Commentary

Fisher Investments Editorial Staff
Into Perspective

Happy Birthday, Moore’s Law—Pearls of Wisdom for Investors

By, 04/21/2015
Ratings164.75

Microprocessors are much smaller than the 1971 model, above. Photo by Keystone/Getty Images.

Editor’s Note: Fisher Investments’ MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight.

Commentary

Todd Bliman
Currencies, Into Perspective, Media Hype/Myths, The Global View

3 Reasons the Dollar’s Reserve Currency Status Shouldn’t Worry You—in Charts!

By, 04/17/2015
Ratings344.191176

The dollar is up 14.2% against a broad basket of 26 world currencies weighted by American trade since last June 30.[i] Bond yields are down significantly since the tapering of quantitative easing (QE) was announced in December 2013. IMF data show the dollar’s share of foreign currency reserves rose last year, adding to its position as the world’s leading reserve currency. America’s economy is growing apace and there is no sign, according to The Conference Board’s Leading Economic Index, that will change soon. Take all these factoids and combine them, and you’d probably think few would fear the dollar losing its status as the world’s primary reserve currency. Yet they persist! Some oddly suggest the news China will launch its own mini-World Bank, the Asian Infrastructure Investment Bank, means the dollar’s days are numbered.[ii] Here is the thing though: These fears were overwrought from moment one, and they are even more so now.

As I’ll show, there are three major reasons why. But before I get started, it may be helpful to cut right to the chase and explain what the dollar-won’t-be-primary-reserve-currency fear actually is: Debt doom.

Behind nearly all these fears lies the misperception that America’s debt is unaffordable, absent some artificial force. For many, the artificial force is widespread use of the dollar as the world’s reserve currency—it’s the most-used, with a 62% share of global forex reserves at 2014’s end. Some presume so many nations buying and holding dollar-denominated assets artificially depresses US government bond yields, and if the dollar were the primary reserve asset no more, that force depressing rates goes poof. Rates skyrocket. Government struggles to make interest payments. It defaults. Doom ensues.

Commentary

Fisher Investments Editorial Staff
Currencies

As Goes Switzerland…?

By, 04/17/2015
Ratings224.545455

Here is a question worth weighing these days: If a strong currency is so devastating to stocks and economies—as many allege—why did stocks in a tiny, export-heavy economy not succumb to a nearly 20% shock appreciation?

Let’s back up. Three months ago this week, the Swiss National Bank (SNB) issued this statement:

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro.

Commentary

Fisher Investments Editorial Staff
The Advisor's Corner

Be-Labor-ing the Fiduciary Standard

By, 04/16/2015
Ratings264.326923

The Department of Labor (DOL) released its long-awaited rules for investment professionals advising on retirement accounts Tuesday, and after five years, we finally know what their idea of a fiduciary standard looks like. And it is … not much different than the old guard, just with reams of added paperwork. The DOL’s promo materials boast they’ll “protect investors from backdoor payments and hidden fees in retirement investing advice,” but that seems a tad too optimistic. We read through all the legalese and loopholes, and in our view, the proposed rules don’t ensure clients’ interests always come first—and they probably won’t improve the quality of advice.

The DOL’s proposal (which is still pending public comment and perhaps some last-minute tweaks) would basically expand ERISA duties of care to all brokers, registered investment advisers (RIAs), insurance brokers and other investment professionals advising on retirement accounts—but with a few small tweaks to, as the DOL’s FAQ put it, continue “to allow for common forms of compensation.” That is your first clue this standard is not quite all it’s cracked up to be. You see, the DOL’s primary beef is with high “hidden” commissions, like backdoor compensation for recommending certain products over others, revenue sharing agreements with mutual fund companies and incentives for selling proprietary products. But these are not banned. Nor are plain vanilla trading commissions. Nor are sales of high-fee products when a similar product with lower fees exists. All those are still legal! As long as the broker selling those products jumps through a few extra hoops: They must agree in writing to act in the client’s best interests, disclose all potential conflicts of interest prominently in writing and on a dedicated website, and describe the policies and procedures in place to mitigate those conflicts. There are also exemptions for principal transactions (where brokers sell products out of their firm’s inventory) and instances where brokers are just executing transactions without giving advice.

