Commentary

Fisher Investments Editorial Staff
Politics, Reality Check

Independent for a Reason

By, 10/01/2014

Let’s play a fun little game. Pretend you’re out on Main Street talking to the average Joe and Jane about the economy. You ask them, “what is the best way to make growth higher and financial crises less painful?” Chances are they would probably say something like, “make it easier for my next-door neighbor Bob to get a loan to open his second trinket shop.” Or, “make powerful people do whatever they need to do so folks don’t totally freak out and start a bank run when things look bad.” In our experience, they would probably not say, “Put a bunch of unelected political officials, central bankers and bureaucrats together until they figure it all out.” Yet this is the conclusion some academics arrived at in a widely publicized new paper. After exploring alleged conflicts between Fed and Treasury policy in recent years, they decided the two should just coordinate already so we can all be better off. Yet reality isn’t so simple or shiny. Their solution invites politicizing the (theoretically) independent Fed—and as we saw firsthand in 2008, when these two bands collaborate, havoc ensues.

Our merry band of academics (including former White House economic adviser Larry Summers) focused their analysis on the Fed’s quantitative easing (QE) program, which they see as de-facto “debt management policy.” In their view, the Fed’s long-term bond purchases pulled down long-term rates by deliberately shortening the US’s average debt maturity, but the Treasury effectively worked against them by issuing more long-term debt—extending average debt maturity—and inadvertently boosting interest rates.[i] Now, from a transaction standpoint, we guess this is factual—but philosophically, it misses. Debt management implies trying to, you know, manage the debt. In the Fed’s case, this would imply buying bonds directly from the Treasury at auction—actually funding the government. But all the Fed did was buy existing bonds on the secondary market, a simple financial transaction. Just as its purchases of long-term mortgage-backed securities weren’t a form of household debt management, buying Treasurys isn’t government debt management. More broadly, as the analysis pertains to interest rates, we see the point that there were conflicting supply-side policies, but the notion the Treasury should have mirrored the Fed, or they should have joined for some sort of super QE, is wide of the mark (see our general thoughts on QE here, here and here.)

Setting QE aside, the notion the Fed and Treasury are a match made in heaven is patently false—we saw that in 2008, and the partnership clicked about as well as Dewey Leboeuf. This was emphasized in a recent New York Times article, which re-examines whether Lehman Brothers had to die. On the day it went bankrupt, Lehman’s assets exceeded debt. It just couldn’t meet short-term funding obligations because of FAS 157’s impact on collateral. As Matt Klein nicely explained in this Financial Times article, Lehman was illiquid, not insolvent.

Commentary

Fisher Investments Editorial Staff
Reality Check, Into Perspective, Media Hype/Myths

Hey La, Hey La, Volatility Is Back?

By, 09/30/2014


Is this bull market taking a break to ride the Cyclone at Coney Island?  Photo by Getty Images/Stringer.

Here is some fun with headlines: “Wall Street Gets a Case of the Jitters” and there is “No Rest for the Volatility-Weary on Wall Street” because this “Wild Stock Market Ride Is Just Beginning,” and we all better “Expect More Volatility With Stocks Priced Near Perfection.” From the general tone and word choice of these blurbs, you might infer stocks are roller-coastering their way through a correction—or at least significantly more herky-jerky than normal. In reality, however, this “volatility” is quite tame. Not that this means anything, of course. This non-volatile volatility is no more predictive of future volatility, corrections or overall market movement than normal volatility is.

