|By Andrew Critchlow, The Telegraph, 04/24/2015|
MarketMinder's View: Even if all the geopolitical stuff here played out exactly as described (not at all guaranteed, though this also isn’t our forte—we’ll save this hypothesizing and strategerizing for the relevant professionals), it is quite likely not a gigantic economic negative for Britain, America or any other Western nation. Should oil spike to $100 (also not guaranteed—this underestimates US production potential), guess what, we had $100-ish oil for years during this bull market. If going back to an earlier, fine-for-all status quo is the biggest economic threat the West faces, things must be pretty darned good overall.
|By Matthew Boesler, Bloomberg, 04/24/2015|
MarketMinder's View: So Q1 US GDP won’t be released until next week, and already folks are ratcheting down estimates for Q2 GDP. Why? Well, March’s core capital goods orders (capital goods orders excluding aircraft and defense) fell -4.6% y/y, the 7th straight drop when measured on a monthly basis. However, manufacturing is a fairly small slice of overall US output relative to services, and the decline seems heavily influenced by oil—machinery orders, which include oil and gas field equipment, tumbled more than 12% y/y. Anyway, this gauge is historically quite volatile and has shown similar weakness during overall expansionary periods before, like in 2012 and 1998. That being said, if economists want to ratchet down their estimates, we say, “Be our guest!” because that just makes it easier for reality to positively surprise them.
|By Justin Wolfers, The New York Times, 04/24/2015|
MarketMinder's View: So here is an interesting preview of next week’s US Q1 GDP report that investigates the question: Why has first-quarter US GDP been the weakest quarter not only in this expansion, but dating back to the 1980s? The answer may be simple: Government math. The seasonal adjustment for GDP isn’t appropriately accounting for wintertime consumption patterns. “If it’s done right, there should be no systematic difference between economic numbers for the first quarter and any other quarter. The problem here is that the seasonally adjusted G.D.P. growth numbers still show a seasonal pattern, in which the first quarter has been weaker than other quarters.” All in all, this is another reason you cannot presume GDP is perfectly equivalent to “the economy.”
|By Josh Zumbrun and Carolyn Cui, The Wall Street Journal, 04/24/2015|
MarketMinder's View: So let us see if we have this right: Low-low commodity prices, low interest rates and inflation and low wage pressures are a policy maker problem threatening growth? They sound to us like: a) the opposite of what folks usually fear b) a boon for business and industry, and c) a sign of the times sentiment-wise.
|By N. Gregory Mankiw, The New York Times, 04/24/2015|
MarketMinder's View: This is an excellent article, not so much on the Trans-Pacific Partnership itself, but more on the issue of why nearly all economists agree international trade is good, while politicians and the public don’t. Here is a salient snippet: “The first is an anti-foreign bias. People tend to view their own country in competition with other nations and underestimate the benefits of dealing with foreigners. Yet economics teaches that international trade is not like war but can be win-win. The second is an anti-market bias. People tend to underestimate the benefits of the market mechanism as a guide to allocating resources. Yet history has taught repeatedly that the alternative — a planned economy — works poorly. The third is a make-work bias. People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries.”
|By Ian Wishart, Corina Ruhe and Karl Stagno Navarra, Bloomberg, 04/24/2015|
MarketMinder's View: Here is your obligatory peek at the latest from Greece. Greece’s leadership attempted to do an end run around the eurozone finance ministers’ rejection of Greece’s list of economic reforms, seeking a deal at the leadership level. It didn’t happen. Today was supposedly a deadline for this to get approval, but no one seems very concerned about Greece not meeting that deadline. The FinMins, for their trouble, seem more interested telling Greek leaders everything they don’t like about them. This, a day after Greek FinMin Yanis Varoufakis said a deal was getting close. Anyway, it’s a lot of noise and dramatics that would make a wonderful CNBC soap opera (We’ll be waiting for our royalty check!), but it isn’t all that meaningful for investors one way or the other. There are few if any signs Greece’s woes are spreading across the eurozone, and Greece is just too small to sway stocks for long.
