Today's Headlines

By , The New York Times, 06/28/2016

MarketMinder's View: We highlight this not to single out the Leave camp’s top brass, but to point out a crucial lesson—that the bluster and optimism of campaign season seldom translates into simple post-election decisions. In the lead-up to last week’s vote, we pointed out that both sides played rather fast and loose with the facts at times. After winning, Leave’s promises are under close scrutiny, and some are already moderating pre-election claims. Politics is messy—and that’s a good thing! For example, former London Mayor and Leave frontrunner Boris Johnson is talking down expectations on immigration reform; UKIP leader Nigel Farage is revising the monetary benefits of leaving; and pretty much everyone is saying they’ll go slow. However, the point here is really global: Getting too high or low over politicians’ promises usually isn’t warranted, because their promises aren’t worth much.

By , The Motley Fool, 06/28/2016

MarketMinder's View: Capital expenditures are rising for some Energy firms, thanks to oil prices holding steady around $50 a barrel over the last couple months. The firms listed here may not presage a sector-wide trend—and we make no recommendations to buy or sell any specific security—but they do illustrate how Energy markets work. Prices are signals. When they fall, oil and gas companies scale back drilling and exploration plans—why bother if profit opportunities are slim? This lowers supply, which eventually helps prices rise. That, in turn, encourages an uptick in production and investment, renewing the cycle. Today, if these firms follow through and invest as outlined, they will be doing so at the time when demand is growing rather slowly and production is still elevated—near record levels. This response, combined with completed-but-untapped shale wells offer additional supply should prices rise. In our view, this likely acts as a ceiling to oil prices over the foreseeable future.

By , CBS Moneywatch, 06/28/2016

MarketMinder's View: Financial markets certainly took it on the chin Friday and Monday after last week’s Brexit vote, as they had priced in a Remain outcome in the days leading up to the referendum, but this take is overly dour indeed. First, it was two down days, and assuming “losses look set to continue” is a classic behavioral mistake in investing, believing the past predicts the future. It doesn’t. Moreover, now that we’ve seen a sharp rebound, is that destined to continue because it happened? Despite fears that the Brexit vote raised political and economic uncertainty across Europe, Brexit is now largely a known quantity. Sure, there are some questions that remain unanswered. For example, when exactly will UK leaders invoke Article 50 of the Lisbon Treaty to officially begin the separation? Who will lead Britain? What will Britain’s trade relationship with the EU look like? But ultimately, most of the relevant questions will likely linger for years, as this piece admits. However, this doesn’t mean “the crisis will simmer.” Instead, this will likely be a blessing, as markets tend to dislike sudden, sweeping changes. A long exit process, with negotiations playing out publicly and dissected endlessly in the media, lets markets slowly discover and price in the likely outcome, negating the shock factor. Oh, and about the supposed “safe haven” assets discussed here, nothing is safe in investing. Gold and US Treasurys can fall in value, and have done so by quite a lot at times.

By , The Wall Street Journal, 06/28/2016

MarketMinder's View: The Bureau of Economic Analysis revised US Q1 GDP growth up from 0.8% annualized to 1.1%. Some of this upward revision is good news, other aspects relate to GDP’s quirky calculation method. Exports were revised up by 2.3 percentage points (from a contraction of -2.0% to growth of 0.3%)—a positive. Imports—a sign of domestic demand—shrank -0.5%, more than the previous estimate’s -0.2% drop. But because GDP considers imports as detracting from growth, imports’ contribution to growth rose from 0.03 percentage point to 0.08 ppt. Business investment fell less than previously thought but consumer spending’s growth rate was revised down from 1.9% to 1.5%. Now, none of this means a hill of beans as to where the economy heads from here, as Q1 is firmly in the rearview mirror. But, as briefly noted here amid a slew of “sluggish growth fears” is this little nugget: Economic data throughout Q2 suggest growth is already re-accelerating, and The Conference Board’s US Leading Economic Index suggests that will continue.

By , MarketWatch, 06/28/2016

MarketMinder's View: The theory here is that despite the US Bureau of Economic Analysis’ measure of corporate profits after tax (with inventory adjustment) rising in Q1 2016, the measure is still down -14% since Q3 2014’s peak, a magnitude of decline that the article asserts usually happens “with no economic recession,” with only two exceptions: 1986 and 1951. Some things about this. One, it is all backward looking, and as such, isn’t predictive. The wording of the article strangely omits to point out that the timing of the recession usually runs concurrent with the decline—falling profits don’t predict. And when you analyze all profit drops exceeding 10% since 1947, what you find is they usually don’t eclipse that mark until very late in the downturn, which is usually when you’d be better off buying stocks than selling. But also, the data aren’t even correct. We checked. From Q3 1997 – Q3 1998, profits fell -14.9%. Why was this omitted? Also, the 1951 drop doesn’t reach 14%—not even close. Between Q4 1951 and Q3 1952 profits fell -7.1%.  The data are dirty. And yes, the 1986 period is a false read—one that bears striking similarities to today, when Energy profits are depressing the total dramatically.

