Commentary

Fisher Investments Editorial Staff
Personal Finance

Lessons on Due Diligence From the Energy Sector

By, 09/23/2016
Ratings74.857143

Investors should always know what they’re buying—what drives returns, what it’s correlated with and how can you gauge performance. Seemingly comparable investments may differ dramatically—a complicating factor. This isn’t controversial advice, but now and again it’s good to have a concrete reminder of the dangers of forgoing essential research. The following case studies may help.

The first concerns Master Limited Partnerships (MLPs)—energy infrastructure-focused investment vehicles (think pipelines like this one or that one) that pay out the vast majority of their profits to shareholders. MLPs’ high dividend-like payments, coupled with their perceived safety, helped them gain great popularity during oil’s run-up. We discuss their risks here and here, but this article isn’t about that. Instead, MLPs are here to teach us how investments often diverge from investors’ expectations. Here is a Bloomberg View article about two energy infrastructure (read: MLP-centric) funds with wildly differing performance since 2013.  We’ll call them Fund 1 and Fund 2 for simplicity.[i] Fund 1 is up 9% since September 2013—great! Fund 2 is down 30%. Not as great. What gives? Well, they have wildly different investment objectives and approaches. In addition to some old-fashioned pipelines, Fund 2 also owns a bunch of exciting new Energy services MLPs whose earnings depend more on oil prices than mere transport MLPs. Fund 1’s MLP investments, on the other hand, are your old-school, move-oil-from-here-to-there type. Now, the article notes that newfangled MLP exposure hurt Fund 2’s performance, and to a certain extent it did. But no MLPs—old and boring or newfangled—escaped the downturn. How, then, did Fund 1 do so much better?

Turns out Fund 1 avoided MLPs’ struggles in large part by not owning MLPs—they made up less than half its holdings. Instead, it held boring old utilities, which surged early this year, during the correction’s steep swings.[ii] Fund 1 can also use leverage (which amplifies the effect of price movements) and write covered call options (a way of earning income by selling the right to buy your shares if their value rises to a certain level).[iii] We aren’t opining on which approach is better—Fund 1’s recent advantage could reverse at any time. We merely note the two have differences any investor must take into account. MLP funds—just like other fund categories—aren’t uniform.

Commentary

Fisher Investments Editorial Staff
US Economy

Pomp and Financial Circumstances

By, 09/22/2016
Ratings174.294117

Fall is officially here, folks! This means college-goers around the country are returning to school, and (right on schedule) pundits are worrying about student loan debt. US student loans exceed $1.3 trillion and have doubled since 2009, sparking concerns of a massive, unpayable burden that might shift to taxpayers or keep grads from becoming full-fledged economic contributors. This is a politically potent issue, to be sure. But the data don’t suggest matters are anywhere near so dire overall: Few borrowers are troubled, and the majority will likely earn (and contribute) far more than they would absent an education. Investors needn’t fear a coming wave of impoverished graduates dragging down the economy or pumping up federal debt.

Tuition costs have risen rapidly in recent years, and the federal government is under increasing pressure to step in and relieve indebted students—not just those who attended now-closed private universities like ITT Technical Institutes and Corinthian Colleges, but perhaps all borrowers. Many suggest student debt is just unaffordable and, with 92.5% of student loans ($1.26 trillion) federally issued, the government is already on the hook for most losses—losses the CBO projects will rise 30% over the next decade. The combination of rising defaults and demands for Congress to intervene has many worried that taxpayers could be on the hook for tens, maybe hundreds of billions of dollars.

Congress has reacted to recent cries for loan forgiveness in time-honored Congressional fashion: by drafting several student debtor-friendly bills that are now stalled in committee until next year at least. Said differently, after the election. Who’s to say whether the 2017 Congress will resurrect the measures, or whether the new president will favor (or prioritize) them? Election-year promises and bill drafts frequently aren’t worth the paper they’re written on. In addition, the CBO’s more pessimistic projection of $170 billion in losses over the next 10 years comes out to just over half of federal spending last month. Not to be dismissive, but student loan defaults are very unlikely to lift federal debt or deficits to dangerous levels, even if the CBO’s projection proves true.

