Commentary

Fisher Investments Editorial Staff
GDP

US GDP: Statisticians Will Replace Fuzzy Math With Different Fuzzy Math

By, 05/29/2015

The sun rises over the Port of Oakland. Photo by Silentfoto and Getty Images.

So US GDP “officially” contracted in Q1, as the Commerce Department revised their estimate from 0.2% growth to a -0.7% contraction (all figures at seasonally adjusted annual rates). While some say this “raises questions” over America’s underlying strength and bemoan the “economy’s continuing inability to generate much momentum,” others were far more calm. Count us among the optimists: In addition to the widely discussed temporary skew from weather and the West Coast Ports labor dispute, most of the components here just weren’t all that bad.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths, Interest Rates

Big Theories, Small Moves

By, 05/29/2015
Ratings174.323529

Image by Fanatic Studio/Getty Images.

The range of opinions regarding what 2015’s bond yield fluctuations mean is wide and volatile. The range of actual yield movement is much less so. This discrepancy is another reminder, dear investors, that before you buy into extrapolations of trends, narratives and plausible-sounding stories, it is wise to check the data.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Pushing Back the Buyback Flak

By, 05/28/2015

Research and development is alive and well. Source: Bloomberg/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
Politics, Across the Atlantic

A Spanish Uprising?

By, 05/27/2015
Ratings84.875

Will Spanish Prime Minister Mariano Rajoy say ahoy to another four years in office or bid his post adiós in December? Based on last Sunday’s local election, many folks predict the latter, as populist upstarts knocked established parties down a few pegs—fueling concerns Syriza’s rise in Greece might not be a one-off, but the start of more radical europolitics. Some fear this all spells trouble for the euro, but that seems quite hasty to us. Even if euroskeptic anti-austerity parties continue rising in Spain and across the eurozone, it is beyond a stretch to assume a rush of political stalemates between national governments and Brussels will break the union.

Spain’s two establishment parties—the center-right Popular Party (PP) and the center-left Socialist Party (PS)—didn’t lose a massive chunk of the popular vote Sunday. Together they retained 52% of voters, down from 65% in 2011, as PP’s share dropped from 37% to 27% and PS’s slipped from 27% to 25%. But because of how local elections are structured, the PP will control just 3 of the 13 regions that voted compared with 11 last time around. The big difference this year: the rise of upstart parties like Podemos and Ciudadanos. Podemos—a far-left, anti-austerity populist party (Spain’s version of Greece’s now-ruling Syriza)—grabbed about 12% of the vote.[i] Because of their success, leftist coalitions could end up running almost half of Spain’s major cities. Podemos also took some prestigious positions: A Socialist/Podemos coalition will give a Podemos-backed candidate the mayor’s office in Madrid and another won outright in Barcelona. Ciudadanos, the pro-market populists, won 7% of the votes as a third party. Though a seemingly natural partner for the center-right PP, Ciudadanos also has certain conditions—like introducing party primaries—before agreeing to any deals. They also support Catalan independence—a big sticking point.

While the elections reveal Spain’s political fragmentation and do highlight the possibility a leftist coalition succeeds Rajoy, it’s too early to handicap. Early polls aren’t very predictive, and local elections aren’t always telling about national trends. Even the limited perspective offered by extrapolating Sunday’s results to a general election isn’t telling. According to Spanish newspaper El País, which crunched the numbers, PP would get 120 seats, PS 108, Podemos 37, Ciudadnos 18, and the remaining 67 would go to 15 other parties. It takes 176 seats to secure a majority in the Spanish Congress, so if that projection comes true, they would have a lot of horse-trading to do. Even if a leftist coalition emerges, multiparty alliances rarely accomplish much—too much infighting. Junior coalition partners and even the main party’s backbenchers are often hard to control. However, gridlock isn’t such a bad outcome. Rajoy’s government has already made some progress on labor market and other tough-but-needed reforms. A gridlocked government unable to undo these positive steps might be for the best.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

The Truth About May—It Is a Month

By, 05/26/2015
Ratings234.717391

It’s May 28! Have you sold your stocks and gone away? We hope not, because so far it would have proven pretty darn unnecessary, given global stocks have posted positive returns thus far. Actually, selling in May would pretty routinely prove an unnecessary—even costly—choice. Whatever happens these last few days, evidence abounds confirming that, despite its catchy rhyme, “Sell in May and go away” isn’t a useful investment strategy.  