By , Brookings Institution, 06/28/2016

MarketMinder's View: The former Fed head weighs in on the impact of last week’s British vote to leave the EU and draws some conclusions in this post. Now, some of these seem like a stretch and are highly speculative given the huge volume of unknowns—like the short- and long-term impact on Britain and Europe. Can’t know much of that until Britain and the EU have exit terms ironed out, really. That said, the last paragraph is quite sensible indeed: “Although bank stock prices are taking hits, especially in the U.K. and Europe, a financial crisis seems quite unlikely at this point. Central banks are monitoring the funding and financial conditions of banks, and so far serious problems have not emerged. (It helps that the date of the referendum has been known for months, giving authorities time to prepare. Also helpful is the substantial buildup in bank capital in recent years.) Through its currency swap lines, established during the global financial crisis, the Fed is making sure that other major central banks have access to dollars.”

By , Bloomberg, 06/28/2016

MarketMinder's View: Well, this is all just a lot of extrapolation of the narratives and events of the past five days over the course of the next three years to reach a highly speculative conclusion. There is no actual evidence, and in that way, this is more a work of fiction than non-fiction. We'd also suggest that three years from now it is highly likely many of the issues remain unresolved. There are ever so many unknowns and unknowables surrounding the UK’s vote to exit the EU that speculation like this is just flat out unhelpful.

By , The Guardian, 06/28/2016

MarketMinder's View: While Conservative Party bigwigs jockeyed for position one day before the formal nominating process opened, the Labour Party hogged most political headlines as 172 MPs voted for a no-confidence motion on leader Jeremy Corbyn, while only 40 supported him. Corbyn refused to resign his post, as the vote was nonbinding under Labour Party rules, and as we type, Deputy Leader Tom Watson and former Shadow Business Secretary Angela Eagle are reportedly meeting to decide which of them will mount an official leadership challenge. One-time leadership contender Yvette Cooper has also strongly hinted she’ll throw her hat in the ring if there is a new contest. It is unclear whether Corbyn himself will even be on the ballot. Things are flying fast, with abundant rumors and speculation, yet while the latest upheaval might fuel political uncertainty in the UK, it is also not an immediate concern for markets. Labour’s leadership decisions will matter at the next general election, but at the moment, there is no way to know when that contest will be or how this leadership saga will play out, so it is impossible to know how any of these events will ultimately impact the UK’s political drivers. Follow along with the saga if you’re a political nerd, like us, who enjoys seeing life imitate The Thick of It. But know that for markets, for now, this is largely noise.

By , The Guardian, 06/28/2016

MarketMinder's View: Here is the rundown on the opening salvos in the UK’s divorce proceedings with the EU. Both sides are staking out their initial positions, bargaining hasn’t started yet, and it’s all quite tense. (Which reminds us a tad of Greek talks’ tone, as leaders posture politically during a negotiation. Though Britain certainly isn’t Greece.) Things could very well remain tense and uncertain for the next two-plus years as UK and EU leaders hash out their new relationship. But as this article highlights very well, all of this is playing out extremely publicly and loudly, which gives markets a chance to discover and digest all possible outcomes. This vastly reduces the potential for a sudden negative shock if they end up negotiating in some unintended consequences, giving investors plenty of time to plan strategically. For now, however, as difficult as it might be to stay patient and disciplined, the abundance of Brexit-related question marks isn’t a reason to avoid UK, European or world stocks. It might weigh on sentiment for a while, but other economic and political drivers point positively.  

By , A Wealth of Common Sense, 06/28/2016

MarketMinder's View: This is a mostly sensible reminder about how leadership shifts among different countries: No singular region of the world is best for all-time. The US has led for much of this current bull market, and for US-based investors, this probably seems like the natural order of things. However, during the 2002-2007 bull market, foreign stocks largely bested the US. America did pretty darn well during the 90s, foreign during the 80s. This rotation is why it is essential to be a globally minded investor. Diversifying your portfolio protects you from being too exposed to any one country or sector, accounting for the possibility that certain segments of the market perform better (or worse) than you forecast. Now, we do have a quibble with the discussion of valuations here, as this take argues that various valuation metrics say Europe looks cheap and attractive from a “buy” standpoint. Valuations can give you a rough sense of sentiment, but they don’t necessarily indicate what the next great opportunity is—something that looks cheap now could always get cheaper. That said, we agree with a concluding point here: “Markets are all about expectations. And when expectations go too far in either direction, investors tend to be surprised by the future results.” Sentiment around the Continent has been pretty dour for most of this bull market, and we believe once folks see reality isn’t as bleak as they thought, stocks should march higher.      