|By Neil Irwin, The New York Times, 04/24/2015|
MarketMinder's View: This article is just plain riddled with fallacies about the impact of a stronger dollar and falling oil and gas prices. The strong dollar, for example, is only a modest headwind on export growth—that US Exports fell in January and February is largely attributable to the widely known (and now settled) West Coast Ports labor dispute (by nearly every economist, not just us). Retail sales are only a small subset of consumer spending and don’t include broad services, a huge slice of the US economy. But also, this decries saving, though in our fractional reserve banking system, saving underpins lending too. Ultimately though, the sentiment this expresses is quite detached from this reality: The factors cited here are not economic negatives or bad for businesses—both contribute to lowering businesses’ costs markedly. This kind of disconnect, friends, is bullish.
|By Lucy Hornby and Henry Sanderson, Financial Times, 04/23/2015|
MarketMinder's View: Bye-bye restrictions on rare earths exports! Yay! That should make the global marketplace much more efficient, and it makes life easier on computer hardware manufacturers outside China. Though, we wouldn’t be too optimistic: “But while international trade officials may cheer the end of the tariffs on rare earths such as tungsten and molybdenum, the end to tariffs on aluminium products could lead to new trade frictions.” Like allegations that China is “dumping” cheap products in the US, undercutting producers here, and distorting competition. We wouldn’t be shocked if protectionist rhetoric flared over this.
|By Peter Spence, The Telegraph, 04/23/2015|
MarketMinder's View: We’ve long been confused by all the handwringing over France’s sad-looking manufacturing and services purchasing managers’ indexes (PMI). France’s PMIs have long been pretty wildly detached from the country’s actual economic results. PMIs were mostly in contraction from late 2013 on, yet France kept growing most of the time. And its Leading Economic Index (LEI) kept rising, suggesting LEI is a better indicator for France than PMIs. France’s LEI has risen in five of the last seven months.
|By Ambrose Evans-Pritchard, The Telegraph, 04/23/2015|
MarketMinder's View: Parts seem over the top, like the discussion of OPEC/US price wars (we’ve seen no evidence this is actually a thing) and Middle Eastern conflict. But otherwise, this is an insightful look at the world’s oil supply and demand landscape. US oil firm reps shared all sorts of goodies at this week’s IHS CERAWeek energy conference. Like this one: “IHS said an astonishing thing is happening as frackers keep discovering cleverer ways to extract oil, and switch tactically to better wells. Costs may plummet by 45pc this year, and by 60pc to 70pc before the end of 2016. ‘Break-even prices are going down across the board,’ said the group's Raoul LeBlanc.” And this one: "‘We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days,’ said Scott Sheffield, head of Pioneer Natural Resources.” The more efficient shale production becomes, the further extraction costs fall, and the less incentives firms have to drastically cut output. Meanwhile, falling fuel subsidies across the developing world probably keep demand there more in line with market fundamentals, removing an artificial boost. Those are two reasons prices probably won’t soar any time soon.
|By Editorial Staff, Financial Times, 04/23/2015|
MarketMinder's View: This is all just sociology. While the US’s Export/Import bank certainly benefits individual companies, it isn’t a huge economic driver, and it doesn’t have much to do with America’s global economic clout—which, again, is a pure sociological issue. Ditto for the Asian Infrastructure Investment Bank, whose existence is not a shot across America’s bow, but a way for countries to get together and, you know, invest. It doesn’t give China clout (whatever that even means) any more than it strips it from America. Overall and average, more capital flowing globally and more investment in Africa and Asia—regardless of where the money comes from—is good for the world economy and trade.
|By Jason Zweig, The Wall Street Journal, 04/23/2015|
MarketMinder's View: In terms of pure behavioral advice, this is spot on. Getting caught up in euphoria and losing sight of fundamentals is the ticket to investing heartache. But the applications of that advice are a tad wide of the mark. Yes, some of the rhetoric accompanying the “sharing economy” sounds a wee bit dot-com-ish, and we’d urge investors to weigh profits, not platitudes about “new economies” and the like. But most of these companies are privately held, and most of the publicly traded Tech sector appears to be in fine shape, fundamentally, with solid earnings and revenues and strong demand growth.
|By Alessandro Speciale, Bloomberg, 04/23/2015|
MarketMinder's View: Wait. Last month, when PMIs rose, we were told it was all because of quantitative easing (QE). Even growth pickups from February have been attributed by media to QE, despite their predating the program's launch. But now, NOW, we must wait for the QE effect?