The adage has its roots in market history and average returns (uh-oh). In English markets’ early days, brokers took the summer off, gallivanting about from May—until the last horse race of the season, the St. Leger Stakes. While they holidayed, trading was thin, markets weren’t terribly liquid, and legend has it stocks had the summertime blues. Ergo, “Sell in May and go away, come back at St. Leger Day.” Brokers don’t take four-month holidays anymore, but the catchphrase stuck, though the second half has morphed over time, moving from St. Leger Day—which usually falls in early or mid-September—to October-ish (depending on who you ask). The Stock Trader’s Almanac, which is basically D’Aulaires’ Book of Seasonal Myths, says to sit out the entire May through October period, citing inferior average returns during May – October than November – April.

This is where Sell in May’s trouble begins. Average returns since 1926 are indeed lower from May to October (4.2%) than from November through April (7.4%)[i]. But avoiding a positive 4.2% return over six months isn’t exactly a winning ticket to long-term growth. May to October returns have been positive roughly 72% of the time during that stretch—May sellers are far likelier to miss growth than avoid downside. Of the 26 times when staying out from May through October would have “worked,” 14 occurred when stocks were already in a bear market—bear markets that had zippo to do with calendar pages. (See Exhibit 1) Of the 13 bear markets since 1926, six began between May and October 31—a coin flip. Two of those (1929 and 2007) began toward the end of the range. Only one began in May, the 36-month bear market that ran from 5/30/1946 – 6/13/1949. There is nothing magical about May. It is a month.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Tall Tales Your Broker Told You

By, 05/21/2015
Ratings873.948276

It’s a longstanding tradition in the press and investment sales to hawk stocks with a great story—a compelling tale of the future prospects of this business for you to share in. Companies intuitively called “story stocks.” Sometimes those story stocks pan out—the tale is nonfiction. But others, not so much. On a daily basis, we consume oodles of articles from news sources the world over, and we are here to tell you the press does the same thing with market-wide fears. They conjure a narrative, and that narrative exists whether facts support it … or not. Here are two examples: Low P/Es[i] are the bees’ knees and high-dividend stocks rock. Both have existed throughout the bull (sometimes simultaneously), despite being debunked again by the very same bull.[ii] In our view, this is a classic reminder that a good story—no matter how compelling—isn’t a valid investment tactic or thesis absent supporting data.

First, let’s tackle price-to-earnings ratios. The classic P/E narrative says low P/Es are a buy signal. A low price relative to earnings means you are paying a little for your share of a firm’s profits (or expected profits). This seems to make sense, in that stock ownership is fundamentally about sharing in a company’s earnings. So paying fewer dollars for more earnings seems wise and beneficial. Cheap stocks! Big performance ahead! On the flipside, high P/Es, the tale goes, mean investors are too optimistic about a company’s prospects for the future—a warning sign prices will soon collapse. This is basically day one theory taught to newbies when learning about stocks, and it’s also wrong. All it takes is a quick look at P/Es during this bull market to see they aren’t predictive.

The S&P 500 Energy sector’s P/E was below the S&P 500’s for most of the period 2011 through 2014, implying undervalued Energy shares were ready to pop! (If you believe the narrative.) Yet the sector has trailed the S&P 500 for most of this bull market. But starting about halfway through 2014, Energy stocks began getting more expensive—quickly. P/Es since then have more than doubled, surging from 12.2 to 30.6—the richest valuation of any S&P 500 sector. So what happened? Did Energy stocks shoot to the moon? No! They cratered. Earnings just cratered more! Which means not only did Energy stocks fall a good bit, but now they sport rich valuations reality may not support.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Yesterday’s False Fears Are Still Here

By, 05/20/2015
Ratings384.381579

A Nobel Prize-winning economist’s valuation tool has reached a level hit only in 1929 and the Tech Bubble. A freak computer-related event could rattle high-speed traders. Like headlines about Greece, those previous sentences could have hit the front page at any time during the past few years. Yet they are “breaking” news this week. Though the specific details vary, these are the latest iterations of long-existing false fears in this bull market—a sign euphoria isn’t here. Stocks still have a wall of worry to climb.

