|By Donald J. Boudreaux and Liya Palagashvili, The Wall Street Journal, 03/07/2014|
MarketMinder's View: A magnificent discussion of some major statistical flaws in the argument Corporate America is profiting at the expense of workers, causing a hollowing out of America’s middle income brackets. When you include employee benefits and use a more apples-to-apples inflation measure, you find the disconnect between rising output per hour and pay disappears. For more on a related topic, see Elisabeth Dellinger’s recent column, “Grabbing the Third Rail: Income Inequality and Stocks.”
|By Thom Lambert, Truth on the Market, 03/07/2014|
MarketMinder's View: This in-depth discussion is a comprehensive guide to what’s at stake in Halliburton v. Erica P. John Fund, a case currently being heard in the Supreme Court. At issue in the case: The determination of eligibility to join a securities class action lawsuit as a plaintiff. The current standard, Fraud on the Market, assumes any erroneous or fraudulent statement by a public company entitles any shareholder to join the case, regardless of whether they knew of the statement at issue. Should the rule be overturned or amended, it could greatly reduce the frequency and size of securities class action lawsuits. In our view, this would be a plus for investors. Typically, plaintiffs recover pennies on the dollar in securities suits—and current investors wind up bearing the legal costs.
|By Dan Hyde, The Telegraph, 03/07/2014|
MarketMinder's View: The rising price of beer since the early 1970s is no more indicative of the “falling value of money” than rising prices of food, clothing, fuel or commodities. As the UK (and US) economy has grown and money supply has expanded over time, it has created vast wealth for society—prices have risen in sympathy. That some goods have seen higher price rises than others is simply an issue of supply and demand.
|By Nicholas Watt, The Guardian, 03/07/2014|
MarketMinder's View: Even if UK “austerity” lasts a while longer, if it’s like the austerity already in the books, it shouldn’t much impact the economy—the tax hikes did have an impact, but the government’s contribution to GDP kept growing. Slow growth during that time was much more a function of quantitative easing and regulatory pressure, which weighed on loan growth (and, thus, private investment).
|By Joshua M. Brown, The Reformed Broker, 03/07/2014|
MarketMinder's View: While we agree with the conclusions drawn here—that the bull market at five years of age has room to run—we’d caution against using pure technical analysis to support that assumption. Charts can be illustrative and very instructive, but they are not forecasting tools. They are depictions of the past—and the past isn’t telling about future returns.
|By Daniel Altman, Foreign Policy, 03/07/2014|
MarketMinder's View: They aren’t. Our growing population of senior citizens is a testament to medical and technological advancement and overall quality of life—and they contribute to economic output and pay taxes like everyone else. None of the measures here claiming to show otherwise holds water. Entitlement spending represents a fraction of total outlays, and while it’s true discretionary government spending is falling, this piece flat ignores the private sector’s vast contributions to investment, R&D and overall growth.
|By Telis Demos, The Wall Street Journal, 03/07/2014|
MarketMinder's View: The “rush” alluded to here amounts to 42 companies that went public in January and February. Assuming that pace is unchanged, 252 firms would go public in 2014—a faster clip than in recent years, but still far below the period 1995-1999, when more than 400 firms went public annually. In addition, as Douglas Epstein details here, equity supply is down dramatically over the past decade. Supply of equities currently doesn’t seem stretched and a middling pace of IPOs isn’t solid evidence of euphoria.
|By Christoph Pauly and Christoph Schult, Der Spiegel, 03/07/2014|
MarketMinder's View: The European Parliament election is heating up, with national leaders already butting heads over how the next European Commission and Council Presidents should be chosen. The Lisbon Treaty says Parliament should elect the Commission chief, but some leaders prefer to keep the presidency as an appointed position. However the chips fall, expect plenty of politicking and horse trading—all of which could stall key measures, like the pending legislation on eurozone bank regulation and resolution.
|By Staff, The Yomiuri Shimbun, 03/07/2014|
MarketMinder's View: The proposed changes would encourage small farms to consolidate—an interesting change that might rankle the Liberal Democratic Party’s agricultural power base. Whether this is an example of Prime Minister Shinzo Abe “drilling” through vested interests (to use his own metaphor) remains to be seen, but that his cabinet is considering a politically contentious change—and one necessary for Japan to join the Trans-Pacific Partnership—is certainly noteworthy.
|By Andrew Burrell, The Australian, 03/07/2014|
MarketMinder's View: Australia’s Mineral Resources Rent Tax (MRRT), designed to raise government revenue by taxing mining firms, raised only A$232 million in fiscal 2013—despite mining companies’ profits rising. This is far below original forecasts, which presumed the tax take would be in the billions. The tax has proven nearly totally feckless for Aussie mining firms, and if Aussie Prime Minister Tony Abbott follows through on a campaign promise, a repeal looms.