In other words, it’s a watered-down version of major investment advisory standards. It’s weaker than the SEC’s fiduciary standard for RIAs (which the SEC is considering expanding to brokers, too). It’s a toothless version of the UK’s Retail Distribution Review (RDR), which outright banned Britain’s version of revenue sharing (called trail commissions and paid directly from the fund to the adviser, not his/her firm) and forced all advisers to charge itemized flat or percentage-based fees. It is essentially a ream of forms, disclosures and a website—paperwork—that doesn’t really change the products sold or advice rendered. It doesn’t guarantee investors’ interests will come first. If anything, it seems designed to enable the status quo—it adds a veneer of client-friendliness while giving brokers the tools to justify current actions. It doesn’t prevent insurance brokers from selling variable annuities in IRAs—they just have to rationalize it. (Which is also not a change.) Nor does it prevent brokers from basing recommendations on Wall Street mythology, age or risk-tolerance surveys—they just have to rationalize it. It doesn’t prevent brokers from selling proprietary products only, limiting clients’ investment options—they just have to rationalize it. It doesn’t require advisers and brokers to objectively analyze all potential investment options for their clients—as long as they can rationalize whatever they pick. It doesn’t improve the quality of funds that are recommended. Even if it didn’t have the high-fee loopholes, lower-cost products aren’t always superior—fees aren’t the only determinant of returns. It doesn’t address how we got here in the first place: the blurring of the line between investment sales and service. If anything, it blurs the line further, promoting confusion. Not to pooh-pooh disclosure—transparency and sunlight are always good—but disclosures are often long tomes written in legalese. Few folks read them, fewer still may understand them. The website aspect is intriguing, but its efficacy is untested. Overall, it seems like a green light for brokers and advisers to keep doing what they’re doing—as long as they can rationalize it if the DOL comes a-knockin’. That last bit is subjective, folks—rationales are based on opinion, experience and knowledge. Expertise matters.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths

QuitE Wrong

By, 04/15/2015
Ratings184.555555

ECB chief Mario Draghi, before the party started. Photo by Martin Leissl/Bloomberg via Getty Images.

So the eurozone economy is turning up, and the media is praising the ECB’s quantitative easing (QE) program for “bearing fruit already.” So is ECB chief Mario Draghi, though it wasn’t he who threw the confetti at the ECB’s presser Wednesday. Even though the ECB has been buying government bonds for all of five weeks. And the eurozone started accelerating months ago. And evidence worldwide shows QE depresses more than it stimulates. That folks are so quick to credit QE and overlook months of improvement shows how, despite improving sentiment, most still underrate the currency union’s economic health.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics, Into Perspective

British Gridlock Isn’t Bearish

By, 04/14/2015
Ratings184.388889

Britain’s election is 23 days away, and pundits near-universally agree it will spell disaster for UK markets. One analyst warns of a “Lehman moment” for the pound if no one wins.[i] Another says election uncertainty is shrinking foreign demand for UK bonds, and fractured politics could cost the UK billions in foreign investment. Worst of all, several warn a hung Parliament could raise the risk of a second contest this year—and trigger a repeat of 1974, when UK stocks plunged nearly 48% between elections in February and October.[ii] Please allow us to put that one to bed: Today is nothing like the early 1970s. Electoral jitters could drive volatility in the vote’s run-up or aftermath, but this shouldn’t cause a bear market in Britain or the world.

There is nothing inherently bearish about a hung Parliament (one in which no party has an absolute majority, for yanks), whether it yields a functioning coalition or a shaky minority government. Britain’s history with hung Parliaments is very limited, but bull markets have coincided with two of three. Britain has had a coalition since May 2010, and UK stocks have done fine—since the 5/6/2010 election, they’re up 60% in sterling and 56% in dollars.[iii] UK stocks also rose while a minority government presided from March 1977 – March 1979—a period that included the severe labor unrest known as the Winter of Discontent. Hung parliaments mean gridlock, which—contrary to widespread belief—doesn’t create uncertainty. It actually reduces the risk of radical new laws, a major source of uncertainty. Considering most fret radical change from both major parties (price controls and England-to-Scotland redistribution from Labour, EU exit from the Conservatives), gridlock should bring relief. Britain is one of the world’s most competitive economies, and its growth rate is among the developed world’s highest. If Parliament has a low likelihood of messing that up, as it would with a minority or coalition government, investors have little or no reason to shun UK stocks.