Since this bull market dawned, pundits have frequently recycled fears, repackaging and dressing them up to appear “new.” The specifics are slightly different, but the broad fear is the same. Consider the morphing fears surrounding debt. Folks widely feared 2009’s record deficits exceeding $1 trillion. Ditto in 2010. 2011’s debt ceiling fight, the loss of the US’ AAA-debt rating and muni-pocalypse fears followed. In 2012, student-loan debt fears perked. Then the debt ceiling returned![i] More recently, it’s fears the dollar will lose its status as the world’s primary reserve currency.

Consider, also, eurozone fear morph. Our tale starts with Greek debt, but it doesn’t end there.[ii] Portuguese debt. Irish banks. Italian debt. Spanish banks. Greek bailout negotiations. Greek defaultGreek political turmoil. Greece going bankrupt. Greek default. Cyprus banks. Austerity driving recession. Deflation doom spiral. A eurozone version of Japan’s “lost decade”. Greek political turmoil. Greece going bankrupt. And don’t forget China slowdown fears! Its hard landing has allegedly been in the works for years now, with all sorts of catalysts to bring it about. A real estate bubble. Construction crash. Shadow banking. Local debt. Manufacturing slump. Property crash. All the while, the Middle Kingdom has continued growing at a steady, albeit slower, rate.

Commentary

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

Earnings 1, Strong Dollar Doom Mongers 0

By, 05/19/2015
Ratings414.585366

Here is a funny thing about economic narratives: They often aren’t true. Take the one about the strong dollar, which we are told has hammered US earnings by making exports less profitable. When Q1 ended, analysts penciled in a -4.6% y/y S&P 500 earnings decline. Yet here we are, with 465 of the index’s constituents reporting, and Q1 earnings are up 0.2% y/y. Yes, up. As in not down. And stocks are back at all-time highs. Looks like that strong dollar isn’t so bearish after all.

This shouldn’t surprise, considering US stocks and earnings did great in the late 1990s, when the dollar was even stronger than today. It also makes logical sense: US firms doing business abroad—those theoretically super-vulnerable to the dollar’s swings—have overseas costs as well as revenues. A stronger dollar makes foreign sales worth less when converted to dollars, but it also reduces foreign costs, including shipping, imported components and labor. These lower costs can offset much of the dollar’s impact on sales. That appears to be the case in Q1, considering revenues fell -2.8% y/y, and some firms offered anecdotal evidence of strong-dollar give and take during their conference calls. Diverging earnings and revenues will probably inspire some whining about firms relying overly on cost cuts, but we wouldn’t make much of that. It’s not like firms are out there slashing production, payrolls and inventories to brace for recession. They’re just dealing with the twin impacts of a stronger currency. Nothing to grouse about here.

Exclude the Energy sector, where earnings and revenues remain under fire from low oil prices, and things look even better. Together, the remaining nine sectors enjoyed 7.8% y/y earnings growth and 2.5% y/y revenue growth. Sectors with big international exposure, like Consumer Staples, Discretionary, Health Care and Technology, did a-ok. Here is a table:

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

How to (Actually) Shield Your Retirement From the Threat of Low Yields

By, 05/18/2015
Ratings643.78125

Raise your hand if you love today’s super-duper low interest rates: ultra-cheap mortgage and car loans! Refinancing boomed in this cycle! Businesses borrow cheaply! Even some student loans are getting cheaper. But on the flip side, bond investors are getting squeezed by the same low interest rates. Given fixed income is a widespread staple of retirees’ investment portfolios, some suggest it’s time retirees materially alter their investment approach to boost yields and reduce risk they run out of money. Proponents posit you should invest less in traditional fixed income and more in alternate asset classes that either have higher yields or generate guaranteed income. Some of this discussion is fine and more or less sensible. But in our view, much of the angst and resulting recommendations stem from an incorrect focus on how to generate income and construct portfolios for retirement in the first place. None of that is brought to you by low rates.

