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
Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
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).
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
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|By Paul R. La Monica, CNN Money, 08/31/2015|
MarketMinder's View: We agree with a couple of tidbits here. For example, we also see recent negative volatility as a correction—not the beginning of a bear market. Also, while stocks stabilized a bit late last week, more volatility could lie ahead—equities can be quite bumpy in the short term, and calling the bottom of a correction is futile, in our view. However, we disagree with the fearful take on the month of September, fed-funds target rate hikes and earnings data. The first two are pure mythology—it is a mere coincidence stocks perform worst (on average) in September, not anything predictive. Fed funds target rate hikes have no history of derailing bull markets, whether they come in September or not. And three, the earnings data cited here are skewed by the Energy sector. Strip out the big, widely known drop in Energy earnings tied to cheap oil and the -0.7% y/y Q2 figure becomes +5.9%. As for the expectations of a -4.1% y/y Q3, you should note that analysts projected very similar figures at this point in Q1 and Q2. They were wrong because they overstated the negative effect of the stronger dollar on revenues and understated the positive effect on costs. For more, see today’s cover story, “Parsing Profits.”
|By Steve Goldstein and Greg Robb, MarketWatch, 08/31/2015|
MarketMinder's View: Now, depending on how you interpret this table of interpretations, you may conclude the Fed will hike rates in September, later this year or even next year. However, we strongly recommend against projecting what the Fed will do based on words, words, words alone. As this piece admits, “Some have spoken on Friday, while others last spoke on the issue since June and those remarks may not represent their current stance.” Heck, some of these folks did speak on Friday and even “those remarks may not represent their current stance.” People change their minds all the time, and we’re pretty sure Fed governors are people too. (Like 80% sure.) Already, rate hikes were supposed to come “something on the order of around six months or that type of thing” after QE ended, which would have meant roughly May 2015. Before that, we were told to anticipate hikes after unemployment hit 6.5%, a level pierced in April 2014. Forecasting the Fed is impossible. Fortunately, it isn’t necessary either, since there is no evidence initial rate hikes knock bull markets or economic expansions. Now we (and probably you as well, dear reader) would prefer if the Fed just gets on with it so investors can put this false fear in their rearview mirror, but until that happens, we suggest doing your best to tune out the rate hike noise as best you can.
|By Paul Vigna, The Wall Street Journal, 08/31/2015|
MarketMinder's View: Those three questions are: When will the Fed raise rates?; did the correction bottom out?; and is the bull market ending? Our answers: we don’t know (and nobody else does either, though, more importantly, initial rate hikes aren’t bearish); we don’t know (and nobody else does either, as we aren’t aware of anyone with a successful track record of timing corrections); and no, not in our view. Bull markets end in one of two ways: they run out of steam as reality can no longer match investors’ euphorically driven expectations or a big, unforeseen negative wipes away trillions of dollars of global GDP. While China certainly is a big, integral part of the global economy, it isn’t in the dire straits many believe—which is also a sign skepticism persists. So while corrections are definitely unpleasant to endure, this isn’t the time to jump out of stocks and wait in cash until volatility passes. For more, see our 8/31/2015 commentary, “Dry Powder Doesn’t Pay.”
|By Tomi Kilgore, MarketWatch, 08/31/2015|
MarketMinder's View: There are so many problems with this “analysis” that we don’t really know where to begin. Here’s a stab: It’s the Dow, a price-weighted, 30-stock gauge that is a faulty measure of markets. But more problematic is the methodology. That 18-month prediction was conjured like this: Take the 52-week high and the 52-week low. Calculate the number of days between. Multiply by 5.5 because it takes 5.5 days of recovery to per day of decline to reach a new high. Oh and all this only works if the drop was within a 100-day window. Folks, this is going to be very skewed by bear markets. What we just went through was a correction—and we’re presently only about 7% from all-time highs. 7% may sound big but the average quarterly move (up or down) is 5%. It wouldn’t take much to get that 7% back. Finally, the method of calculation here is a complete misuse of market history assuming past patterns are predictive.
Market Wrap-Up, Monday August 31, 2015
Below is a market summary as of market close Monday, 8/31/2015:
Global Equities: MSCI World (-0.8%)
US Equities: S&P 500 (-0.8%)
UK Equities: MSCI UK (+0.2%)
Best Country: Ireland (+1.8%)
Worst Country: Australia (-2.0%)
Best Sector: Energy (+0.7%)
Worst Sector: Health Care (-1.3%)
Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 2.22%.
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.