Commentary

Elisabeth Dellinger
Into Perspective, US Economy, Media Hype/Myths

America, the Liberated

By, 03/04/2015
Ratings154.333333

America's economic prospects are as cheery as this little fella. Photo by FPG/Hulton Archive/Getty Images.

It is no secret this expansion is America’s slowest since World War II. It is also no secret folks are frustrated with sluggish growth and keen for a boost—never mind the fact GDP growth beat its postwar average in four of the last six quarters. But that doesn’t mean America’s economy is a problem that needs fixing. Stocks have already proven they can rise fine amid slow growth, and efforts to fix what isn’t broken often do more harm than good.

Commentary

Fisher Investments Editorial Staff
Into Perspective, GDP

A Second Glance at Growth

By, 03/04/2015

Is the global economy slowing down? Seems many think so, based on concerns over US growth’s downward revision and the UK’s “unbalanced” expansion, for example. However, these widely reported headline figures don’t tell the tale; data overall confirm global growth is continuing apace.

In the US, Q4 2014 GDP was revised to 2.2% seasonally adjusted annual rate (SAAR), lower than the 2.6% preliminary estimate. However, this revision says more about GDP’s statistical quirks and limitations than faltering growth. Higher imports and leaner company inventories were the downward revision’s main drivers. Yet rising imports indicate healthy domestic demand—a positive! And leaner inventories are subject to interpretation. Are companies forecasting bad times ahead, or were shelves depleted by healthy demand? Given consumer spending rose at the fastest clip since 2010 and business spending also advanced, healthy demand seems more likely—suggesting possible future restocking. A look at the purely domestic private sector measures combined—personal consumption, business spending and real estate—shows accelerating growth.

While a second look at October-December 2014 growth won’t tell you about current—let alone future—prospects, other data suggest the US is chugging along. The Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) highlight the private sector’s strength. February’s Services PMI increased to 56.9 while Manufacturing hit 52.9—readings over 50 indicate more businesses saw growth than contraction. Likewise, the New Orders subindexes for both Services (56.7) and Manufacturing (52.5) allude to future economic activity. Some were downright perplexed when low oil prices didn’t goose consumer spending, which fell -0.2% m/m in January—particularly the -0.1% m/m durable goods spending drop. But consumers don’t exclusively spend on goods—services spending rose 0.5% m/m, and the headline negative is dragged down by the very same falling oil prices—adjusted for inflation, headline spending rose 0.3% m/m. The durables drop shows a similar influence, rising 0.2% in real terms.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Aversion to the Mean

By, 03/03/2015
Ratings344.588235

Stop us if you’ve heard this one before: What goes up must go down, and what falls the furthest bounces the highest. If you are Galileo or Sir Isaac Newton and referring to physics, then yes. But in stocks, not so much. The statement assumes Extreme A is followed by an equal and opposite extreme, maintaining the long-term average—also known as reverting to the mean. But stocks don’t do that. If you see a forecast assuming they do, you can probably tune it out.

We’re compelled to point this out because stocks did great in February. The S&P 500 rose 5.7%.[i] The MSCI World Index rose 5.9%.[ii] Right on cue, some pundits are warning March will probably stink, mostly because of February. One seemed surprised history doesn’t actually support this, calling it “slightly counter-intuitive” that the S&P 500 rose during the month following nine of the ten 5%-plus moves during this bull market. But that sample size is so small, it incorrectly leads readers to believe big months mean more big returns ahead! The truth is far more boring and less gameable. From 1926 through 2014, the S&P 500 rose 5% or more in a month 179 times.[iii] It fell the next month 59 times.[iv] That is a 67% frequency of positive returns, higher than the 62% frequency of positive monthly returns overall.[v]  But that isn’t a predictive tool! It doesn’t mean big months beget positivity! It merely guts the notion stocks must mean revert after they go up nicely. Averages are just observations of history. Interesting factoids. Not objects with gravitational pull.