By , USA Today, 06/28/2016

MarketMinder's View: We understand the motivation behind the titular question, but we strongly disagree with all of the suggestions provided here. Yes, markets have pulled back over the past couple days following the Brexit referendum. These declines probably feel pretty darn uncomfortable, especially since prospect theory (also known as myopic loss aversion) argues investors dislike losses about twice as much than they enjoy gains—so many folks are likely inclined to do something to make the discomfort go away. However, if you are a long-term, growth-oriented investor, these periods of negative volatility are times to grit your teeth, keep a stiff upper lip and steel your nerves. They are not times to make portfolio changes. The suggestions here (increase your allocation to the Utilities sector, utilize “protective puts,” sit in cash or buy bonds) are all fine tools if deployed in advance of a market decline, not in reaction to one, as the question suggests—that smacks of letting one’s emotions steer their portfolio. Folks, during times like these, the best action is to remind yourself why your portfolio is constructed as it is. Altering it could make it much more difficult to reach your investment goals. For more, see Todd Bliman’s column, “Your Chief Enemy Today Is Likely Yourself.”     


By , The Wall Street Journal, 06/27/2016

MarketMinder's View: One key issue the Brexit vote gave rise to was whether Britain will find trade partners willing to negotiate bilateral trade deals with it, absent the EU’s economic might. That South Korean officials are already extending overtures aimed at reconfirming the country’s UK trade connections is an encouraging early sign. More countries may follow suit, perhaps paving the way for stronger UK-EU ties as well: “The sooner Britain can renegotiate deals with major partners outside Europe, the likelier EU leaders will be to do the same, rather than try to punish Brits for choosing divorce.” Now, this would still be a gradual process: Britain has no trade representative presently, and the administrative infrastructure to negotiate and implement trade treaties doesn’t pop up overnight. But bilateral deals can move more quickly than their TPP-style counterparts, particularly when both parties have an existing template—in the form of EU treaties—to work from. If other countries follow South Korea’s example, trade disruptions would be limited. This is something to watch over the coming months and years.

By , The New York Times, 06/27/2016

MarketMinder's View: Come for the neat napkin art, stay for the sage advice!  Scary headlines and everybody-panic moments are the stuff bull markets are made of, and while it may not take a half-decade of avoiding financial news (as this author did) to appreciate stocks’ long-term returns, it certainly couldn’t hurt. For more, see Todd Bliman’s 6/24/2016 column, “Your Chief Enemy Today Is Likely Yourself.”

By , Bloomberg, 06/27/2016

MarketMinder's View: Euroskepticism has risen in Greece, France, Spain and other EU members, so it’s reasonable to wonder if the Leave camp’s success in the UK will embolden like-minded groups elsewhere. It’s too early assess the full political implications of the vote, but Spain’s election result over the weekend suggests the opposite may have happened: Voters, seeing the impact of a Brexit vote, supported the established parties stronger than in December’s vote. Prime Minister Mariano Rajoy’s center-right People’s Party, leader of the caretaker administration since December, won more seats while the anti-establishment Podemos party failed to gain ground. Now, although the People’s Party holds a plurality of seats—137 of 350—they need 176 for a majority, and cannot achieve it even by partnering with Ciudadanos, their ideological ally. They will need the support of either the Socialist Party or tiny parties in the Basque Country or elsewhere. Continued gridlock is most likely, then—an outcome markets should welcome, as it would leave Rajoy’s positive economic reforms in place.

By , Bloomberg, 06/27/2016

MarketMinder's View: According to this, bond markets are apparently worried about perpetually low growth, thanks to “demographics, the explosion of debt globally and the disparity in wealth between the rich and poor.” Investors will continue piling into fixed income, we’re told, as these forces drag down the world economy for “years to come.” The first and last trend are primarily sociological, and no attempt is made here to explain their impact on long-term growth. As for debt, the assertion that governments were counting on spending their way to growth “over the next decade”—and are now too indebted to try—is far-fetched and insufficiently explained to overcome the basic logic problem: If debt had “exploded” globally, one would typically expect to see higher rates, not lower, as investors demand compensation for the added risk of lending to more leveraged borrowers.  But also, the private sector makes up the bulk of developed-world economies, and outside of shoring up economic activity during recessions, government expenditures don’t often play a make-or-break role. In our view, the world would benefit from higher long-term rates, mostly because it would (all else equal) widen yield spreads, increasing loan profitability and thereby encouraging bank lending. But it is a stretch to presume the rates we’d seen “for years” were hugely problematic, because the economy grew.