“Yah, but 1974.” That’s when an election on February 28 ousted Edward Heath’s Conservative government as Labour won the most seats—but fell 33 shy of a majority. Labour led a minority government for seven months, before Prime Minister Harold Wilson called a snap election for October 10, which yielded Labour a three-seat majority. In between the contests, UK stocks plunged.

Commentary

Fisher Investments Editorial Staff
Personal Finance

The Value of Good Advice

By, 04/13/2015
Ratings593.864407

Last week, New York City officials were shocked to learn they’d spent over $2.5 billion on pension fund management fees over the past decade.[i] They are probably not the only ones who would have sticker shock: According to a new North American Securities Administrators Association (NASAA) survey, one-third of US investors don’t know how much they pay for money management. Older studies suggest up to half say they don’t know or—frighteningly—think they pay zilch. Folks, public service announcement: You can’t know whether you’re receiving good value from an investment manager unless you know how much you’re paying. Though, a full cost/benefit analysis isn’t quite so simple as comparing fees and returns, despite what some suggest—qualitative factors matter, too. 

The performance aspect does matter, of course. Fees can be high for some investment vehicles versus other lower-cost options, and the difference can add up over time. Variable annuities, for example, pile fees on top of fees. Paying for multiple layers of management—like paying an adviser or broker to select funds for you, and then paying fund management costs—can erode returns and stymie progress toward your long-term goals. Understanding who you’re paying and how they’re paid can help you eliminate some perhaps unnecessary drag. Money paid in fees is money that isn’t compounding for you (hence why ensuring you receive performance reports net of fees, not gross, is paramount).

However, in some cases, fees’ impact on returns is not the be-all, end-all. For mutual funds, sure—performance is all you’re paying for, as they don’t provide service, and you’ve presumably done the hard work of picking an asset allocation to reach your long-term goals. But if you’re working with an adviser, service is a big piece of the package. And by service, we don’t just mean helping with operational matters or sending the odd research report (though those are nice)—we mean all the things an adviser does to help ensure you, the investor, get and stay on track to reach your long-term goals.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Currencies, Media Hype/Myths

Dollar Up, Costs Down?

By, 04/10/2015
Ratings484.3125

The strong dollar is not so sad an occurrence for Corporate America as many presume. Image by Image Source/Getty Images.

(Editor's Note: Fisher Investments’ MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

A Greece-y State of Affairs

By, 04/09/2015
Ratings194.342105

Greece is the word these days, and to many, the word doesn’t sound good. Syriza’s coalition government is fraying, and there is already talk of a new unity government to prevent a “Grexit.” Prime Minister Alexis Tsipras sought a bailout from Russia[i] and received Russian “President” Vladimir Putin’s “moral support and long-term cooperation” (along with unspecified offers to buy state assets). Greece restated its claims Germany owes it about €280 billion ($300 billion) in WWII reparations. Greek banks are issuing government-guaranteed debt to keep themselves afloat. After repaying a €458 million IMF loan Thursday, leaders claim they lack cash for April’s state salary and pension obligations. Greece is turning into a swirling saga of allegation and denial, wild ideas and tame rejection—possibly a case of game theory gone awry. Yes, things are increasingly bizarre, with pundits ever-surer Greece is hurtling toward a eurozone exit. And hey, anything is possible, despite all participants’ well-demonstrated penchant for kicking the can. Whatever the outcome, though, markets have long since moved on from Greece—we see no evidence a Greek contagion is at all likely or a threat to the rest of the eurozone, let alone global markets.

While Greece’s hubbub has some new twists, it’s the same movie we’ve seen since 2010. Treasury payments loom, banks are hemorrhaging cash, government needs money, creditors have conditions, politicians are politicking, and everyone fears Greece will eventually have no choice but to leave the euro and print fistfuls of drachmas to stay afloat. This time Greece has about €6 billion due to various creditors over the next four weeks and needs to pay state employees, but the government claims its coffers are depleted—hence their effort to unlock €7.2 billion in previously agreed (and recently extended) bailout funding.

