|By Anatole Kaletsky, Project Syndicate , 10/12/2015|
MarketMinder's View: Now here is a sensible take countering the many dour interpretations of China’s economic growth. Folks, nothing about China’s slowing growth rate is surprising or especially troubling. As this piece notes, “Simple arithmetic shows that $10.3 trillion growing at 6% or 7% produces much bigger numbers than 10% growth starting from a base that is almost five times smaller.” Said another way, China adds more to the global economy today than it did 10 years ago despite expanding more slowly—a more meaningful economic factoid compared to one month’s manufacturing survey falling into contractionary territory. We also quite liked this observation about the widespread disbelief in China’s official GDP stats: “Why do the skeptics accept the truth of dismal government figures for construction and steel output – down 15% and 4%, respectively, in the year to August – and then dismiss official data showing 10.8% retail-sales growth?“ Even if China isn’t growing quite as fast as the officially reported figures, this is not what a hard landing looks like.
|By David Harrison, The Wall Street Journal, 10/12/2015|
MarketMinder's View: We found parts of this sensible, but the underlying theme—that a Fed rate hike will knock Emerging Markets (EM)—is one big false fear and misperception. First, the sensible: Plenty of central bankers, both from EM and developed markets, want the Fed to get on with it already and hike rates. From Singapore to Germany, the perception is that the US economy can easily handle a rate hike, and doing so would remove some uncertainty—a positive. However, EM is pretty well positioned, too. Many EMs today are adequately prepared to exist in a world where US rates are slightly above 0-0.25%, and much of the impact on EM debt is already priced in—rates have already risen and currencies already fallen (vs. the dollar), particularly in commodity-reliant nations, as rate-hike talk swirled. Yet we haven’t seen this widely feared wave of dollar-denominated defaults throughout the developing world. We aren’t saying all are in great shape, and companies in Brazil and Russia, to name a couple, will probably face tough sledding. But don’t lump the strong in with the weak.
|By Ken Goldberg, The Street, 10/12/2015|
MarketMinder's View: While this piece is chock-full of misperceptions, we present it as an opportunity to review the difference between a correction (a short, sentiment-driven decline of -10% or more) and bear markets—extended market declines of -20% or more, driven by fundamental and identifiable causes. In our view, the decline starting in the summer fits the bill of a correction, which is normal during bull markets. A bear market, on the other hand, happens for one of two reasons: too-high investor expectations euphorically overlook reality or a huge, widely unnoticed negative that could shave trillions off global GDP wallops markets. Bear markets also often start with a rolling top, with much of the downside happening towards the end. For investors who can correctly identify a bear market forming, it makes sense to readjust your portfolio accordingly (and you have time to do so). However, corrections can end as quickly as they begin, and those trying to time a correction’s ideal exit and reentry points (or using stop-losses) risk getting whipsawed and losing potential gains—a damaging blow to those who require portfolio growth to meet long-term goals.
|By Grant Smith, Bloomberg, 10/12/2015|
MarketMinder's View: In September, the Organization of Petroleum Exporting Countries’ (OPEC) members pumped the most oil in a month since 2012, anticipating supply will contract in other parts of the world (e.g., the US) as persistently low prices prompt producers to cancel future extraction projects. However, while US producers are cutting costs, technological innovations and efficiency gains have kept production steady. While it is certainly possible US production contracts more in the future, the global picture doesn’t look radically different: Global supply growth is outpacing demand, and it’s too early to say whether that reverses in 2016. In our view, the Energy sector’s headwinds look likely to linger for the time being.
|By Editorial Staff, InvestmentNews, 10/12/2015|
MarketMinder's View: As taxpayers and citizens, we understand the frustration with Congress: Dithering, bluster and can-kicking aren’t hallmark signs of an efficient organization. But as investors, look past that bickering and consider the actual implications of a government shutdown. “Non-essential” services stop for several days (the longest shutdown lasted 21 days)—a big annoyance if you planned a trip to the Smithsonian or national park, but not a market negative. And the difficulties our fine legislators have in agreeing to anything is an underappreciated positive in a competitive, developed economy like the US since the likelihood potential market-moving rules become reality rounds to zero. So if government shutdown, highway funding bills and/or debt ceiling chatter causes you angst, we recommend turning off the TV and enjoy a nice brisk autumn walk instead—the market impact of Congressional dilly-dallying is nil. (Also, public service announcement, hitting the debt ceiling does not mean we “default.” For more, see our 10/8/2013 commentary, “Defaulty Logic.”)