By , CNBC, 06/27/2016

MarketMinder's View: Credit raters are now weighing in on Brexit—after the vote and after markets moved—which we see as yet more evidence ratings agencies don’t tell markets anything they don’t already know, and have no influence on a country’s true creditworthiness. Despite the raters’ downgrades, markets seemingly upgraded the UK since the vote, with 10-year Gilt yields falling almost half a percentage point to sit below 1% for the first time ever. We’re going to go ahead and say markets’ assessment is really what counts here, considering the credit ratings agencies’ long history of being late to the game and referring to their own work as “exaggerations … for promotional purposes: hype.” These downgrades change nothing for the UK economy, which remains a fine spot to invest. To see why, check out our recent article, “Life After Brexit: The UK Economy.” In or out of the EU, it appears UK debt is quite attractive. Many fears still swirl after the vote, but as in this case, benign reality could gradually put them to bed.

By , Yahoo Finance, 06/27/2016

MarketMinder's View: Leave’s victory in last Thursday’s Brexit referendum startled US markets along with European, triggering a sharp selloff and leading some to wonder about Brexit’s impact on the US. While post-vote jitters are understandable, these charts suggest that while the US and UK indeed have a “special relationship” on a political, cultural and historical level, the direct economic relationship between the two isn’t huge. The UK made up less than 4% of total US exports, or under 0.4% of US GDP; UK-based assets are a mere 3% of US bank assets; and less than 3% of S&P 500 revenues come from Britain, compared to almost 70% from the US. Now, we are always a tad skeptical of these sorts of analyses, as they can’t quantify indirect ties and the cumulative effect on the global supply chain (e.g., German finished goods containing British components), but it’s worth noting anyway. We’d also note that a lot of this is speculative, in the sense that it presumes the UK will enter recession, a prediction that is far from assured to happen. For more, see our recent commentary, “What About America?

By , MarketWatch, 06/27/2016

MarketMinder's View: One has to roam far and wide these days to find stories without some sort of Brexit tie-in, and this is one of them. A preliminary report on US trade in goods showed imports exceeded exports by $60.6 billion, as imports increased 1.6% m/m and exports stayed about flat. As always, we’re pleased to see healthy US demand underpin rising imports—contrary to popular perception (and GDP math), this is a positive. Since the US is a major services exporter, expect to see the headline “gap” diminish in the final report, though that still isn’t “in the US’s favor” as suggested here. Trade benefits both parties—foreign buyers enjoying those services find plenty to cheer too.

By , Bloomberg, 06/24/2016

MarketMinder's View: This piece mostly focuses on experts who predicted a “Remain” victory in the Brexit referendum, and while we aren’t here to pile on (no one forecasts with 100% accuracy), we believe there are some salient points here that investors can apply to any media take. The big one: Know that anyone, pro or no, can be wrong—and wrong often! Expert takes aren’t infallible, and they should be viewed with healthy skepticism. Their forecasts are opinions, and any forecast is only as good as its inputs. That said, we aren’t recommending outright ignoring or disregarding experts’ opinions, either. As this piece points out, “Experts have biases and make mistakes, but the very act of gaining expertise usually makes them less vulnerable to misinformation. Most people don’t have time to develop that sort of informed skepticism—which is one reason why experts are so essential.” We don’t know about “essential,” but more information for markets to digest and price in reduces the overall surprise power of an upcoming event.   

By , The New York Times, 06/24/2016

MarketMinder's View: With Britons deciding to leave the EU, many have begun speculating about the fallout Brexit will have on politics around the world. Will this embolden populist movements in Austria, France, Germany and elsewhere on the Continent? Could it affect upcoming votes, like Spain’s parliamentary election this Sunday? Or even the US presidential election in November? While all possible, we can’t definitively pinpoint how one election will influence another—it may be a factor, it may not be at all. However, we do urge investors to put aside any blinding political biases they may hold and avoid extrapolating the Brexit result into a blanket statement about the entire state of global politics. Yes, populist movements have been grabbing headlines recently, but they have yet to grab substantial power that could break the gridlock present in most developed economies—preventing radical legislation from becoming reality. That is what matters most for markets.    