|By Chuck Jaffe, Marketwatch, 04/23/2015|
MarketMinder's View: We are pretty darned ambivalent about this one. We share its bullishness, and we agree these six reasons are indeed bad reasons. But much of the supporting logic misses the mark. So let’s go one by one and parse the good and bad. 1) Indeed, “it can’t go up forever” is probably wrong if you’re thinking ultra-long term, and there is no such thing as markets being due, overdue or underdue for a correction or longer, deeper bear market. But the spirit too strikes us as pretty buy-and-hold-for-all-time. In our view, there are times—bear markets—when it’s sensible for long-term growth investors to leave stocks, but only if you identify one before most of it has passed. 2) Hear, hear: “There is nothing that says bull and bear runs need to be balanced in any way.” (Though, the veiled suggestion that the next downturn will be “a long, nuclear winter” strikes us as odd, to say the least.) 3) We don’t think a Fed rate hike will kill the bull, either, but that’s because short-term rates alone aren’t stock market drivers, and no initial rate hike since 1970 has ended a bull. The explanation here also implies the move would have impacted stocks if it weren’t already priced in, which imagines a set relationship where none exists. 4) We don’t expect the government to muck up markets, either, but that’s because DC is wonderfully gridlocked. Not because the fiscal cliff, sequester and general budget bickering didn’t mess things up, and if those couldn’t, nothing can—those were all non-things from the start. Fact is, Congress could hurt stocks in a big way if they passed something radical. The chance of that happening now is simply slim. 5) No, the market isn’t overpriced. But there is also no such thing as a too-high valuation. Plus, keeping dry powder and taking profits to put to work after a dip aren’t viable long-term strategies—there is a high opportunity cost. Heck, this bit contradicts point 6), which quite rationally states how waiting for a better buying opportunity is money lost if that better buying opportunity never comes.
|By Lynn Doan and Dan Murtaugh, Bloomberg, 04/23/2015|
MarketMinder's View: One more reason crude oil prices probably won’t skyrocket soon: There are currently 4,731 drilled shale oil wells that have not yet been hydraulically fractured and therefore aren’t pumping, keeping an estimated 332,000 barrels per day off the market but available at short notice. With prices low, firms lack incentive to press “go” today. But should prices inch up and pumping become more profitable, producers can turn on spigots. This will likely keep oil prices low over the foreseeable future, making it difficult for most oil firms—whose profits depend on higher prices—to massively increase earnings. Chalk this up as another reason bottom-fishing for Energy stocks is probably still premature.
|By Mark Gilbert, Bloomberg, 04/22/2015|
MarketMinder's View: So our beef here isn’t so much with Mr. Gross’s prediction that German bund yields are as unsupportable as the British pound was in September 1992—everyone is entitled to their opinion (though we think the supply of and demand for German debt will make it hard for German yields to soar any time soon, and most bund demand isn’t artificial). Our issue is more with the scenario envisioned here, which claims German yields alone would rise first, then everyone else’s would jump amid “a tsunami of repricing across trillions of dollars of government debt around the world.” Thing is, we’re talking about German 10-year yields at 1.7%, where they were for much of 2013, which was a pretty darned good year. Plus! All similarly liquid markets discount widely known information near-simultaneously. And it isn’t like a central bank is artificially propping up the value of German bonds the way the BoE was propping the pound in 1992. Again, supply and demand. German bond supply has fallen since 2013, as the government ran surpluses. But demand is high, because capital requirements make banks really, really, really want to own stable bonds. Yes, the ECB has added some demand through quantitative easing (QE), but that is incremental compared to the demand from banks and savers. Stopping QE probably won’t cause German yields to soar, just as the end of QE in the US and UK didn’t make yields skyrocket. US yields did rise after Ben Bernanke first telegraphed QE “tapering” in May 2013, but growth accelerated, the world did not implode, and then they fell again. So to the extent you do get higher yields in Germany eventually, you likely get a slower drift that happens simultaneously with slower drifts in other countries, which is just not very Armageddony. That’s just how markets work, folks.