|By Staff, Deutsche Welle, 03/07/2014|
MarketMinder's View: January’s 0.8% m/m rise was a big jump from December’s 0.1%, offering further evidence Germany’s Q4 slowness was a blip.
|By Robert Barnes, The Washington Post, 03/06/2014|
MarketMinder's View: Based on Wednesday’s arguments, the Supreme Court doesn’t appear to have strong leanings for or against the “fraud on the market” ruling underpinning most securities class actions. What they ultimately decide, however, is still anyone’s guess. For more, see our 03/05/2014 commentary, “Looking Beyond the Crimea—Policy Edition.”
|By Ben Rooney, CNN Money, 03/06/2014|
MarketMinder's View: While some of the stats here aren’t quite right—the analysis ignores the bear market in 1990—the thesis is largely correct. This bull market isn’t as long in the tooth as people think. Moreover, while bull markets die for many reasons, age and magnitude alone aren’t among them. Looking ahead, the combination of still-skeptical investor sentiment and a positive political and economic backdrop points to more bull market. For more, see our 1/21/2014 cover story, “A Bullish 2014.”
|By Richard Evans, The Telegraph, 03/06/2014|
MarketMinder's View: This is a concise, backward-looking snapshot of how various asset classes have performed amid the escalation of the crisis in Crimea—and no more than that. It doesn’t tell you how the situation there will impact markets. Barring massive global escalation—an exceedingly unlikely outcome—its longer-term impact on global markets should be minimal considering the Ukraine is 0.2% of GDP and business continues largely as usual in the remaining 99.8%. For more on the Ukraine, see our 03/04/2014 cover, “Back in the USSR.”
|By Suzanne McGee, The Guardian, 03/06/2014|
MarketMinder's View: While this interpretation of “black swan” doesn’t quite match the definition according to Black Swan author Nassim Nicholas Taleb, the advice is largely on point: As scary as big market gyrations like 2010’s flash crash and other quick selloffs can be, making a hasty, decision to get out typically isn’t the best move—short-term jumps and dives are impossible to predict, and experiencing volatility is the trade-off for achieving market-like returns over time.
|By Daniel Gros, Project Syndicate, 03/06/2014|
MarketMinder's View: It shouldn’t be hard to see why Greek exports aren’t growing—output is down big throughout the country. If Greece is making less, it has less to export. If Greek officials can create a more favorable environment for starting a business, remove barriers to productivity and allow the private sector to grow, then exports will follow. That—and not trying to goose exports for the sake of a balanced current account (which just doesn’t matter)—is what Greece’s adjustment program aims to do. It just takes time and political will.
|By Garry Shilson-Josling, Australian Associated Press, 03/06/2014|
MarketMinder's View: This story nicely captures current investor sentiment: Good news (in this case, rising Australian retail sales) is couched as something that can’t last. That’s not to say the Aussie economy shoots up from here—but until euphoric sentiment overshoots economic and fundamental market data, this bull market should have more room to run.
|By P.H., The Economist, 03/06/2014|
MarketMinder's View: The Mt. Gox collapse illustrates one of Bitcoin’s biggest drawbacks: It’s easily susceptible to hacking schemes, and investors have no chance to recover losses like they would at an FDIC-insured bank. Once a Bitcoin is stolen, it’s gone forever—a major reason Bitcoin seems to be a long ways off from being a viable currency. For more, see Talia Hosenpud’s column, “Bitcoin Goes Boom.”
|By Adam Creighton, The Australian, 03/06/2014|
MarketMinder's View: For many policymakers, GDP is the go-to stat in determining how productive a country’s economy is. But as this commentary rightfully (and colorfully) points out, there are many limitations to this measurement. The government’s contribution, for example, can both obscure strength and whitewash weakness in the private sector, creating a mismatch between total GDP and the economy’s underlying health. Investors shouldn’t rely on any one statistic as a perfect indicator of economic health—markets are too complex to be captured in one measurement.
|By Annalyn Kurtz, CNN Money, 03/05/2014|
MarketMinder's View: Analysts expect harsh winter conditions to weigh on February’s employment report (to be released Friday) like it did on January’s—a very likely scenario! But it’s nothing investors should worry much about: “If weather truly is the culprit, then the latest bout of weak data should prove temporary, and the economy will likely pick up in the spring.” Plus, employment is a lagging indicator—growth leads to jobs, not the other way around.