|By Geoff Cutmore, CNBC, 10/12/2015|
MarketMinder's View: While this piece isn’t perfect, it does highlight a theme we’ve championed for a while now: Europe’s economic reality—particularly in the 19-member eurozone—isn’t as dour as folks make it out to be. Though bumpy, growth is increasingly broad-based. Purchasing managers’ indexes indicate more businesses expanding than contracting. Inflation remains benign and credit conditions continue improving—a positive for businesses and individuals. And The Conference Board’s Leading Economic Index (LEI) has risen for 10 straight months, signaling growth likely continues. So while we aren’t going to say Europe’s “best” is yet to come—we don’t even know what “best” means in this context—“better than expected” is good enough to beat low expectations.
|By Edwin Heathcote, Financial Times, 10/09/2015|
MarketMinder's View: This fun rundown of what Back to the Future II did and didn’t get right about 2015 actually has implications for investors, believe it or not. Back in 1989, the filmmakers guessed that in 2015 we’d have flying cars, self-tying shoes, hoverboards, video conferencing, mobile devices, and the Cubs beating Miami in the World Series. They mostly whiffed on the first three, sort of nailed the next two, and might get a 50% grade on the final one (the Cubs are in the playoffs and Miami does have a team, but they had a dismal season and are in the National League with Chicago). But they flat out missed the Internet, and they thought clunky fax machines with dot-matrix printing would be super high tech today. Oops! As the late great Yogi Berra said, “it’s tough to make predictions, especially about the future.” Remember that whenever you see long-term doom-and-gloom forecasts of weak growth, secular stagnation and below-average stock returns. Technological evolution is a huge, unknown variable, and it can shift the world’s course radically in not much time.
|By Patricia Cohen, The New York Times, 10/09/2015|
MarketMinder's View: Here is your obligatory recap of the Fed’s latest meeting minutes, released Thursday. Apparently the Fed likes most of what it sees but is a little worried a potential slowdown abroad could impact trade, so they want more data before making a move. At least that was the case two weeks ago—some are jawboning that things are already looking up. None of this tells you when they’ll hike, though. It’s all just noise. We’d prefer it if they just got on with it so the world can finally see the false fear of rate hikes for what it is.
|By Editorial Board, The Wall Street Journal, 10/09/2015|
MarketMinder's View: Whatever you think of the sociology behind the OECD’s proposals to curb legal tax avoidance, as this piece shows, the measures would carry costly compliance burdens, making businesses’ lives harder and probably crimping economic activity as they’re forced to channel energy from productive uses to administrative hassle. That is a rather counterproductive unintended consequence. However, these measures aren’t likely to go anywhere. Even though G-20 finance ministers blessed them, the chances national legislatures pass wholesale tax code amendments seem fairly close to zero.
|By Andrew Critchlow, The Telegraph, 10/09/2015|
MarketMinder's View: Just an interesting look at recent developments in the natural gas market, which has fallen under the radar while oil hogs all the attention. There is a huge supply glut in this market, too, which has reduced prices globally and eliminated much of the spread between prices in the US, Europe and Japan. This is great for consumers and businesses worldwide, not so great for Energy producers. And with production still going strong—and Iran likely about to ramp up—prices (and profits) likely stay low in this segment of the Energy market for the foreseeable future.
|By Jacob M. Schlesinger, The Wall Street Journal, 10/09/2015|
MarketMinder's View: Ok party people, what time is it? Time to set aside ideological leanings and take an objective look at the Democratic Presidential front-runner’s bank regulation proposals! Fun time! Overall, we think they look like a solution in search of a problem, as they increase costs without addressing the issues that actually led to the Financial Crisis. (Don’t worry, those were addressed six and a half years ago, when regulators changed their stance on mark-to-market accounting.) There might also be some unintended consequences, like lower liquidity and higher costs for individual investors. But, it is also way too early to fear (or cheer, if you’re so inclined) this all becoming a thing. We haven’t even had the first primary contest yet, and there is no way to know today who will win the Presidency, House or Senate. So whether you think this is terrible or the greatest innovation since the bagel slicer, don’t get too excited.
|By Staff, The Yomiuri Shimbun, 10/09/2015|
MarketMinder's View: Japan’s government is trying to improve the chances of the Trans-Pacific Partnership (TPP) passing in Parliament by helping local farmers deal with the new competition it will bring—not just with subsidies and procurement policies, but with technological and administrative assistance to boost efficiency and export capabilities. This might give TPP an incremental push toward implementation, though Japan is just one country, and 11 others must also ratify it. Also, as the nifty graphic shows, it will be years before many of TPP’s benefits materialize. So great as the deal would be for the US and global economy in the long run, it really won’t do much to boost growth in the foreseeable future.
|By A Catarina Saraiva, Bloomberg, 10/09/2015|
MarketMinder's View: No it didn’t. Some economists think it did, raising their estimate of the probability of near-term recession from 10% to 15%, but that is (a) low and (b) exactly what they said throughout 2013. Growth accelerated in 2013. Just because a bunch of people agree on something doesn’t make it true.
