Commentary

Fisher Investments Editorial Staff
The Global View, US Economy, GDP

Thankful the World Over

By, 11/27/2014
Ratings84.875

Thanksgiving is an American holiday, a time when we in the States give thanks for the many blessings in our lives. Family. Friends. Health. Turkey.[i] But we have our own Thanksgiving tradition here at MarketMinder: A global celebration of the bullish backdrop underpinning stocks—reasons investors the world over can celebrate right along with Americans, no matter their definition of football.

Overall Positive Political Scene

This year’s US midterm elections all but assured continued government gridlock—a positive for stocks many miss. Forget party affiliation. (Especially, we’d advise, at the dinner table.) Whether you celebrated or mourned the Republicans taking the Senate and adding to their House majority, the White House is still controlled by the Democrats—gridlock! The likelihood contentious legislation potentially dinging stocks or the economy becomes law is low, a plus for stocks. Since 1928, 86.4% of midterm election year Q4s—and the following Q1 and Q2 have been positive—well above the average quarter’s 67.8% frequency of positivity.[ii] While the identical frequency figure is coincidental, gridlock’s positivity is causal.

Commentary

Fisher Investments Editorial Staff

Some Thoughts on 2016

By, 11/25/2014
Ratings134.192307

Don’t get all fired up over the 2016 Presidential election just yet. Photo by Joe Raedle/Getty Images News.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment

All Quiet on the Record High Front

By, 11/24/2014
Ratings194.157895

This is a peak. The 131 S&P 500 record highs in this cycle were not peaks. Photo by Claude-Olivier Marti/Getty Images.

Stocks have quietly set a string of new all-time highs in recent weeks.

Commentary

Fisher Investments Editorial Staff
The Global View

The Unnecessary $2 Trillion Global Stimulus Economic Benefit Concert

By, 11/21/2014
Ratings163.9375

Are the world economy’s lights flashing red or green? Photo by David Arthur/Getty Images.

Here is a memo for the G-20: The global economy is actually growing.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Clearing Up Bond Trading

By, 11/20/2014
Ratings213.714286

Most bond trading is as opaque as this black case. Photo by Todd Bliman.

Here is a simple question that often doesn’t have a simple answer: How much did you pay to buy that bond? This week, the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) proposed amendments to their current rules that seek to make that answer easier to come by, clarifying transaction costs for municipal, corporate and agency debt securities. Their plan is a step in the right direction, in our view, but the proposed rules are still less clear than they could otherwise be.

Commentary

Fisher Investments Editorial Staff
The Global View

Is the World Turning Japanese?

By, 11/19/2014
Ratings163.96875

Monday’s news of Japan falling back into recession continued spurring headlines Tuesday, albeit of a different flavor. They stopped expressing shock at Abenomics’ inability to spur growth and started fearing the world is turning Japanese too—and about to take stocks down with it. However, we humbly suggest the issues hamstringing Japan are the same ones that led to its lost decade. That didn’t go global, and we see little reason to think this time will be different.[i]

Japan’s struggles stem from its … ummm … unique take on capitalism, which is rather more mercantilist than Smithian.[ii] The result: deep structural issues like waning productivity, narrow labor markets, protectionist trade policy and an uncompetitive corporate sector dominated by large, horizontally integrated keiretsu—to name just a few (we could go on). These are supposedly in Japanese Prime Minister Shinzo Abe’s crosshairs, the target of long-promised but undelivered structural reforms.

But most pundits don’t acknowledge how much these structural issues muffle Japanese growth, arguing the lost decade[iii] was a product of deflation and demographics. They don’t acknowledge deflation is a signal—not a cause—of deeper problems. To the extent demographic issues are problematic, they are no match for a free, open economy. From this misdiagnosis, the experts hunt for the next economy ripe for its own “lost decade.” Today’s popular target: the eurozone.

Commentary

Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings273.814815

No word on whether Australian PM Tony Abbott was giving Japanese PM Shinzo Abe election tips or just making a funny. Maybe both? Photo by Ian Waldie, Pool/Getty Images.

Pop quiz: What do you get when you hit a struggling country with higher prices and a three percentage point sales tax hike? Give up? Recession! At least, according to Japanese GDP released Monday that’s what Japan got, with the second straight GDP contraction placing the archipelago into recession by one common definition. Globally, this doesn’t mean a ton—growth elsewhere is more than enough to offset Japan’s -1.6% annualized Q3 drop. But the causes and domestic fallout reiterate why we’ve long thought investors’ expectations for Japan are too high and better opportunities lie elsewhere.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP, Investor Sentiment

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865


Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts’ estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany’s insistence risks a “lost decade.” The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove “insufficient to create jobs,” too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

All Aboard the Through Train?

