Commentary

Elisabeth Dellinger
The Global View

About That ‘Brexit’ Pounding

By, 02/05/2016
Ratings194.131579

What happens if these two break up? Photo by Toby Melville – Pool/Getty Images.

Stop me if you’ve heard this one before: If the UK leaves the EU, the pound will plunge, interest rates will soar and the economy will crater, because foreign investors will stop funding the current account deficit. Financial Armageddon will ensue, and probably a plague on humanity. Or something—I might have exaggerated for dramatic effect.[i] BoE Governor Mark Carney and others have warned of this dismal chain reaction, and the sirens got louder after the first draft of Britain’s renegotiated EU membership landed with a resounding thud, giving Brexit advocates more momentum. But it is far too early to fear the worst, and not just because the vote could easily go either way. These warnings are dubious on their face and frankly misunderstand how capital markets work.

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Survey Says … Growth!

By, 02/04/2016
Ratings883.931818

In today’s upside-down financial press, what’s fair seems to be foul. For instance, a January survey reported more businesses grew than didn’t in the US’ robust “non-manufacturing” sector, which includes industries ranging from Retail Trade and Mining to Health Care and Construction. The UK’s own burgeoning services sector experienced a similar January. Sounds grand, right? Not if you read the news coverage. Headlines bemoaned services growth at its slowest pace in two years in the US, while another pundit declared the “UK’s economic recovery is a shadow of its former self.” All this left us a wee bit confused, especially when the media attempted to pin stock market volatility on reported output last month. While old January data don’t mean much for forward-looking stocks, this also overlooks the larger point: The latest non-manufacturing and services PMIs show growth. That so few recognize this speaks to how dour sentiment is.     

For the US, the Institute for Supply Management’s Non-Manufacturing Purchasing Managers’ Index (PMI) slowed to 53.5 in January—down from December’s 55.8. In the UK, Markit/CIPS’ Services PMI rose a tad from December’s 55.5 to 55.6. PMIs are business surveys asking whether activity in various categories rose or fell in a given month, and readings over 50 indicate more respondents grew than contracted once all the categories were aggregated. While PMIs have limitations—they don’t tell you the magnitude of growth and they’re surveys—many use them as a quick-and-dirty proxy for business growth since they hit within days of month-end.

Considering both surveys were well in expansion, we’re a little perplexed by the near-uniform gloom. Even though ISM’s non-manufacturing PMI is at its slowest level since February 2014[i], it still indicated growth—as does Markit/CIPS’ Services PMI. And while monthly data can be pretty darn volatile, the longer-term trends suggest nothing out of the ordinary for both the ISM and Markit/CIPS PMIs. (Exhibits 1 and 2)

Commentary

Fisher Investments Editorial Staff
Politics, Media Hype/Myths

That Raucous Iowa Caucus

By, 02/03/2016
Ratings274.259259


As his thumbs up seemingly indicate, Martin O’Malley is out. Photo by Steve Pope/Getty Images.

As always, we favor no candidate or party and assess politics solely to analyze how it may impact markets. We believe political bias is blinding and dangerous for investors.

And then there were 12. Former Governors Martin O’Malley (MD) and Mike Huckabee (AR) dropped out of the Presidential race after Monday’s Iowa caucus[i], which saw Democrat Hillary Clinton edge Bernie Sanders in a photo finish, while Ted Cruz trumped[ii] pollsters and The Donald on the GOP side. Kentucky Senator Rand Paul, who finished fifth on the GOP side, suspended his campaign early Tuesday.[iii] Pundits are slicing and dicing the caucus results, and if you’re into that sort of thing, there is entertainment and wonkery galore. But for investors, there are really only two main takeaways at this juncture: Polls are terrible at predicting primary races, and it’s too early to handicap who wins the Republican nomination. That means it’s too early to assess how November’s vote will impact markets.  

Commentary

Fisher Investments Editorial Staff
Into Perspective

Did the US Economy Have a Case of the Mondays?