Mean reversion is everywhere. It’s in warnings the S&P 500’s high cyclically adjusted P/E ratio (CAPE) means stocks will soon suffer. It’s in the wallowing about above-average normal P/Es in the US putting a ceiling on equity returns. Neither of those statements are true. Both assume past performance predicts the future. They assume economic, political and sentiment-related factors stop moving stocks—the CAPE warning assumes gravity must take hold, the traditional P/E argument assumes stocks can rise only if earnings do. That ignores a long history of multiple expansion during mature bull markets as investors gain confidence and get ever-cheerier about the future.

Commentary

Fisher Investments Editorial Staff
Commodities

Drilling Deep for Oil Stocks?

By, 03/02/2015
Ratings184.555555

And up in the headlines came a bubblin’ crude. Oil, that is. Texas tea. Black gold. As the oil VIX[i] hovered near 60, some called swingin’ volatility the “new normal.” Others searched for meaning in bouncy benchmarks as Brent crude more than doubled WTI’s monthly gains with one day left in February. Pundits parsed February’s rise—the first since June—for signs of stabilization, bottoms and double bottoms. Feel free to tune it all out, because all this yammering is largely meaningless for investors. None of it tells you where oil prices will go. Nor should you let it drive you headlong into Energy stocks, as some have done lately—for all the talk of “bargain hunting,” there still doesn’t appear to be much upside looking forward.

Unless you’re speculating on oil futures, there isn’t much point in stewing over short-term swings and analysts’ price targets. Volatility is just volatile. Unpredictable, too. If you’re a normal long-term investor, what matters is whether prices are likelier to rise to levels that would make Energy firms profitable over the foreseeable future—solely a function of supply and demand.

Commodity prices usually move in cycles. As prices rise, firms invest more in production, hoping to ramp up output to capitalize. But they overshoot, supply outstrips demand, and prices fall. So firms cut costs and cut investment, and supply falls. Eventually it undershoots demand, and prices start rising again. These cycles can sometimes take years to play out. Energy prices stayed low for ages in the 1980s and 1990s as firms cut investment and production. They rose throughout the 2000s, and investment and production shot back up as high prices made shale production increasingly economical. And then 2014 happened.

Commentary

Todd Bliman
Reality Check, Media Hype/Myths

1,896 Days Ago, Greece Was a Mess

By, 02/26/2015
Ratings424.273809

Greek fears aren’t quite as old as these buildings, but they aren’t new. Photo by Yorgos Karahalis/Bloomberg Finance via Getty Images.

It has been 1,896 calendar days since we first documented Greek woes on December 18, 2009. Since then, we’ve frequently reminded investors small economies and markets often zig while the world zags, particularly those with big, entrenched competitiveness issues and Ottoman-style bureaucracies. Yet fearful headlines keep stoking concerns over Greece. Folks, if Greece didn’t quash the bull when it was new news, it isn’t likely to now.

Commentary

Elisabeth Dellinger
The Global View, Across the Atlantic, Developed Markets

The ECB Would Gladly Pay You Tuesday for a Hamburger Today

By, 02/26/2015
Ratings314.032258

The ECB implements full-fledged quantitative easing (QE) next week, and many hope nearly €1 trillion of sovereign bond-buying will rocket the eurozone out of its supposed post-recession malaise. As we wrote here, those hopes are probably too lofty, because QE isn’t stimulus—it flattens yield curves, defying over a century’s worth of economic theory and data showing steeper curves are best, and eurozone yield curves are already crazy flat. But here’s another wrinkle: It is far from certain whether the ECB can even reach its monthly bond-buying target. The ECB’s own capital requirements and interest rate policy might shoot its plans in the foot—not an economic negative, necessarily, but evidence policy there is rather wacky.

The ECB plans to buy €60 billion in bonds monthly—€13 billion in asset-backed securities and covered bonds, and €47 billion in sovereign debt. That €47 billion will be split between 18 of 19 eurozone member-states[i], dished out according to each country’s portion of the bloc’s population and GDP. People who have done all the math say German bunds will account for nearly 25% of the program, with France, Spain and Italy close behind.

