Commentary

Todd Bliman
Currencies, Into Perspective, Media Hype/Myths, The Global View

3 Reasons the Dollar’s Reserve Currency Status Shouldn’t Worry You—in Charts!

By, 04/17/2015
Ratings133.961539

The dollar is up 14.2% against a broad basket of 26 world currencies weighted by American trade since last June 30.[i] Bond yields are down significantly since the tapering of quantitative easing (QE) was announced in December 2013. IMF data show the dollar’s share of foreign currency reserves rose last year, adding to its position as the world’s leading reserve currency. America’s economy is growing apace and there is no sign, according to The Conference Board’s Leading Economic Index, that will change soon. Take all these factoids and combine them, and you’d probably think few would fear the dollar losing its status as the world’s primary reserve currency. Yet they persist! Some oddly suggest the news China will launch its own mini-World Bank, the Asian Infrastructure Investment Bank, means the dollar’s days are numbered.[ii] Here is the thing though: These fears were overwrought from moment one, and they are even more so now.

As I’ll show, there are three major reasons why. But before I get started, it may be helpful to cut right to the chase and explain what the dollar-won’t-be-primary-reserve-currency fear actually is: Debt doom.

Behind nearly all these fears lies the misperception that America’s debt is unaffordable, absent some artificial force. For many, the artificial force is widespread use of the dollar as the world’s reserve currency—it’s the most-used, with a 62% share of global forex reserves at 2014’s end. Some presume so many nations buying and holding dollar-denominated assets artificially depresses US government bond yields, and if the dollar were the primary reserve asset no more, that force depressing rates goes poof. Rates skyrocket. Government struggles to make interest payments. It defaults. Doom ensues.

Commentary

Fisher Investments Editorial Staff
Currencies

As Goes Switzerland…?

By, 04/17/2015
Ratings154.633333

Here is a question worth weighing these days: If a strong currency is so devastating to stocks and economies—as many allege—why did stocks in a tiny, export-heavy economy not succumb to a nearly 20% shock appreciation?

Let’s back up. Three months ago this week, the Swiss National Bank (SNB) issued this statement:

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro.

Commentary

Fisher Investments Editorial Staff
The Advisor's Corner

Be-Labor-ing the Fiduciary Standard

By, 04/16/2015
Ratings144.178571

The Department of Labor (DOL) released its long-awaited rules for investment professionals advising on retirement accounts Tuesday, and after five years, we finally know what their idea of a fiduciary standard looks like. And it is … not much different than the old guard, just with reams of added paperwork. The DOL’s promo materials boast they’ll “protect investors from backdoor payments and hidden fees in retirement investing advice,” but that seems a tad too optimistic. We read through all the legalese and loopholes, and in our view, the proposed rules don’t ensure clients’ interests always come first—and they probably won’t improve the quality of advice.

The DOL’s proposal (which is still pending public comment and perhaps some last-minute tweaks) would basically expand ERISA duties of care to all brokers, registered investment advisers (RIAs), insurance brokers and other investment professionals advising on retirement accounts—but with a few small tweaks to, as the DOL’s FAQ put it, continue “to allow for common forms of compensation.” That is your first clue this standard is not quite all it’s cracked up to be. You see, the DOL’s primary beef is with high “hidden” commissions, like backdoor compensation for recommending certain products over others, revenue sharing agreements with mutual fund companies and incentives for selling proprietary products. But these are not banned. Nor are plain vanilla trading commissions. Nor are sales of high-fee products when a similar product with lower fees exists. All those are still legal! As long as the broker selling those products jumps through a few extra hoops: They must agree in writing to act in the client’s best interests, disclose all potential conflicts of interest prominently in writing and on a dedicated website, and describe the policies and procedures in place to mitigate those conflicts. There are also exemptions for principal transactions (where brokers sell products out of their firm’s inventory) and instances where brokers are just executing transactions without giving advice.