By, 02/02/2016
Ratings1004.15

The latest US manufacturing and consumer spending numbers hit Monday, and if you take most coverage at face value, it wasn’t pretty. “Cautious consumers hold back on spending in December as concerns rise about US economy,” said one headline. “Consumer spending cooled in December as Americans padded savings,” said another. Manufacturing “continued to contract,” and the Institute of Supply Management’s report had a “weak tone.” It all left folks wondering how worried we should be and if the long-feared recession is nigh. None of these headlines really give you the full scoop. As it happens, ISM’s survey showed manufacturing output and new orders rose, and when adjusted for inflation, so did consumer spending. But the widespread effort to find a cloud in a silver lining shows where sentiment is: still in the doldrums. It shouldn’t take much for US growth to beat expectations and give stocks some positive surprise.

Consider manufacturing. The headline Purchasing Managers’ Index (PMI) hit 48.2 in January—higher than December’s 48.0, but still below 50, therefore indicating contraction for the fourth straight month. That fed the long-running narrative of a manufacturing recession that’s poised to take down the US economy. But if you look at the PMI’s components, it doesn’t exactly look recessionary. New orders and production moved back into expansion at 51.5 and 50.2, respectively. New orders’ rise is particularly noteworthy, as today’s orders are tomorrow’s production—it’s the most forward-looking component. The biggest detractors were inventories—always open to interpretation—and employment, which is always and everywhere a late-lagging indicator. While one month doesn’t make a trend, January’s report has plenty of reasons for optimism.

Plus, for all the handwringing about this being the longest contractionary streak since the recession ended in 2009, the actual decline is small—much smaller than you usually get in a recession. As Exhibit 1 shows, it looks much more like the 10 or so false reads since 1948. There were deeper, longer declines in the 1980s and 1990s. But last we checked, there were no recessions in 1985, 1995 or 1998. ISM’s report even says that while manufacturing has hit a soft patch, the numbers are still consistent with a broad economic expansion.

Commentary

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Drilling Deep: How Did Energy Influence US Q4 GDP’s Slowdown?

By, 01/29/2016
Ratings854.147059

Friday morning, the US Bureau of Economic Analysis (BEA) announced US Q4 2015 GDP grew a meager 0.7% annualized, slowing from Q3’s 2.0%. With this seemingly jiving with fears of a slowdown or worse, the deceleration stole headlines in short order. The Wall Street Journal dubbed it “anemic.” The New York Times said, “The American economy barely grew last quarter, finishing the year much as it had started and stoking concern about its momentum in 2016.” And many blame Energy, suggesting oil’s drop is hamstringing the US economy. While the report is indeed a slowdown, we’d suggest that the details allude to an economy that was on fine footing at 2015’s close—and that Energy isn’t likely to derail growth looking forward.

First, to be clear, this report isn’t stellar. But it also isn’t a surprise. Wall Street analysts’ forecasts ranged from 0.0% to 2.3%, with the consensus being +0.9%. So this isn’t shocking anyone. And before you figure this raises doubts about the US economy’s “momentum,” consider that laws of physics do not really apply in econometrics. The simple fact of the matter is this is a backward-looking reflection of one slightly wonky, incomplete attempt to tally US economic performance. It is also one quarter—annual 2015 GDP data, also published Friday, showed GDP grew 2.4%, matching 2014’s rate.

Exhibit 1: US GDP Growth, Quarterly and Annual Rates

Commentary

Fisher Investments Editorial Staff
Into Perspective

Don’t Be Afraid of Rating Agency Downgrades

By, 01/29/2016
Ratings453.644444

Credit-ratings agency analysts have been a busy bunch lately. And not with upgrades. Last year, Standard & Poor’s downgraded more issuers than they have in six years. Separately, Moody’s placed 120 oil and gas firms and dozens of mining companies on review for possible downgrades. Fitch—the third major rating agency—has been relatively quiet thus far, but given the three agencies tend to move in lockstep, it wouldn’t surprise us if they joined the party. But while these moves took headlines recently, with many quoting Moody’s statement that this is a huge “fundamental shift” for commodities firms, these downgrades really aren’t even news. They only confirm what markets have long known: The global commodities slump has pressured many indebted resource producers. Which is par for the course for credit-rating agencies’ decisions. They have a rich history of forecasting what just finished happening, and that appears to be the case here. Investors should categorize their blanket commodities industry downgrades as noise, not news.