We are told stocks are “volatile” right now because:

Commentary

Fisher Investments Editorial Staff

Lessons From the Golden Bear

By, 09/29/2014
Ratings204.25

GOOOOOOOOOOOOOOLD!!!! It doesn’t seem that long ago to us that the shiny yellow metal was all the rage. Some saw gold prices reaching 5,000 … and beyond! Folks couldn’t seem to get enough. Ads touted gold as a “safe haven”—offering growth and shelter from (wrongly) perceived risks. Some even debated whether you could replace bonds with gold and get equity-like growth with little volatility![i] You can still find some of that talk today, but you may have to go looking a bit. So why has gold seemingly lost some of its shine? Ironically, for the same reason these hyperbolic calls were common back then. You see, while performance was hot back in 2011, gold has since cooled dramatically. Like it entered a big bear market. Now, we aren’t here to say “we told you so!” or even forecast where gold goes from here. But rather, to point out the lessons this turn of events has to offer about gold generally.

Gold’s recent weakness isn’t an isolated incident—it has been falling for over three years. From its record high on September 6, 2011, gold has dropped -36%, while the S&P 500 and MSCI World Index have risen 80% and 59%, respectively.[ii] Dating back to the beginning of this bull market, gold has risen only 31% compared to the S&P 500’s and MSCI World’s respective 226% and 179%.[iii] However, that doesn’t mean when gold falls, stocks rise—the two aren’t negatively correlated. After all, both stocks and gold fell after the panic initially hit in 2008. Both rose in 2009 and 2010. (Exhibit 1) Divergence didn’t persistently start until late 2011. Gold isn’t a consistent or reliable buffer against equity market volatility because it doesn’t move contrary to stocks with consistency. In other words, even if you foresee a correction or bear market, buying gold may not be a good tactic.  

Exhibit 1: Gold’s Price Compared to the S&P 500 and MSCI World, 03/09/2009-09/25/2014

Commentary

Fisher Investments Editorial Staff
US Economy, Into Perspective, Reality Check

Seven Charts to Free You From Skepticism’s Shackles

By, 09/26/2014
Ratings1094.509174

Is the bull market illusory?

Five-plus years into this economic expansion, some still say yes. They commonly claim growth and the bull market are pumped up by global central bankers’ allegedly easy money. They wag an accusatory finger at the Fed in particular, for pinning overnight rates at zero and enacting widely misunderstood “extraordinary” monetary policy they claim is stimulus (despite a century of theory and data arguing the opposite). Some even argue the economy has fundamentally mutated as a result and a rate hike will be disastrous for stocks and the economy. That the Fed’s financial engineering has created a recovery limited to only those with fortunes already invested in markets. Broader growth, they claim, is built on a shaky foundation. For these reasons and more, many skeptics remain unconvinced the bull market is for real—and when volatility strikes like it did Thursday (a relative rarity this and last year)—they presume it is not just markets being their unpredictable, occasionally wild, selves. They presume it is the beginning of the end they’ve long envisioned. But in our view, there are plenty of hard, fast data points that show growth isn’t exclusive to a few stock jobbers[i] and financial market players. Some were featured in a recent post we saw on Scott Grannis’ Calafia Beach Pundit blog. Others we’ve added. These more tangible data points are beyond the Fed’s ability to skew. None are wonderful indicators of future growth, but taken together, they are an excellent illustration of the reality underpinning this bull market.

Let’s start with oil production. The US shale revolution has fundamentally transformed the industry from being in long-term decline to a sharp revival. Combining three long-known factors—shale oil resources, hydraulic fracturing and horizontal drilling—unearthed massive, previously untapped oil. Today, domestic oil production has surged to levels not seen since 1988. Once down more than 50% from its highest-ever oil output recorded in October 1970, oil production today stands about 17% below that mark.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Ken Fisher: “Nothing Is Better—Stocks Are Stocks.” Even Small Caps.

By, 09/25/2014
Ratings1064.216981

Mere months ago, you couldn’t venture too far onto the World Wide Web without some pundit telling you small-cap stocks are the bee’s knees. After all, small caps’ long-term average annualized return beats the broader market, and they’re ahead during this bull market. Open and shut case, they argued. So it might surprise you to know small caps are down this year. While the broader market is up. It might also surprise you to know small usually falls behind as a bull market matures. As our boss, Ken Fisher, wrote in the Financial Times in June, Nothing is better—stocks are stocks. Every category, correctly calculated, has its day in the sun and also the rain.” There is mounting evidence clouds may be gathering, dimming small cap’s shine.