Much of the trouble seems to stem from conflating two investment terms: Income and cash flow. Cash flows are withdrawals to cover expenses, while income is a piece of investment return (dividend, interest payment, etc.). You can earn income and never withdraw a penny. You can take cash flow and never earn income. Income is one way to generate cash flow, but it is not a requirement.

Yet some believe otherwise, a misperception creating this whole low-interest-rate-squeeze concern by limiting the universe you are picking from. If you free yourself from the shackles of investing for cash flow with income-producing securities—instead correctly focusing on price movement and income (total return)—the universe of investible securities is wide open. When a total return-focused investor needs cash flow, he or she can sell securities. In taxable accounts, it can easily be a more tax efficient means of doing so, no less.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

The Fed Isn’t Fueling This Typical Bull Market

By, 05/15/2015
Ratings654.523077

Quite high.” That is how Fed chair Janet Yellen described stock valuations last week. Cue the usual Fed rate hike speculation. One camp thinks a hike is overdue—that the Fed has been too accommodating, inflating  asset bubbles across the land. Others fret a hike and argue the US economy needs continued “Fed support.” So who is right?  Neither! In our view, Fed monetary policy has neither overinflated investible assets like stocks, nor has it artificially propped up the bull. This debate shows skepticism and fears are alive and well—bullish for stocks.

Some pundits claim low interest rates and other policies like quantitative easing (QE) have driven investors to forsake low-yielding assets and pile into higher-yielding, “riskier” securities (e.g., corporate and junk bonds and stocks)—inflating prices. While we’re sure this has happened in individual cases, as a broad thesis, there are big holes. First, evidence suggests Fed policy has actually been more “tight” than “loose.” Traditionally, when the Fed has sought to boost liquidity, it has kept the discount rate below the fed-funds rate, allowing banks to borrow directly from the Fed cheap and profit by lending at the higher fed-funds rates—the profit is an incentive to pump cash. Today’s Fed has held the discount rate above fed-funds throughout the bull—suggesting policy wasn’t easy. As for QE, if it were truly a weapon of mass stimulation, why was loan growth anemic while it ran? QE’s long-term bond buying lowered long rates and flattened the yield curve—discouraging banks from lending, as loan profitability relies on low short-term rates (banks’ funding costs) and higher long-term rates (interest revenue).

Data also show bubble worries are overwrought. In a frothy environment, valuations should be stratospheric—but they aren’t. They are modestly above average, suggesting optimism, but far from bubble-like 2000 levels. (Exhibit 1)

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Tall Tales Your Broker Told You

By, 05/21/2015
Ratings873.948276

It’s a longstanding tradition in the press and investment sales to hawk stocks with a great story—a compelling tale of the future prospects of this business for you to share in. Companies intuitively called “story stocks.” Sometimes those story stocks pan out—the tale is nonfiction. But others, not so much. On a daily basis, we consume oodles of articles from news sources the world over, and we are here to tell you the press does the same thing with market-wide fears. They conjure a narrative, and that narrative exists whether facts support it … or not. Here are two examples: Low P/Es[i] are the bees’ knees and high-dividend stocks rock. Both have existed throughout the bull (sometimes simultaneously), despite being debunked again by the very same bull.[ii] In our view, this is a classic reminder that a good story—no matter how compelling—isn’t a valid investment tactic or thesis absent supporting data.

First, let’s tackle price-to-earnings ratios. The classic P/E narrative says low P/Es are a buy signal. A low price relative to earnings means you are paying a little for your share of a firm’s profits (or expected profits). This seems to make sense, in that stock ownership is fundamentally about sharing in a company’s earnings. So paying fewer dollars for more earnings seems wise and beneficial. Cheap stocks! Big performance ahead! On the flipside, high P/Es, the tale goes, mean investors are too optimistic about a company’s prospects for the future—a warning sign prices will soon collapse. This is basically day one theory taught to newbies when learning about stocks, and it’s also wrong. All it takes is a quick look at P/Es during this bull market to see they aren’t predictive.

