|By Fisher Investments Editorial Staff, 03/27/2015|
In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.
Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment
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
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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|By John Cochrane, The Grumpy Economist, 03/27/2015|
MarketMinder's View: So eliminating maturities on US debt and making them all interest-bearing notes that extend into perpetuity is not the worst idea in the world, but we are struck by the pesky thought that it is a solution seeking a problem. The Treasury debt market works just fine today and we see no real reason to change it. However, we are fond of the argument presented by Bloomberg’s Matt Levine: “One other thing that I like about this proposal is that you sometimes hear claims from politicians that the U.S. can't keep borrowing forever, that it needs to pay down its debt, etc. These claims are straightforwardly false -- the normal condition of national debt is for it to get rolled over and go up over time -- but that is not especially intuitive. Making the debt perpetual would make it more obvious. ‘We need to pay back our debt,’ a politician would say, and you'd say ‘No, actually, look, it says it right here in the contract, it never needs to be paid back, it's cool.’”
|By Jeff Kearns, Bloomberg, 03/27/2015|
MarketMinder's View: Well, whoop-de-doo. Here is what she actually said, with some emphasis in bold we added: “The Committee's decision about when to begin reducing accommodation will depend importantly on how economic conditions actually evolve over time. Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year.” That is a lot of hedging! But it also overtly says the decision will be data-dependent. She also later said hikes and policy aren’t on a preset course. Oh and remember she is only one of 10 votes. And as we’ve written many times, there is no history of initial fed-funds target rate hikes roiling stocks. Here’s a messy chart that gives you more actionable information than Janet Yellen’s speech.
|By Ambrose Evans-Pritchard, The Telegraph , 03/27/2015|
MarketMinder's View: This article snakes through 1,145 well-crafted words of prose to deliver the following message: The Middle East is not a stable region politically. To which we say, thank you, but we and nearly every investor who has bought a stock since long about 1947 is aware. Suffice it to say, this is a truism that didn’t need “exposing.”
|By Justin Lahart, The Wall Street Journal, 03/27/2015|
MarketMinder's View: This is yet another article discussing analysts slashing estimates of profit growth, presuming this is somehow surprising and failing to acknowledge that sentiment matters a lot to stocks’ direction. Look, folks, even if you know exactly what S&P 500 profit growth will be in Q1—and analysts don’t, you can rest assured of that—it doesn’t mean you know what stocks will do, because fundamentals alone do not determine market direction. What’s more, if this is correct and the outlook is brighter in spring due to warmer weather and no West Coast Port Labor dispute, aren’t forward-looking stocks likely to do what they did in 2014 and see right through it? Why would this support the conclusion that “…share prices may get squeezed?”
Market Wrap-Up, Thursday Mar 26, 2015
Below is a market summary as of market close Thursday, 3/26/2015:
Global Equities: MSCI World (-0.7%)
US Equities: S&P 500 (-0.2%)
UK Equities: MSCI UK (-1.8%)
Best Country: Singapore (+0.4%)
Worst Country: Austria (-2.4%)
Best Sector: Information Technology (-0.3%)
Worst Sector: Utilities (-1.1%)
Bond Yields: 10-year US Treasury yields rose 0.07 percentage point to 1.99%.
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.