By, 11/14/2014
Ratings294.137931

Starting Monday, foreign investors will have unprecedented access to mainland  Chinese stocks courtesy of the delightfully named “through train” program, which lets foreigners buy “selected” Chinese A-shares traded on the Shanghai exchange through Hong Kong brokerages. Many are cheery about the prospect of new demand worth tens of billions of dollars pushing Chinese stocks higher. But before you choo-choo your way over, we’d encourage you to keep a rational perspective. China has plenty going for it, but anyone expecting the through train to be the ticket to sky-high returns might end up a tad disappointed.

In recent years, Chinese A-shares haven’t quite reflected the economy’s rapid growth rate. They boomed at times during the 2000s bull market, but as Exhibit 1 shows, this was short-lived and out of step with the global bull that began in 2003. As of Thursday’s close, A-shares were still 36% under their 1/14/2008 peak. Meanwhile, China’s economy kept on chugging, taking Japan’s place as the world’s second biggest. Not that stocks and GDP should move one-to-one—that isn’t how it works ever. But it underscores how China’s political climate, capital market controls and sentiment have offset many an economic tailwind.

Exhibit 1: Chinese A-Shares

Commentary

Fisher Investments Editorial Staff
Politics

What to Expect from Lame-Duck Season

By, 11/13/2014
Ratings453.844445


President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.

Commentary

Fisher Investments Editorial Staff
The Global View

Is the World Turning Japanese?

By, 11/19/2014
Ratings163.96875

Monday’s news of Japan falling back into recession continued spurring headlines Tuesday, albeit of a different flavor. They stopped expressing shock at Abenomics’ inability to spur growth and started fearing the world is turning Japanese too—and about to take stocks down with it. However, we humbly suggest the issues hamstringing Japan are the same ones that led to its lost decade. That didn’t go global, and we see little reason to think this time will be different.[i]

Japan’s struggles stem from its … ummm … unique take on capitalism, which is rather more mercantilist than Smithian.[ii] The result: deep structural issues like waning productivity, narrow labor markets, protectionist trade policy and an uncompetitive corporate sector dominated by large, horizontally integrated keiretsu—to name just a few (we could go on). These are supposedly in Japanese Prime Minister Shinzo Abe’s crosshairs, the target of long-promised but undelivered structural reforms.

But most pundits don’t acknowledge how much these structural issues muffle Japanese growth, arguing the lost decade[iii] was a product of deflation and demographics. They don’t acknowledge deflation is a signal—not a cause—of deeper problems. To the extent demographic issues are problematic, they are no match for a free, open economy. From this misdiagnosis, the experts hunt for the next economy ripe for its own “lost decade.” Today’s popular target: the eurozone.

Commentary

Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings273.814815

No word on whether Australian PM Tony Abbott was giving Japanese PM Shinzo Abe election tips or just making a funny. Maybe both? Photo by Ian Waldie, Pool/Getty Images.

Pop quiz: What do you get when you hit a struggling country with higher prices and a three percentage point sales tax hike? Give up? Recession! At least, according to Japanese GDP released Monday that’s what Japan got, with the second straight GDP contraction placing the archipelago into recession by one common definition. Globally, this doesn’t mean a ton—growth elsewhere is more than enough to offset Japan’s -1.6% annualized Q3 drop. But the causes and domestic fallout reiterate why we’ve long thought investors’ expectations for Japan are too high and better opportunities lie elsewhere.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP, Investor Sentiment

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865


Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts’ estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany’s insistence risks a “lost decade.” The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove “insufficient to create jobs,” too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

All Aboard the Through Train?

By, 11/14/2014
Ratings294.137931

Starting Monday, foreign investors will have unprecedented access to mainland  Chinese stocks courtesy of the delightfully named “through train” program, which lets foreigners buy “selected” Chinese A-shares traded on the Shanghai exchange through Hong Kong brokerages. Many are cheery about the prospect of new demand worth tens of billions of dollars pushing Chinese stocks higher. But before you choo-choo your way over, we’d encourage you to keep a rational perspective. China has plenty going for it, but anyone expecting the through train to be the ticket to sky-high returns might end up a tad disappointed.

In recent years, Chinese A-shares haven’t quite reflected the economy’s rapid growth rate. They boomed at times during the 2000s bull market, but as Exhibit 1 shows, this was short-lived and out of step with the global bull that began in 2003. As of Thursday’s close, A-shares were still 36% under their 1/14/2008 peak. Meanwhile, China’s economy kept on chugging, taking Japan’s place as the world’s second biggest. Not that stocks and GDP should move one-to-one—that isn’t how it works ever. But it underscores how China’s political climate, capital market controls and sentiment have offset many an economic tailwind.