Credit-rating agencies base their decisions on recent and current events and other widely known information. They adjust an issuer’s credit rating only when it’s apparent fundamental conditions have actually changed—e.g., when oil prices fall far, it’s fairly clear Energy firms’ profits will  drop, but the raters wait to actually get that report. Markets, however are forward-looking. If things start looking dicey, they usually begin discounting it right away. If certain developments make it likely a firm won’t be able to service its debt in the foreseeable future, yields don’t wait for some formal announcement to start rising. They move first.

Credit markets began discounting Energy firms’ troubles long ago. Energy junk bond yields first spiked in late 2014. They recovered some in early 2015, while oil prices dead-cat-bounced, then soared—far outstripping broader high-yield bond yields. Ditto for the metals & mining industry’s junk bond yields. This was a sign markets knew oil and commodities’ sharp declines spelled trouble for many resource firms. 

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Industry Isn’t Producing a Recession

By, 01/29/2016
Ratings464.043478

As the global expansion nears its seventh birthday, many folks see worrisome signs that the “r” word—recession—looms. As evidence of weakness, they point to contracting industrial production, now down in 10 of the past 12 months—presuming industrial production is a forward-looking economic indicator. Spoiler alert: It isn’t. And that isn’t the only shortcoming to this theory. A closer look at the data reveals some other big caveats. In our view, recession doesn’t look likely.  

First, the stats behind the fear. According to one pundit, when industrial production falls at least 8 months in a 12-month period, it’s a surefire sign a recession will occur. Here is the messy chart allegedly supporting this thesis (Exhibit 1).

Exhibit 1: Does Industrial Production Foresee Recession?

Commentary

Fisher Investments Editorial Staff
Monetary Policy, Media Hype/Myths

The Folly of Dissecting Fedspeak

By, 01/28/2016
Ratings824.262195

Here is a big fear you might have seen recently: The Fed jumped the gun by hiking rates last December, and unless they back off from plans to hike four times this year, the economy and stocks are doomed. Well, they met Tuesday and Wednesday, didn’t hike rates, and didn’t change their forward guidance. Markets tumbled after Wednesday’s statement release, and headlines blamed the Fed for not ruling out a March rate hike, even though it had a slightly dimmer view of the economy. As ever, it’s impossible to pin any day’s stock price movements on any one thing. But the broader obsession with the Fed allegedly penciling in four rate hikes this year seems blown out of proportion. One, a Fed that doesn’t make knee-jerk reactions to market volatility is probably a more measured, thoughtful, confidence-inspiring Fed. Two, the Fed hasn’t penciled in a darn thing.

The Fed did make some adjustments to its statement. Where December’s statement described growth as “moderate,” this one said it “slowed late last year.” Consumer spending and business investment are now “moderate” instead of “solid.” Gone was a statement calling risks to the economy and labor markets “balanced.” In its place: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market inflation, and for the balance of risks to the outlook.” Most headlines interpreted this as a souring outlook. One called it a mea culpa for projecting four rate hikes this year. But it seems awfully presumptuous to speculate about the Fed’s motivations when no one on the FOMC has actually said anything. Janet Yellen didn’t give a press conference. We have zero interviews or soundbites. Reading between the lines thus strikes us as a fool’s errand. For all we know, maybe the Fed just didn’t want to sound tone deaf.

Parsing Fed statements and guidance won’t get you anywhere, ever. Every move they make depends on data. Not forecasts, not internal projections, not a reading of the public mood. Just the FOMC’s collective interpretation of the latest readings of economic growth, job growth, inflation and signals from global markets. (OK, maybe with a smattering of politics—as we’ll explain.) This has always been true, and Janet Yellen and her Fed-head predecessors have always taken great pains to emphasize it.

Commentary

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Oil and Stocks, Hand in Hand?

By, 01/25/2016
Ratings2304.258696


Is oil driving stocks? Photo by Seth Joel/Getty Images.

Oil! Got your attention? Headlines are blaring about an alleged link between oil and stock prices, with several noting a near-perfect correlation over the last few weeks—and saying high correlation is common during recessions or periods of “financial stress.” One prominent article pronounced the correlation over the last month to be the highest since 1990. Many take the link one step further, warning cheap oil is about to cause a recession. Texas jobless claims are now considered a key national indicator. But we’ve crunched the numbers, and frankly, we don’t get the hype. Oil’s recent tight relationship with stocks is an interesting observation, but its predictive powers are about nil. And fundamentally speaking, oil’s economic impact, for good or ill, just isn’t big enough to move the needle in the US or globally.