Commentary

Fisher Investments Editorial Staff
Emerging Markets

Brazil’s Impending Impeachment Hangover

By, 09/21/2016
Ratings164.0625

Brazil has been a bit of a Dickensian tale in recent years. In the last two years, it’s been mostly the worst of times: The deepest and longest recession in generations; political scandals, including one that resulted in a sitting president’s ouster; high inflation; Ryan Lochte.[i] Given this scenario, one might expect Brazilian stocks to have significantly underperformed the broader MSCI Emerging Markets Index. And for a time, this was true. From mid-September 2014 through late January 2016, the MSCI Brazil underperformed the MSCI Emerging Markets (EM) by more than 30 percentage points.[ii] But, since then, the worst of times has become the best of times for Brazilian stocks, up 87% since January 25 and outperforming EM by a whopping 59 percentage points.[iii] The question, however, is: Is this sustainable? In our view, the answer is no.

Brazil’s economy and stocks were mostly ravaged by the commodity downturn. Brazil’s economy relies heavily on commodity production and exports—particularly iron ore, soybeans and oil. All these have seen very weak prices in recent years, weighing on Brazil’s economy and markets. This is especially true of Energy—EM Energy stocks and the MSCI Brazil’s relative returns have been tightly linked until very recently. The correlation coefficient—a statistical measure of the relationship between two data series ranging from -1 (exact opposites) to 1 (move in lockstep)—was 0.70 for most of the last two years.[iv] As one would assume, when Energy stocks lagged badly due to declining oil prices, Brazil lagged right along with them. However, in January, oil prices touched their low and rallied. Energy stocks—and Brazil—rallied as well.

This is all as one might presume. It’s quite unsurprising that a commodity-heavy country’s relative performance would show heavy influence from one of the world’s primary commodities. However, relative returns sharply diverged starting in early June. During this span, EM Energy stocks (like their developed-world counterparts) floundered rather directionlessly, underperforming broad markets. Brazilian stocks have shot higher. The correlation coefficient flipped from 0.70 to -0.73.[v] What gives?

Commentary

Timothy Schluter
Interest Rates

Bank of Japan Beefs Up Policy With Three More Letters

By, 09/21/2016
Ratings324.484375

The BoJ threw some extra letters at Japan’s stagnant economy Wednesday, tweaking its quantitative easing program after the bank’s “Comprehensive Assessment of Monetary Policy” identified the flattening yield curve, which is crimping banking profitability, as the primary negative resulting from its policy decisions. Officials made no changes to short-term negative interest rates (-0.1%) or planned asset purchases (¥80 trillion in Japanese Government Bonds, aka JGBs; ¥6 trillion in equity ETFs; ¥90 billion in REITs). However, they set a new interest rate target of 0% for 10-year JGB yields—an effort to steepen the yield curve. The BoJ’s standing program is now called “Quantitative and Qualitative Monetary Easing With Yield Curve Control,” or if you prefer, QQEYCC. The media flipped for it, but the YCC addition doesn’t much change the calculus, as even success would ensure the yield curve remains very flat.

The BoJ called for the “Comprehensive Assessment” to examine why monetary policy has failed to stoke economic activity and reach a 2% inflation target, despite Japan’s being four years into one of the largest QE programs ever attempted. The bank also sought to examine both the positive and negative effects of its policy decisions, with intent to tweak future policy to mitigate the negatives.

The BoJ’s chief finding about QE isn’t surprising, though it is noteworthy that this is the first central bank to publicly acknowledge it. As we’ve repeatedly pointed out over the years, any benefits from QE (lower borrowing costs for households and businesses) are overshadowed by the flatter yield curve, which compresses banks’ profit margins and thus discourages lending. Negative interest rates on excess reserves, implemented in Japan in January, aimed to coax lending but instead made the yield curve even flatter, as they fueled demand for higher-yielding, longer-dated assets. This made life even more painful for Japanese Financials, which have complained bitterly about reduced profitability.

