Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.
Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.
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|By Matt Levine, Bloomberg, 07/29/2015|
MarketMinder's View: This is an excellent look at how bond markets work, why liquidity fears are likely overwrought, and how markets are evolving to overcome regulatory hurdles to banks’ playing a big role in primary dealing. We recommend reading the whole thing, but here’s a fun teaser: “Sometimes people criticize market participants who act as pure middlemen and do no fundamental analysis. You see this mostly in markets with lots of high-frequency traders: Those traders aren't adding to the information content of markets, the argument goes, so they are probably just skimming money from real investors and should be banned or disfavored or spoofed. Here, though, the real-money investors have done the fundamental analysis, but still can't trade. What they need is someone to do the non-fundamental analysis, to figure out how many buyers there are and how many sellers and what the price should be so that all the fundamental investors can trade. The middlemen aren't adding information to markets, but they're allowing the information that's already there to flow freely. And without them, you can't find the information.”
|By Paul R. LaMonica, CNN Money, 07/29/2015|
MarketMinder's View: The Big One being a stock market correction—a short 10%-20% drop—which hasn’t happened in over three years, considerably longer than the average time between I corrections since World War II. This isn’t predictive, however. Markets don’t mean-revert, and averages comprise much shorter and longer periods. There is no way to tell when the next correction will come, whether the last one was 6 months or 36 months ago. Also, while it is largely true corrections can help “cleanse the market” of frothy sentiment by heightening fear, they are neither necessary nor unnecessary. We’ve had three-plus years of correction-free gains, yet sentiment is far from bubbly. (Though, we also see no signs of “extreme fear,” and the components in the “Fear and Greed Index” are simply an odd mix of technical indicators, not actual sentiment gauges.) Finally, while niche industries like semiconductors and transportation have corrected, this isn’t telling for the broader market. These “highly cyclical” industries aren’t leading indicators—stocks don’t predict stocks. These industries just face unique headwinds at the moment.
|By Debarati Roy and Eddie Van Der Walt, Bloomberg, 07/29/2015|
MarketMinder's View: Gold’s near four-year bear market, in which prices have dropped about 40% while stocks are up, has tarnished sentiment for the glittering metal, and many forecast further declines ahead. But regardless of where you think gold might be headed, we think it has no place in diversified portfolios. Contrary to popular belief, it does not protect against inflation or economic or financial calamity, it does not pay a dividend, and it generates no earnings, unlike stocks. An ounce of gold today will not grow into two or three ounces 5, 10, or 20 years out. It will still be an ounce of gold.
|By Walter Updegrave, CNN Money, 07/29/2015|
MarketMinder's View: The first eight paragraphs are a mostly great look at timing market peaks and troughs precisely is basically impossible. We do think investors can benefit from trying to navigate market cycles, but it isn’t about nailing a top and bottom. It’s about trying to avoid at least part of a bear market if you can identify one before the bulk of the downside has past—and being able and willing to get back in before stocks start recovering so you don’t miss the rebound. This is why we have several quibbles with the final two paragraphs, which take a hard turn into Buy and Hold land, encouraging investors to pick a static mix of stocks and bonds, based solely on their risk tolerance, and stick with it forever and ever. The trouble here is most people are simply unable to accurately assess their long-term risk tolerance, because the recent past skews their perception. After a long, booming bull market investors are much more likely to believe they are quite comfortable taking risk, and after a brutal bear market they probably want little to do with risk. In our view, it’s better to determine which allocation provides the best chances of meeting your needs over your investment time horizon. Comfort with volatility and ability to withstand short-term declines are important, but needs and goals should come first. You can’t aim without a target.
Market Wrap-Up, Wednesday July 29, 2015
Below is a market summary as of market close Wednesday, 7/29/2015:
Global Equities: MSCI World (+0.8%)
US Equities: S&P 500 (+0.7%)
UK Equities: MSCI UK (+1.6%)
Best Country: Norway (+2.9%)
Worst Country: Italy (-0.5%)
Best Sector: Energy (+1.6%)
Worst Sector: Utilities (-0.4%)
Bond Yields: 10-year US Treasury yields rose 0.04 percentage point to 2.29%.
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.