In other words, it’s a watered-down version of major investment advisory standards. It’s weaker than the SEC’s fiduciary standard for RIAs (which the SEC is considering expanding to brokers, too). It’s a toothless version of the UK’s Retail Distribution Review (RDR), which outright banned Britain’s version of revenue sharing (called trail commissions and paid directly from the fund to the adviser, not his/her firm) and forced all advisers to charge itemized flat or percentage-based fees. It is essentially a ream of forms, disclosures and a website—paperwork—that doesn’t really change the products sold or advice rendered. It doesn’t guarantee investors’ interests will come first. If anything, it seems designed to enable the status quo—it adds a veneer of client-friendliness while giving brokers the tools to justify current actions. It doesn’t prevent insurance brokers from selling variable annuities in IRAs—they just have to rationalize it. (Which is also not a change.) Nor does it prevent brokers from basing recommendations on Wall Street mythology, age or risk-tolerance surveys—they just have to rationalize it. It doesn’t prevent brokers from selling proprietary products only, limiting clients’ investment options—they just have to rationalize it. It doesn’t require advisers and brokers to objectively analyze all potential investment options for their clients—as long as they can rationalize whatever they pick. It doesn’t improve the quality of funds that are recommended. Even if it didn’t have the high-fee loopholes, lower-cost products aren’t always superior—fees aren’t the only determinant of returns. It doesn’t address how we got here in the first place: the blurring of the line between investment sales and service. If anything, it blurs the line further, promoting confusion. Not to pooh-pooh disclosure—transparency and sunlight are always good—but disclosures are often long tomes written in legalese. Few folks read them, fewer still may understand them. The website aspect is intriguing, but its efficacy is untested. Overall, it seems like a green light for brokers and advisers to keep doing what they’re doing—as long as they can rationalize it if the DOL comes a-knockin’. That last bit is subjective, folks—rationales are based on opinion, experience and knowledge. Expertise matters.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Media Hype/Myths

QuitE Wrong

By, 04/15/2015
Ratings154.566667

ECB chief Mario Draghi, before the party started. Photo by Martin Leissl/Bloomberg via Getty Images.

So the eurozone economy is turning up, and the media is praising the ECB’s quantitative easing (QE) program for “bearing fruit already.” So is ECB chief Mario Draghi, though it wasn’t he who threw the confetti at the ECB’s presser Wednesday. Even though the ECB has been buying government bonds for all of five weeks. And the eurozone started accelerating months ago. And evidence worldwide shows QE depresses more than it stimulates. That folks are so quick to credit QE and overlook months of improvement shows how, despite improving sentiment, most still underrate the currency union’s economic health.  

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, Politics, Into Perspective

British Gridlock Isn’t Bearish

By, 04/14/2015
Ratings174.411765

Britain’s election is 23 days away, and pundits near-universally agree it will spell disaster for UK markets. One analyst warns of a “Lehman moment” for the pound if no one wins.[i] Another says election uncertainty is shrinking foreign demand for UK bonds, and fractured politics could cost the UK billions in foreign investment. Worst of all, several warn a hung Parliament could raise the risk of a second contest this year—and trigger a repeat of 1974, when UK stocks plunged nearly 48% between elections in February and October.[ii] Please allow us to put that one to bed: Today is nothing like the early 1970s. Electoral jitters could drive volatility in the vote’s run-up or aftermath, but this shouldn’t cause a bear market in Britain or the world.

There is nothing inherently bearish about a hung Parliament (one in which no party has an absolute majority, for yanks), whether it yields a functioning coalition or a shaky minority government. Britain’s history with hung Parliaments is very limited, but bull markets have coincided with two of three. Britain has had a coalition since May 2010, and UK stocks have done fine—since the 5/6/2010 election, they’re up 60% in sterling and 56% in dollars.[iii] UK stocks also rose while a minority government presided from March 1977 – March 1979—a period that included the severe labor unrest known as the Winter of Discontent. Hung parliaments mean gridlock, which—contrary to widespread belief—doesn’t create uncertainty. It actually reduces the risk of radical new laws, a major source of uncertainty. Considering most fret radical change from both major parties (price controls and England-to-Scotland redistribution from Labour, EU exit from the Conservatives), gridlock should bring relief. Britain is one of the world’s most competitive economies, and its growth rate is among the developed world’s highest. If Parliament has a low likelihood of messing that up, as it would with a minority or coalition government, investors have little or no reason to shun UK stocks.

“Yah, but 1974.” That’s when an election on February 28 ousted Edward Heath’s Conservative government as Labour won the most seats—but fell 33 shy of a majority. Labour led a minority government for seven months, before Prime Minister Harold Wilson called a snap election for October 10, which yielded Labour a three-seat majority. In between the contests, UK stocks plunged.