Commentary

Fisher Investments Editorial Staff
Taxes

Why You Shouldn’t Overrate the 2016 Election’s Tax Policy Debate

By, 09/20/2016
Ratings364.444445

Will the next president delete the dreaded form? Image from Internal Revenue Service.

This article centers on tax policy, which can evoke emotions from both sides of the political aisle. Please recognize our sole interest here is in assessing how changes in tax policy have historically affected stocks in order to frame expectations for what may happen if taxes are changed after 2016’s election.

Commentary

Fisher Investments Editorial Staff
Monetary Policy

The Fed Says Lots of Words, Words, Words

By, 09/16/2016
Ratings533.679245

Whatever Fed head Janet Yellen's opinion of short-term interest rates is, hers is only one of many. Photo by Chip Somodevilla/Getty Images.

After a relatively quiet summer, the Fed has returned to the forefront, especially after Republican presidential nominee Donald Trump intimated Fed chair Janet Yellen is playing politics with monetary policy. Most of the chatter, though, centers on the Fed’s meeting next week and the $64,000 question: Will they hike or not? We don’t profess to know the answer, but rather than wade through the myriad analyses out there, we present to you the voting members’ latest public comments about a rate hike, and you can try and decipher yourself which way they’ll go. In our view, the varying opinions highlight how difficult—and ultimately, futile—it is to game how a group of people will interpret data and answer one question. 

Commentary

Fisher Investments Editorial Staff
MarketMinder Minute, Politics

MarketMinder Minute - Presidential Authority Has Limited Power

By, 09/15/2016
Ratings633.523809

This MarketMinder Minute evaluates the limited authority and potential market impact of a newly elected president.

Research Analysis

Scott Botterman
Into Perspective

Fear and Loathing and European Politics

By, 09/15/2016
Ratings224.022727

Political uncertainty is stoking fear across much of the developed world. In the US, pundits pontificate about the potential negative market impact from either a Donald Trump or Hillary Clinton presidency. Similarly, recent and upcoming votes in the eurozone’s four biggest economies—Spain, Italy, France and Germany—have contributed to an environment of fear and loathing across the Continent, causing many to miss the region’s overall fine economic results.  Time and again, forecasted political “disasters” have had a limited impact on the fundamental environment in Europe. The Brexit vote increasingly appears to have had little economic impact, with the most recent data pointing to the 14th consecutive quarter of expansion in Q3. Even long-beleaguered European Financials stocks are doing better, as issues like negative interest rates and regulatory changes have failed to live up to fears. While the upcoming votes might bring minor political shifts, all appear unlikely to result in big, sweeping change. Instead, they likely push governments deeper into gridlock—an underappreciated positive—which reduces uncertainty and legislative risk. 

Spain

Spain is likely headed to its third general election in a year after its fragmented parliament failed to form a government following June’s election. Prime Minister Mariano Rajoy of the center-right Popular Party (PP) was unable to win a confidence vote to form a minority government with upstart, centrist Ciudadanos. If neither Rajoy nor the opposition Socialist Party is able to form a government by Halloween, Spanish voters will return to the voting booth—potentially on Christmas Day.

Commentary

Fisher Investments Editorial Staff
Developed Markets

Fiscal Stimu-less?