Two Wall Street Journal articles published Wednesday highlighted some of the obstacles the ECB faces. One, “ECB Faces Struggle in Sourcing Enough Bonds for QE,” shows how supply is limited:

Commentary

Fisher Investments Editorial Staff
Into Perspective, Market Cycles

Around the World in All-Time Highs

By, 02/25/2015
Ratings144.321429

Stock indexes worldwide continue climbing to new heights. The FTSE 100 hit a new high this week, its first in 15 years. The Nasdaq is a rounding error from 5,000, itself a rounding error from its early 2000 record. The Nikkei 225 isn’t close to an all-time high, but it too is near levels last seen in April 2000.[i] The MSCI World, S&P 500 and Germany’s DAX have added to records set earlier in this bull market, too. This record-breaking flurry has spurred comparisons to the early 2000s, when the tech bubble popped. Nasdaq, FTSE and Nikkei price levels might be similar, but today’s environment doesn’t resemble 2000’s—all-time highs are just what you get in a rip-roaring global bull market. They aren’t evidence of a bubble or bull market about to die.

The Nasdaq’s current climb toward 5048 doesn’t resemble the last one. In 2000, technology was ushering in the “New Economy.” Pundits cheered the 1990s’ growth, saying, “there is no end of that success in sight.” A CNN roundtable debated whether “boom and bust” was over forever. “Dot-Com” initial public offering (IPOs) hit fever pitch, with mom and pop investors clamoring to get in. Yet many of these companies were slop, pushed by investment banks to take advantage of rising investor optimism. As a New York Times article noted, “instead of repelling investors, a lack of profits, past performance or history of any kind appears to be an enticement these days.” According to the University of Florida’s Professor Jay Ritter, 72% and 73% of IPOs in 1999 and 2000 had less than $50 million in sales. 2014? 48%. (Exhibit 1)

Exhibit 1: IPOs Categorized by the LTM (Last Twelve Months) Sales, 1990-2014

Commentary

Fisher Investments Editorial Staff
Into Perspective

The DOL Gets a Homework Assignment

By, 02/24/2015
Ratings504.18

As always, our political analysis is non-partisan and ignores ideology and sociological factors. Our aim is solely to assess how the proposed rules impact investors. Oh and full disclosure: MarketMinder’s parent company, Fisher Investments, is a registered investment adviser held to the fiduciary standard.

President Obama gave a big speech at AARP on Monday and made the announcement the world was waiting for: He had picked up his AARP card. Kidding![i] He said he told the Department of Labor to write rules requiring any investment professional advising on a retirement account to “put the best interests of their clients above their own financial interests.”[ii] He goes on: “You want to give financial advice, you’ve got to put your clients’ interests first. You can’t have a conflict of interest.” And not to be overly literal, but we have a hard time seeing how a uniform fiduciary standard, as outlined on The White House Blog Monday, will do this—or solve any of the issues described in Obama’s speech. A fiduciary standard can’t eliminate conflicts of interest or ensure investors receive top advice. Well-intended as these plans seem to be, they won’t fix all that ails the brokerage industry, and the onus will remain on investors to look beyond rules and designations when picking an adviser. 

According to the White House: “Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward a retirement plan that’s not in your financial best interest. … Right now your financial advisor—someone who’s supposed to be acting in your best interest—can direct you toward a high-cost, low-return investment rather than recommending a quality investment that works better for you. That’s because those lower-return investments come along with hidden fees that benefit their Wall Street firms on your dime. On average, these conflicts of interest result in annual losses of about one percentage point for affected investors.”

Commentary

Fisher Investments Editorial Staff
Politics

Greece U-Turns, Declares Victory

By, 02/23/2015
Ratings354.014286

Greece’s self-proclaimed libertarian-Marxist Finance Minister, Yanis Varoufakis, dons a not-so-austere scarf for his meeting... Photo by Jasper Junien/Bloomberg via Getty Images.