|By Matt Levine, Bloomberg, 04/22/2015|
MarketMinder's View: We offer this to you, dear readers, as an entertaining, easy-to-read, even-handed look at the US government’s case against a British gent whose alleged trading actions allegedly contributed to alleged volatility that allegedly contributed to the May 6, 2010 Flash Crash (innocent until proven guilty, we aren’t lawyers or experts, we don’t have a dog in this fight, etc.). If you’re curious on the ins and outs and points for and against the feds’ case, this one’s for you.
|By Kosaku Narioka, The Wall Street Journal, 04/22/2015|
MarketMinder's View: Potato chips, not computer chips, but anyway. Far be it from us to fully pooh-pooh the positives mentioned here, like rising profits at some consumer firms and the recent measures to improve corporate governance, but expectations for Japanese stocks still seem way too high. Byzantine labor markets still make it hard for companies to raise wages and stay profitable. The flat yield curve is still hampering lending. Trade barriers are still high. A tangled web of cross-shareholdings still limits how conglomerates can respond to corporate governance incentives. The weak yen is still inflating import costs even with oil prices down, and Japanese manufacturers import a heckuva lot of raw materials and high-tech components. Nuclear power plants are still idled. There are many, many, many obstacles in Japan’s way, and hopeful investors don’t seem to realize this. That’s likely a recipe for sadder stock returns, on balance, over the foreseeable future. Also, that 20,000 magic number refers to the Nikkei 225 denominated in yen. Returns in USD, though high this year, are less eye-popping.
|By John Tamny, RealClearMarkets, 04/22/2015|
MarketMinder's View: Jordan Spieth is the professional golfer who rewrote the Augusta National record book as he won this year’s Masters, a feat that earned him a cool $1.8 million and probably raised income inequality—which many argue is an economic scourge that must be solved through higher taxation and redistribution. This delightful read shows why that isn’t necessary to spread the wealth at all! “Assuming what seems observably untrue, that Spieth is a wasteful, prodigal spender, wealth redistributors should seemingly rejoice such a scenario. Spieth could quickly spend the portion of the winnings he keeps on private jets, hotels, cars, and booze, and per the alleged Keynesian multiplier, expand the economy through aggressive consumption. Even better, the money wouldn't have to sit in Washington in wait of politicians to vote on its final destination.” And if he saves it instead? “There’s no such thing as idle wealth. Applied to Spieth, unless he intends to stuff his Masters winnings under a mattress, the $1.8 million he earned will quickly migrate to the hands of many people not named Jordan Spieth, and who are not nearly as rich as he is. … If Spieth chooses to put his Masters windfall in the bank, his deposit will soon enough represent loans to individuals who need money to buy a car, to pay the college tuition of a son or daughter, who need a home loan, or who perhaps need credit in order to start a small business.”
|By Staff, Reuters, 04/22/2015|
MarketMinder's View: Welp, this was as close to inevitable as the real world gets. Congress is working on a bill to grant President Obama authority to “fast track” the Trans-Pacific Partnership (TPP), US/EU Transatlantic Trade and Investment Partnership and other free-trade deals through Congress, submitting them for up-and-down votes only, no amendments. This is good in theory, as it raises the likelihood TPP becomes official (assuming negotiations are ultimately successful—a big IF). But some Senators plan to add amendments cracking down on “currency manipulation,” which would turn the unenforceable “hey don’t do it please, mmmkay?” in the current bill into toothy sanctions for supposed currency cheaters. That is basically adding protectionism to a free-trade bill and would probably discourage Japan and others from signing on, as Japan is often (wrongly) accused of currency manipulation due to quantitative easing and its mercantilist economic structure. The Senators involved telegraphed this move long ago, and the 12 other participating nations told the Treasury it was a nonstarter, so if this amendment passes, it probably jeopardizes TPP. That isn’t a huge deal, as multiparty trade deals are rarely likely to pass, and TPP faced numerous other obstacles, but it is a bit of a disappointment—a 13-nation free-trade deal could have been a WOW! for global markets. Stocks love free trade.
