|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.
|By Christo Barker, 10/10/2013|
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.
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|By Jonathan Clements, The Wall Street Journal, 03/26/2015|
MarketMinder's View: There is no real divide here—they are all active investors. That is the only thing this study proves, as the numbers don’t actually tell you which group is better at timing (or whether they are equally bad). The only way you could even begin to measure this is if you were to compare a fund’s dollar-weighted return to its time-weighted return (and even that says next to nothing)—this study compares each fund’s dollar-weighted return to its category’s average total return. That is not an accurate comparison, and it basically tells you nothing. Then again, even comparing one fund’s dollar-weighted and time-weighted return wouldn’t tell you anything about investors’ actual behavior, because it lacks a counterfactual. What if they rotated into something that did even better, and their personal performance was better? The only way you can track this in real-life is by studying individual investors over time, tracking every transaction, and then evaluating the timing in hindsight. And even that wouldn’t be perfect, because you still wouldn’t have a control group. Anyway, that’s all academic—the simple takeaway here is that no, investing in an index fund doesn’t mean you are automatically smarter, more disciplined or a better trader. People are people.
|By Brett Arends, MarketWatch, 03/26/2015|
MarketMinder's View: Well, the conclusion here is correct, in our view: Today’s Nasdaq nearing 5,000 bears little resemblance to 2000’s Nasdaq at the same level. And yes, valuations (the second point of three included) are very different between now and then. We would suggest, though, that comparing inflation-adjusted index levels (point #1) is an unnecessary and wrongheaded comparison, because an index level will never show whether investors are euphoric or not. You must analyze economic and market fundamentals and then compare those to sentiment to do that. As to sentiment, we aren’t seeing actual debates on widely watched cable TV suggesting that “bust” has been eliminated (leaving just “boom”—we reckon the “and” was collateral damage), or that we are in a new economy that has rendered profits an obsolete metric, or that there are no fears. Those are your hallmark signs of euphoric sentiment, and they are basically absent today.
|By Michelle Jamrisko, Bloomberg, 03/26/2015|
MarketMinder's View: Here is a very interesting article regarding a widely overlooked feature of the US economy in 2014: “Corporate spending on research and development rose 6.7 percent in 2014, almost twice the previous year’s gain and the biggest advance since 1996, according to Commerce Department data. The pickup was capped by a 14 percent fourth-quarter surge that signals additional increases are on the way. … ‘CEOs wouldn’t be paying all these researchers -- which is where the R&D budget primarily flows to -- unless they thought that there was something really interesting going on,’ Jason Cummins, chief U.S. economist and head of research in Washington for hedge fund Brevan Howard Inc.” said.
|By David Román and Jeanette Neumann, The Wall Street Journal, 03/26/2015|
MarketMinder's View: An alternate headline that summarizes the story more accurately: “Bank of Spain Sees Deflation Stimulating Demand, Growth.” Granted, forecasts by central banks can be revised … or just wrong. But the projection here seems to us to at least acknowledge the fact deflation in the eurozone isn’t likely to cause a downward spiral. Consumers seem likelier to respond to lower prices by consuming more.
Market Wrap-Up, Wednesday Mar 25, 2015
Below is a market summary as of market close Wednesday, 3/25/2015:
Global Equities: MSCI World (-0.9%)
US Equities: S&P 500 (-1.5%)
UK Equities: MSCI UK (-0.1%)
Best Country: Hong Koing (+1.3%)
Worst Country: United States (-1.5%)
Best Sector: Energy (+1.0%)
Worst Sector: Information Technology (-2.3%)
Bond Yields: 10-year US Treasury yields rose 0.05 percentage point to 1.92%.
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.