After yet another week of stalemates, ripped-up agreements and live-blogging, Greece and its creditors reached a deal to keep Greece and its banks funded (and Greece in the eurozone) through June. Yes, they kicked the can! This isn’t some whopping positive for stocks, but it should help ease “Grexit” dread and boost overall sentiment.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Random Stock Market Factoids 35 Days Into 2015

By, 02/20/2015
Ratings594.152543

Here is our look at markets between the Roman Calendar’s New Year and the Lunar New Year. Photo by Anthony Kwan/Getty Images News.

At just past the halfway point of Q1, many might wonder where things stand. After all, if you don’t live and breathe markets, you might focus on the headline items (Greece, oil, the dollar,[i] etc., etc., and so forth) and miss the actual action. Here is a quick roundup to update you on some interesting market movements year to date.

Commentary

Elisabeth Dellinger
The Global View, Across the Atlantic, Developed Markets

The ECB Would Gladly Pay You Tuesday for a Hamburger Today

By, 02/26/2015
Ratings314.032258

The ECB implements full-fledged quantitative easing (QE) next week, and many hope nearly €1 trillion of sovereign bond-buying will rocket the eurozone out of its supposed post-recession malaise. As we wrote here, those hopes are probably too lofty, because QE isn’t stimulus—it flattens yield curves, defying over a century’s worth of economic theory and data showing steeper curves are best, and eurozone yield curves are already crazy flat. But here’s another wrinkle: It is far from certain whether the ECB can even reach its monthly bond-buying target. The ECB’s own capital requirements and interest rate policy might shoot its plans in the foot—not an economic negative, necessarily, but evidence policy there is rather wacky.

The ECB plans to buy €60 billion in bonds monthly—€13 billion in asset-backed securities and covered bonds, and €47 billion in sovereign debt. That €47 billion will be split between 18 of 19 eurozone member-states[i], dished out according to each country’s portion of the bloc’s population and GDP. People who have done all the math say German bunds will account for nearly 25% of the program, with France, Spain and Italy close behind.

Two Wall Street Journal articles published Wednesday highlighted some of the obstacles the ECB faces. One, “ECB Faces Struggle in Sourcing Enough Bonds for QE,” shows how supply is limited:

Commentary

Fisher Investments Editorial Staff
Into Perspective, Market Cycles

Around the World in All-Time Highs

By, 02/25/2015
Ratings144.321429

Stock indexes worldwide continue climbing to new heights. The FTSE 100 hit a new high this week, its first in 15 years. The Nasdaq is a rounding error from 5,000, itself a rounding error from its early 2000 record. The Nikkei 225 isn’t close to an all-time high, but it too is near levels last seen in April 2000.[i] The MSCI World, S&P 500 and Germany’s DAX have added to records set earlier in this bull market, too. This record-breaking flurry has spurred comparisons to the early 2000s, when the tech bubble popped. Nasdaq, FTSE and Nikkei price levels might be similar, but today’s environment doesn’t resemble 2000’s—all-time highs are just what you get in a rip-roaring global bull market. They aren’t evidence of a bubble or bull market about to die.

The Nasdaq’s current climb toward 5048 doesn’t resemble the last one. In 2000, technology was ushering in the “New Economy.” Pundits cheered the 1990s’ growth, saying, “there is no end of that success in sight.” A CNN roundtable debated whether “boom and bust” was over forever. “Dot-Com” initial public offering (IPOs) hit fever pitch, with mom and pop investors clamoring to get in. Yet many of these companies were slop, pushed by investment banks to take advantage of rising investor optimism. As a New York Times article noted, “instead of repelling investors, a lack of profits, past performance or history of any kind appears to be an enticement these days.” According to the University of Florida’s Professor Jay Ritter, 72% and 73% of IPOs in 1999 and 2000 had less than $50 million in sales. 2014? 48%. (Exhibit 1)

Exhibit 1: IPOs Categorized by the LTM (Last Twelve Months) Sales, 1990-2014

Commentary

Fisher Investments Editorial Staff
Into Perspective

The DOL Gets a Homework Assignment

By, 02/24/2015
Ratings504.18

As always, our political analysis is non-partisan and ignores ideology and sociological factors. Our aim is solely to assess how the proposed rules impact investors. Oh and full disclosure: MarketMinder’s parent company, Fisher Investments, is a registered investment adviser held to the fiduciary standard.