The S&P 500 Energy sector’s P/E was below the S&P 500’s for most of the period 2011 through 2014, implying undervalued Energy shares were ready to pop! (If you believe the narrative.) Yet the sector has trailed the S&P 500 for most of this bull market. But starting about halfway through 2014, Energy stocks began getting more expensive—quickly. P/Es since then have more than doubled, surging from 12.2 to 30.6—the richest valuation of any S&P 500 sector. So what happened? Did Energy stocks shoot to the moon? No! They cratered. Earnings just cratered more! Which means not only did Energy stocks fall a good bit, but now they sport rich valuations reality may not support.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

Yesterday’s False Fears Are Still Here

By, 05/20/2015
Ratings384.381579

A Nobel Prize-winning economist’s valuation tool has reached a level hit only in 1929 and the Tech Bubble. A freak computer-related event could rattle high-speed traders. Like headlines about Greece, those previous sentences could have hit the front page at any time during the past few years. Yet they are “breaking” news this week. Though the specific details vary, these are the latest iterations of long-existing false fears in this bull market—a sign euphoria isn’t here. Stocks still have a wall of worry to climb.

Since this bull market dawned, pundits have frequently recycled fears, repackaging and dressing them up to appear “new.” The specifics are slightly different, but the broad fear is the same. Consider the morphing fears surrounding debt. Folks widely feared 2009’s record deficits exceeding $1 trillion. Ditto in 2010. 2011’s debt ceiling fight, the loss of the US’ AAA-debt rating and muni-pocalypse fears followed. In 2012, student-loan debt fears perked. Then the debt ceiling returned![i] More recently, it’s fears the dollar will lose its status as the world’s primary reserve currency.

Consider, also, eurozone fear morph. Our tale starts with Greek debt, but it doesn’t end there.[ii] Portuguese debt. Irish banks. Italian debt. Spanish banks. Greek bailout negotiations. Greek defaultGreek political turmoil. Greece going bankrupt. Greek default. Cyprus banks. Austerity driving recession. Deflation doom spiral. A eurozone version of Japan’s “lost decade”. Greek political turmoil. Greece going bankrupt. And don’t forget China slowdown fears! Its hard landing has allegedly been in the works for years now, with all sorts of catalysts to bring it about. A real estate bubble. Construction crash. Shadow banking. Local debt. Manufacturing slump. Property crash. All the while, the Middle Kingdom has continued growing at a steady, albeit slower, rate.

Commentary

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

Earnings 1, Strong Dollar Doom Mongers 0

By, 05/19/2015
Ratings414.585366

Here is a funny thing about economic narratives: They often aren’t true. Take the one about the strong dollar, which we are told has hammered US earnings by making exports less profitable. When Q1 ended, analysts penciled in a -4.6% y/y S&P 500 earnings decline. Yet here we are, with 465 of the index’s constituents reporting, and Q1 earnings are up 0.2% y/y. Yes, up. As in not down. And stocks are back at all-time highs. Looks like that strong dollar isn’t so bearish after all.

This shouldn’t surprise, considering US stocks and earnings did great in the late 1990s, when the dollar was even stronger than today. It also makes logical sense: US firms doing business abroad—those theoretically super-vulnerable to the dollar’s swings—have overseas costs as well as revenues. A stronger dollar makes foreign sales worth less when converted to dollars, but it also reduces foreign costs, including shipping, imported components and labor. These lower costs can offset much of the dollar’s impact on sales. That appears to be the case in Q1, considering revenues fell -2.8% y/y, and some firms offered anecdotal evidence of strong-dollar give and take during their conference calls. Diverging earnings and revenues will probably inspire some whining about firms relying overly on cost cuts, but we wouldn’t make much of that. It’s not like firms are out there slashing production, payrolls and inventories to brace for recession. They’re just dealing with the twin impacts of a stronger currency. Nothing to grouse about here.

