Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.
European Union Government
European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.
There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.
|By Christo Barker, 03/28/2014|
It seems the IRS is going global, a development that has some pundits up in arms about potential stock market impact. The Foreign Account Tax Compliance Act (FATCA) is what I’m referring to. Under FATCA, the IRS is moving toward taxing US citizens’ offshore financial activity, including money held in banks abroad—effectively eliminating “tax havens” for US citizens. US expatriates and foreign banks are up in arms. The law conflicts with local banking laws in other countries, and banks have responded by simply slashing access to banking services for Americans living abroad. But while it creates hassles, barring a big international regulatory blowback, the law doesn’t seem poised to create many ripples for stocks.
FATCA, now four years old, was conjured following a 2009 scandal, which revealed a major Swiss bank was helping well-to-do Americans dodge taxes. The backlash against the scandal peaked in 2010, when Congress passed FATCA as a provision of HR 2847, the Hiring Incentives to Restore Employment Act. An effort to boost US government tax revenue by broadening the base, FATCA also has some grassroots appeal as it carries the label of reducing tax dodging. FATCA was supposedly a means to get fatcats to pay their fair share. (My apologies for the pun.) Foreign banks were also not the most popular group in the immediate aftermath of the Global Financial Crisis.
Initially, FATCA seeks to provide the IRS information about US citizens’ and green card holders’ taxable accounts exceeding $50,000 in market value held at foreign financial institutions. International banks (Foreign Financial Institutions or FFIs) are required to ink a special deal with the IRS, under which they report all US taxpayers’ qualifying accounts and holdings. Account disclosure began January 1, 2014. After June 30, 2014, foreign banks will have to provide details regarding investment account holdings, and by January 1, 2015, FATCA’s full implementation will install a 30% withholding on US sourced income (salary/capital gains/interest/dividends).
|By Fisher Investments Research Staff, 12/10/2013|
In its second release, Q3 US GDP was revised up to a seasonally adjusted annual rate of 3.6%—the fastest growth in more than a year and among the quickest rates in the current expansion to date. However, most economists and pundits greeted the acceleration with a resounding thud. Under the hood, they claim, the data were not so hot. Reason being, the most notable contributor to growth was increasing inventories, adding 1.7 percentage points to the headline number. Some posit this means growth is hollow—after all, inventory change is open to interpretation. It could be due to slowing sales, a potential negative for profits and growth ahead. Or due to inventory build ahead of an expected pick-up in sales this holiday season. If the pessimists are right, one would expect wholesale inventory growth to sharply slow as we enter Q4. Yet Tuesday, the first inventory report of the quarter suggested no such thing: US wholesale inventories grew at their fastest clip in two years.
In October, wholesale inventories grew 1.4% m/m (3.3% y/y) vs. estimates of 0.3%. Both durables and non-durables stockpiles grew (0.4% m/m and 3.0% m/m, respectively.) So what gives?
While inventory growth undoubtedly contributed strongly to GDP in Q3, that never meant inventories were at historically high levels. As Exhibit 1 shows, the inventory-to-sales ratio isn’t overall elevated. Total goods and non-durable goods are at relatively low levels compared to history, and while durable goods inventories are somewhat higher relative to sales, they are not alarmingly high. In short, there is nothing suggesting inventory growth is unsustainable overall relative to the pace of sales. Of course, maybe inventory growth does slow in the period ahead, but it wouldn’t seem to be related to overall overstocked shelves. This is yet another factor illustrating the fact reality may be considerably better than skeptics presume.
Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.
To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.
Exhibit 1: Cumulative GDP Growth
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|By Carl Richards, The New York Times, 02/08/2016|
MarketMinder's View: Here’s an interesting theory on why people are prone to making ill-timed decisions when markets are volatile, like selling after a big drop: “We yearn so badly for clarity that we often prefer a negative outcome we’re certain about to one that leaves us in suspense.” When markets swing, locking in a loss sometimes seems preferably, emotionally, to hanging in and risking another big down move before the recovery—even though participating in the recovery is vital. Knowing how your brain and feelings try to trick you can help you avoid serious errors.
|By Theo Francis, The Wall Street Journal, 02/08/2016|
MarketMinder's View: Here is really all you need to know about this: “With nearly a third of S&P 500 companies reporting detailed year-end financial results through early last week, capital expenditures were up 6.2% from a year earlier, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That is less than half the 13.9% increase reported in the last quarter of 2014, though much of the slowdown comes from energy companies, Mr. Silverblatt said.” Capex is still growing, which is the opposite of pulling back. Especially outside the Energy sector, whose struggles have been widely known for over 18 months. The rest of this article has little to no merit once you realize this isn’t a contraction in business spending, just a slowdown.
|By Joseph Ciolli, Oliver Renick and Lu Wang, Bloomberg, 02/08/2016|
MarketMinder's View: Though these pundits are overall still rather bullish, considering the median forecast is for a 6.4% full-year S&P 500 price gain, the downwardly revised forecasts are nonetheless encouraging. It’s fairly normal to see this sort of capitulation in the final throes of a downturn. We aren’t calling bottom or anything, but this is an encouraging development.
|By Paul Vigna, The Wall Street Journal, 02/08/2016|
MarketMinder's View: The only correct thing in this article is the picture, which shows that Head & Shoulders is shampoo. That’s all it is. It is not a predictive chart pattern, even if you can stretch your imagination to see four happening at once. If technical analysis worked, everyone would do it and no one would mistime a market ever. It doesn’t. This is all just searching for meaning in meaningless wavy lines.
Market Wrap-Up, Friday, February 5, 2016
Below is a market summary as of market close Friday, February 5, 2016:
- Global Equities: MSCI World (-1.6%)
- US Equities: S&P 500 (-1.8%)
- UK Equities: MSCI UK (-1.4%)
- Best Country: Singapore (+2.1%)
- Worst Country: Italy (-2.4%)
- Best Sector: Materials (-0.4%)
- Worst Sector: Information Technology (-3.5%)
Bond Yields: 10-year US Treasury yields fell -0.01 percentage point to 1.83%.
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.