Exhibit 1 shows why everyone is very excited about oil.

Commentary

Todd Bliman
Into Perspective, Personal Finance

Rational Thoughts for Irrational Times

By, 01/22/2016
Ratings2673.964419

Have you heard? The stock market is off to a not-so-wonderful start this year. And, unlike this past summer, when a similar-sized drop had many personal finance pundits preaching passive peace, now headlines shriek of big drops ahead. Many who suggested a “stay cool” approach to your retirement portfolio earlier now suggest stocks are in for a world of hurt. Instead of the sage advice they offered then, many now ask a litany of questions that could easily skew readers off their investing course. They ask if recession is near; wonder if the bottom is in. They tell you just how many trillions the correction has thus far dinged.

Here is the thing: These thoughts can easily skew you from what matters.

I’ve been in this industry ever since I graduated college—depending how you measure them, that’s nine corrections and two bear markets ago. I’m not the most experienced person in the world, by any stretch, but I have been through this rodeo a few times before and understand how investors tend to react. When times get rocky, it is human to feel losses sharply and wonder if some form of action is requisite. That human urge will seek justification in virtually any headline.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Don’t Be Afraid of Rating Agency Downgrades

By, 01/29/2016
Ratings453.644444

Credit-ratings agency analysts have been a busy bunch lately. And not with upgrades. Last year, Standard & Poor’s downgraded more issuers than they have in six years. Separately, Moody’s placed 120 oil and gas firms and dozens of mining companies on review for possible downgrades. Fitch—the third major rating agency—has been relatively quiet thus far, but given the three agencies tend to move in lockstep, it wouldn’t surprise us if they joined the party. But while these moves took headlines recently, with many quoting Moody’s statement that this is a huge “fundamental shift” for commodities firms, these downgrades really aren’t even news. They only confirm what markets have long known: The global commodities slump has pressured many indebted resource producers. Which is par for the course for credit-rating agencies’ decisions. They have a rich history of forecasting what just finished happening, and that appears to be the case here. Investors should categorize their blanket commodities industry downgrades as noise, not news.

Credit-rating agencies base their decisions on recent and current events and other widely known information. They adjust an issuer’s credit rating only when it’s apparent fundamental conditions have actually changed—e.g., when oil prices fall far, it’s fairly clear Energy firms’ profits will  drop, but the raters wait to actually get that report. Markets, however are forward-looking. If things start looking dicey, they usually begin discounting it right away. If certain developments make it likely a firm won’t be able to service its debt in the foreseeable future, yields don’t wait for some formal announcement to start rising. They move first.

Credit markets began discounting Energy firms’ troubles long ago. Energy junk bond yields first spiked in late 2014. They recovered some in early 2015, while oil prices dead-cat-bounced, then soared—far outstripping broader high-yield bond yields. Ditto for the metals & mining industry’s junk bond yields. This was a sign markets knew oil and commodities’ sharp declines spelled trouble for many resource firms. 

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Industry Isn’t Producing a Recession

By, 01/29/2016
Ratings464.043478

As the global expansion nears its seventh birthday, many folks see worrisome signs that the “r” word—recession—looms. As evidence of weakness, they point to contracting industrial production, now down in 10 of the past 12 months—presuming industrial production is a forward-looking economic indicator. Spoiler alert: It isn’t. And that isn’t the only shortcoming to this theory. A closer look at the data reveals some other big caveats. In our view, recession doesn’t look likely.  

First, the stats behind the fear. According to one pundit, when industrial production falls at least 8 months in a 12-month period, it’s a surefire sign a recession will occur. Here is the messy chart allegedly supporting this thesis (Exhibit 1).

Exhibit 1: Does Industrial Production Foresee Recession?

