painful—private employment fell -4.2%.[iii] With such a big drop, and the slowest economic growth since World War II, it was largely a given that we’d see the slowest trough-to-peak private-sector jobs recovery.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment, US Economy

Data Galore, Switching Sentiment

By, 04/04/2014
Ratings374.121622

While hotter topics hogged headlines, many data-focused news stories more pertinent to the global economy and bull market were quietly published this week. We can sum the reactions in a word: “Meh.” Most releases were second or third-page news at best. Those who did bother reporting pointed out positives and negatives near-equally, but neither angle dominated. Maybe folks were too distracted by the high frequency hysteria drumbeat to care. Or maybe they just think the data need to thaw from the polar vortex a bit further to indicate much. But fundamentally, these data show expansion continues. That the widespread take didn’t involve much handwringing or celebrating indicates investor sentiment’s slow switch from skepticism to optimism continues.

Over the last few days, governments and other global sources have dumped data galore—we rounded them up for your enjoyment: In the US, February trade data showed falling exports (-1.1% m/m; +1.9% y/y) and rising imports (+0.4% m/m; +1.1% y/y). US factory orders rose +1.6% m/m in February on aircraft and auto demand after two months of decline. Bank lending improved, rising +2.5% in Q1 (through the third week of March). Under the hood, lending rose from +2.0% m/m in January to +2.5% in February to a relatively hot +3.4% growth in most of March, with business lending up +9.7% y/y in 2014’s first 12 weeks. March’s Purchasing Managers Indexes (PMI) were strong: Manufacturing read 53.7 and services 53.1 (readings over 50 indicate growth). Both saw rising new orders (55.1 and 53.4) and healthy production (55.9 and 53.5). Across the pond, UK PMIs all showed slower but still-steady growth, reading 57.6 (services), 62.5 (construction) and 55.3 (manufacturing). The eurozone’s composite PMIs slowed slightly, too (53.1), but underlying data were broadly positive with services hitting 52.2 and manufacturing  53.0. Manufacturing output (55.6) and new orders (54.3) remained quite strong—all countries but Greece showed growth. In services, all but Italy grew, as new business and business activity increased.

On balance, the data were good—just what we’d expect in a maturing global bull. No expansion brings consistent acceleration. More interesting, though: There was little accompanying hyperbole, positive or negative. Any “it’s good!” or “watch out!” sentiment was offset with an explanation or a counterpoint.

Commentary

Fisher Investments Editorial Staff

How Now, Dow Theory

By, 04/03/2014
Ratings1873.601604

Like Punxsutawney Phil, Dow Theory is an old-timey tradition lacking inherent predictive power. Source: Ron Ploucha/Getty Images.

Have you ever wished for a clear-cut market timing signal? Maybe a Punxsutawney Phil for stock markets? You aren’t alone. Even though no such signal exists, any time a purported technical indicator flashes, folks perk up. This time it’s Dow Theory, which adherents say is on the verge of signaling a big bull. Sounds great! But like all technical indicators, Dow Theory is flawed—underpinned by fallacies galore—and not a reliable market predictor.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

Three Down. Nine to Go.

By, 04/02/2014
Ratings334.590909

Does a ho-hum Q1 mean 2014 will be a bust? Many are asking after the MSCI World managed a mere +1.3%i gain over three back-and-forth months. Some fear meager stock returns signal a weak economy ahead—bad for stocks, they presume. Others want more data before making a final call. Underneath it all lies a big fallacy: the notion past performance predicts the future. As ever, stocks look forward—and we think they still have a lot to look forward to.

Just like the January Indicator gets press for being a harbinger of stock performance for the year, some view Q1 performance as a tone setter as well—and for them, a bumpy Q1 likely means a bumpy 2014. But past performance doesn’t drive future returns, and markets don’t move in straight lines. Even 2013, which many in hindsight see as a straight shot up, had its share of dips and dives.

Returns often come in bunches. 2006, for example, was flat through mid-June, but ended the second half strong—the MSCI World was up a little over 20%ii for the year. In 2010, the MSCI rose +3.2% in Q1, fell -12.7% in Q2, but rallied hard to finish the year up 11.8%.iii Nothing about Q1 and Q2’s final performance suggested big up moves were coming. Stocks don’t follow predetermined paths, and how they ended one quarter doesn’t dictate where they go next. 

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
Ratings864.098837

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.

Research Analysis

Austin Fraser
Into Perspective

Chinese Fundamentals: Likely Fine, Not Falling

By, 09/12/2013
Ratings133.576923

China’s August economic results are in, and overall, the data showed continued improvement. The economy appears stable and growing at a healthy rate, and the long-dreaded hard-landing appears increasingly unlikely—an underappreciated positive for global markets.

Nearly across the board, China accelerated and beat expectations—illustrating broad-based stabilization in the wider economy. Of particular note, industrial production had its best reading since March 2012, and together with China’s most recent PMIs, the results suggest Chinese manufacturing data are rebounding nicely. Retail sales were also robust and exports accelerated, with shipments to the US and EU up for the second consecutive month. On the whole, August economic data signal a fundamentally fine China—growth may be slowing from recent years, but that’s likely more a function of China’s gradual economic development than weakness.

 

What We're Reading

By , Forbes, 04/16/2014

MarketMinder's View: “High frequency trading [HFT] is secretive and mysterious, but not at all evil.” Reading other HFT articles these days may tempt investors to think differently, but this article explains HFT’s often overlooked benefits well: By buying frequently, quickly and in large quantities, HFT makes markets more efficient and liquid—better and more quickly evening out price changes large institutional investors can cause when trading huge sums and narrowing the bid/ask spread. For long-term investors, that matters most.

By , EUBusiness, 04/16/2014

MarketMinder's View: Extending the Markets in Financial Instrument Directive (MiFID II) post Europe’s financial crisis is well-intended—and the ideals behind it, like increasing transparency, seem noble. But the notion more regulation makes markets less “crisis prone” disregards history, both in the distant past and present. In regulating, often times politicians address nonexistent issues. MiFID II’s high-frequency trading restrictions seem like a benign example. While the near-term impact seems limited, it’s key to understand the regulation to see issues connected to other potential changes down the line.

By , BBC, 04/16/2014

MarketMinder's View: China growing in the 7%-8% range is perfectly fine with global growth, and that is where they were in Q1. Yes, it’s a slower rate than Q4 2013’s, but the underlying data were largely healthy, and nothing fundamental suggests that will change. The services sector’s growth is a plus, as it alludes to China’s economic growth may be broadening, a sign of its ongoing development. For more, see our 04/11/2014 commentary, “When the Growing Gets Tough.”

By , Bloomberg, 04/16/2014

MarketMinder's View: In added confirmation the US economy’s cooling during January’s winter weather was temporary and not sign of a bigger trend: Industrial production beat expectations, rising 0.7% m/m. Manufacturing led the rise (+0.5% m/m), but most other sub-indexes grew, too—suggesting broad fundamental strength underlies the US expansion.

Global Market Update

Market Wrap-Up, Tues Apr 15 2014

Below is a market summary (as of market close Tuesday, 04/15/2014):

  • Global Equities: MSCI World (+0.1%)
  • US Equities: MSCI USA (+0.7%)
  • UK Equities: MSCI UK (-0.7%)
  • Best Country: Singapore (+1.0%)
  • Worst Country: Italy (-2.2%)
  • Best Sector: Energy (+0.8%)
  • Worst Sector: Materials (-0.3%)
  • Bond Yields: 10-year US Treasurys fell .02 to 2.63%.

Editors' Note: Tracking Stock and Bond Indexes