The myth of small caps’ permanent superiority stems from the category’s long-term and recent returns. From 1926 through 2013, small caps returned roughly 11.5% annualized—slightly higher than large cap’s—represented by the S&P 500—10%.[i] Small cap also led for much of this bull market’s first five years, leading many to extrapolate its leadership forward. But as Ken also wrote in that June Financial Times piece, “that’s recency bias and a great way to lead yourself to trouble.” Past performance, as ever, doesn’t predict future returns.

Small cap’s leadership is largely cyclical. It does great early in a bull—small caps usually get hammered the hardest late in a bear, then bounce disproportionately off the bottom. That high long-term return stems from some really, really big bounce-back years, like the early goings of the bull markets that began in 1932, 1942, 1974 and 2002. As bulls age, small fades and big does better.

Commentary

Fisher Investments Editorial Staff

The Treasury’s Inverted Logic

By, 09/24/2014
Ratings264.384615

After weeks of promising to address the alleged scourge of those M&A deals known as corporate inversions, the Treasury took action Monday, announcing what Secretary Jack Lew called an “important first step” to closing “this unfair loophole.” Politicians cheered and jeered, and businesses weren’t amused, but in our view, this is all just noisy political theater. The small rule changes might bring some unintended consequences, as rule changes tend to do, but the negatives are nowhere near big enough to buck the bull.  

As a quick refresher, an inversion is when a US company buys a much smaller foreign firm (whose shareholders can hold as little as a 20% interest in the newly combined firm under current law), then switches HQ to that foreign address—an easy way to redomicile in a country with a friendlier tax code, with current shareholders maintaining majority control. Contrary to popular myth, they don’t do it to avoid paying all US taxes. They’ll still pay US rates on all profits booked here. They just won’t get taxed twice on foreign earnings. Foreign firms don’t have to pay Uncle Sam when they shift foreign earnings to the US for investment purposes or other use. (And they don’t get taxed shifting US-sourced profits to their new home country.)

But politicians dislike inversions, because they believe the practice robs America of very important tax dollars. This is also an election year—the time to convince voters these lost tax dollars deprive America of very important investment, and then let the heavens bathe them in holy light when they “do something” about it. The administration has spent months doing the convincing. Now they’re doing the “doing something.”

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths

Some Ken Fisher Wisdom on the Eurozone

By, 09/24/2014
Ratings234.543478

“The older an argument is, the less power it has.”

Our boss, Ken Fisher, wrote that in Forbes on March 13, 1995, explaining why long-running inflation fears were too old and too tired to end the bull market. It sprang to mind yesterday, when we read for the 1,947th time that the eurozone is on the precipice of a dismal spiral of deflation, depression and doom.

It might not feel this way, but these eurozone jitters are the same old euro collapse fears folks have had for years, just dressed up in new clothes. Most folks might not fear the common currency’s splintering these days (though, fear hasn’t completely died out), but you can’t go far without some headline telling you the eurozone will be a black hole in the world economy for a long time to come. The same old fear. It just went through a metamorphosis.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

G-20 Minus One Country Plus 900 Bullet Points = 2 Percentage Points of Extra Growth?

By, 09/23/2014
Ratings223.909091

Australian finance minister Joe Hockey has one of the greatest last names in politics. He also claims (along with 18 fellow fin-mins) to have the 900-point key to faster global growth. Photo by Bloomberg/Getty Images.