Commentary

Fisher Investments Editorial Staff
Monetary Policy, Media Hype/Myths

The Folly of Dissecting Fedspeak

By, 01/28/2016
Ratings824.262195

Here is a big fear you might have seen recently: The Fed jumped the gun by hiking rates last December, and unless they back off from plans to hike four times this year, the economy and stocks are doomed. Well, they met Tuesday and Wednesday, didn’t hike rates, and didn’t change their forward guidance. Markets tumbled after Wednesday’s statement release, and headlines blamed the Fed for not ruling out a March rate hike, even though it had a slightly dimmer view of the economy. As ever, it’s impossible to pin any day’s stock price movements on any one thing. But the broader obsession with the Fed allegedly penciling in four rate hikes this year seems blown out of proportion. One, a Fed that doesn’t make knee-jerk reactions to market volatility is probably a more measured, thoughtful, confidence-inspiring Fed. Two, the Fed hasn’t penciled in a darn thing.

The Fed did make some adjustments to its statement. Where December’s statement described growth as “moderate,” this one said it “slowed late last year.” Consumer spending and business investment are now “moderate” instead of “solid.” Gone was a statement calling risks to the economy and labor markets “balanced.” In its place: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market inflation, and for the balance of risks to the outlook.” Most headlines interpreted this as a souring outlook. One called it a mea culpa for projecting four rate hikes this year. But it seems awfully presumptuous to speculate about the Fed’s motivations when no one on the FOMC has actually said anything. Janet Yellen didn’t give a press conference. We have zero interviews or soundbites. Reading between the lines thus strikes us as a fool’s errand. For all we know, maybe the Fed just didn’t want to sound tone deaf.

Parsing Fed statements and guidance won’t get you anywhere, ever. Every move they make depends on data. Not forecasts, not internal projections, not a reading of the public mood. Just the FOMC’s collective interpretation of the latest readings of economic growth, job growth, inflation and signals from global markets. (OK, maybe with a smattering of politics—as we’ll explain.) This has always been true, and Janet Yellen and her Fed-head predecessors have always taken great pains to emphasize it.

Commentary

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Oil and Stocks, Hand in Hand?

By, 01/25/2016
Ratings2304.258696


Is oil driving stocks? Photo by Seth Joel/Getty Images.

Oil! Got your attention? Headlines are blaring about an alleged link between oil and stock prices, with several noting a near-perfect correlation over the last few weeks—and saying high correlation is common during recessions or periods of “financial stress.” One prominent article pronounced the correlation over the last month to be the highest since 1990. Many take the link one step further, warning cheap oil is about to cause a recession. Texas jobless claims are now considered a key national indicator. But we’ve crunched the numbers, and frankly, we don’t get the hype. Oil’s recent tight relationship with stocks is an interesting observation, but its predictive powers are about nil. And fundamentally speaking, oil’s economic impact, for good or ill, just isn’t big enough to move the needle in the US or globally.

Exhibit 1 shows why everyone is very excited about oil.

Commentary

Todd Bliman
Into Perspective, Personal Finance

Rational Thoughts for Irrational Times

By, 01/22/2016
Ratings2673.964419

Have you heard? The stock market is off to a not-so-wonderful start this year. And, unlike this past summer, when a similar-sized drop had many personal finance pundits preaching passive peace, now headlines shriek of big drops ahead. Many who suggested a “stay cool” approach to your retirement portfolio earlier now suggest stocks are in for a world of hurt. Instead of the sage advice they offered then, many now ask a litany of questions that could easily skew readers off their investing course. They ask if recession is near; wonder if the bottom is in. They tell you just how many trillions the correction has thus far dinged.

Here is the thing: These thoughts can easily skew you from what matters.

I’ve been in this industry ever since I graduated college—depending how you measure them, that’s nine corrections and two bear markets ago. I’m not the most experienced person in the world, by any stretch, but I have been through this rodeo a few times before and understand how investors tend to react. When times get rocky, it is human to feel losses sharply and wonder if some form of action is requisite. That human urge will seek justification in virtually any headline.

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths

The Debt Mountain and Other Chinese Ghost Stories

By, 01/22/2016
Ratings1133.769912


Not quite an insurmountable mountain. Photo by SeongJoonCho/Bloomberg via Getty Images.  