By, 09/14/2016
Ratings653.538461

Quick—what’s the best way to perk up a slack economy? Since 2008, “vigorous and creative monetary policy!” was the popular response, and central bankers heeded the cry. The results: Rock-bottom (even negative) interest rates in the world’s largest economies. Quantitative easing in the eurozone, UK, US (now over), Sweden and Japan, where the central bank is buying virtually anything under the sun. Yet growth rates mostly lag past expansions. So now, there is a new fashionable response to the opening question: Monetary stimulus is no longer effective, and fiscal stimulus needs an at bat. Even central bankers seem to agree! In our view, however, this “new consensus” misses a few key points. Fiscal stimulus is handy during an actual recession, but it isn’t a sustainable growth-boosting tool, and overall and on average, the world economy doesn’t need it now. Investors shouldn’t fall into the trap of thinking government aid today is necessary to keep this expansion—and bull market—humming.

First, to be clear, we aren’t ideologically opposed to fiscal stimulus. Fast-acting tax rebates and new spending can jumpstart demand during a recession by putting new money into the economy when banks aren’t lending and businesses are retrenching. Consumers and businesses get a small boost, a temporary jolt to speed the recovery. The private sector eventually has to do the heavy lifting to get the new expansion going for real, but stimulus can be a nice salve in the meantime.

Likewise, a sharp pullback in spending or an onslaught of taxes in anemic times adds to economic pain. Tax hikes and spending cuts likely worsened the eurozone crisis in 2012, for example, by sucking resources out of the economy.[i] Waiting for data to confirm a recession before ramping up stimulus isn’t necessarily required either—acute problems in industries that represent a huge swath of the economy can also be valid reasons to prime the pump a bit. Australia's government is responding to declining commodity prices via aggressive fiscal stimulus, even though the country hasn’t experienced a recession in a quarter-century. While not crucial, the move is arguably a reasonable response to genuine headwinds, as natural resources play a heavy role in the Land of Oz. One could make a similar case for Russia, Brazil or Canada.

Commentary

Fisher Investments Editorial Staff
Personal Finance, The Advisor's Corner

Money Market Reforms, Libor and You

By, 09/13/2016
Ratings363.847222

Money market funds typically get little coverage in the financial press because, except under extreme circumstances, they don’t rise or fall in value. Boring! But that’s about to change, as new rules will soon require institutional prime money market funds to report their real-time market value and hold more liquid assets. Many worry this will dry up short-term funding markets, as money market funds are one of the primary investors in commercial paper. Sure enough, Libor rates have risen lately, driving fears of "stealth tightening" in credit markets. While the nervousness is understandable, it’s unlikely major turmoil lies ahead.

The London Interbank Offered Rate, better known as Libor, is the average rate banks pay to borrow from each other over short time periods. It is also the reference rate for many bank loans—hence why people are worried about the apparent spike. The volatility is quite simple to trace to the money market fund reforms, which take effect on October 14. Money market funds have long invested in commercial paper for its yield (which exceeds T-bills), offering investors a way to hold “cash” with a higher return than a plain old bank deposit. But the looming rule changes will require prime institutional money market funds to have floating net asset values instead of being fixed at $1 / share—regulators’ attempt to prevent a repeat of the panic that ensued when one huge money market fund “broke the buck” in 2008, triggering a run on money market funds.[i] The rules also impose liquidity requirements and tighter restrictions on portfolio holdings, and many fund providers have decided to switch from prime funds to funds that invest primarily in government debt, which regulators treat with more leniency. As a result, banks and other firms that issue commercial paper have had to raise rates a tad to attract buyers.

Yet there is a large gap between incrementally higher funding costs due to a structural change in the marketplace and an actual, acute funding squeeze. For one thing, despite the clamor, Libor remains low by historical standards. (Exhibit 1)

Commentary

Fisher Investments Editorial Staff
Monetary Policy

The Fed Says Lots of Words, Words, Words

By, 09/16/2016
Ratings533.679245

Whatever Fed head Janet Yellen's opinion of short-term interest rates is, hers is only one of many. Photo by Chip Somodevilla/Getty Images.