What happens when finance ministers from 19 apparently important economies hang out in Australia for a weekend? For one thing, you get bizarre promises like this: “As of today, we are 90 percent of the way to reaching our 2 percent goal for additional global growth.” At least, so says Aussie finance minister Joe Hockey, talking up the 900-plus initiatives he and his cohorts supposedly agreed to in their effort to make the world grow two percentage points faster (annually) over the next five years.[i] But before you start doing the Snoopy dance over the prospect of faster growth, here is a reality check: This is the G-20.[ii] We are darned skeptical that 900-plus measures blessed by the consensus at a political sideshow will do anything to boost growth above and beyond what it already would have done anyway. Don’t get us wrong—we think the world is poised to grow faster over the foreseeable future! But this isn’t why. All the media attention on this gathering of global economic glitterati is a sideshow for investors.  

Commentary

Fisher Investments Editorial Staff

After Scotland’s No, the UK’s Devolution Revolution

By, 09/22/2014
Ratings174.294117

Thursday, 55% of Scots voted to remain in the 307-year-old union with England, Wales and Northern Ireland, resolving a big source of UK political uncertainty. But political jitters still linger, largely owing to party leaders’ eleventh-hour pledge to extend Scotland’s autonomy if voters chose the union—and Prime Minister David Cameron’s post-game pledge to devolve more power to all the constituent countries. Negotiations on what this entails are about to start, and Cameron’s goal is to have legislation written by January and passed before May’s election, driving fears over the fallout of a potentially radical, quick shift in how the UK is governed. Political drivers like this are important for stocks, but what matters most is whether changes impact economic competitiveness and corporations’ ability to grow and profit. While no one knows yet what exactly a more federalized UK would look like, the likelihood changes would undermine the country’s many economic strengths or the current expansion seem slim.

Devolution, launched under Tony Blair’s government in 1998, stems from Wales’, Northern Ireland’s and Scotland’s long-running concerns about English MPs’ influence over local policy. Historically, the UK’s government was heavily centralized, with Westminster setting policy for the entire union. But 533 of the House of Commons’ 650 seats are English, compared with 40 for Wales, 18 for Northern Ireland and 59 for Scotland—all of whose economies are structurally different from England’s. So each country was granted its own national legislature with powers to set policy in certain areas. All three countries control their own health care, education, environment and agriculture and tourism. Scotland and Northern Ireland have their own judiciary. Scotland also has power to set its own tax rates under the Scotland Act 2012—where it can vary its income tax rate by up to three percentage points (and by 2016, up to 10 percentage points). Scotland can also issue debt in its own name, as of February, but has yet to do so.

However, none of the constituent countries can control social spending—one of the principal drivers of Scotland’s independence campaign. Many Scottish politicians and voters prefer more spending, but they didn’t believe the UK Parliament would ever loosen the purse strings due to a perceived ideological split between England and Scotland. To fight this perception and keep the union together, the three main party leaders—the Conservative Party’s David Cameron, Labour’s Ed Miliband and the Liberal Democrats’ Nick Clegg—promised Scots more fiscal autonomy if they stayed put, publishing a letter on the front page of Scotland’s Daily Record that loosely promised what pundits call “devo max”[i] and what former PM Gordon Brown called “home rule.” With Cameron’s implied backing.

Commentary

Fisher Investments Editorial Staff
Interest Rates, Media Hype/Myths

The FOMC’s Rorschach Test

By, 09/19/2014
Ratings363.444444

Wednesday was one of those days the financial press just goes nuts for. They live blog. Feature exclusive video. Previews lead up to it. Prognostications and analyses, factboxes[i] and listicles detail what you should take away. It, we are told, is a really big deal. However, in our view, “It” is really just noise, and something investors would be well served to tune out.

In this case, “It” is the Federal Reserve’s policy statement and the presser that takes place at the end of the biquarterly meeting of the Federal Open Market Committee, the (usually) 12-member committee that sets US monetary policy.[ii] The meeting has taken on a new aura in recent years, not because (as we are often reminded) the Fed did a lot of stuff in the years after 2008. But rather, because one of the specific things it did was release individual Fed member forecasts of expected economic conditions, unemployment and interest rates. The media loves forecasts, especially coming from a mysterious body so widely claimed to sit at the helm of the US economy, steering output and markets along the way. But this was a media dustup, pure and simple, and when the release of September’s statement came, markets basically yawned. And moved on.