By , CNNMoney, 06/24/2016

MarketMinder's View: The titular bubble question is based on a Fed statement from earlier this week that stock valuations “have increased to a level well above their median of the past three decades.” Some interpret that to mean stocks look frothy and the Fed’s “easy” monetary policy is to blame. We have some serious qualms about that notion. For one, let’s review how a financial bubble actually works. Bubbles tend to inflate quietly as investors overlook fundamentals and expectations begin surpassing reality. Fear deflates them, and if everyone sees bubbles forming in every single sector, that’s a sign skepticism exceeds optimism. Pointing out bubbles has been commonplace throughout this entire bull market, and correspondingly, persistent uncertainty has weighed heavily on investor sentiment—these bubble fears are self-deflating. Oh, and though the Fed is filled with smart people, we wouldn’t put a whole of stock in their market forecasting abilities. For instance, Fed head Janet Yellen observed that the biotech and social media industries were a bit frothy in summer 2014 … yet that froth was from earlier in the year and markets had largely recovered by the time Yellen made her statement. Plus, there is little evidence that the Fed has inflated any sort of bubble during the current expansion, either in stocks or the broader economy, so we aren’t buying that claim, either. Folks, given how dour investors have been for most of this bull market, we fail to see how broader bubbly conditions can form in the first place.         

By , The New York Times, 06/24/2016

MarketMinder's View: For investors rattled by today’s sharp spike in market volatility and considering selling stocks to prevent further portfolio declines, here is some very sage advice. Though the UK’s exit from the EU is an unusual event, market volatility isn’t. It’s normal, and one day’s decline, however steep, doesn’t mean stocks will no longer grow over time. Withstanding short-term volatility is the price you pay to achieve growth over the long run. If you need any exposure to stocks to reach your long-term financial goals, and those goals haven’t changed just because of Brexit, it probably isn’t prudent to radically alter your allocation to stocks today. If you do, determining when to get back in is fraught with peril—stocks will likely be up sharply by the time you feel comfortable re-entering the market. Also, for investors in or near retirement, your investment time horizon is likely longer than you think, as folks are living longer than ever. Selling stocks now, especially if you remain out of the market for a prolonged period, may materially reduce your portfolio’s ability to meet your needs throughout your lifetime. Finally, we’ll leave you with this nugget of wisdom, though we humbly suggest you read the whole piece: “Nothing about the vote for Britain to leave the European Union suggests that the fundamentals of capitalism have changed. So neither should your confidence in very long-term ownership of the pieces of the for-profit enterprises that benefit from your fortitude.”

By , The Wall Street Journal, 06/24/2016

MarketMinder's View: The idea that Brexit will send shock waves through the US economy is based on a wide array of assumptions, many of which are highly questionable.  While the British pound fell sharply immediately after the Brexit outcome was known, the US dollar won’t necessarily keep surging over the coming months. Cooler heads may prevail in currency markets once folks realize Brexit likely doesn’t spell doom for Europe’s economy. And even if the dollar does rise, that isn’t the big negative for the US economy some think. The idea that a strong dollar will materially crimp US growth partly stems from the belief it makes US exports more expensive for foreigners. But many finished products in the US have foreign-sourced input costs such as raw materials, components, labor and transportation, which are cheaper for US firms when the dollar is strong. This helps offset the impact of a strong dollar on many finished goods for people buying in weak foreign currencies. It’s also worth noting the dollar was even stronger than it is now early and late last year as well as earlier this year, and this didn’t derail the expansion. Not to mention most of the late 1990s. Moreover, US growth is not highly dependent on exports. Instead, domestic consumption is the key, and Brexit likely won’t have any material impact on this.

By , The Street, 06/24/2016

MarketMinder's View: This piece posits rising global debt, up about $57 trillion (as of 2014) since 2007, now totaling a whopping $199 trillion, will cripple the global economy as lenders lose faith governments will ever repay their debts. Some things about this figure: One, it includes financial sector debt, which no proper credible analysis would ever do. The financial sector IS debt. Two, it also includes all household and corporate debt. So it isn’t like governments have a $199 trillion tab. It’s significantly lower. The rest of the piece is your standard mishmash of slow-growth and government debt fears, arguing governments will be unable to repay, either risking default or widespread debt monetization. Hey, maybe one or two will default! Happens. But what matters is borrowers’ ability to service their debt, and there is ample evidence the vast majority of world governments can easily afford to do this. The fact sovereign borrowing rates are at generational lows is strong evidence for this. If lenders (bond buyers) doubted governments’ ability to pay them back, they would demand higher yields on government bonds to compensate them for the risk of default. But demand for government bonds across the globe remains strong. For debt service to be prohibitively expensive, interest rates would have to soar to nosebleed levels and stay there. Markets move on probabilities, not possibilities, and this is highly unlikely to happen within any reasonably foreseeable timeframe.