After a relatively quiet summer, the Fed has returned to the forefront, especially after Republican presidential nominee Donald Trump intimated Fed chair Janet Yellen is playing politics with monetary policy. Most of the chatter, though, centers on the Fed’s meeting next week and the $64,000 question: Will they hike or not? We don’t profess to know the answer, but rather than wade through the myriad analyses out there, we present to you the voting members’ latest public comments about a rate hike, and you can try and decipher yourself which way they’ll go. In our view, the varying opinions highlight how difficult—and ultimately, futile—it is to game how a group of people will interpret data and answer one question. 

Commentary

Fisher Investments Editorial Staff
MarketMinder Minute, Politics

MarketMinder Minute - Presidential Authority Has Limited Power

By, 09/15/2016
Ratings633.523809

This MarketMinder Minute evaluates the limited authority and potential market impact of a newly elected president.

Commentary

Fisher Investments Editorial Staff
Developed Markets

Fiscal Stimu-less?

By, 09/14/2016
Ratings653.538461

Quick—what’s the best way to perk up a slack economy? Since 2008, “vigorous and creative monetary policy!” was the popular response, and central bankers heeded the cry. The results: Rock-bottom (even negative) interest rates in the world’s largest economies. Quantitative easing in the eurozone, UK, US (now over), Sweden and Japan, where the central bank is buying virtually anything under the sun. Yet growth rates mostly lag past expansions. So now, there is a new fashionable response to the opening question: Monetary stimulus is no longer effective, and fiscal stimulus needs an at bat. Even central bankers seem to agree! In our view, however, this “new consensus” misses a few key points. Fiscal stimulus is handy during an actual recession, but it isn’t a sustainable growth-boosting tool, and overall and on average, the world economy doesn’t need it now. Investors shouldn’t fall into the trap of thinking government aid today is necessary to keep this expansion—and bull market—humming.

First, to be clear, we aren’t ideologically opposed to fiscal stimulus. Fast-acting tax rebates and new spending can jumpstart demand during a recession by putting new money into the economy when banks aren’t lending and businesses are retrenching. Consumers and businesses get a small boost, a temporary jolt to speed the recovery. The private sector eventually has to do the heavy lifting to get the new expansion going for real, but stimulus can be a nice salve in the meantime.

Likewise, a sharp pullback in spending or an onslaught of taxes in anemic times adds to economic pain. Tax hikes and spending cuts likely worsened the eurozone crisis in 2012, for example, by sucking resources out of the economy.[i] Waiting for data to confirm a recession before ramping up stimulus isn’t necessarily required either—acute problems in industries that represent a huge swath of the economy can also be valid reasons to prime the pump a bit. Australia's government is responding to declining commodity prices via aggressive fiscal stimulus, even though the country hasn’t experienced a recession in a quarter-century. While not crucial, the move is arguably a reasonable response to genuine headwinds, as natural resources play a heavy role in the Land of Oz. One could make a similar case for Russia, Brazil or Canada.

Commentary

Fisher Investments Editorial Staff
Personal Finance, The Advisor's Corner

Money Market Reforms, Libor and You

By, 09/13/2016
Ratings363.847222

Money market funds typically get little coverage in the financial press because, except under extreme circumstances, they don’t rise or fall in value. Boring! But that’s about to change, as new rules will soon require institutional prime money market funds to report their real-time market value and hold more liquid assets. Many worry this will dry up short-term funding markets, as money market funds are one of the primary investors in commercial paper. Sure enough, Libor rates have risen lately, driving fears of "stealth tightening" in credit markets. While the nervousness is understandable, it’s unlikely major turmoil lies ahead.

The London Interbank Offered Rate, better known as Libor, is the average rate banks pay to borrow from each other over short time periods. It is also the reference rate for many bank loans—hence why people are worried about the apparent spike. The volatility is quite simple to trace to the money market fund reforms, which take effect on October 14. Money market funds have long invested in commercial paper for its yield (which exceeds T-bills), offering investors a way to hold “cash” with a higher return than a plain old bank deposit. But the looming rule changes will require prime institutional money market funds to have floating net asset values instead of being fixed at $1 / share—regulators’ attempt to prevent a repeat of the panic that ensued when one huge money market fund “broke the buck” in 2008, triggering a run on money market funds.[i] The rules also impose liquidity requirements and tighter restrictions on portfolio holdings, and many fund providers have decided to switch from prime funds to funds that invest primarily in government debt, which regulators treat with more leniency. As a result, banks and other firms that issue commercial paper have had to raise rates a tad to attract buyers.