Exclude the Energy sector, where earnings and revenues remain under fire from low oil prices, and things look even better. Together, the remaining nine sectors enjoyed 7.8% y/y earnings growth and 2.5% y/y revenue growth. Sectors with big international exposure, like Consumer Staples, Discretionary, Health Care and Technology, did a-ok. Here is a table:

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

How to (Actually) Shield Your Retirement From the Threat of Low Yields

By, 05/18/2015
Ratings643.78125

Raise your hand if you love today’s super-duper low interest rates: ultra-cheap mortgage and car loans! Refinancing boomed in this cycle! Businesses borrow cheaply! Even some student loans are getting cheaper. But on the flip side, bond investors are getting squeezed by the same low interest rates. Given fixed income is a widespread staple of retirees’ investment portfolios, some suggest it’s time retirees materially alter their investment approach to boost yields and reduce risk they run out of money. Proponents posit you should invest less in traditional fixed income and more in alternate asset classes that either have higher yields or generate guaranteed income. Some of this discussion is fine and more or less sensible. But in our view, much of the angst and resulting recommendations stem from an incorrect focus on how to generate income and construct portfolios for retirement in the first place. None of that is brought to you by low rates.

Much of the trouble seems to stem from conflating two investment terms: Income and cash flow. Cash flows are withdrawals to cover expenses, while income is a piece of investment return (dividend, interest payment, etc.). You can earn income and never withdraw a penny. You can take cash flow and never earn income. Income is one way to generate cash flow, but it is not a requirement.

Yet some believe otherwise, a misperception creating this whole low-interest-rate-squeeze concern by limiting the universe you are picking from. If you free yourself from the shackles of investing for cash flow with income-producing securities—instead correctly focusing on price movement and income (total return)—the universe of investible securities is wide open. When a total return-focused investor needs cash flow, he or she can sell securities. In taxable accounts, it can easily be a more tax efficient means of doing so, no less.

Commentary

Fisher Investments Editorial Staff
Media Hype/Myths

The Fed Isn’t Fueling This Typical Bull Market

By, 05/15/2015
Ratings654.523077

Quite high.” That is how Fed chair Janet Yellen described stock valuations last week. Cue the usual Fed rate hike speculation. One camp thinks a hike is overdue—that the Fed has been too accommodating, inflating  asset bubbles across the land. Others fret a hike and argue the US economy needs continued “Fed support.” So who is right?  Neither! In our view, Fed monetary policy has neither overinflated investible assets like stocks, nor has it artificially propped up the bull. This debate shows skepticism and fears are alive and well—bullish for stocks.

Some pundits claim low interest rates and other policies like quantitative easing (QE) have driven investors to forsake low-yielding assets and pile into higher-yielding, “riskier” securities (e.g., corporate and junk bonds and stocks)—inflating prices. While we’re sure this has happened in individual cases, as a broad thesis, there are big holes. First, evidence suggests Fed policy has actually been more “tight” than “loose.” Traditionally, when the Fed has sought to boost liquidity, it has kept the discount rate below the fed-funds rate, allowing banks to borrow directly from the Fed cheap and profit by lending at the higher fed-funds rates—the profit is an incentive to pump cash. Today’s Fed has held the discount rate above fed-funds throughout the bull—suggesting policy wasn’t easy. As for QE, if it were truly a weapon of mass stimulation, why was loan growth anemic while it ran? QE’s long-term bond buying lowered long rates and flattened the yield curve—discouraging banks from lending, as loan profitability relies on low short-term rates (banks’ funding costs) and higher long-term rates (interest revenue).

Data also show bubble worries are overwrought. In a frothy environment, valuations should be stratospheric—but they aren’t. They are modestly above average, suggesting optimism, but far from bubble-like 2000 levels. (Exhibit 1)

Commentary

Fisher Investments Editorial Staff
GDP

Eight Straight and Counting: The Eurozone’s Underappreciated Growth Streak

By, 05/14/2015
Ratings124.541667

It’s now eight straight, folks. That’s right—the eurozone has grown for eight straight quarters following this week’s report, which clocked Q1 growth at +0.4% q/q. Headlines lauded the acceleration from Q4’s +0.3%—but they were quick to add caveats, like Finland’s contraction and Greece’s return to recession ,  high government debt levels, still-elevated unemployment or Germany’s slower growth   rate. For investors, the data themselves don’t mean a whole lot—stocks are forward-looking and GDP looks backwards. But reactions to the report say a lot about sentiment—a key market driver—towards the region today.