Commentary

Fisher Investments Editorial Staff
Personal Finance

The Value of Good Advice

By, 04/13/2015
Ratings493.857143

Last week, New York City officials were shocked to learn they’d spent over $2.5 billion on pension fund management fees over the past decade.[i] They are probably not the only ones who would have sticker shock: According to a new North American Securities Administrators Association (NASAA) survey, one-third of US investors don’t know how much they pay for money management. Older studies suggest up to half say they don’t know or—frighteningly—think they pay zilch. Folks, public service announcement: You can’t know whether you’re receiving good value from an investment manager unless you know how much you’re paying. Though, a full cost/benefit analysis isn’t quite so simple as comparing fees and returns, despite what some suggest—qualitative factors matter, too. 

The performance aspect does matter, of course. Fees can be high for some investment vehicles versus other lower-cost options, and the difference can add up over time. Variable annuities, for example, pile fees on top of fees. Paying for multiple layers of management—like paying an adviser or broker to select funds for you, and then paying fund management costs—can erode returns and stymie progress toward your long-term goals. Understanding who you’re paying and how they’re paid can help you eliminate some perhaps unnecessary drag. Money paid in fees is money that isn’t compounding for you (hence why ensuring you receive performance reports net of fees, not gross, is paramount).

However, in some cases, fees’ impact on returns is not the be-all, end-all. For mutual funds, sure—performance is all you’re paying for, as they don’t provide service, and you’ve presumably done the hard work of picking an asset allocation to reach your long-term goals. But if you’re working with an adviser, service is a big piece of the package. And by service, we don’t just mean helping with operational matters or sending the odd research report (though those are nice)—we mean all the things an adviser does to help ensure you, the investor, get and stay on track to reach your long-term goals.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Currencies, Media Hype/Myths

Dollar Up, Costs Down?

By, 04/10/2015
Ratings484.3125

The strong dollar is not so sad an occurrence for Corporate America as many presume. Image by Image Source/Getty Images.

(Editor's Note: Fisher Investments’ MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

A Greece-y State of Affairs

By, 04/09/2015
Ratings184.472222

Greece is the word these days, and to many, the word doesn’t sound good. Syriza’s coalition government is fraying, and there is already talk of a new unity government to prevent a “Grexit.” Prime Minister Alexis Tsipras sought a bailout from Russia[i] and received Russian “President” Vladimir Putin’s “moral support and long-term cooperation” (along with unspecified offers to buy state assets). Greece restated its claims Germany owes it about €280 billion ($300 billion) in WWII reparations. Greek banks are issuing government-guaranteed debt to keep themselves afloat. After repaying a €458 million IMF loan Thursday, leaders claim they lack cash for April’s state salary and pension obligations. Greece is turning into a swirling saga of allegation and denial, wild ideas and tame rejection—possibly a case of game theory gone awry. Yes, things are increasingly bizarre, with pundits ever-surer Greece is hurtling toward a eurozone exit. And hey, anything is possible, despite all participants’ well-demonstrated penchant for kicking the can. Whatever the outcome, though, markets have long since moved on from Greece—we see no evidence a Greek contagion is at all likely or a threat to the rest of the eurozone, let alone global markets.

While Greece’s hubbub has some new twists, it’s the same movie we’ve seen since 2010. Treasury payments loom, banks are hemorrhaging cash, government needs money, creditors have conditions, politicians are politicking, and everyone fears Greece will eventually have no choice but to leave the euro and print fistfuls of drachmas to stay afloat. This time Greece has about €6 billion due to various creditors over the next four weeks and needs to pay state employees, but the government claims its coffers are depleted—hence their effort to unlock €7.2 billion in previously agreed (and recently extended) bailout funding.