Compounding matters, the ECB has cut off its primary lifeline for Greek banks, leaving them to get cash from the Bank of Greece (which then taps the ECB). Cash banks are accessing by using their own short-term commercial paper as collateral—paper that carries a Greek government guarantee, hence meeting the central bank’s requirements. If a bank fails, the technical term would probably be “kablooey.” Will Greece miss payments, defaulting? If so, will default mean bye-bye euro? Will bank failures force it out of the eurozone? Tsipras promises he and his cabinet will work through this weekend’s Easter holiday to reach an agreement at April 24’s meeting of eurozone finance ministers. They’ve all compromised before and could do so again, but, you know, game theory. Germany might be less willing to help with those WWII demands (and related threats to seize German assets) swirling.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

British Retirees Are Now Free to Choose

By, 04/08/2015
Ratings193.815789

The UK’s pension reforms took effect Monday, giving new retirees unprecedented freedom. Out with the perceived de facto requirement for most to buy an annuity, in with choice! And with it, a potentially overwhelming flurry of new products, aggressive cold-callers, flashy marketing and, unfortunately, shady characters seeking to prey on newly free pensioners. Her Majesty’s trusty aides are trying to help via the snazzy newPension Wise,” but early reviews of the online service aren’t smashing. What’s the discerning pensioner to do? Here are a few tips.

As a refresher, new retirees now have five primary options:

  • Withdraw 25% tax-free and the rest at marginal income tax rates to spend or invest as per your wishes
  • Withdraw 25% tax-free, if desired, and leave the rest invested within the pension wrapper, enrolled in “Flexi- Access drawdown” plans
  • Leave your savings invested within the pension wrapper without buying an annuity or entering a drawdown arrangement, and take ad hoc “uncrystallised fund pension lump sum” distributions as you wish—with 25% of each distribution tax-free, 75% at marginal income tax rates
  • Withdraw 25% tax-free, if desired, and/or buy an annuity
  • Do nothing

Freedom of choice also comes with freedom to fail. Identifying your goals, accurately assessing your time horizon and figuring out which mix of assets best helps you reach them is crucial to reducing your error rate. For ages, insurance firms did all the work, calculating your life expectancy and leaving it to you to select from various annuity types and rates. Now, that’s changing, and if you wish to capitalize on your freedoms, it’s up to you to calculate your time horizon—how long your assets must be invested to reach your goals.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics, Into Perspective

British Gridlock Isn’t Bearish

By, 04/14/2015
Ratings184.388889

Britain’s election is 23 days away, and pundits near-universally agree it will spell disaster for UK markets. One analyst warns of a “Lehman moment” for the pound if no one wins.[i] Another says election uncertainty is shrinking foreign demand for UK bonds, and fractured politics could cost the UK billions in foreign investment. Worst of all, several warn a hung Parliament could raise the risk of a second contest this year—and trigger a repeat of 1974, when UK stocks plunged nearly 48% between elections in February and October.[ii] Please allow us to put that one to bed: Today is nothing like the early 1970s. Electoral jitters could drive volatility in the vote’s run-up or aftermath, but this shouldn’t cause a bear market in Britain or the world.

There is nothing inherently bearish about a hung Parliament (one in which no party has an absolute majority, for yanks), whether it yields a functioning coalition or a shaky minority government. Britain’s history with hung Parliaments is very limited, but bull markets have coincided with two of three. Britain has had a coalition since May 2010, and UK stocks have done fine—since the 5/6/2010 election, they’re up 60% in sterling and 56% in dollars.[iii] UK stocks also rose while a minority government presided from March 1977 – March 1979—a period that included the severe labor unrest known as the Winter of Discontent. Hung parliaments mean gridlock, which—contrary to widespread belief—doesn’t create uncertainty. It actually reduces the risk of radical new laws, a major source of uncertainty. Considering most fret radical change from both major parties (price controls and England-to-Scotland redistribution from Labour, EU exit from the Conservatives), gridlock should bring relief. Britain is one of the world’s most competitive economies, and its growth rate is among the developed world’s highest. If Parliament has a low likelihood of messing that up, as it would with a minority or coalition government, investors have little or no reason to shun UK stocks.