Yet there is a large gap between incrementally higher funding costs due to a structural change in the marketplace and an actual, acute funding squeeze. For one thing, despite the clamor, Libor remains low by historical standards. (Exhibit 1)

Commentary

Fisher Investments Editorial Staff
Developed Markets, Media Hype/Myths

Brexit Boo-Hooing Seems Like a Bust

By, 09/09/2016

10 weeks after the Brexit referendum and speculation about its impact has yet to simmer down. Besides the usual politicking and theorizing, the occasional threat grabs headlines too. However, the latest data show the fear and hype surrounding Britain’s decision to leave the EU hasn’t yet materialized into a certifiable economic downturn—a timely reminder for investors that the media’s “big market negative” often isn’t so. 

On Tuesday, Markit reported its August UK services purchasing managers’ index (PMI) rebounded to 52.9 from July’s 47.4—the biggest month-on-month gain in the survey’s 20-year history. This news followed similar bounce-back stories in the UK: Retail sales turned around from -0.9% m/m in June to 1.4% in July, smashing expectations of 0.2%. Markit’s August manufacturing PMI rose to 53.3 from July’s 48.3. Now, we would be remiss if we didn’t include our standard “one month isn’t telling” language.  We cautioned investors against equating the UK services’ PMI record drop in July with evidence of economic doomsday. Likewise, this positive report doesn’t mean Brexit lacks economic impact whatsoever and all those prognostications were dead wrong (more on this later). Rather, we recommend looking at this latest report like any economic metric: See what it measures, evaluate the data in context, and assess the popular interpretation of the news.

On that note, the Markit/CIPS UK services PMI is a survey,[i] covering six service sector categories, that tabulates the percentage of respondents reporting improvement/deterioration/no change from the previous month. Readings over 50 purportedly indicate expansion; below 50, contraction. PMIs provide a rough, quick assessment of the breadth—though not magnitude—of business growth. Beyond the record-making reports of the past two months, here is a broader look at the UK’s services PMI.

Commentary

Fisher Investments Editorial Staff
Into Perspective

September Is Still Just a Month

By, 09/08/2016
Ratings574.061403

Here we go again! September has arrived, and with it, warnings to buckle your seatbelt because, historically, September stinks. And yes, it’s true, poor September does boast the lowest average S&P 500 return of any month, and some Septembers have been truly awful. It’s easy to see how September gained notoriety as the start of the legendary “financial hurricane season.” But it doesn’t deserve the bum rap. Bad Septembers are a freakish coincidence. We’ve seen plenty of fine Septembers, too, but these don’t win headlines. September isn’t special, for good or ill.[i] It is just a month, and not automatically bad for stocks.

True, since 1926, the S&P 500’s average September return is -0.7%, and September is the only month with a negative average return.[ii] But here is your first clue that the average is skewed by a couple outliers: The median return is 0.1%.[iii] Positive. Within spitting distance of zero, but positive, which tells you we’ve had more good Septembers than bad, even if just barely.

Exhibit 1 shows the distribution of September returns over the last 90 years. Unsurprisingly, it’s pretty darned bell curvy. More Septembers qualify as “modestly positive” than any other return bracket. There are more really bad Septembers than really good Septembers, but most of these abysmal Septembers occurred during pre-existing bear markets, not out of the blue. Only one bear market—the 1929-1932 bloodbath—began in September, and it wasn’t because the calendar turned.

