|By Fisher Investments Editorial Staff, 03/27/2015|
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
Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.
Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.
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|By Michael Kitces, Nerd’s Eye View , 03/31/2015|
MarketMinder's View: A great explanation of the fiduciary standard’s origins and how the blurring of the line between investment sales and service, not the fact that sales people don’t have rules requiring them to consider clients’ interests first, is the real trouble: “Perhaps the better solution to the blurring of the distinction between investment advisers and brokers is not to subject them all to a single uniform fiduciary standard as ‘financial advisors,’ but instead to simply re-assert the dividing line between them. Let advisors be [investment] advisers (subject to the fiduciary rule that already exists), brokers be the sales people they legally are, and rather than mixing the two let each hold out as such to the public – where brokerage salespeople are called brokers and investment advisers are called financial advisers – so consumers understand the true choice being presented to them. In other words, consumers don’t deserve a choice between fiduciary and suitability; they deserve a choice between advisers and salespeople.” For more on the fiduciary standard see our commentaries here and here.
|By Ben Bernanke, Brookings Institution, 03/31/2015|
MarketMinder's View: Hey, look, our former Fed head has a blog! In this, his second post (and part two in a series on low interest rates), he tackles “secular stagnation”—that fear productivity gains have topped out, driving investment and growth lower. He argues it isn’t a thing, which we fully agree with, but the evidence is a mixed bag—and therefore worth diving into. One, it assumes the Fed has more influence on long-term interest rates than the market, largely ignoring the impact of supply and demand on bond prices (long-term government yields are the reference rate for corporate bonds and bank loans). Two, while bulldozing the entire Rocky Mountain range might indeed be “profitable” if financed at low or negative interest rates because trains and cars would save on fuel by not climbing steep grades, we reckon the lost commerce at ski resorts, mountain hamlets, national parks and bike trails would more than offset it. Three, all available evidence suggests credit recovered slowly after the crisis not because markets were scarred, but because the yield curve flattened (a result of quantitative easing). Four, the “restrictive fiscal policies” known as the sequester didn’t dent private-sector growth.
|By Ira Iosebashvili, The Wall Street Journal, 03/31/2015|
MarketMinder's View: Once again, rumors of the dollar’s impending demise as a global reserve currency have been greatly exaggerated—its share of allocated foreign exchange reserves rose in Q4 and 2014 overall. Bully! While that is a slight change from the past decade-plus of declines—which happened as the total number of dollars held in reserve rose—we would hesitate to call this a sea change. The total amount of reserves held globally fell, which about mirrors Russia’s falling reserves, so most of this appears tied to their efforts to defend the ruble. Most likely, other currencies continue gaining share slowly and steadily over the very long term, as international capital markets continue developing. This is good for the world. For more, see Elisabeth Dellinger’s column, “The Tale of the Dollar’s Demise.”
|By Gabriel Wildau, Financial Times, 03/31/2015|
MarketMinder's View: How so? Because competing on deposit rates requires banks to take risk, which theoretically zaps the state-owned banks de facto government guarantees, and most agree some safeguard is thus necessary to prevent bank runs. Insuring deposits up to RMB 500,000 ($80,600) will bring China in line with the US, UK and much of the developed world, and if officials follow through with freeing up deposit rates as pledged, that’s a big step in China’s ongoing modernization. Though, as this piece notes, it remains an open question whether officials will take a fully market-oriented approach, allowing banks to fail if they overextend themselves, markets have long known Chinese reform will be a fitful, gradual process.
Market Wrap-Up, Tuesday Mar 31, 2015
Below is a market summary as of market close Tuesday, 3/31/2015:
Global Equities: MSCI World (-0.9%)
US Equities: S&P 500 (-0.9%)
UK Equities: MSCI UK (-1.5%)
Best Country: Australia (+0.8%)
Worst Country: Ireland (-3.1%)
Best Sector: Utilities (-0.5%)
Worst Sector: Health Care (-1.4%)
Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 1.92%.
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.