“Yah, but 1974.” That’s when an election on February 28 ousted Edward Heath’s Conservative government as Labour won the most seats—but fell 33 shy of a majority. Labour led a minority government for seven months, before Prime Minister Harold Wilson called a snap election for October 10, which yielded Labour a three-seat majority. In between the contests, UK stocks plunged.

Commentary

Fisher Investments Editorial Staff
Personal Finance

The Value of Good Advice

By, 04/13/2015
Ratings593.864407

Last week, New York City officials were shocked to learn they’d spent over $2.5 billion on pension fund management fees over the past decade.[i] They are probably not the only ones who would have sticker shock: According to a new North American Securities Administrators Association (NASAA) survey, one-third of US investors don’t know how much they pay for money management. Older studies suggest up to half say they don’t know or—frighteningly—think they pay zilch. Folks, public service announcement: You can’t know whether you’re receiving good value from an investment manager unless you know how much you’re paying. Though, a full cost/benefit analysis isn’t quite so simple as comparing fees and returns, despite what some suggest—qualitative factors matter, too. 

The performance aspect does matter, of course. Fees can be high for some investment vehicles versus other lower-cost options, and the difference can add up over time. Variable annuities, for example, pile fees on top of fees. Paying for multiple layers of management—like paying an adviser or broker to select funds for you, and then paying fund management costs—can erode returns and stymie progress toward your long-term goals. Understanding who you’re paying and how they’re paid can help you eliminate some perhaps unnecessary drag. Money paid in fees is money that isn’t compounding for you (hence why ensuring you receive performance reports net of fees, not gross, is paramount).

However, in some cases, fees’ impact on returns is not the be-all, end-all. For mutual funds, sure—performance is all you’re paying for, as they don’t provide service, and you’ve presumably done the hard work of picking an asset allocation to reach your long-term goals. But if you’re working with an adviser, service is a big piece of the package. And by service, we don’t just mean helping with operational matters or sending the odd research report (though those are nice)—we mean all the things an adviser does to help ensure you, the investor, get and stay on track to reach your long-term goals.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Currencies, Media Hype/Myths

Dollar Up, Costs Down?

By, 04/10/2015
Ratings484.3125

The strong dollar is not so sad an occurrence for Corporate America as many presume. Image by Image Source/Getty Images.

(Editor's Note: Fisher Investments’ MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

A Greece-y State of Affairs

By, 04/09/2015
Ratings194.342105

Greece is the word these days, and to many, the word doesn’t sound good. Syriza’s coalition government is fraying, and there is already talk of a new unity government to prevent a “Grexit.” Prime Minister Alexis Tsipras sought a bailout from Russia[i] and received Russian “President” Vladimir Putin’s “moral support and long-term cooperation” (along with unspecified offers to buy state assets). Greece restated its claims Germany owes it about €280 billion ($300 billion) in WWII reparations. Greek banks are issuing government-guaranteed debt to keep themselves afloat. After repaying a €458 million IMF loan Thursday, leaders claim they lack cash for April’s state salary and pension obligations. Greece is turning into a swirling saga of allegation and denial, wild ideas and tame rejection—possibly a case of game theory gone awry. Yes, things are increasingly bizarre, with pundits ever-surer Greece is hurtling toward a eurozone exit. And hey, anything is possible, despite all participants’ well-demonstrated penchant for kicking the can. Whatever the outcome, though, markets have long since moved on from Greece—we see no evidence a Greek contagion is at all likely or a threat to the rest of the eurozone, let alone global markets.

While Greece’s hubbub has some new twists, it’s the same movie we’ve seen since 2010. Treasury payments loom, banks are hemorrhaging cash, government needs money, creditors have conditions, politicians are politicking, and everyone fears Greece will eventually have no choice but to leave the euro and print fistfuls of drachmas to stay afloat. This time Greece has about €6 billion due to various creditors over the next four weeks and needs to pay state employees, but the government claims its coffers are depleted—hence their effort to unlock €7.2 billion in previously agreed (and recently extended) bailout funding.