|By Peter Rudegeair, The Wall Street Journal, 04/22/2015|
MarketMinder's View: This story about community banks’ struggle to stay profitable illustrates a couple things. One, the yield curve spread matters—when the gap between long- and short-term rates is slim, banks profits shrink, and that makes lending difficult. Two, for all the talk about community banks being more traditional and therefore safer than the megabanks with their investment-banking, trading and wealth management, the “safest”* bank is the bank with growing profits, as consistently profitable banks tend not to fail. Banks struggling to profit are more prone to failure and therefore not so very safe. That, folks, is a big reason why we’ve long viewed efforts to end “too big to fail” and diversified banking as a solution in search of a problem. *We put “safest” in scare quotes because there is really no such thing as safety, ever, in the financial world. Even if you don’t invest or use banks. Someone could break into your house and steal the money stuffed in your mattress. Or disable all the booby traps you rig around where you buried your money three feet deep in your back yard.
|By Joshua Robinson and Catherine Bosley, Bloomberg, 04/22/2015|
MarketMinder's View: Ok maybe, but that’s a forecast, and economic data often beat expectations. (Disclosure: They miss and meet, too.) Even if this does turn out to be true, and Swiss GDP falls -0.1% in Q1 and -0.2% in Q2 before bouncing later this year, a very shallow recession in a country where exports comprise 72% of GDP should defang many worries over a strong dollar and pound. Exports are 13.3% of US GDP and 28.8% of UK GDP. But this also illustrates how quickly stocks can discount widely expected results. Swiss stocks corrected for two days while the Swiss National Bank broke the peg was fresh, and have surged since. All sufficiently liquid markets are roughly equally forward looking. Any questions?
|By Tommy Stubbington and Josie Cox, The Wall Street Journal, 04/22/2015|
MarketMinder's View: Sign of complacency, or evidence the risk of contagion is next to nil? This isn’t something you can prove either way, but our opinion lies in the “no contagion” camp. It seems hard to argue investors are complacent when headlines have spent five years warning of the financial doompocalypse that could ensue if Greece leaves the euro and give daily updates on the likelihood of said “Grexit.” Plus, investors appear to have realized Greece is Greece, while Spain and Italy aren’t. They are Spain and Italy, and all have made hard choices, cut deficits and passed some reforms along the lines of those at which Greek leaders are presently thumbing their collective noses. So it seems quite rational that investors buying Spanish and Italian bonds this week would say this: “If Greece developed badly, we’d be absolutely of the same mind-set. There’s no comparison to draw between the periphery and Greece.” (Aside from the fact all three produce and export olive oil, and yes, we know, we are way too literal.)
|By Larry Elliott, The Guardian, 04/22/2015|
MarketMinder's View: Well, we’d just read them as a summary of some things some central bankers said when they got together a couple weeks ago. Those things resulted from the economic data available then and how the central bankers felt that day. None of that means anything looking forward, because the next time these central bankers get together, they will have new data and maybe different feelings and who knows what they’ll say about all that! Never mind what they’ll do!
|By John Authers, Financial Times, 04/22/2015|
MarketMinder's View: Yep, many investors trade often and at the wrong times, and DALBAR’s Quantitative Analysis of Investor Behavior demonstrates this—it shows how fund in/outflows spike when volatility does, and it pegs the average mutual fund holding period at 3.4 years over the past two decades, which isn’t sufficiently long to reap the benefits of investing in stocks over time. But we rather doubt the industry can solve this by limiting the supply of funds available. Investors don’t make badly timed trades because they are distracted by a dizzying array of shiny objects. They do it because humans are emotional and hard-wired to trade on fear and greed. We’re all equally prone to that whether we have one fund to choose from or thousands. The real ticket to battling those instincts, in our view, is to find an adviser who can dispense the tough-love advice you need when your emotions threaten to trump reason.
|By Bradley Olson, Bloomberg, 04/22/2015|
MarketMinder's View: Yes, at some point, oil production will fall, supporting higher prices. But that tends to happen gradually. People are conditioned to believe in oil “shocks” (and higher prices) thanks to the 1970s and mid-2000s, but long stretches of lower prices are far more common. Plus, new supply is easier and cheaper to extract than ever, thanks to evolving technology. And while firms are delaying high-cost new projects, many are also still trying to squeeze revenues from existing wells to recoup the high upfront costs. Conditions just don’t appear to be in place for prices to soar any time soon. Actually, this inadvertently shows why supply changes tend to happen so gradually by highlighting the 5-10 year lead time between initial investment in some of these new wells and when the first barrel of oil is produced.
