Commentary

Fisher Investments Editorial Staff

Some Thoughts on 2016

By, 11/25/2014

Don’t get all fired up over the 2016 Presidential election just yet. Photo by Joe Raedle/Getty Images News.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

Commentary

Fisher Investments Editorial Staff
Investor Sentiment

All Quiet on the Record High Front

By, 11/24/2014
Ratings93.833333

This is a peak. The 131 S&P 500 record highs in this cycle were not peaks. Photo by Claude-Olivier Marti/Getty Images.

Stocks have quietly set a string of new all-time highs in recent weeks.

Commentary

Fisher Investments Editorial Staff
The Global View

The Unnecessary $2 Trillion Global Stimulus Economic Benefit Concert

By, 11/21/2014
Ratings163.9375

Are the world economy’s lights flashing red or green? Photo by David Arthur/Getty Images.

Here is a memo for the G-20: The global economy is actually growing.

Commentary

Fisher Investments Editorial Staff
Into Perspective

Clearing Up Bond Trading

By, 11/20/2014
Ratings203.725

Most bond trading is as opaque as this black case. Photo by Todd Bliman.

Here is a simple question that often doesn’t have a simple answer: How much did you pay to buy that bond? This week, the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) proposed amendments to their current rules that seek to make that answer easier to come by, clarifying transaction costs for municipal, corporate and agency debt securities. Their plan is a step in the right direction, in our view, but the proposed rules are still less clear than they could otherwise be.

Commentary

Fisher Investments Editorial Staff
The Global View

Is the World Turning Japanese?

By, 11/19/2014

Monday’s news of Japan falling back into recession continued spurring headlines Tuesday, albeit of a different flavor. They stopped expressing shock at Abenomics’ inability to spur growth and started fearing the world is turning Japanese too—and about to take stocks down with it. However, we humbly suggest the issues hamstringing Japan are the same ones that led to its lost decade. That didn’t go global, and we see little reason to think this time will be different.[i]

Japan’s struggles stem from its … ummm … unique take on capitalism, which is rather more mercantilist than Smithian.[ii] The result: deep structural issues like waning productivity, narrow labor markets, protectionist trade policy and an uncompetitive corporate sector dominated by large, horizontally integrated keiretsu—to name just a few (we could go on). These are supposedly in Japanese Prime Minister Shinzo Abe’s crosshairs, the target of long-promised but undelivered structural reforms.

But most pundits don’t acknowledge how much these structural issues muffle Japanese growth, arguing the lost decade[iii] was a product of deflation and demographics. They don’t acknowledge deflation is a signal—not a cause—of deeper problems. To the extent demographic issues are problematic, they are no match for a free, open economy. From this misdiagnosis, the experts hunt for the next economy ripe for its own “lost decade.” Today’s popular target: the eurozone.

Commentary

Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings273.814815

No word on whether Australian PM Tony Abbott was giving Japanese PM Shinzo Abe election tips or just making a funny. Maybe both? Photo by Ian Waldie, Pool/Getty Images.

Pop quiz: What do you get when you hit a struggling country with higher prices and a three percentage point sales tax hike? Give up? Recession! At least, according to Japanese GDP released Monday that’s what Japan got, with the second straight GDP contraction placing the archipelago into recession by one common definition. Globally, this doesn’t mean a ton—growth elsewhere is more than enough to offset Japan’s -1.6% annualized Q3 drop. But the causes and domestic fallout reiterate why we’ve long thought investors’ expectations for Japan are too high and better opportunities lie elsewhere.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP, Investor Sentiment

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865


Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts’ estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany’s insistence risks a “lost decade.” The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove “insufficient to create jobs,” too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

All Aboard the Through Train?