Compounding matters, the ECB has cut off its primary lifeline for Greek banks, leaving them to get cash from the Bank of Greece (which then taps the ECB). Cash banks are accessing by using their own short-term commercial paper as collateral—paper that carries a Greek government guarantee, hence meeting the central bank’s requirements. If a bank fails, the technical term would probably be “kablooey.” Will Greece miss payments, defaulting? If so, will default mean bye-bye euro? Will bank failures force it out of the eurozone? Tsipras promises he and his cabinet will work through this weekend’s Easter holiday to reach an agreement at April 24’s meeting of eurozone finance ministers. They’ve all compromised before and could do so again, but, you know, game theory. Germany might be less willing to help with those WWII demands (and related threats to seize German assets) swirling.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

British Retirees Are Now Free to Choose

By, 04/08/2015
Ratings193.815789

The UK’s pension reforms took effect Monday, giving new retirees unprecedented freedom. Out with the perceived de facto requirement for most to buy an annuity, in with choice! And with it, a potentially overwhelming flurry of new products, aggressive cold-callers, flashy marketing and, unfortunately, shady characters seeking to prey on newly free pensioners. Her Majesty’s trusty aides are trying to help via the snazzy newPension Wise,” but early reviews of the online service aren’t smashing. What’s the discerning pensioner to do? Here are a few tips.

As a refresher, new retirees now have five primary options:

  • Withdraw 25% tax-free and the rest at marginal income tax rates to spend or invest as per your wishes
  • Withdraw 25% tax-free, if desired, and leave the rest invested within the pension wrapper, enrolled in “Flexi- Access drawdown” plans
  • Leave your savings invested within the pension wrapper without buying an annuity or entering a drawdown arrangement, and take ad hoc “uncrystallised fund pension lump sum” distributions as you wish—with 25% of each distribution tax-free, 75% at marginal income tax rates
  • Withdraw 25% tax-free, if desired, and/or buy an annuity
  • Do nothing

Freedom of choice also comes with freedom to fail. Identifying your goals, accurately assessing your time horizon and figuring out which mix of assets best helps you reach them is crucial to reducing your error rate. For ages, insurance firms did all the work, calculating your life expectancy and leaving it to you to select from various annuity types and rates. Now, that’s changing, and if you wish to capitalize on your freedoms, it’s up to you to calculate your time horizon—how long your assets must be invested to reach your goals.

Commentary

Fisher Investments Editorial Staff
US Economy, Media Hype/Myths

Theories Miss the Mark on March’s Jobs Miss

By, 04/07/2015
Ratings504.24

Job growth slowed in March, and here is what people are saying about that: “Financial markets got the news Friday that March job creation was subpar, and that complicates the investment outlook.” “It wasn’t just that the economy added 126,000 jobs in March when we’d been expecting 245,000. It was also that we lost 69,000 jobs in revisions to previous months. These tend to mark turning points in the economy.” “The March jobs report showed tell-tale signs that the factory sector is struggling and the broader economy is feeling the impact. … manufacturing employment fell into contraction … this is the broader impact from a stronger dollar hurting the export sector as well as domestic industry.” The thing is, all this talk is a wee bit wide of the mark, in our view. Whatever happens with jobs today is always a function of what happened in the economy months ago—jobs aren’t a leading indicator. Nor is March’s manufacturing employment decline evidence the stronger dollar is about to take its toll on US stocks.

Economies move first. Then jobs. During the last recession, US GDP bottomed in June 2009. Employment kept falling and bottomed in February 2010. GDP growth accelerated in Q4 2011, then slowed a bit. Job growth accelerated in Q1 2012, then slowed a bit. GDP accelerated in Q2 and Q3, then slowed in Q4. Job growth accelerated in Q4 and early Q1, and now it is slowing. Here are all of those words in picture form.

Exhibit 1: Late-Lagging Job Growth

Research Analysis

Akash Patel
Into Perspective

Heating Up—A Look at UK Housing

By, 11/27/2013
Ratings124.041667

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).

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.