|By Kristen Scholer, The Wall Street Journal, 04/21/2015|
MarketMinder's View: Why? Because “stalled earnings growth, high valuations and slow economic activity have put a lid on gains.” Same old backward-looking-and-not-predictive issues we discussed , and . As for the notion stocks need a “clear catalyst” to rise, . Stocks’ natural tendency when the economic and political backdrop favors earnings growth is to rise. They don’t need a push. That people broadly think they do is a good sign sentiment is lagging reality, which is bullish.
|By Neil Gough, The New York Times, 04/21/2015|
MarketMinder's View: Private companies have “defaulted,” which we put in air quotes because investors in onshore issues were eventually made whole by the government. But state-run firms haven’t defaulted on domestic investors. They’ve always enjoyed an implicit government guarantee. So the default of state-owned solar power equipment maker Baoding Tinwei Group, though small (they are missing a $14 million interest payment, not a principal repayment), is noteworthy and will be an interesting case study, however it plays out. In theory, it should be a positive sign of ongoing reform and maturity in Chinese capital markets, but these are untested waters, and the government may yet feel compelled to intervene in the name of peace and harmony: “‘Ultimately the question is one of market discipline,’ said Charles Chung, the head of Asian credit strategy at Credit Suisse in Hong Kong. ‘In a free capitalist market, this is gained by default experience, but in China, this has yet to come in a meaningful way to the bond market.’” This episode strikes us as a litmus test for China’s commitment to reform: If they let this play out, it should be a positive sign indeed.
|By Staff, Reuters, 04/21/2015|
MarketMinder's View: Re-insurance is when an insurance company transfers some of its risk to other insurance companies, reducing the chance it will have to pay out a big claim—a normal risk mitigation practice in the insurance world. Naturally, different countries have different regulatory requirements for re-insurers. The US has collateral requirements. From next January, EU firms will have to comply with Solvency II, a huge yarnball of restrictions and capital requirements (similar to Basel III, but for insurance firms). EU firms doing business in the US will have to comply with both regimes, adding costs and limiting their flexibility, putting them at a disadvantage. So the EU is asking the US to bend and accept Solvency II standards as sufficient, which would improve competition globally. That would likely be a net benefit for Financials (though we are dubious about Solvency II overall), but the chances seem slim given insurance is regulated by state governments. Then again, as this notes, the fact EU regulators are considering slapping Solvency II rules on US re-insurers doing business over there may give US regulators an incentive to figure something out. Either way, this could set the precedent not just for cross-border insurance regulation, but for financial regulation overall—and the US and EU’s efforts to free transatlantic trade in services.
|By David Keohane and James Crabtree, Financial Times, 04/21/2015|
MarketMinder's View: We highlight this not for India’s central bank chief’s harsh words for Indian banks, who aren’t transmitting recent stimulus measures to customers, but for the mechanics of what’s going on. The Reserve Bank of India cut rates twice this year in an effort to boost lending—but banks aren’t lending. The reason is impossible to pinpoint, but analysts have a good working theory: Indian banks are funded primarily through deposits (78% of total liabilities in India’s commercial banks), not interbank lending, so rate cuts don’t immediately impact their funding costs. That makes it much more difficult to lend at lower rates—it would pinch profits, limiting incentives to lend enthusiastically. This situation is a largely overlooked counterpoint to the broad global push to limit banks’ wholesale funding and push them more toward deposits. Regulators globally (wrongly, in our view) perceive deposits as less run-prone than interbank loans, and Basel III capital standards penalize wholesale funding. If regulators get their wish, however, it could become far more difficult to conduct monetary policy.
|By Staff, Reuters, 04/21/2015|
MarketMinder's View: When politicians speak out about alleged global market risks overseas, it is a fair assumption that they are speaking as, well, politicians, not economic analysts. A little jawboning from the US Administration over Greece is nothing new (and likely politically motivated), and the latest iteration doesn’t mean a Greek euro exit is actually now a huge global risk that markets haven’t discounted. As the article notes, Greece’s “financial woes have not had a major impact on other peripheral euro zone members like Portugal, Spain or Italy, which have seen their borrowing costs fall substantially since peaking three years ago. And world stocks are near all-time highs.”(See our charts here for more.) Those factoids, along with the drop in peripheral eurozone bond insurance costs—and the fact this saga has swirled for five-plus years, through two Greek defaults in 2012—are strong signals markets have already dealt with every possible Greek outcome and then moved on. If the risk of contagion were high, it would cost a lot more to ensure Spanish, Italian and Portuguese bonds.