China has dominated headlines this month, from bouncy markets and hijinks with circuit breakers to the return of yuan devaluation worries. All are riffs on one overarching fear: that China’s oft-predicted “hard landing” is happening now. After five years of waiting. Yet Godot hasn’t arrived, and he doesn’t seem likely to. China’s growth is slowing, yes, but not dramatically, and the latest GDP figures beat expectations. But fear didn’t fade. Instead, it morphed to another old worry: a foreboding “debt mountain” that threatens to bury China. We don’t think this iteration of hard-landing fears is any more valid than its predecessors. Resurgent fears may weigh on investor sentiment in the short term, but China still shouldn’t derail the global economy or bull market.

First, the GDP numbers: China grew 6.8% y/y in Q4 and 6.9% y/y in 2015—in line with the government’s target of “about 7%” for the year. Yet headlines found reasons to mope, bemoaning the slowest growth in a generation[i] and questioning the data’s accuracy. [ii] While we, too, are skeptical, we hold that standard to all data, China or no—no one gauge or provider is perfectly accurate. More importantly, nothing in recent Chinese data suggest anything out of the ordinary: Growth is still slowing modestly as the government shifts the economy’s focus from heavy industry to services and consumption. December industrial production slowed a bit from November, from 6.2% y/y to 5.9% y/y,[iii] as did fixed asset investment, which eased to 10.0% YTD December 2015 vs. 15.7% over the same period in December 2014.[iv] However, retail sales rose 11.1% y/y in December 2015, a tad slower than November’s 11.2% y/y, but still darned fast on an absolute basis.[v] And, for the first time, services comprise more than half of the economy, up from 48.1% to 50.5% in 2015. Manufacturing’s share of GDP fell two percentage points to 40.5%. In short: The biggest chunk of China’s economy is growing the fastest. Plus, despite all the fretting about slower growth, China still adds significantly to the global economy. Per Bloomberg, China’s $10 trillion economy—more than two Japans—grew by about $645 billion in 2015, essentially adding another Sweden or nearly three Greeces[vi] to the global economy.

Research Analysis

Scott Botterman
Into Perspective

European Parliament Elections—Setting Expectations

By, 05/23/2014
Ratings493.295918

Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.

European Union Government

  • European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
  • European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
  • European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.

There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.

Research Analysis

Christo Barker
Into Perspective

FATCA Follies

By, 03/28/2014
Ratings723.930556

It seems the IRS is going global, a development that has some pundits up in arms about potential stock market impact. The Foreign Account Tax Compliance Act (FATCA) is what I’m referring to. Under FATCA, the IRS is moving toward taxing US citizens’ offshore financial activity, including money held in banks abroad—effectively eliminating “tax havens” for US citizens. US expatriates and foreign banks are up in arms. The law conflicts with local banking laws in other countries, and banks have responded by simply slashing access to banking services for Americans living abroad. But while it creates hassles, barring a big international regulatory blowback, the law doesn’t seem poised to create many ripples for stocks. 

FATCA, now four years old, was conjured following a 2009 scandal, which revealed a major Swiss bank was helping well-to-do Americans dodge taxes. The backlash against the scandal peaked in 2010, when Congress passed FATCA as a provision of HR 2847, the Hiring Incentives to Restore Employment Act. An effort to boost US government tax revenue by broadening the base, FATCA also has some grassroots appeal as it carries the label of reducing tax dodging. FATCA was supposedly a means to get fatcats to pay their fair share. (My apologies for the pun.)  Foreign banks were also not the most popular group in the immediate aftermath of the Global Financial Crisis.

Initially, FATCA seeks to provide the IRS information about US citizens’ and green card holders’ taxable accounts exceeding $50,000 in market value held at foreign financial institutions. International banks (Foreign Financial Institutions or FFIs) are required to ink a special deal with the IRS, under which they report all US taxpayers’ qualifying accounts and holdings. Account disclosure began January 1, 2014. After June 30, 2014, foreign banks will have to provide details regarding investment account holdings, and by January 1, 2015, FATCA’s full implementation will install a 30% withholding on US sourced income (salary/capital gains/interest/dividends). 