By , The Wall Street Journal, 06/24/2016

MarketMinder's View: New orders for durable goods—items such as household appliances, machinery and cars that typically last at least three years—fell -2.2% m/m in May, badly missing expectations of a -0.4% m/m fall. The decline was broad-based, as orders fell in almost all categories, though the main culprit was a -34.1% decline in defense aircraft orders. Core capital goods orders (nondefense capital goods excluding aircraft) fell a milder -0.7% m/m and -3.5% y/y. As core orders are widely seen as a proxy for business investment, the news renewed concerns about the expansion’s strength. But nothing here is out of line with the recent trend of choppy orders alongside broader economic growth. Business investment fell the past two quarters, but not enough to tip the US into recession, and weakness was concentrated in the commodity-heavy Energy and Materials sectors. Also, May’s drop doesn’t automatically mean business investment will fall again in Q2, as the relationship between the two isn’t as strong as many believe.

By , Bloomberg, 06/23/2016

MarketMinder's View: All 33 banks the Fed subjected to its arbitrary, make-believe recession passed through the fantasy, which we are told here was tough. We’re sure it was! But it is also based on purely imaginary inputs which are incredibly unlikely to match up with how the next financial crisis actually looks. Heck, they aren’t even stress testing for factors that led to the last crisis, considering unemployment, however high, wasn’t a causal factor in the bank panic, it was an effect. The US banking system is holding vastly increased capital and is on very sound footing—the Fed’s confirmation of it is a merely academic exercise. Now, next week the Fed publishes the results of another academic exercise with arbitrary criteria—the Comprehensive Capital Analysis and Review—which is more meaningful for investors. Not because the Fed’s test says anything about readiness for a crisis, mind you, but because banks’ planned dividend payments and buybacks must be approved to advance. Those are meaningful, the tests, meh.

By , MarketWatch, 06/23/2016

MarketMinder's View: This article highlights near perfectly 1) why the Fed should talk much, much less and 2) why you should pay much less attention until they act on number 1. “No one who follows the Fed expects insightful questioning from members of Congress, all of whom use the hearing to advocate for pet causes. However, Tuesday’s testimony produced a real winner. Noting that the Fed’s incorrect predictions had caused the central bank to lose credibility, Banking Committee Chairman Richard Shelby asked Yellen to ‘rate the utility of forward guidance over the last several months.’ Yellen replied, with some prodding, that the Fed was ‘relying less on forward guidance’ than in the aftermath of the financial crisis. She cited the Fed’s quarterly dot plot as a means of conveying Fed expectations.” Now, that might seem like a doozy of a statement from the Fed head, but it isn’t the biggest snafu this go ground. This is: “He then wandered off on a tangent to inquire how often Ms. Yellen consults with Richard Cordray of the Consumer Financial Protection Bureau and what thoughts she had on the agency’s budget. An apparently puzzled Ms. Yellen pointed out that it is her staff that deals with Mr. Cordray, a longtime Republican target, before waving off how the new agency is funded as a matter for Congress, which holds the government’s purse strings, not the Fed.” The Fed, not Congress, funds the CFPB, an independent organization within the independent Fed.

By , Reuters, 06/23/2016

MarketMinder's View: If a composite purchasing managers’ index (PMI) read of 52.8—well in excess of the 50 mark that divides growth and contraction—services at 52.4, manufacturing rising to 52.6 and posting the fastest rate of new order growth in 2016 is “struggling,” then we guess the dour take here is accurate. But to us it looks like growth, and considering PMIs measure the breadth of growth—not the magnitude—we’d recommend taking the projections with a grain of salt.

By , The Washington Post, 06/23/2016

MarketMinder's View: These reports are typically met with bizarrely off target headlines like this one, which seem to operate on the SNL-inspired notion there is a giant lockbox account labeled “SOCIAL SECURITY” with money in it that will be bare in 20 years. That, friends, is wildly inaccurate. For one, there is no lockbox, no account, no fund. Social Security is pay-as-you-go. Your benefits are paid for by working folks’ taxes, pure and simple, the end. Now, the report says Social Security taxes will cover full benefits for the next 18 years and some 75% thereafter. But as ever, these long-term forecasts operate on straight-line projections of the past, one reason why they frequently miss the mark. And, here is the kicker: All these projections can change with legislation. See, for example, this: “In one bright spot of the report, the fund used to pay benefits for people with disabilities — which was set to run out of funds by the end of this year — should last at least through 2023. Congress made changes last year that directed more cash to that part of the program by reallocating money from the trust fund used to pay benefits to retirees and survivors.”