Compounding matters, the ECB has cut off its primary lifeline for Greek banks, leaving them to get cash from the Bank of Greece (which then taps the ECB). Cash banks are accessing by using their own short-term commercial paper as collateral—paper that carries a Greek government guarantee, hence meeting the central bank’s requirements. If a bank fails, the technical term would probably be “kablooey.” Will Greece miss payments, defaulting? If so, will default mean bye-bye euro? Will bank failures force it out of the eurozone? Tsipras promises he and his cabinet will work through this weekend’s Easter holiday to reach an agreement at April 24’s meeting of eurozone finance ministers. They’ve all compromised before and could do so again, but, you know, game theory. Germany might be less willing to help with those WWII demands (and related threats to seize German assets) swirling.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

British Retirees Are Now Free to Choose

By, 04/08/2015
Ratings193.815789

The UK’s pension reforms took effect Monday, giving new retirees unprecedented freedom. Out with the perceived de facto requirement for most to buy an annuity, in with choice! And with it, a potentially overwhelming flurry of new products, aggressive cold-callers, flashy marketing and, unfortunately, shady characters seeking to prey on newly free pensioners. Her Majesty’s trusty aides are trying to help via the snazzy newPension Wise,” but early reviews of the online service aren’t smashing. What’s the discerning pensioner to do? Here are a few tips.

As a refresher, new retirees now have five primary options:

  • Withdraw 25% tax-free and the rest at marginal income tax rates to spend or invest as per your wishes
  • Withdraw 25% tax-free, if desired, and leave the rest invested within the pension wrapper, enrolled in “Flexi- Access drawdown” plans
  • Leave your savings invested within the pension wrapper without buying an annuity or entering a drawdown arrangement, and take ad hoc “uncrystallised fund pension lump sum” distributions as you wish—with 25% of each distribution tax-free, 75% at marginal income tax rates
  • Withdraw 25% tax-free, if desired, and/or buy an annuity
  • Do nothing

Freedom of choice also comes with freedom to fail. Identifying your goals, accurately assessing your time horizon and figuring out which mix of assets best helps you reach them is crucial to reducing your error rate. For ages, insurance firms did all the work, calculating your life expectancy and leaving it to you to select from various annuity types and rates. Now, that’s changing, and if you wish to capitalize on your freedoms, it’s up to you to calculate your time horizon—how long your assets must be invested to reach your goals.

Commentary

Fisher Investments Editorial Staff
US Economy, Media Hype/Myths

Theories Miss the Mark on March’s Jobs Miss

By, 04/07/2015
Ratings504.24

Job growth slowed in March, and here is what people are saying about that: “Financial markets got the news Friday that March job creation was subpar, and that complicates the investment outlook.” “It wasn’t just that the economy added 126,000 jobs in March when we’d been expecting 245,000. It was also that we lost 69,000 jobs in revisions to previous months. These tend to mark turning points in the economy.” “The March jobs report showed tell-tale signs that the factory sector is struggling and the broader economy is feeling the impact. … manufacturing employment fell into contraction … this is the broader impact from a stronger dollar hurting the export sector as well as domestic industry.” The thing is, all this talk is a wee bit wide of the mark, in our view. Whatever happens with jobs today is always a function of what happened in the economy months ago—jobs aren’t a leading indicator. Nor is March’s manufacturing employment decline evidence the stronger dollar is about to take its toll on US stocks.

Economies move first. Then jobs. During the last recession, US GDP bottomed in June 2009. Employment kept falling and bottomed in February 2010. GDP growth accelerated in Q4 2011, then slowed a bit. Job growth accelerated in Q1 2012, then slowed a bit. GDP accelerated in Q2 and Q3, then slowed in Q4. Job growth accelerated in Q4 and early Q1, and now it is slowing. Here are all of those words in picture form.

Exhibit 1: Late-Lagging Job Growth

Commentary

Fisher Investments Editorial Staff
Personal Finance

The Value of Good Advice

By, 04/13/2015
Ratings493.857143

Last week, New York City officials were shocked to learn they’d spent over $2.5 billion on pension fund management fees over the past decade.[i] They are probably not the only ones who would have sticker shock: According to a new North American Securities Administrators Association (NASAA) survey, one-third of US investors don’t know how much they pay for money management. Older studies suggest up to half say they don’t know or—frighteningly—think they pay zilch. Folks, public service announcement: You can’t know whether you’re receiving good value from an investment manager unless you know how much you’re paying. Though, a full cost/benefit analysis isn’t quite so simple as comparing fees and returns, despite what some suggest—qualitative factors matter, too. 

The performance aspect does matter, of course. Fees can be high for some investment vehicles versus other lower-cost options, and the difference can add up over time. Variable annuities, for example, pile fees on top of fees. Paying for multiple layers of management—like paying an adviser or broker to select funds for you, and then paying fund management costs—can erode returns and stymie progress toward your long-term goals. Understanding who you’re paying and how they’re paid can help you eliminate some perhaps unnecessary drag. Money paid in fees is money that isn’t compounding for you (hence why ensuring you receive performance reports net of fees, not gross, is paramount).