|By Joe Carroll, Bradley Olson and Dawn Kopecki, Bloomberg, 04/21/2015|
MarketMinder's View: And they, along with the sponsoring legislators, quite rationally stress that ending the ban is good for consumers. Popular perception holds that allowing crude exports will cause US oil prices to rise, matching the global benchmark, but this ignores the fact that added US supply would probably bring down the global average. Plus, as the article explains, US consumers don’t really benefit from discounted crude prices here: The law bans crude oil exports, not gasoline exports, so refiners take cheap crude, refine it, and ship it abroad for a healthy profit, reducing domestic gas supply. Ending crude exports would remove this incentive, likely boosting domestic gasoline supplies. As alluded to here (and mentioned more directly in an imbedded link here), gas prices are determined by the supply and demand of refined gasoline—not crude oil. Also, most US refiners are equipped to process heavy crude, not the light, sweet crude that comes from shale, so allowing exports would help the market function much more efficient overall.
|By Mehreen Khan, The Telegraph, 04/21/2015|
MarketMinder's View: Yup. Total eurozone government debt-to-GDP has reached its highest level since the currency union started in 1999. But! All these figures are gross public debt. Net debt, which excludes debt owned by the issuing country’s government, is a better measure for evaluating the actual burden (money you owe yourself cancels, so it doesn’t make sense to include). That figure will be much lower. UK net debt, for example, is around 79% of GDP, vs. the 89% gross debt-to-GDP listed here. French net public debt is 86% of GDP—this lists gross French debt at 95% of GDP. Plus, total debt isn’t what matters—debt servicing costs determine whether debt is affordable or not. Right now, countries not named Greece are having no trouble servicing debt, and falling yields since 2012 have allowed them to refinance maturing debt at lower interest rates. Most eurozone countries’ interest rates today are historically low (some are even negative, where borrowers basically “pay” to lend the governments money). And while deflation can make debt payments more burdensome over time, the eurozone isn’t in Japan-style deflation (and nominal GDP is rising). It’s merely enjoying the fruit of lower oil prices.
|By Carolyn Cui, The Wall Street Journal, 04/20/2015|
MarketMinder's View: So according to this take, rising corporate defaults—exacerbated by a strengthening dollar and a looming Fed interest rate hike—are the newest threat emerging from Emerging Markets (EM). But we’ve seen this movie before: Last year, the Fed “tapering” quantitative easing (QE) was supposed to wreck EMs. And January was bouncy in Turkey, Ukraine and Argentina! Yet that passed and the taper continued, which supports our contention that volatility was due more to domestic issues in a handful of well-known basket cases rather than Fed monetary policy. Today is largely the same song, different verse. Consider the examples cited here: Brazil, the Ukraine and Russia. Energy-sector headwinds and corruption scandals have slammed Brazil, war ravages Ukraine, and Russia faces all three. Attributing all this to a potential fed funds target rate hike is to overlook virtually every major development in those countries in the last 12 months. Oh, and as to China: One Chinese property developer defaulting on a bond payment recently doesn’t mean a rash of defaults will follow—especially when China has been willing to (quietly) lend a helping hand.
|By Robert Milburn, Barron’s, 04/20/2015|
MarketMinder's View: Here is some sensible advice about the problems of being concentrated in any one stock: “…roughly 40% of the publicly traded companies (13,000 firms in the Russell 3,000 between 1980 and 2014) had suffered a ‘catastrophic loss’ in value, defined as a 70% decline or more from its peak value which never recovered more than 10% of that original value.” Owning a position exceeding 5% of your liquid net worth is, to us, too concentrated—and that is whether you founded the company, worked there for your career or just admired from afar. As much as you may know about a company and/or its industry, you can never know everything that may sway a stock—which can be an internal or external factor. Ultimately, humility is crucial in investing, and having a well-diversified portfolio humbly hedges those risks.