By, 11/14/2014
Ratings294.137931

Starting Monday, foreign investors will have unprecedented access to mainland  Chinese stocks courtesy of the delightfully named “through train” program, which lets foreigners buy “selected” Chinese A-shares traded on the Shanghai exchange through Hong Kong brokerages. Many are cheery about the prospect of new demand worth tens of billions of dollars pushing Chinese stocks higher. But before you choo-choo your way over, we’d encourage you to keep a rational perspective. China has plenty going for it, but anyone expecting the through train to be the ticket to sky-high returns might end up a tad disappointed.

In recent years, Chinese A-shares haven’t quite reflected the economy’s rapid growth rate. They boomed at times during the 2000s bull market, but as Exhibit 1 shows, this was short-lived and out of step with the global bull that began in 2003. As of Thursday’s close, A-shares were still 36% under their 1/14/2008 peak. Meanwhile, China’s economy kept on chugging, taking Japan’s place as the world’s second biggest. Not that stocks and GDP should move one-to-one—that isn’t how it works ever. But it underscores how China’s political climate, capital market controls and sentiment have offset many an economic tailwind.

Exhibit 1: Chinese A-Shares

Commentary

Fisher Investments Editorial Staff
Politics

What to Expect from Lame-Duck Season

By, 11/13/2014
Ratings453.844445


President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Risky Business

By, 11/12/2014


There is more risk than just volatility (and a board game). Photo by Robert Nickelsberg/Getty Images.

Risk. This four letter word both tempts and terrifies investors. Some folks think it’s the ticket to sky-high returns. Others find it scary or uncomfortable. Both mentalities lead many to an effort to measure it. Because if you can quantify something (e.g. this stock is risky based on this metric), you can understand what you’re dealing with—and understanding things is nice. Don’t want much risk? Avoid the thing with the higher risk number! But as one stellar paper we recently read thoroughly explained, you can’t reduce investment risk to a single number or set of figures. Most investment risks aren’t actually quantifiable. Believing they are can lead to truly risky portfolio decisions. 

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Commentary

Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings273.814815

No word on whether Australian PM Tony Abbott was giving Japanese PM Shinzo Abe election tips or just making a funny. Maybe both? Photo by Ian Waldie, Pool/Getty Images.

Pop quiz: What do you get when you hit a struggling country with higher prices and a three percentage point sales tax hike? Give up? Recession! At least, according to Japanese GDP released Monday that’s what Japan got, with the second straight GDP contraction placing the archipelago into recession by one common definition. Globally, this doesn’t mean a ton—growth elsewhere is more than enough to offset Japan’s -1.6% annualized Q3 drop. But the causes and domestic fallout reiterate why we’ve long thought investors’ expectations for Japan are too high and better opportunities lie elsewhere.

Commentary

Fisher Investments Editorial Staff
Across the Atlantic, GDP, Investor Sentiment

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865


Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts’ estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany’s insistence risks a “lost decade.” The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove “insufficient to create jobs,” too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

Commentary

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

All Aboard the Through Train?

By, 11/14/2014
Ratings294.137931

Starting Monday, foreign investors will have unprecedented access to mainland  Chinese stocks courtesy of the delightfully named “through train” program, which lets foreigners buy “selected” Chinese A-shares traded on the Shanghai exchange through Hong Kong brokerages. Many are cheery about the prospect of new demand worth tens of billions of dollars pushing Chinese stocks higher. But before you choo-choo your way over, we’d encourage you to keep a rational perspective. China has plenty going for it, but anyone expecting the through train to be the ticket to sky-high returns might end up a tad disappointed.

In recent years, Chinese A-shares haven’t quite reflected the economy’s rapid growth rate. They boomed at times during the 2000s bull market, but as Exhibit 1 shows, this was short-lived and out of step with the global bull that began in 2003. As of Thursday’s close, A-shares were still 36% under their 1/14/2008 peak. Meanwhile, China’s economy kept on chugging, taking Japan’s place as the world’s second biggest. Not that stocks and GDP should move one-to-one—that isn’t how it works ever. But it underscores how China’s political climate, capital market controls and sentiment have offset many an economic tailwind.