However, in some cases, fees’ impact on returns is not the be-all, end-all. For mutual funds, sure—performance is all you’re paying for, as they don’t provide service, and you’ve presumably done the hard work of picking an asset allocation to reach your long-term goals. But if you’re working with an adviser, service is a big piece of the package. And by service, we don’t just mean helping with operational matters or sending the odd research report (though those are nice)—we mean all the things an adviser does to help ensure you, the investor, get and stay on track to reach your long-term goals.

Commentary

Fisher Investments Editorial Staff
Corporate Earnings, Currencies, Media Hype/Myths

Dollar Up, Costs Down?

By, 04/10/2015
Ratings484.3125

The strong dollar is not so sad an occurrence for Corporate America as many presume. Image by Image Source/Getty Images.

(Editor's Note: Fisher Investments’ MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Across the Atlantic

A Greece-y State of Affairs

By, 04/09/2015
Ratings184.472222

Greece is the word these days, and to many, the word doesn’t sound good. Syriza’s coalition government is fraying, and there is already talk of a new unity government to prevent a “Grexit.” Prime Minister Alexis Tsipras sought a bailout from Russia[i] and received Russian “President” Vladimir Putin’s “moral support and long-term cooperation” (along with unspecified offers to buy state assets). Greece restated its claims Germany owes it about €280 billion ($300 billion) in WWII reparations. Greek banks are issuing government-guaranteed debt to keep themselves afloat. After repaying a €458 million IMF loan Thursday, leaders claim they lack cash for April’s state salary and pension obligations. Greece is turning into a swirling saga of allegation and denial, wild ideas and tame rejection—possibly a case of game theory gone awry. Yes, things are increasingly bizarre, with pundits ever-surer Greece is hurtling toward a eurozone exit. And hey, anything is possible, despite all participants’ well-demonstrated penchant for kicking the can. Whatever the outcome, though, markets have long since moved on from Greece—we see no evidence a Greek contagion is at all likely or a threat to the rest of the eurozone, let alone global markets.

While Greece’s hubbub has some new twists, it’s the same movie we’ve seen since 2010. Treasury payments loom, banks are hemorrhaging cash, government needs money, creditors have conditions, politicians are politicking, and everyone fears Greece will eventually have no choice but to leave the euro and print fistfuls of drachmas to stay afloat. This time Greece has about €6 billion due to various creditors over the next four weeks and needs to pay state employees, but the government claims its coffers are depleted—hence their effort to unlock €7.2 billion in previously agreed (and recently extended) bailout funding.

Compounding matters, the ECB has cut off its primary lifeline for Greek banks, leaving them to get cash from the Bank of Greece (which then taps the ECB). Cash banks are accessing by using their own short-term commercial paper as collateral—paper that carries a Greek government guarantee, hence meeting the central bank’s requirements. If a bank fails, the technical term would probably be “kablooey.” Will Greece miss payments, defaulting? If so, will default mean bye-bye euro? Will bank failures force it out of the eurozone? Tsipras promises he and his cabinet will work through this weekend’s Easter holiday to reach an agreement at April 24’s meeting of eurozone finance ministers. They’ve all compromised before and could do so again, but, you know, game theory. Germany might be less willing to help with those WWII demands (and related threats to seize German assets) swirling.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic

British Retirees Are Now Free to Choose

By, 04/08/2015
Ratings193.815789

The UK’s pension reforms took effect Monday, giving new retirees unprecedented freedom. Out with the perceived de facto requirement for most to buy an annuity, in with choice! And with it, a potentially overwhelming flurry of new products, aggressive cold-callers, flashy marketing and, unfortunately, shady characters seeking to prey on newly free pensioners. Her Majesty’s trusty aides are trying to help via the snazzy newPension Wise,” but early reviews of the online service aren’t smashing. What’s the discerning pensioner to do? Here are a few tips.