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What We're Reading

By , The Wall Street Journal, 04/21/2015

MarketMinder's View: Why? Because “stalled earnings growth, high valuations and slow economic activity have put a lid on gains.” Same old backward-looking-and-not-predictive issues we discussed here, here and here. As for the notion stocks need a “clear catalyst” to rise, that just isn’t true. Stocks’ natural tendency when the economic and political backdrop favors earnings growth is to rise. They don’t need a push. That people broadly think they do is a good sign sentiment is lagging reality, which is bullish.

By , The New York Times, 04/21/2015

MarketMinder's View: Private companies have “defaulted,” which we put in air quotes because investors in onshore issues were eventually made whole by the government. But state-run firms haven’t defaulted on domestic investors. They’ve always enjoyed an implicit government guarantee. So the default of state-owned solar power equipment maker Baoding Tinwei Group, though small (they are missing a $14 million interest payment, not a principal repayment), is noteworthy and will be an interesting case study, however it plays out. In theory, it should be a positive sign of ongoing reform and maturity in Chinese capital markets, but these are untested waters, and the government may yet feel compelled to intervene in the name of peace and harmony: “‘Ultimately the question is one of market discipline,’ said Charles Chung, the head of Asian credit strategy at Credit Suisse in Hong Kong. ‘In a free capitalist market, this is gained by default experience, but in China, this has yet to come in a meaningful way to the bond market.’” This episode strikes us as a litmus test for China’s commitment to reform: If they let this play out, it should be a positive sign indeed.

By , Reuters, 04/21/2015

MarketMinder's View: Re-insurance is when an insurance company transfers some of its risk to other insurance companies, reducing the chance it will have to pay out a big claim—a normal risk mitigation practice in the insurance world. Naturally, different countries have different regulatory requirements for re-insurers. The US has collateral requirements. From next January, EU firms will have to comply with Solvency II, a huge yarnball of restrictions and capital requirements (similar to Basel III, but for insurance firms). EU firms doing business in the US will have to comply with both regimes, adding costs and limiting their flexibility, putting them at a disadvantage. So the EU is asking the US to bend and accept Solvency II standards as sufficient, which would improve competition globally. That would likely be a net benefit for Financials (though we are dubious about Solvency II overall), but the chances seem slim given insurance is regulated by state governments. Then again, as this notes, the fact EU regulators are considering slapping Solvency II rules on US re-insurers doing business over there may give US regulators an incentive to figure something out. Either way, this could set the precedent not just for cross-border insurance regulation, but for financial regulation overall—and the US and EU’s efforts to free transatlantic trade in services.   

By , Financial Times, 04/21/2015

MarketMinder's View: We highlight this not for India’s central bank chief’s harsh words for Indian banks, who aren’t transmitting recent stimulus measures to customers, but for the mechanics of what’s going on. The Reserve Bank of India cut rates twice this year in an effort to boost lending—but banks aren’t lending. The reason is impossible to pinpoint, but analysts have a good working theory: Indian banks are funded primarily through deposits (78% of total liabilities in India’s commercial banks), not interbank lending, so rate cuts don’t immediately impact their funding costs. That makes it much more difficult to lend at lower rates—it would pinch profits, limiting incentives to lend enthusiastically. This situation is a largely overlooked counterpoint to the broad global push to limit banks’ wholesale funding and push them more toward deposits. Regulators globally (wrongly, in our view) perceive deposits as less run-prone than interbank loans, and Basel III capital standards penalize wholesale funding. If regulators get their wish, however, it could become far more difficult to conduct monetary policy.

Global Market Update

Market Wrap-Up, Monday April 20, 2015

Below is a market summary as of market close Monday, 4/20/2015:

  • Global Equities: MSCI World (+0.6%)
  • US Equities: S&P 500 (+0.9%)
  • UK Equities: MSCI UK (+0.5%)
  • Best Country: Germany (+1.4%)
  • Worst Country: Hong Kong (-1.7%)
  • Best Sector: Information Technology (+1.5%)
  • Worst Sector: Consumer Staples (+0.1%)
  • Bond Yields: 10-year US Treasury yields rose 0.02 percentage point to 1.89%.

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.