|By Staff, The Telegraph, 03/05/2014|
MarketMinder's View: No surprises here: China’s leaders set 7.5% as their minimum tolerable growth rate for 2014 (likely planning to beat it—under-promise and over-deliver seems to be their M.O.) and reiterated their dedication to opening up China’s economy, with a bonus objective of cutting back pollution. Meeting these goals would certainly be beneficial, but leaders likely move very slowly so as not to sacrifice growth—we’d temper optimism over policy changes for now.
|By Simon Kennedy, Bloomberg, 03/05/2014|
MarketMinder's View: Inflation (and deflation) is a monetary phenomenon, and eurozone money supply is rising—albeit slowly. Weakness in eurozone money markets isn’t tied to “too tight” monetary policy, though—an onerous regulatory environment is incentivizing banks to hoard capital. Quantitative easing (QE) won’t change this any more than Japanese (or US or UK) loan growth. QE flattens yield curves, disincentivizing bank lending—and weighing on money supply growth and velocity in the process.
|By Tomi Kilgore, The Wall Street Journal, 03/05/2014|
MarketMinder's View: The Dow is no more a “defensive” index than the S&P 500 is a “momentum” index—stocks are stocks. The Dow is simply a 30-stock, price-weighted index not fairly representative of overall markets (US or otherwise) in any environment.
|By Mohammed El-Erian, The Guardian, 03/05/2014|
MarketMinder's View: There are a number of misperceptions here, but the biggest (and most confusing) is the assumption big capital reserves at private firms mean they aren’t investing in the economy. But they are! US business investment has grown in all but two quarters since Q1 2010 (+7.3% in Q4 2013!) and hit an all-time high in Q4 2013. Research and development spending has fairly steadily grown since Q2 2009. High profits aren’t only for shareholders—they enable firms to keep boosting investment without depleting cash buffers, keeping balance sheets healthy (a good thing).
|By Martin Hesse, Der Spiegel, 03/05/2014|
MarketMinder's View: Here’s a comprehensive review of the ECB’s upcoming stress tests on European banks and the uncertainty surrounding them. Banks don’t know the standards they’ll be held to, the ECB’s review team isn’t yet established, banks’ business models vary greatly per country and—the kicker—banks that fail could be liquidated or shut. For more on this and other regulatory headwinds for eurozone banks, see our 2/28/2014 commentary, “Deleverage or Deregulate.”
|By Jim Puzzanghera, The Los Angeles Times, 03/05/2014|
MarketMinder's View: One month’s slower growth isn’t necessarily a signal of worse data to come, especially if that decline occurred amid severe winter weather in much of the US. Tellingly, one of the biggest detractors was a contraction in the employment index, while forward-looking new orders grew faster.
|By Aurelie Mayembo, Yahoo! News, 03/05/2014|
MarketMinder's View: With Q4 2013 GDP rising +0.3% q/q, household spending still growing, final PMIs’ showing strong results and Germany, France, Italy and Spain all expanding, the eurozone’s economy seems to be in much better shape than sentiment suggests—reactions focused on “not enough growth” and still-high unemployment.
|By Chikako Mogi and Keiko Ujikane, Bloomberg, 03/04/2014|
MarketMinder's View: While base pay ticked up +0.1% y/y in January for the first time since March 2012 as companies raised part-time workers’ pay, Japan’s labor market still has a ways to go—full-time wages didn’t budge, and total pay dropped -0.2%. Plus, wage growth remains well behind inflation and April’s sales tax hike adds another burden on consumers. In our view, this isn’t the start of a Japanese consumption melt up.
|By Staff, EUbusiness, 03/04/2014|
MarketMinder's View: With the EU and Russia’s relationship deteriorating amid the Crimean conflict, there are some concerns Vladimir Putin might cut off the natural gas that flows through Ukraine to the rest of Europe. But as this shows, Europe is ready—gas reserves are significantly higher than the last two times Putin cut supply, spring is around the corner, and Norway now plays a greater role in EU energy markets.
|By Damian Paletta, The Wall Street Journal, 03/04/2014|
MarketMinder's View: Whether you love or loathe the President’s new budget, we’d suggest not getting too excited. Given the Senate has already passed a budget agreement for fiscal 2015, and given how divided the House and Senate are over fiscal matters, this stands almost no chance of passing.
|By Leo Shanahan, The Australian, 03/04/2014|
MarketMinder's View: And the award for most creative defense argument goes, once again, to S&P! After calling its own ratings “puffery” in response to criminal suits in the US, S&P employed the Top Gear defense Down Under, saying its ratings are like the TV program’s car reviews—only a guide. In other words, even the raters admit their decisions are matters of opinion, not hard, fast statements of a company or country’s creditworthiness. We’d also add that they’re backward-looking and don’t tell investors anything markets don’t already know. For more, see Todd Bliman’s 04/23/2013 column, “Puffery: S&P’s Magical First Amendment Defense.”