|By Mohammed A. El-Erian, Bloomberg, 04/20/2015|
MarketMinder's View: While we appreciate the effort to go to 11, these “need to know” factoids aren’t meaningful or even new for global investors. To review: 1) Default isn’t unfamiliar to Greece—just because it’s the IMF doesn’t make it unique; 2) A lack of confidence in a shaky Greek financial sector isn’t breaking news; 3) Greece struggling to find lending? Isn’t that pretty much where we’ve been on-and-off since 2010?; 4-7) Ditto for Greece and its creditors bickering about reforms and funding; 8) A Greek contagion is very unlikely according to markets; 9-11) We, too, are very skeptical there will be “visionary policy making on both sides”—heck, these are all just politicians we’re talking about—but to be clear, stocks and the eurozone economy don’t really need a magical solution for Greece. Greece does, but it is tiny.
|By Andrew Critchlow, The Telegraph, 04/20/2015|
MarketMinder's View: Most of the predictions here are either speculative or just rather detached from reality. Consider: Those hedge funds that increased their net-long position in oil contracts are not as bullish as they were in June 2014, according to the chart included—that was right before the floor fell out from under oil. Why be so sure they are right this time? But also, yes, shale drilling activity is down, but production is up and could be ramped up rapidly if prices bounce. While factors like one listed here—unrest in the Middle East—can add to already volatile commodity markets, in our view, it’s flat wrong to suggest the market is tighter than data show—again, if prices rise, it’s likely US shale producers snap into action fast. Finally, small Energy firms are issuing stock to replace high-rate bank loans and junk debt, diluting shareowners’ stakes. In our view, headwinds in the Energy sector remain, and now is not the time to go bottom-fishing for oil stocks.
|By Staff, Bloomberg News, 04/20/2015|
MarketMinder's View: The People’s Bank of China’s (PBOC’s) one percentage point (to 18.5%) cut to its reserve-ratio requirement (RRR) will free up about 1.2 trillion yuan ($200 billion) for banks to lend. And, interestingly, this follows the primary securities regulator dialing back margin availability last week. Taken together, it seems China wants to give the impression (at least) that it is willing to goose the economy, but wants that credit channeled to the economy, not stocks. Ultimately, it’s likely just another batch of mini-stimulus--like infrastructure spending or targeted tax cuts to specific industries—to keep its slowing growth up at an “acceptable” level.
|By Katie Morley, The Telegraph, 04/20/2015|
MarketMinder's View: While this story is particularly relevant for British retirees who are now free to choose new options for their retirement funds, it has lessons for all investors who work with or are looking for financial advisers. We would only suggest that you expand this logic beyond the delineation provided here (regulated versus unregulated investments) to include any adviser who takes custody of your assets, can’t explain their strategy simply and offers too-good-to-be-true high and positive returns with no downside risk. See our 8/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For,” for more.
|By Gretchen Morgenson, The New York Times, 04/20/2015|
MarketMinder's View: Look, we’re all for clearer regulation—complex and vague rules can create uncertainty. But the proposals here seem off base, in our view. They assume banks with smaller proprietary trading departments, less than $3 billion notional value in hedging-only derivatives positions, and a 10% capital ratio are somehow “safer” and thus don’t need to be subject to certain regulations. Yet that conclusion misses the elephant in the room: Small banks fail at a much higher clip than big banks do. Did in the crisis. Did before the crisis. Have since the crisis. Megabanks JPMorgan Chase, Wells Fargo and Bank of America were all major acquirers of troubled institutions in 2008. We’re not saying big banks are inherently any better than smaller ones—both are fine. But arguing small banks rarely fail and thus shouldn’t be burdened with regulations that were the result of big banks’ (supposed) actions in 2008 misconstrues both history and reality and misses a broader point: The size of the institution didn’t cause 2008. FAS 157 and the haphazard actions of the US government took out big banks and small ones alike.
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Market Wrap-Up, Thursday April 23, 2015
Below is a market summary as of market close Thursday, 4/23/2015:
Global Equities: MSCI World (+0.3%)
US Equities: S&P 500 (+0.2%)
UK Equities: MSCI UK (+0.6%)
Best Country: Norway (+1.6%)
Worst Country: New Zealand (-2.3%)
Best Sector: Telecommunication Services (+1.4%)
Worst Sector: Consumer Staples (0.0%)
Bond Yields: 10-year US Treasury yields fell 0.02 percentage point to 1.96%.
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.