By , Bloomberg, 06/23/2016

MarketMinder's View: This argues that, Brexit or no, Britain’s economy is sluggish and pointing downward, an argument it supports by noting that the MSCI UK is down -8.9% annualized since June 2014, far below the index’s average 10.1% annualized return. Which is true! (In dollars—in pounds returns are more-or-less flat over that period, annualizing -0.9%.) As for the pound’s weakness against the dollar, that’s also accurate, but skewed because the dollar has spiked against virtually every currency globally over that span. And both these are market gauges subject to sentiment, heavily influenced in Britain by Brexit uncertainty. Global markets, too, haven’t fared spectacularly over this period, weighed down by a big correction with two primary downdrafts along the way. The GDP data herein are very backward looking, averages since 1980. In this cycle, UK growth has been near the forefront of the developed world. In our view, you’d do better to analyze credit market conditions (money supply and credit are growing), output gauges (GDP is rising, as did industrial output in the most recent readings), consumption (retail sales data are strong) and Purchasing Managers’ Indexes, which are in expansionary trends.

By , The Wall Street Journal, 06/23/2016

MarketMinder's View: An excellent summary of Indian Prime Minister Narendra Modi’s incremental approach to reform. Though some decry the lack of huge home run initiatives, his small ball technique seems to be working: “Mr. Modi has used executive orders to accomplish many of his reforms due to resistance from left-wing parties in Parliament. He is gaining politically, with his Bharatiya Janata Party and its allies doing better than expected in five state elections last month. Some Indian political analysts estimate he is within 10 votes of passing a reform of the goods-and-services tax in the upper house … Mr. Modi’s liberalization Monday was an important step that should encourage foreign investors. There’s more to do.”

By , Bloomberg Businessweek, 06/23/2016

MarketMinder's View: Set aside partisan bias and your opinions of President Obama (positive or negative) for a moment to assess the logical flaw in this article. On the campaign trail, many painted Barack Obama with the typical brush they paint Democratic presidential candidates with: They seize on campaign rhetoric to allege the candidate is “anti-business” and, hence, bad for stocks and the economy. This article juxtaposes that with the data and argues, in an interview with the President, that he has been good for business. The reality is Obama has been neither as bad for business as feared nor as good for business as claimed herein. Presidents in general are far less important for the US economy and stocks than most claims suggest. Obama cannot take credit for the “stock market … roaring back” from the Financial Crisis, nor can he realistically be credited for employment improvements or GDP being well above pre-crisis levels. (No president could be.) More than 85% of jobs and economic output in this country are from the private sector. By the way, since 2010 we’ve had a historically inactive government due to gridlock, which highlights that point near perfectly. Just remember all this when election rhetoric hypes one candidate and bashes another this year. (Or bashes both, as the case may be this year.)

By , AEI Ideas, 06/23/2016

MarketMinder's View: This goes after one US presidential candidate’s trade rhetoric a bit much for our tastes, as certainly Donald Trump isn’t the only candidate in this race to misperceive the trade deficit. (Though the commentary herein is entertaining in that regard.) But that aside, this is an excellent argument showing the absurdity of the claim that the US running trade deficits means our trading partners pursue unfair practices.

By , Yahoo Finance , 06/22/2016

MarketMinder's View: We’ve discussed in great detail over the last few months why Brexit—if it happens—very likely won’t be the economic catastrophe many fear. (See here, here and here) This piece puts Brexit fears into perspective by looking at previous events many similarly thought would wreak havoc but didn’t: The downgrade of US government debt in 2011, the so-called “fiscal cliff” in 2012, fear of a potential US default in 2013 and the sequestration-induced budget cuts in the same year. Now, these events themselves aren’t analogous to Brexit, so you can’t use them to model the potential economic impact of the UK exiting the EU. But widespread fears over Brexit seem like a classic case of history repeating itself, and another brick in the wall of worry markets love to climb. It’s a sign investor sentiment remains nowhere near the euphoric levels you tend to see at major market peaks, which suggests the bull market is far from over.

By , CNBC, 06/22/2016

MarketMinder's View: Why? Because a “Leave” win will drive uncertainty, while a “Remain” win will supposedly strengthen the pound and knock the greenback by extension. Here are some counterpoints. One, it’s a behavioral error to assume Event A has Automatic Outcome B. What if markets have already priced in the outcome either way? Two, gold’s four-plus year bear market included all manner of uncertainty and allegedly risky events, including the fiscal cliff, a couple of wars and several terrorist attacks. Gold is no more a safe haven against turmoil than any other asset class. Three, gold and the dollar don’t have much of a relationship at all. Four, gold moves most on sentiment, and sentiment is by definition unpredictable. Given gold is a poor long term investment, we humbly suggest investors avoid including it in their portfolios, regardless of how tomorrow’s vote turns out.