Research Analysis

Fisher Investments Research Staff
Into Perspective

Wholesale Skeptics

By, 12/10/2013
Ratings273.833333

In its second release, Q3 US GDP was revised up to a seasonally adjusted annual rate of 3.6%—the fastest growth in more than a year and among the quickest rates in the current expansion to date. However, most economists and pundits greeted the acceleration with a resounding thud. Under the hood, they claim, the data were not so hot. Reason being, the most notable contributor to growth was increasing inventories, adding 1.7 percentage points to the headline number. Some posit this means growth is hollow—after all, inventory change is open to interpretation. It could be due to slowing sales, a potential negative for profits and growth ahead. Or due to inventory build ahead of an expected pick-up in sales this holiday season. If the pessimists are right, one would expect wholesale inventory growth to sharply slow as we enter Q4. Yet Tuesday, the first inventory report of the quarter suggested no such thing: US wholesale inventories grew at their fastest clip in two years.

In October, wholesale inventories grew 1.4% m/m (3.3% y/y) vs. estimates of 0.3%. Both durables and non-durables stockpiles grew (0.4% m/m and 3.0% m/m, respectively.) So what gives?

While inventory growth undoubtedly contributed strongly to GDP in Q3, that never meant inventories were at historically high levels. As Exhibit 1 shows, the inventory-to-sales ratio isn’t overall elevated. Total goods and non-durable goods are at relatively low levels compared to history, and while durable goods inventories are somewhat higher relative to sales, they are not alarmingly high. In short, there is nothing suggesting inventory growth is unsustainable overall relative to the pace of sales. Of course, maybe inventory growth does slow in the period ahead, but it wouldn’t seem to be related to overall overstocked shelves. This is yet another factor illustrating the fact reality may be considerably better than skeptics presume.

Research Analysis

Elisabeth Dellinger
Quantitative Easing

Happy Birthday, QE

By, 12/02/2013
Ratings633.976191

Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.

To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.

Exhibit 1: Cumulative GDP Growth

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What We're Reading

By , The New York Times, 02/08/2016

MarketMinder's View: Here’s an interesting theory on why people are prone to making ill-timed decisions when markets are volatile, like selling after a big drop: “We yearn so badly for clarity that we often prefer a negative outcome we’re certain about to one that leaves us in suspense.” When markets swing, locking in a loss sometimes seems preferably, emotionally, to hanging in and risking another big down move before the recovery—even though participating in the recovery is vital. Knowing how your brain and feelings try to trick you can help you avoid serious errors.

By , The Wall Street Journal, 02/08/2016

MarketMinder's View: Here is really all you need to know about this: “With nearly a third of S&P 500 companies reporting detailed year-end financial results through early last week, capital expenditures were up 6.2% from a year earlier, said  Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That is less than half the 13.9% increase reported in the last quarter of 2014, though much of the slowdown comes from energy companies, Mr. Silverblatt said.” Capex is still growing, which is the opposite of pulling back. Especially outside the Energy sector, whose struggles have been widely known for over 18 months. The rest of this article has little to no merit once you realize this isn’t a contraction in business spending, just a slowdown.

By , Bloomberg, 02/08/2016

MarketMinder's View: Though these pundits are overall still rather bullish, considering the median forecast is for a 6.4% full-year S&P 500 price gain, the downwardly revised forecasts are nonetheless encouraging. It’s fairly normal to see this sort of capitulation in the final throes of a downturn. We aren’t calling bottom or anything, but this is an encouraging development.  

By , The Wall Street Journal, 02/08/2016

MarketMinder's View: The only correct thing in this article is the picture, which shows that Head & Shoulders is shampoo. That’s all it is. It is not a predictive chart pattern, even if you can stretch your imagination to see four happening at once. If technical analysis worked, everyone would do it and no one would mistime a market ever. It doesn’t. This is all just searching for meaning in meaningless wavy lines.

Global Market Update

Market Wrap-Up, Friday, February 5, 2016

Below is a market summary as of market close Friday, February 5, 2016:

  • Global Equities: MSCI World (-1.6%)
  • US Equities: S&P 500 (-1.8%)
  • UK Equities: MSCI UK (-1.4%)
  • Best Country: Singapore (+2.1%)
  • Worst Country: Italy (-2.4%)
  • Best Sector: Materials (-0.4%)
  • Worst Sector: Information Technology (-3.5%)

Bond Yields: 10-year US Treasury yields fell -0.01 percentage point to 1.83%.

 

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.