Overall, the report was pretty positive. Twelve of the 16 reporting nations grew, and troubled Cyprus came in first at 1.6%—its first quarter of growth since 2011[i]. Spain led the major economies at 0.9%, continuing its solid run. France resumed growing and came in second among the core four at 0.6%. Italy grew (0.3%) for the first time since Q4 2013. Only Germany disappointed, slowing to 0.3%.

Exhibit 1: Eurozone GDP Growth (Q/Q, Seasonally Adjusted)

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 , Bloomberg, 05/29/2015

MarketMinder's View: So this assumes that Thursday's -6.5% drop in the Shanghai index is just the first step off a cliff, as China's market "bubble" bursts. Look, we get it. Chinese stocks have gone up a ton in the last year, leading many to suggest the run is overdone. But if, as noted here, margin requirements have been tightened all year—and they have been—why be so sure this sharp drop is the difference maker that proves China's a "bubble?" Yeah, China's growth is slowing. But that isn't a reason stock returns should falter, just as its booming growth in earlier years didn’t cause a massive China stock boom. Maybe, just maybe, that slow growth is topping long-in-the-tooth hard-landing fears that have weighed on Chinese stocks for years?

By , MarketWatch, 05/29/2015

MarketMinder's View: The Enron-era audit requirements referred to here are parts of the onerous Sarbanes-Oxley Act of 2002, which sought to ban accounting fraud by requiring executive certification of balance sheet accuracy, with criminal penalties if inaccuracies were found. Well intended? Sure, but it massively increased compliance and audit costs at the same time, which is probably not the most productive use of capital in our economy and is a drag for public companies. But what’s more, here the Chamber of Commerce notes requirements and standards have expanded and morphed since 2002, to include coverage of “internal controls” like oversight of the JPMorgan internal trading strategy run by the “London Whale.” These expansions, the Chamber claims, aren’t legislated and haven’t even been subjected to the typical rulemaking process. While these costs are likely only an incremental increase, if the Chamber is correct, this exemplifies how regulators can creep beyond their mandated bounds. This is a story worth watching, if only to see whether this government creep can withstand scrutiny and public challenge.

By , The Wall Street Journal, 05/29/2015

MarketMinder's View: Well, thing is, there is much, much more you need to identify other than just the fees and specific fund choices made in a target-date fund. The glide path, how it gradually shifts from stocks to bonds, when and what types it chooses, are far more important. Those asset allocation decisions are highly likely to render fee rates near irrelevant by contrast, and if you don’t know what they are you are risking your whole retirement, not a few basis points of return. Target-date funds operate on the misperception retirees should own far fewer stocks and may wind up generating less return than you need in the long run.

By , Reuters, 05/29/2015

MarketMinder's View: Well, he’s wrong in the sense that if you file Chapter 11 (Lehman did!), you are bankrupt. Because that is also called, “Filing for bankruptcy.” But he is right in the sense that Lehman was solvent (assets exceeded liabilities) on the day the Fed elected to let them fail. And yes, that wording is entirely intentional, because (as the Fed’s meeting transcripts make clear) they denied backing a bid for Lehman, sealing its doom. This, despite the fact the Fed brokered a deal with JPMorgan to save Lehman’s twin, Bear Stearns, from a near-identical predicament six months earlier. And this is the byproduct of accounting rule FAS 157, a well-intended rule that caused banks to take greatly exaggerated paper losses.

Global Market Update

Market Wrap-Up, Wednesday May 27, 2015

Below is a market summary as of market close Wednesday, May 27, 2015:

  • Global Equities: MSCI World (+0.7%)
  • US Equities: S&P 500 (+0.9%)
  • UK Equities: MSCI UK (+0.8%)
  • Best Country: Italy (+2.1%)
  • Worst Country: Singapore (-1.4%)
  • Best Sector: Information Technology (+1.6%)
  • Worst Sector:  Energy (+0.0%)
  • Bond Yields: 10-year US Treasury yields fell -0.01 percentage point to 2.13%.

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.