By , Bloomberg, 06/22/2016

MarketMinder's View: A US District Court judge recently struck down an Interior Department rule that imposed tighter standards for hydraulic fracturing on public lands. This followed an appeals court halting an EPA wetlands rule last October and a Supreme Court decision in February temporarily blocking regulation that limits carbon emissions from power plants. We neither support nor oppose these rulings and take no sides politically, as political bias is blinding in investing. Instead, we present this to you to show how difficult it is for a president—and the federal agencies under his or her administration—to enact meaningful change without Congress’ consent. This seems quite relevant now as each of the major parties’ presumptive presidential nominees have proposed some rather extreme and controversial policies should they take the White House in November. Candidates often do this during campaigns in an attempt to win votes, but few of these measures end up coming to fruition once they’re elected. This is because the Constitution purposely limits a president’s powers to ensure no one branch of government alone can impose radical change. Regardless of who becomes president later this year, the risk of sweeping legislation that increases uncertainty, possibly roiling markets, appears low because political gridlock will likely persist. For more, see our 2/9/2016 commentary, “Presidential Change Has Limited Range.”

By , CNNMoney, 06/22/2016

MarketMinder's View: Given short-term interest rates—which the Fed often lowers during economic downturns to stimulate growth—remain near zero, many have argued the Fed has few tools at their disposal to combat the next recession. Now Fed head Janet Yellen has joined the chorus, commenting during Congressional testimony yesterday, "If there were to be a negative shock to the economy...we don't have a lot of room using our traditional tried and true methods to respond." This piece briefly discusses other monetary policy tools the Fed could implement if the economy were to turn south, namely, quantitative easing and helicopter money, and why their stimulative powers are questionable. But despite Ms. Yellen’s suggestion the Fed has few options to address a recession, many potential ones exist. The Fed could reduce bank reserve requirements (as China has done lately) or create new lending facilities (such the many and varied programs targeting the purchase of certain types of loans it created in 2008 and 2009) to target particularly impaired areas of credit markets. It could also use a long-forgotten tool, dropping the discount rate below the fed-funds rate to make interbank lending profitable—something the Fed did many times before 2008, when Ben Bernanke apparently forgot about it. Fortunately, the Fed likely won’t have to implement any of these policy tools anytime soon, as forward-looking indicators such as the Conference Board’s Leading Economic Index suggest a recession isn’t in the cards, at least over the near term.

By , The Wall Street Journal, 06/22/2016

MarketMinder's View: We’re entirely sympathetic to the notion that markets have already begun pricing in a vote to remain in the EU. That’s how markets work—they discount widely known events and are usually good at discerning the outcome of a date-certain event like the referendum long before that outcome is official. It happened with the fiscal cliff, and it often happens with US elections. That, however, doesn’t mean upside gains are limited from Friday onward if “Remain” wins, in the UK or globally. Nor does it mean huge downside risk if Brits vote to leave, as markets have spent the better part of a year considering that possibility. This piece cites factors from “tepid U.S. employment data to the fragility of Europe’s economic recovery” as supposed headwinds even if Brexit doesn’t happen, but those aren’t inherently bad for stocks. Employment data are late-lagging indicators, and the eurozone recovery’s tepid pace is quite widely known. Surprises move markets, and the potential for surprise is far more good than bad.  Fundamentals are much better than many currently believe, and perceived risk factors aren’t the negatives many think. If Brexit passes, volatility may temporarily spike, but investors should quickly realize the economic Armageddon that many predicted will not happen, as the UK’s separation from the EU is a process that will move glacially. Nothing changes economically on June 24 if Leave wins. The uncertainty over the possible outcome will fall, a positive for markets.

By , The Wall Street Journal, 06/22/2016

MarketMinder's View: According to FICO, the percentage of US adults considered subprime borrowers (credit scores below 600) was just 20.7% in April, the lowest share since 2005. A host of factors have contributed to the decline, including folks having paid down debt since the recession, low borrowing rates shrinking debt-service payments and prior negative credit events no longer detracting from people’s credit scores. Some believe more creditworthy borrowers will encourage banks to lend more, juicing the economy, and hey, maybe this will happen! An increase in creditworthy borrowers could help offset some of the impact of a relatively flatter yield curve, which generally encourages banks to be a bit more judicious about whom they’ll lend to. And if the yield curve steepens again, so much the better. Either way, that fewer Americans are less creditworthy should help dispel the idea rising household debt is a problem for the US economy.


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Global Market Update

Market Wrap-Up, Monday, June 25, 2016

Below is a market summary as of market close Monday, June 25, 2016:

  • Global Equities: MSCI World (-2.3%)
  • US Equities: S&P 500 (-1.8%)
  • UK Equities: MSCI UK (-6.0%)
  • Best Country: Japan (+2.0%)
  • Worst Country: Ireland (-10.9%)
  • Best Sector: Utilities (+0.3%)
  • Worst Sector: Financials (-3.8%)

Bond Yields: 10-year US Treasury yields fell -0.13 percentage point to 1.43%.


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.