President Obama gave a big speech at AARP on Monday and made the announcement the world was waiting for: He had picked up his AARP card. Kidding![i] He said he told the Department of Labor to write rules requiring any investment professional advising on a retirement account to “put the best interests of their clients above their own financial interests.”[ii] He goes on: “You want to give financial advice, you’ve got to put your clients’ interests first. You can’t have a conflict of interest.” And not to be overly literal, but we have a hard time seeing how a uniform fiduciary standard, as outlined on The White House Blog Monday, will do this—or solve any of the issues described in Obama’s speech. A fiduciary standard can’t eliminate conflicts of interest or ensure investors receive top advice. Well-intended as these plans seem to be, they won’t fix all that ails the brokerage industry, and the onus will remain on investors to look beyond rules and designations when picking an adviser. 

According to the White House: “Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward a retirement plan that’s not in your financial best interest. … Right now your financial advisor—someone who’s supposed to be acting in your best interest—can direct you toward a high-cost, low-return investment rather than recommending a quality investment that works better for you. That’s because those lower-return investments come along with hidden fees that benefit their Wall Street firms on your dime. On average, these conflicts of interest result in annual losses of about one percentage point for affected investors.”

Commentary

Fisher Investments Editorial Staff
Politics

Greece U-Turns, Declares Victory

By, 02/23/2015
Ratings354.014286

Greece’s self-proclaimed libertarian-Marxist Finance Minister, Yanis Varoufakis, dons a not-so-austere scarf for his meeting... Photo by Jasper Junien/Bloomberg via Getty Images.

After yet another week of stalemates, ripped-up agreements and live-blogging, Greece and its creditors reached a deal to keep Greece and its banks funded (and Greece in the eurozone) through June. Yes, they kicked the can! This isn’t some whopping positive for stocks, but it should help ease “Grexit” dread and boost overall sentiment.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Random Stock Market Factoids 35 Days Into 2015

By, 02/20/2015
Ratings594.152543

Here is our look at markets between the Roman Calendar’s New Year and the Lunar New Year. Photo by Anthony Kwan/Getty Images News.

At just past the halfway point of Q1, many might wonder where things stand. After all, if you don’t live and breathe markets, you might focus on the headline items (Greece, oil, the dollar,[i] etc., etc., and so forth) and miss the actual action. Here is a quick roundup to update you on some interesting market movements year to date.

Commentary

Fisher Investments Editorial Staff
The Advisor's Corner

A Q&A on Passive Investing: How Pactive Are You?

By, 02/19/2015
Ratings593.559322

The passive versus active debate is heating up again, with many going so far as to claim 2014 shows passive investing—the notion markets are unbeatable, so give up, mirror a selected index and never make moves—has won the day. Yet, true passive investing is rare. More often than not, folks are making active investment decisions even though they claim to be passive, rendering them pactive.[i] There is no real evidence pactive investing is superior to active. Here is a Q&A to illustrate this point.

Q: How did you determine your asset allocation?

A: Before you even elect to go passive or active, it’s crucial to determine which mix of stocks, bonds, cash and other securities to employ. Studies have shown this decision alone accounts for between 70% and 90% of your longer-term investment results. (That dwarfs any active or passive decision’s impact.) So how did you get your allocation? Did you subtract your age from 100 to get the percentage you invested in stocks? Use another method? Did you take your time horizon and other long-term financial factors into account? Did you answer a risk tolerance questionnaire?  No matter which method you chose, this is a choice. And often, investors choose allocations that aren’t in keeping with their goals, focusing too much on volatility, fear or greed. Right out of the gate there is significant room for error—and an inherently active choice. But even if we overlook this active choice, passive investing’s problems don’t end.

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.