Exhibit 1: Chinese A-Shares

Commentary

Fisher Investments Editorial Staff
Politics

What to Expect from Lame-Duck Season

By, 11/13/2014
Ratings453.844445


President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.

Commentary

Fisher Investments Editorial Staff
Personal Finance

Risky Business

By, 11/12/2014


There is more risk than just volatility (and a board game). Photo by Robert Nickelsberg/Getty Images.

Risk. This four letter word both tempts and terrifies investors. Some folks think it’s the ticket to sky-high returns. Others find it scary or uncomfortable. Both mentalities lead many to an effort to measure it. Because if you can quantify something (e.g. this stock is risky based on this metric), you can understand what you’re dealing with—and understanding things is nice. Don’t want much risk? Avoid the thing with the higher risk number! But as one stellar paper we recently read thoroughly explained, you can’t reduce investment risk to a single number or set of figures. Most investment risks aren’t actually quantifiable. Believing they are can lead to truly risky portfolio decisions. 

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Commentary

Fisher Investments Editorial Staff

Mark Carney Wants Big Banks to Save More—in Bullet Points!

By, 11/11/2014

The Financial Stability Board released plans to make banks less “too big to fail”[i] Monday,[ii] continuing their long-running effort to prevent governments from ever profiting off failing banks again.[iii] Or taking losses. Or just bailing them out in general. Starting in 2019 or so, a few dozen of the world’s biggest banks must hold at least twice as much “loss absorbing capital” as normal banks so they can replace bailouts with “bail-ins,” Cyprus-style. Regulators, led by BoE chief Mark Carney, believe this will allow the system to deal with failing banks in an orderly way, without triggering panic, and without governments stepping in. We are skeptical.

Here is a quick outline of the FSB’s plan:

Who: “Globally Systemically Important Banks,” aka G-SIB—the 30 biggest and/or most interconnected banks globally.[iv] Here is the 2014 list.[v] Here is the geographical breakdown:

Research Analysis

Fisher Investments Research Staff

MLPs and Your Portfolio

By, 11/26/2013
Ratings823.890244

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.

Research Analysis

Christo Barker
US Economy

Let’s Call It FARRP

By, 10/10/2013
Ratings93.777778

While the rest of the country fretted over taper terror, government shutdown and debt ceiling limits, the Federal Reserve tested its Fixed Rate Full-Allotment Reverse-Repo Facility (a mouthful—let’s call it FARRP) for the first time September 24. FARRP allows banks and non-banks, like money market funds and asset managers, to access Fed-held assets—i.e., the long-term securities bought under the Fed’s quantitative easing—via securities dealers’ tri-party repo (and reverse-repo) market for short-term funding. (More on repos to follow.) FARRP aims to address what many feel is a collateral shortage in the non-bank financial system caused by too much QE bond buying concentrating eligible collateral on the Fed’s balance sheet, where it doesn’t circulate freely. As a result, many private sector repo rates turned negative. But, should FARRP be fully implemented, the facility could actually hinder some assets (in this case, high-quality, long-term collateral like bonds) from circulating through the financial system—much like quantitative easing (QE) locked up excess bank reserves. A more effective means of freeing collateral in the repo market is tapering the Fed’s QE.

Repurchase agreements, or repos, are used to generate short-term liquidity to fund other banking or investment activity—a means to move liquidity (cash) from one institution to another. In a repo, one party sells an asset—usually long-term debt—agreeing to repurchase it at a different price later on. A reverse repo is, well, the opposite: One party buys an asset from another, agreeing to sell it back at a different price later. In both cases, the asset acts as collateral for what is effectively the buyer’s loan to the seller, and the repo rate is the difference between the initial and future sales prices, usually expressed as a per annum interest rate. The exchange only lasts a short while—FARRP’s reverse repos are overnight affairs to ensure markets are sufficiently funded. In the test last Tuesday, the private sector tapped the facility for $11.81 billion of collateral—a small, but not insignificant, amount.