Research Analysis

Chase Arneson
Into Perspective

Prescription Drug Price Politics and Pharmaceuticals/Biotech Stocks

By, 09/25/2015
Ratings774.220779

Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks don’t favor any party, and partisan ideology invites bias—dangerous in investing.

Are drug prices running rampant? After The New York Times reported on Sunday that a small private Pharmaceuticals firm, Turing Pharmaceuticals, jacked up the price of a 62-year-old drug by 5,000-ish percent, that question has sparked a media firestorm.[i] Monday, partly in reaction to the news, Democratic Presidential front-runner Hillary Clinton fueled further debate by vowing to “deal with skyrocketing out-of-pocket health costs and particularly, runaway prescription drug prices.” All week, media articles aplenty have focused on the issue and wondered whether Federal price controls are necessary to put a lid on the rise. But whatever your opinion of the sociological merits of this plan or drug prices, price controls in general have a long history of causing more harmful unintended consequences—including dinging stock prices—than any positive they may bring. That being said, pharmaceutical price controls seem unlikely to come to fruition any time soon.

For those interested in the details of Mrs. Clinton’s plan, here are the major proposals:

Research Analysis

Pete Michel
Into Perspective

Why Bond Market Liquidity Fears Don’t Hold Much Water

By, 09/22/2015
Ratings933.956989

Market liquidity is usually a pretty banal subject, garnering little attention. But in the last year,  it has gone from being a dry afterthought to being the subject of frequent articles claiming it’s a major concern, particularly in the bond markets. So much so, that Bloomberg’s Matt Levine had a running section of his daily link wrap titled, “People Are Worried About Bond Market Liquidity” for months and rarely ran low on articles to share. It is now bigger news when there aren’t “People Worried About Bond Market Liquidity!” So what is market liquidity, and are the recent fears justified—or overblown?

Market liquidity refers to how easily an asset can be bought or sold without dramatically impacting the price or incurring large costs. It’s a defining feature separating asset classes, a key consideration for investors. Some financial assets, like listed stocks, are easy to buy or sell with little price impact and small commissions—they’re “liquid.” Conversely, commercial real estate takes time to sell and likely includes high commissions and significant negotiations—it is “illiquid.” For most investors, particularly those with potential cash flow needs, liquidity is an important facet of any investment strategy.

Bonds are among the more liquid investments available for investors, though liquidity varies among different types. Treasurys, among the deepest markets in the world, are highly liquid. Corporates and municipals are less so, and some fancier debt is actually quite illiquid.

Research Analysis

Scott Botterman
Into Perspective

Greek Contagion Risk Is Minimal

By, 08/11/2015
Ratings274.703704

Flags fly in front of the Parthenon in Athens. Photo by Bloomberg/Getty Images.

After five years of Greek crisis, two defaults and going-on three bailouts, many still fear a contagion across the eurozone. While default and “Grexit” risk persist, the risk of a contagion has fallen significantly over the last few years. The eurozone economy is improving, foreign banks hold less Greek debt, bank deposits aren’t fleeing other peripheral nations, and euroskeptic parties poll well behind traditional parties across the eurozone.  Greece’s problems are contained and shouldn’t put the broader eurozone at risk.

Research Analysis

Fisher Investments Editorial Staff
Reality Check

Quick Hit: ‘Corporate Profits Recession’ and Stocks—There Is No ‘There!’ There

By, 03/27/2015
Ratings364.069445

In Friday’s third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled “the worst news.” Others claim a “profit recession”—whatever that means—looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis’ measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren’t exactly rare and occur at random points throughout a bull market and expansion.   

Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment

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What We're Reading

By , The Collaborative Fund, 09/23/2016

MarketMinder's View: Here is a delightful antidote to worries about secular stagnation and the end of innovation. Most people think technological advancement is all about some big-bang invention, like the PC or Internet. But like growth, innovation compounds over time, and small gains add up to a much better world: “Growth follows the same exponential road of compound interest. One person sticks their neck out and does X. The next generation starts with X and says “I can do X + 1.” The next starts with X+1 and shoots for X+1+1, and so on. These are often tiny improvements. But, as compound interest teaches us, tiny improvements built upon a base that’s generations in the making can add up to something remarkable. This all may seem obvious. But a lot of pessimism about the future comes from being incredulous that today’s generation is producing, say, another Bill Gates, Henry Ford, or Tony Hawk. This misses a critical point: We now get to use all of those people’s discoveries as a starting point, a foundation to build off of. Never underestimate the power of someone armed with the accumulated trial and error of every genius who came before them.”

By , Bloomberg, 09/23/2016

MarketMinder's View: What was that titular trade? Letting fees, not investment process, drive their investment management hiring decisions. After alumni and donors complained about “too high” compensation for the Harvard endowment’s investment managers, who happened to be delivering stellar returns that all of academia (nevermind the investing world) envied, the powers that be sacked that high-earning management team and replaced them with cheaper talent that built a portfolio “festooned with expensive private equity, hedge funds and commodities holdings.”* The result is (ironically) a fee-laden, perpetually underperforming pile of illiquidity. Folks, fees matter, but they aren’t the only or most important consideration when selecting an investment manager. Nor is historical performance. How any manager generated their returns is paramount. The past doesn’t predict the future, but you can at least assess whether a process is sound, which generally increases its likelihood of future success. In other words, you have to take a holistic approach, evaluating qualitative as well as quantitative factors. (*We could have paraphrased this easily, but we so enjoyed the use of “festooned” that we felt we would have done you, dear reader, a disservice if we didn’t highlight it.)

By , The Wall Street Journal, 09/23/2016

MarketMinder's View: Required reading for anyone who has ever read, been forwarded, or been tempted to read an investment newsletter boasting how you can earn sensational returns if you pay them money to show you this One Weird, Simple Trick. They are nearly always peddling slop or fraud, and it is very easy to spot the signs if you put on your skeptic’s hat and do about two and a half minutes of independent Googling. Yet so few readers bother. How come? “Robert Cialdini, a social psychologist at Arizona State University and author of the new book ‘Pre-Suasion,’ is an expert on how people convince others to trust them. ‘The mindset that you put people into when they encounter your material,’ he says, ‘leads them to prioritize their attention and behave in ways that are consistent with that focus.’ In other words, a consistent message can elbow your skepticism aside; clever marketing can administer a kind of investing lobotomy, numbing you to the most obvious warning signs.”

By , The Telegraph, 09/23/2016

MarketMinder's View: Indeed, it does. How great will it be when DUIs and texting-while-driving accidents are a thing of the past? Think how much better off society will be! There will probably be scores of good investment opportunities along the way, too, as new firms arise to provide and service self-driving cars, while others compete for all the spare cash consumers gain from not paying a boodle on car maintenance over time if we do indeed shift to a “sharing” model in the long run. This is all very cool and, as the article notes, a crushing counterargument against “those who still cling pessimistically to a Malthusian view of history, believing our ever-growing appetite for energy and other apparently dwindling supplies of natural resource to be an unsustainable catastrophe in the making.” The potential for technology to improve quality of life here is vast, But also, it’s very far off, and speculative. Stocks usually don’t look more than 30 months out, making it too early for investors to be able to handicap the potential winners and losers today. Keep an eye out, and celebrate the amazing potential, but be patient with your portfolio. 

Global Market Update

Market Wrap-Up, Thursday, September 22, 2016

Below is a market summary as of market close Thursday, September 22, 2016:

  • Global Equities: MSCI World (+1.1%)
  • US Equities: S&P 500 (+0.7%)
  • UK Equities: MSCI UK (+2.2%)
  • Best Country: Norway (+4.0%)
  • Worst Country: Japan (-0.1%)
  • Best Sector: Materials (+1.7%)
  • Worst Sector: Information Technology (+0.7%)

Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 1.62%.

 

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. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.