As a refresher, new retirees now have five primary options:

  • Withdraw 25% tax-free and the rest at marginal income tax rates to spend or invest as per your wishes
  • Withdraw 25% tax-free, if desired, and leave the rest invested within the pension wrapper, enrolled in “Flexi- Access drawdown” plans
  • Leave your savings invested within the pension wrapper without buying an annuity or entering a drawdown arrangement, and take ad hoc “uncrystallised fund pension lump sum” distributions as you wish—with 25% of each distribution tax-free, 75% at marginal income tax rates
  • Withdraw 25% tax-free, if desired, and/or buy an annuity
  • Do nothing

Freedom of choice also comes with freedom to fail. Identifying your goals, accurately assessing your time horizon and figuring out which mix of assets best helps you reach them is crucial to reducing your error rate. For ages, insurance firms did all the work, calculating your life expectancy and leaving it to you to select from various annuity types and rates. Now, that’s changing, and if you wish to capitalize on your freedoms, it’s up to you to calculate your time horizon—how long your assets must be invested to reach your goals.

Commentary

Fisher Investments Editorial Staff
US Economy, Media Hype/Myths

Theories Miss the Mark on March’s Jobs Miss

By, 04/07/2015
Ratings504.24

Job growth slowed in March, and here is what people are saying about that: “Financial markets got the news Friday that March job creation was subpar, and that complicates the investment outlook.” “It wasn’t just that the economy added 126,000 jobs in March when we’d been expecting 245,000. It was also that we lost 69,000 jobs in revisions to previous months. These tend to mark turning points in the economy.” “The March jobs report showed tell-tale signs that the factory sector is struggling and the broader economy is feeling the impact. … manufacturing employment fell into contraction … this is the broader impact from a stronger dollar hurting the export sector as well as domestic industry.” The thing is, all this talk is a wee bit wide of the mark, in our view. Whatever happens with jobs today is always a function of what happened in the economy months ago—jobs aren’t a leading indicator. Nor is March’s manufacturing employment decline evidence the stronger dollar is about to take its toll on US stocks.

Economies move first. Then jobs. During the last recession, US GDP bottomed in June 2009. Employment kept falling and bottomed in February 2010. GDP growth accelerated in Q4 2011, then slowed a bit. Job growth accelerated in Q1 2012, then slowed a bit. GDP accelerated in Q2 and Q3, then slowed in Q4. Job growth accelerated in Q4 and early Q1, and now it is slowing. Here are all of those words in picture form.

Exhibit 1: Late-Lagging Job Growth

Commentary

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths, Personal Finance

Three Backward-Looking, Not-So-Predictive Valuations Are High

By, 03/31/2015
Ratings693.775362

Evidently, Uncle Sam wants YOU … to be worried stocks are overvalued. At least, that’s the impression we get from a recent report by the US Treasury’s Office of Financial Research, “Quicksilver Markets,” which has trickled through mainstream financial publications since it was published March 17. Citing three … ummm … unconventional valuations, the report warns US stocks are “nearing extreme highs,” so look out below. Folks, this warning and its supporting evidence are about as useful to investors as a whale’s hip bone—bizarrely calculated backward-looking ratios do not predict stocks.

The report does point out that traditional valuations, like the 12-month forward price-to-earnings (P/E) ratio, aren’t extreme—then dismisses that because they didn’t signal trouble in 2007. Hence the focus on the oddballs, which were supposedly more prescient then and are higher still today. The measures in question are the cyclically adjusted P/E (CAPE), Q-ratio and the market value of all listed US equities as a percentage of all goods and services produced by US residents—or the ratio of US market cap to gross national product (GNP). In July 2001, Warren Buffett called this “the best single measure of where valuations stand at any given moment,” so it is now known as the “Buffett Indicator.”

No disrespect to any of the fine minds behind these indicators, but none tell you where stocks go. CAPE, created by John Campbell and Nobel Laureate Robert Shiller, compares stock prices to the last 10 years of inflation-adjusted earnings—the height of backward-looking. The intent is to even out market cycles’ impacts on earnings, smoothing away the extreme highs and lows at peaks and troughs, but it actually adds skew. The 2007-2009 recession is still in CAPE’s denominator. Does that have anything to do with how things go this year? Next year? 2017? There is little reason to think average earnings over the last decade predict anything, whether it’s this year’s earnings or the next decade’s (CAPE is designed to “predict” 10-year returns). CFOs don’t write business plans by slotting the last decade’s earnings into the next 10 years. They try to assess the actual return on all their current and new investments, which generally have little to do with the last 10 years. They’re at now now. Stocks look forward, too, not backward.