The run up to the meeting was rife with talk of “risky” semantics—a will-they-or-won’t-they debate over whether the words “considerable time” would be in the statement. As in, would the statement keep this Hemingway-esque phraseology:

Commentary

Fisher Investments Editorial Staff

The Treasury’s Inverted Logic

By, 09/24/2014
Ratings264.384615

After weeks of promising to address the alleged scourge of those M&A deals known as corporate inversions, the Treasury took action Monday, announcing what Secretary Jack Lew called an “important first step” to closing “this unfair loophole.” Politicians cheered and jeered, and businesses weren’t amused, but in our view, this is all just noisy political theater. The small rule changes might bring some unintended consequences, as rule changes tend to do, but the negatives are nowhere near big enough to buck the bull.  

As a quick refresher, an inversion is when a US company buys a much smaller foreign firm (whose shareholders can hold as little as a 20% interest in the newly combined firm under current law), then switches HQ to that foreign address—an easy way to redomicile in a country with a friendlier tax code, with current shareholders maintaining majority control. Contrary to popular myth, they don’t do it to avoid paying all US taxes. They’ll still pay US rates on all profits booked here. They just won’t get taxed twice on foreign earnings. Foreign firms don’t have to pay Uncle Sam when they shift foreign earnings to the US for investment purposes or other use. (And they don’t get taxed shifting US-sourced profits to their new home country.)

But politicians dislike inversions, because they believe the practice robs America of very important tax dollars. This is also an election year—the time to convince voters these lost tax dollars deprive America of very important investment, and then let the heavens bathe them in holy light when they “do something” about it. The administration has spent months doing the convincing. Now they’re doing the “doing something.”

Commentary

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths

Some Ken Fisher Wisdom on the Eurozone

By, 09/24/2014
Ratings234.543478

“The older an argument is, the less power it has.”

Our boss, Ken Fisher, wrote that in Forbes on March 13, 1995, explaining why long-running inflation fears were too old and too tired to end the bull market. It sprang to mind yesterday, when we read for the 1,947th time that the eurozone is on the precipice of a dismal spiral of deflation, depression and doom.

It might not feel this way, but these eurozone jitters are the same old euro collapse fears folks have had for years, just dressed up in new clothes. Most folks might not fear the common currency’s splintering these days (though, fear hasn’t completely died out), but you can’t go far without some headline telling you the eurozone will be a black hole in the world economy for a long time to come. The same old fear. It just went through a metamorphosis.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

G-20 Minus One Country Plus 900 Bullet Points = 2 Percentage Points of Extra Growth?

By, 09/23/2014
Ratings223.909091

Australian finance minister Joe Hockey has one of the greatest last names in politics. He also claims (along with 18 fellow fin-mins) to have the 900-point key to faster global growth. Photo by Bloomberg/Getty Images.

What happens when finance ministers from 19 apparently important economies hang out in Australia for a weekend? For one thing, you get bizarre promises like this: “As of today, we are 90 percent of the way to reaching our 2 percent goal for additional global growth.” At least, so says Aussie finance minister Joe Hockey, talking up the 900-plus initiatives he and his cohorts supposedly agreed to in their effort to make the world grow two percentage points faster (annually) over the next five years.[i] But before you start doing the Snoopy dance over the prospect of faster growth, here is a reality check: This is the G-20.[ii] We are darned skeptical that 900-plus measures blessed by the consensus at a political sideshow will do anything to boost growth above and beyond what it already would have done anyway. Don’t get us wrong—we think the world is poised to grow faster over the foreseeable future! But this isn’t why. All the media attention on this gathering of global economic glitterati is a sideshow for investors.  