|By Gwynn Guilford, Quartz, 03/04/2014|
MarketMinder's View: While Europe may have experienced heavy flooding in 2013, there is no guarantee the pace escalates from here or that it becomes anywhere near this costly. Long-term weather forecasts, like long-term economic forecasts, are fraught with peril. Whether you agree with the science here or not, economic conditions and technology change over long periods in ways few can predict today.
|By Staff, Reuters, 03/04/2014|
MarketMinder's View: French PMIs have shown contracting business activity since October, but the Treasury’s surveys have reported growth—and France’s GDP is up. The debate here shows one reason why: The Treasury’s survey has a bigger dataset. We’d add another: PMI surveys tell you how many firms are growing, but they don’t report the magnitude of growth (or decline) for each firm. If a minority of firms are growing, but they grow more than other firms contract, output will still rise.
|By Staff, BBC News, 03/04/2014|
MarketMinder's View: Despite severe flooding, the construction PMI hit 62.6, indicating growth continued at a robust place and underscoring the UK’s economic strength.
|By Ansuya Harjani, CNBC, 03/03/2014|
MarketMinder's View: Probably not, and this piece largely captures the reasons why. Ukraine’s economy is relatively small, representing 0.2% of global GDP, and outside of Russia, foreign banks’ exposure to the country is small. Investors also seem to realize Ukrainian currency volatility stems from country-specific issues, not anything categorical in Emerging and Frontier Markets. As for global markets, while events in Crimea likely weigh on investor sentiment in the short term, barring the conflict escalating into a major global event, its longer-term impact is likely minimal. For more, see our 3/3/2014 commentary, “Back in the USSR.”
|By Lorraine Woellert, Bloomberg, 03/03/2014|
MarketMinder's View: For all the jitters about the weather’s impact on US manufacturing, factory activity accelerated in February, with new orders leading the charge. Production fell into contraction, but this was largely due to a shortage of parts, which points to a pickup in the near future as manufacturers replenish component inventories.
|By Price Headley, Seeking Alpha, 03/03/2014|
MarketMinder's View: Calendars aren’t predictive. The observation that March is the S&P’s third-best month over the past 20 years is just, well, an observation. It means nothing for this March—or for stocks over the foreseeable future. We’re bullish, but not because of market returns over arbitrary past periods.
|By Julie Steinberg, The Wall Street Journal, 03/03/2014|
MarketMinder's View: No. The payouts are typically cents on the share, which usually doesn’t compare with potential losses caused by whatever behavior triggered the lawsuit in the first place. The settlements and legal fees also hurt the business’s costs, which hits current shareholders—which could very well include class action claimants. All things to keep in mind as the Supreme Court reviews the practice this week.
|By Staff, Bloomberg, 03/03/2014|
MarketMinder's View: Slower Chinese manufacturing growth isn’t surprising given the government’s ongoing efforts to tackle steel and other supply gluts. The crackdown on shadow banking also doesn’t help, as it starves smaller, private firms of funding. But this isn’t indicative of broad economic weakness. As also described here, a separate survey showed faster growth in the service sector, which is now the largest component of China’s economy. Seems to us China is simply shifting as officials intend.
|By Staff, BBC News, 03/03/2014|
MarketMinder's View: Regional growth slowed a bit, but the four largest economies—Germany, France, Italy and Spain—grew output simultaneously for the first time in nearly three years. Overall, this report is more evidence the region’s recovery is broadening.
|By Nicole Blackmore, The Telegraph, 03/03/2014|
MarketMinder's View: While this might not kill the UK housing recovery, it is a timely example of new regulations’ unintended consequences. Starting in April, banks—not borrowers—are responsible for assessing the “affordability” of each new mortgage, and banks anticipate the arbitrary standards will force them to knock mortgage approvals by about one-third. While this would be a headwind, the UK economy runs on far more than real estate.
Market Wrap-Up, Thurs Mar 06 2014
Below is a market summary (as of market close Thursday, 03/06/2014):
Global Equities: MSCI World (+0.4%)
US Equities: S&P 500 (+0.2%)
UK Equities: FTSE 100 (GBP) (+0.3%)
Best Country: Austria (+2.0%)
Worst Country: UK (+0.1%)
Best Sector: Telecommunication Services (+0.9%)
Worst Sector: Health Care (-0.3%)
Bond Yields: 10-year US Treasurys rose .03 to 2.74%.
Editors' Note: Tracking Stock and Bond Indexes