Research Analysis

Akash Patel
Into Perspective

Heating Up—A Look at UK Housing

By, 11/27/2013
Ratings124.041667

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).

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings833.885542

With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.

MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).

To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).

Research Analysis

Elisabeth Dellinger
Reality Check

Inside Indian Taper Terror

By, 11/08/2013
Ratings174.294117

When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.

The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.

Exhibit 1: Emerging Markets Foreign Equity Inflows

Research Analysis

Brad Pyles

Why This Bull Market Has Room to Run

By, 10/31/2013
Ratings884.102273

With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.

Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.

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What We're Reading

By , The Wall Street Journal, 04/17/2015

MarketMinder's View: While we guess you could theoretically call limiting margin, enabling short sales and warning against selling property to invest in stocks a big “red flag,” in this case, you could also interpret them as signs Chinese officials are trying to encourage more mature capital markets. The short sale thing isn’t new—they started drafting this years ago, in an effort to attract more foreign investors. Limiting speculation might also make foreign investors view Chinese markets as less rickety. And the property piece could easily be aimed at trying to salve a multiyear slowdown in property markets. In other words, none of today’s developments mean China is in a bubble about to pop. It has had a strong run lately, but there is fundamental support—better-than-expected economic growth and slow-but-steady economic reform. Also, even if Chinese stocks do eventually encounter tough sledding, Chinese markets don’t correlate strongly with the world’s. There are too many contained local variables. Big upswings and big plunges over the last 15 years haven’t tugged world stocks hard in either direction.

By , The Wall Street Journal, 04/17/2015

MarketMinder's View: While a couple of the conclusions go juuuust a bit too far, this is an overall great look at how overconfidence—a dangerous behavioral error—builds and why it’s so hazardous. The more an investor gets right in investing, whether or not rightness has anything to do with analytical skill, the more they believe in their own superiority and forget they could be wrong. That leads to excessive risk-taking, willful blindness and, often extremely poor returns. “Think of the folks who bought Internet stocks in 1999 and doubled or tripled their money in no time. Plenty of them were convinced, by early 2000, that nothing else was worth owning. Within 12 to 18 months, Many of them had lost 90% or more. No wonder the economist and investment strategist Peter Bernstein, who died in 2009, was fond of saying, ‘the riskiest moment is when you’re right.’”

By , Bloomberg, 04/17/2015

MarketMinder's View: This article runs through a range of five imaginative, hypothetical outcomes for Greece ranging from can kick to Grexit, and we give them one point for creativity. But there is no perspective offered or scale, so it is really a thought experiment in what's possible with no broad view of probable outcomes. Minus one point. And all the overwrought language ("catastrophic divorce"; "financial purgatory"; "economic afterlife") obscure the fact there next to signs of contagion or any reason to believe Greek woes are actually as contagious as Scenario C argues. The Russia/warm water port stuff at the end is wild, sociological speculation. In sum, we award this article no points, and actually think it owes us a few.

By , Financial Times, 04/17/2015

MarketMinder's View: This is all just a bunch of textbook theory and long-term-forecast malarkey—there is no such thing as a “natural” interest rate, and demographics are not cyclical market drivers. Markets are efficient, pricing in all widely known information quickly. Demographic trends play out slowly, over decades, and they are quite easy to see coming years in advance. We’d suggest erasing from your brain the concept of normal, natural, equilibrium, or whatever word someone might use to describe some fairytale interest-rate paradigm, and simply considering supply and demand factors over the foreseeable future. Do that, and you’ll likely find bond yields are low because bond supply is constrained (falling deficits in much of the world), while demand is high thanks to central bank purchases and tougher bank capital rules, which incentivize hoarding highly rated sovereign bonds. None of those factors appears likely to change materially in the next year or two.

Global Market Update

Market Wrap-Up, Thursday April 16, 2015

Below is a market summary as of market close Thursday, 4/16/2015:

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (-0.1%)
  • UK Equities: MSCI UK (+0.5%)
  • Best Country: Australia (+2.7%)
  • Worst Country: Portugal (-1.6%)
  • Best Sector: Consumer Staples (+0.6%)
  • Worst Sector: Information Technology (-0.3%)
  • Bond Yields: 10-year US Treasury yields fell -0.02 percentage point to 1.87%.

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.