FARRP’s first round is scheduled to end January 29, and during that time, non-bank institutions can invest between $500 million and $1 billion each at FARRP’s fixed overnight reverse-repo rates ranging from one to five basis points. A first for repo markets: Normally, repo and reverse-repo rates are free-floating, determined by market forces. Another of FARRP’s differentiating factors is private-sector need will facilitate reverse-repo bids instead of the Fed. Ideally, FARRP’s structure will encourage unproductive collateral to be released back into the system when it’s most needed—and new sources of collateral demand may help ensure this. Swaps, for example, are shifting to collateral-backed exchanges due to Dodd-Frank regulation—meaning more collateral will be needed to back the same amount of trading activity. Collateral requirements for loans will likely also rise.

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What We're Reading

By , Reuters, 11/25/2014

MarketMinder's View: Hey! Breaking news! Japan wants to avoid deflation. But we would suggest the evidence continues to mount that quantitative and qualitative easing (QQE) isn’t a solution. Thus far QQE hasn’t really helped on that front (and it has also been a drag on broad money supply growth). Sure, CPI has ticked up, but that has been largely a function of pricier imports (natural gas and other Energy sources). Removing energy and April’s consumption tax from the equation, inflation remains pretty lackluster. Further, as a byproduct of QQE—the yen has weakened. But that isn’t a net benefit for Japan because it makes imports expensive—taking a toll on businesses and people. (Which the government even acknowledges now.) In our view, adding another Q to QQE would be a questionable move indeed. In related news, it seems BoJ head Haruhiko Kuroda is attempting to start a wage-price spiral (up, we mean) with himself.

By , The Wall Street Journal, 11/25/2014

MarketMinder's View: So this is interesting in the sense that the rules in question were those targeting coal-fired utilities, which some have hyperbolically labeled a “war” on a carbon-based inanimate object which the US is considered the Saudi Arabia of. Whichever way the court rules, though, we would suggest the coal industry faces headwinds unrelated to the EPA. Namely, natural gas, which is super cheap, super plentiful and emits less carbon. In fact, these rules are actually pretty toothless, when you consider the free market has already been trending this way at a faster clip than mandated by the EPA. But, you know, who’s counting?

By , Bloomberg, 11/25/2014

MarketMinder's View: A solid article on why you should take sell-side analysts’ buy or sell recommendations with a grain of salt: “An investment bank is primarily an intermediary. To make its money, it needs to convince some people to buy a security, and other people to sell the same security. How can it mean it both ways? The more sincerely and adamantly it believes that people should buy a particular security, the less plausible is its simultaneous belief that other people should sell it.” An inherent conflict of interest exists—it is vital that investors do their own research or hire someone to do it for them, rather than blindly relying on such conflicted recommendations. That was the lesson of the tech bubble, and it’s the same lesson today.

By , Reuters, 11/25/2014

MarketMinder's View: Q3 US GDP was revised up from the first estimate—rising at seasonally adjusted annual rate of 3.9% instead of 3.5%, led by consumer spending and business investment. Yippee! But we’d like to remind investors that this figure is subject to more revisions down the road (up or down). And it is still backward-looking. Read: Stocks have already moved on this data. We mean, if you still needed confirmation US economic growth has picked up from this expansion’s historically slow earlier years, here you go. But if you read this website frequently, that’s old news to you.

Global Market Update

Market Wrap-Up, Mon Nov 24 2014

Below is a market summary (as of market close Monday, 11/24/2014):

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.3%)
  • UK Equities: MSCI UK (-0.2%)
  • Best Country: Spain (+1.5%)
  • Worst Country: New Zealand (-1.2%)
  • Best Sector: Consumer Discretionary (+0.7%)
  • Worst Sector: Energy (-0.8%)
  • Bond Yields: 10-year US Treasurys remained at 2.31%

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.