Exhibit 1: Chinese A-Shares

Commentary

Fisher Investments Editorial Staff
Politics

What to Expect from Lame-Duck Season

By, 11/13/2014
Ratings453.844445


President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Risky Business

By, 11/12/2014


There is more risk than just volatility (and a board game). Photo by Robert Nickelsberg/Getty Images.

Risk. This four letter word both tempts and terrifies investors. Some folks think it’s the ticket to sky-high returns. Others find it scary or uncomfortable. Both mentalities lead many to an effort to measure it. Because if you can quantify something (e.g. this stock is risky based on this metric), you can understand what you’re dealing with—and understanding things is nice. Don’t want much risk? Avoid the thing with the higher risk number! But as one stellar paper we recently read thoroughly explained, you can’t reduce investment risk to a single number or set of figures. Most investment risks aren’t actually quantifiable. Believing they are can lead to truly risky portfolio decisions. 

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings823.890244

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.

Research Analysis

Christo Barker
US Economy

Let’s Call It FARRP

By, 10/10/2013
Ratings93.777778

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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What We're Reading

By , The Wall Street Journal, 11/26/2014

MarketMinder's View: Some good, some less good here. We’ll start with the less good, because we feel like being Grinchy today: Rebalancing is quite often synonymous with market timing, unless you have a very rigid schedule you stick to. Too many folks think rebalancing means, “This category did really well, so I should sell some of it and plug the proceeds into this other thing.” Which is all a backward-looking, performance-only based decision that doesn’t account for the fact category outperformance can persist for long, long periods. In our view, your foreign versus domestic allocation should really reflect your outlook for various regions. Now then, the non-Grinchy stuff: “The diversification argument is simple. Living in a global economy as we do, I wouldn’t consider limiting my stock buying to only my home state or country, and neither should you. In fact, I’d diversify into interstellar stock markets if I could. The argument that we get enough international exposure by owning U.S. stocks which do business overseas is flawed, and gets me to my second argument, market timing.”

By , The Wall Street Journal, 11/26/2014

MarketMinder's View: Well, maybe it is and maybe it isn’t. However, we feel compelled to point out the obsession over Black Friday and Cyber Monday as indicators of how retail sales will go is amazingly overdone. Public service message: Black Friday and Cyber Monday aren’t meaningful for investors—too myopic—and they aren’t indicative of which way holiday spending goes in total. Which itself is awfully myopic for longer-term investors to consider heavily.

By , The Australian, 11/26/2014

MarketMinder's View: Well, not really. It’s causing low inflation. This article is a totally mixed bag, but it does highlight one common confusion around deflation: the notion it is always bad. It isn’t. Deflation that occurs as a result of a bank panic or monetary policy error probably is (though it usually follows the onset of those factors). Deflation that occurs because of a production surge (a la the industrial revolution) is not at all bad. Today, we have some modestly deflationary monetary policy (not hugely so) in quantitative easing (QE), which discourages lending through flattening the yield curve. But arguably a bigger factor is the massive increase in commodity production, which has flattened prices for oil, iron ore, copper and more. But again, we don’t have deflation today, and with the US ending QE, one major deflationary pressure has been alleviated.

By , The Guardian, 11/26/2014

MarketMinder's View: For those of you who don’t follow econo-talk closely, here is what’s up: After the crisis, the policymaking “elite” in Britain decided the economy’s problem was it was too reliant on the consumer to sustainably grow. So instead, they promoted a bunch of policy positions and talked about targeting increased exports and business investment, to supposedly put the UK economy on more solid footing. Now, nevermind that UK GDP growth has been among the fastest in the developed world for about two years now, underpinned largely by consumer spending. Instead, consider the general operating thesis here: That exports and business investment, two very volatile economic metrics, are more “sustainable” than consumer spending, which is stable by contrast. Suffice it to say, the logic of this plan has never been exactly clear to us. But also, business investment’s 0.7% dip follows a string of fairly positive quarters, and exports have been weak throughout the UK’s expansion. So we don’t really think this is so unsustainable after all.

Global Market Update

Market Wrap-Up, Tues Nov 25 2014

Below is a market summary (as of market close Tuesday, 11/25/2014):

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (-0.1%)
  • UK Equities: MSCI UK (+0.2%)
  • Best Country: Ireland (+2.0%)
  • Worst Country: New Zealand (-2.7%)
  • Best Sector: Consumer Discretionary (+0.7%)
  • Worst Sector: Energy (-1.2%)
  • Bond Yields: 10-year US Treasurys fell .05 to 2.26%

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.