Commentary

Fisher Investments Editorial Staff

After Scotland’s No, the UK’s Devolution Revolution

By, 09/22/2014
Ratings174.294117

Thursday, 55% of Scots voted to remain in the 307-year-old union with England, Wales and Northern Ireland, resolving a big source of UK political uncertainty. But political jitters still linger, largely owing to party leaders’ eleventh-hour pledge to extend Scotland’s autonomy if voters chose the union—and Prime Minister David Cameron’s post-game pledge to devolve more power to all the constituent countries. Negotiations on what this entails are about to start, and Cameron’s goal is to have legislation written by January and passed before May’s election, driving fears over the fallout of a potentially radical, quick shift in how the UK is governed. Political drivers like this are important for stocks, but what matters most is whether changes impact economic competitiveness and corporations’ ability to grow and profit. While no one knows yet what exactly a more federalized UK would look like, the likelihood changes would undermine the country’s many economic strengths or the current expansion seem slim.

Devolution, launched under Tony Blair’s government in 1998, stems from Wales’, Northern Ireland’s and Scotland’s long-running concerns about English MPs’ influence over local policy. Historically, the UK’s government was heavily centralized, with Westminster setting policy for the entire union. But 533 of the House of Commons’ 650 seats are English, compared with 40 for Wales, 18 for Northern Ireland and 59 for Scotland—all of whose economies are structurally different from England’s. So each country was granted its own national legislature with powers to set policy in certain areas. All three countries control their own health care, education, environment and agriculture and tourism. Scotland and Northern Ireland have their own judiciary. Scotland also has power to set its own tax rates under the Scotland Act 2012—where it can vary its income tax rate by up to three percentage points (and by 2016, up to 10 percentage points). Scotland can also issue debt in its own name, as of February, but has yet to do so.

However, none of the constituent countries can control social spending—one of the principal drivers of Scotland’s independence campaign. Many Scottish politicians and voters prefer more spending, but they didn’t believe the UK Parliament would ever loosen the purse strings due to a perceived ideological split between England and Scotland. To fight this perception and keep the union together, the three main party leaders—the Conservative Party’s David Cameron, Labour’s Ed Miliband and the Liberal Democrats’ Nick Clegg—promised Scots more fiscal autonomy if they stayed put, publishing a letter on the front page of Scotland’s Daily Record that loosely promised what pundits call “devo max”[i] and what former PM Gordon Brown called “home rule.” With Cameron’s implied backing.

Commentary

Fisher Investments Editorial Staff
Interest Rates, Media Hype/Myths

The FOMC’s Rorschach Test

By, 09/19/2014
Ratings363.444444

Wednesday was one of those days the financial press just goes nuts for. They live blog. Feature exclusive video. Previews lead up to it. Prognostications and analyses, factboxes[i] and listicles detail what you should take away. It, we are told, is a really big deal. However, in our view, “It” is really just noise, and something investors would be well served to tune out.

In this case, “It” is the Federal Reserve’s policy statement and the presser that takes place at the end of the biquarterly meeting of the Federal Open Market Committee, the (usually) 12-member committee that sets US monetary policy.[ii] The meeting has taken on a new aura in recent years, not because (as we are often reminded) the Fed did a lot of stuff in the years after 2008. But rather, because one of the specific things it did was release individual Fed member forecasts of expected economic conditions, unemployment and interest rates. The media loves forecasts, especially coming from a mysterious body so widely claimed to sit at the helm of the US economy, steering output and markets along the way. But this was a media dustup, pure and simple, and when the release of September’s statement came, markets basically yawned. And moved on.

The run up to the meeting was rife with talk of “risky” semantics—a will-they-or-won’t-they debate over whether the words “considerable time” would be in the statement. As in, would the statement keep this Hemingway-esque phraseology:

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

The Li Keqiang Put

By, 09/18/2014
Ratings224.25

Beijing (and China broadly) likely continues to benefit from the government’s growth-and-reform balancing act. Source: Feng Li/Getty Images.