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, 03/05/2015

MarketMinder's View: While some are calling China’s projected RMB 1.4 trillion drop in government borrowing a liquidity-zapping “fiscal cliff,” as this piece shows, reality is more benign. This isn’t a huge planned pullback in public investment or liquidity squeeze. It’s an attempt to shift from public financing to private, where officials believe lending decisions will be more judicious and investment more productive. Time will tell whether they’re right—execution matters—but they appear to have a system in place to continue financing infrastructure and development. And if it doesn’t work, leaders there have a long track record of saying one thing and doing another, as needed, to shore up growth and job creation. We rather doubt China will really find itself “stuck in the fiscal mud.”

By , The New York Times, 03/05/2015

MarketMinder's View: Look, we don’t think Dodd-Frank was some magical bank safety-enhancing, crisis-ending panacea either. But the metrics used here to evaluate it are just bizarre. Bank profits as a negative? Last we checked, profits are a sign of health, and banks have retained most of those earnings to shore up capital levels. Supposedly high financial services fees as evidence of a lack of competition? We have a hard time seeing that one in an industry with tens of millions of customers. Bank dependence on short-term funding? That assumes retail depositors—all of us normal folks—don’t flee when things look dicey. Take a peek at Greece if you need proof that assumption is incorrect. Overall, we don’t see much (if any) evidence the financial industry is merely a “money-extraction machine, enriching itself while endangering society as a whole.” If that were the case, why would capital be flowing freely from banks to businesses? Banks are investing in the real economy, folks.

By , CNBC, 03/05/2015

MarketMinder's View: Well, we respectfully disagree with the thesis that a bubble limited to select private firms—not publicly traded stocks—is actually a bubble. Simply, bubbles are caused by widespread euphoric sentiment overlooking negative fundamentals. The number of investors diving into these private firms is extremely small, and even if you presume their valuations are wacky (we have no way to verify that), that isn’t a sign of widespread euphoria. Folks, the tech sector was 30% of the S&P 500 when the tech bubble was at its zenith. Now, these private firms might be a fad, like small “momentum stocks” were in early 2014. But global economic and market fundamentals today appear overall better than sentiment appreciates, which does not a bubble make. Finally, we are not 100% convinced the blog post that inspired this article wasn’t ironic.

By , Financial Times, 03/05/2015

MarketMinder's View: This claims to prove fees matter more than asset allocation (the mix of stocks, bonds, cash and other assets you use), but it does no such thing, because the method of proving the point herein is totally flawed. For one, it’s a simple backtest of various portfolios using results from 1973 – 2013. That might seem sufficient to draw major conclusions, but you should really use Monte Carlo analyses for this, because the past won’t predict the future order in which returns occur, perhaps throwing the entire basis for drawing conclusions off. E.g., would any of this be the same in 2009? Or 1999? Answer: No. Additionally, the evidence of the influence of fees is demonstrated by simply subtracting returns (1.25%  - 2.25%) from very same strategies outlined. Which is a self-reinforcing feedback loop. You cannot calculate the impact of fees this way and prove anything other than the fact you can do basic mathematics. It also does not at all address how you arrived at the allocation in the first place, which is crucial because no matter what you pay, your allocation darn well better match your goals. Said differently, if two identical bond portfolios had different fees, that would be the deciding factor. But it wouldn’t say anything about whether or what percentage you should put in bonds in the first place. Finally, these are all inflation-adjusted returns and the inflation adjustment used is neither explained nor described. This is really just a bizarre comparison of various strategies, not a study showing fees matter more than asset allocation.

Global Market Update

Market Wrap-Up, Wednesday Mar 4 2015

Below is a market summary as of market close Wednesday, 3/4/2015:

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.4%)
  • UK Equities: MSCI UK (-0.3%)
  • Best Country: Belgium (+0.2%)
  • Worst Country: Portugal (-3.4%)
  • Best Sector: Health Care (+0.2%)
  • Worst Sector: Materials (-0.9%)
  • Bond Yields: 10-year US Treasury yieldswere unchanged at 2.12%.

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.