“New normal China is less interested in growth rates and more interested in quality and efficiency of growth: pushing forward reform, adjusting structure and trying to benefit the people.” So said China’s state-run media in a piece called “No Need to Hype China’s Weak Figures,” published Wednesday after a string of dismal (by Chinese standards) data and quite in keeping with what Premier Li Keqiang said at last week’s World Economic Forum: “We are restructuring instead of expanding the monetary supply.” He also said growth was still in a satisfactory range despite some noticeably weaker figures in August. And yet, on Wednesday, the top headline on state-run China Daily’s English language website was this: “PBOC Injects $81b into banks.” Then, on Thursday, the PBOC cut banks’ short-term borrowing costs. All of which smells a lot like monetary stimulus. Yes, it seems China is sticking with its standard approach: Talking up reform efforts and trying to manage folks’ expectations while quietly ensuring the economy has just enough oomph to meet their target.

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings813.882716

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
Ratings874.109195

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 , CNBC, 10/01/2014

MarketMinder's View: We are typing this at 10:29 AM Pacific Daylight Time on October 1, 2014. This article was posted 23 minutes earlier, according to CNBC. That means it hit the wires exactly 3 hours and 36 minutes into October’s trading. Could this be any more myopic? Yes, yes it could! But … why? Oh! And four of the five preceding first-day-of-October declines (assuming the close is, in fact, lower) were in 2005, 2006, 2009 and 2011. None of these preceded a bear. In fact, that 2011 point would’ve been at about the bottom of a correction! (The S&P 500 Price Index rose 10.8% that month.) Since 1928, the S&P has risen in 58% of Octobers. Seems to us most of its reputed negativity ties to 1929, 1932, 1987 and 2008, which were indeed terrible, but not caused by the calendar.

By , MarketWatch, 10/01/2014

MarketMinder's View: “US manufacturing companies grew at slower but still rapid pace in September, a survey of executives found.”

By , Financial Planning, 10/01/2014

MarketMinder's View: This is a very interesting and quite sensible piece discussing one factor at the heart of 2008’s financial crisis: How to prevent a run on a non-bank financial? Granting them access to the discount window could provide nonbanks liquidity to meet current obligations, and, as noted here, “Panics result from runs on short-term financial liabilities, and in our modern financial system runs no longer just occur on bank deposits.” The Fed was created to serve as lender of last resort to address runs on bank deposits, and it seems to us this time-tested tool could add value for more modern bank funding markets, too. On a semi-related note, here is Matt Klein discussing the difference between insolvency and illiquidity. What we take from this is that the proper strategy for heading off crises is to 1) eliminate procyclical regulation like FAS 157’s fair-value accounting and 2) broadly provide liquidity via the discount window to banks and nonbanks so the question of solvency vs. liquidity never arises, eliminating the risk political decisions are made.

By , Bloomberg, 10/01/2014

MarketMinder's View: This. Is. Noise. Consider: While he announced the cancellation of the region’s independence vote after Spain’s highest court shot it down as unconstitutional, Catalan Regional President Artur Mas claims he will do something. Something completely undefined even in the broadest brushstrokes. Which we can all claim, but we doubt it carries the force of the Spanish constitution. Just sayin', watch what they do, not what they say.

Global Market Update

Market Wrap-Up, Wed Oct 1 2014

Below is a market summary (as of market close Tuesday, 10/01/2014):

  • Global Equities: MSCI World (-1.1%)
  • US Equities: S&P 500 (-1.3%)
  • UK Equities: MSCI UK (-1.0%)
  • Best Country: Australia (+0.3%)
  • Worst Country: Belgium (-1.8%)
  • Best Sector: Utilities (-0.1%)
  • Worst Sector: Energy (-1.7%)
  • Bond Yields: 10-year US Treasurys fell .09 to 2.41%

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.