|By Staff, Reuters, 10/09/2015|
MarketMinder's View: Here is more evidence all is not well in Japan’s economy, which contracted in Q2 and struggled mightily in Q3, based on data released thus far. We’ve long thought investors’ optimism for the island nation was unwarranted, and reality looks increasingly unlikely to meet folks’ lofty expectations.
|By Spencer Jakab, The Wall Street Journal, 10/08/2015|
MarketMinder's View: While it’s true analysts expect Q3 will post negative headline earnings growth for the second straight quarter after Q2’s -0.7% y/y dip, this article wisely councils caution before you draw big conclusions. You see, there are some asterisks worth noting here. Namely, if you strip out Energy earnings, Q2 earnings flip from a tiny dip to 5.9% y/y growth. Oh, and as for the Q3 forecast: Analysts forecast a more than -4% y/y drop in Q1 2015 earnings. They grew. And Q2 earnings were forecast to fall over -4% initially, too. Don’t take these forecasts to the bank.
|By Colleen McCain Nelson and William Mauldin, The Wall Street Journal, 10/08/2015|
MarketMinder's View: Ahead of Congress’s approval hearings and vote, Jeff Zients, director of the Obama Administration’s National Economic Council, is pitching the Trans-Pacific Partnership (TPP) thusly: “At its core, TPP is a massive tax cut for American businesses.” And guess what? He’s sort of right! Tariffs are merely taxes on imported goods. Businesses typically pass those costs on to consumers rather than eating them, which artificially boosts the price of foreign-made goods. Now the President, also quoted herein, correctly notes “If we eliminate those taxes, now U.S. goods and services are more competitive.” Which seemingly suggests he gets that consumers ultimately pay that tax, which makes us wonder why there are any American tariffs on foreign-produced goods and services. But hey, we digress. Ultimately, removing an external influence and making the global market more level and even is a plus. Tariff elimination is a step in the right direction on that.
|By Mark Gilbert, Bloomberg, 10/08/2015|
MarketMinder's View: If you are caught up in reading the articles and reviews of former Fed head Ben Bernanke’s new memoir on his days at the helm, you might have seen media repeat (time and again) the notion the Fed couldn’t have saved Lehman. Folks, that is revisionist history, and this article does an excellent job explaining why. Here is a tidbit, but read the whole thing: “The feds underwrote the bailout of Bear Stearns, then let Lehman Brothers become the biggest bankruptcy in U.S. history, and the very next day rescued American International Group, and leaving the world of finance bewildered and confused. After reading the latest memoir on the period, I'm still not convinced the principal actors in the drama are being entirely frank about what happened behind the scenes of the real Lehman moment.” Besides, the Fed transcripts released last year show the Fed described their role in Lehman’s failure as a “decision” or “choice” intended to limit the potential “moral hazard” of repeat bailouts.
|By Mohammed A. El-Erian, Bloomberg, 10/08/2015|
MarketMinder's View: So this starts from a fallacious place—forecasting volatility, an impossibility—and then layer on some internally contradictory advice. How exactly can you dollar cost average (periodically deploy a portion of your cash by buying stocks at regular intervals) yet take advantage of especially tasty buying opportunities like when stocks hit an alleged “air pocket” where liquidity vanishes and prices temporarily fall? (Hint: You can’t. Don’t overthink it.) How can you move “up in quality” while bottom fishing in “Areas destabilized by fundamental demand and supply shocks”? That isn’t quality, it’s called value investing. All in all, this contradictory and slightly confusing commentary seems to us like bad advice. The better, wiser, time-tested advice is for long-term investors to invest in an allocation commensurate with their objectives and tune out the short-term noise.
|By Julie Segal, Institutional Investor, 10/08/2015|
MarketMinder's View: This very smart article puts structural changes in bond market trading in proper context and dispels the myth that regulatory changes evaporated bond market liquidity. Here is a particularly good snippet: “Although there is a shrill chorus today about the lack of liquidity, the bond markets never worked all that smoothly, because there is no central exchange for them. Companies issue bonds constantly, all of them unique. The investment banks that helped companies bring the bonds to the market in the first place also control secondary trading. …Bond dealers are often compared to market makers, or specialists, on the New York Stock Exchange, who simultaneously offer to buy and sell a particular stock and are required to step in during times of stress. ‘People imagine that these corporate-bond dealers have an obligation to stabilize the market,’ Fridson explains. ‘That’s never been the case in fixed income. There is a mistaken notion that in some past era dealers lost money to prevent the market from going under.” For more, please see Pete Michel’s recent analysis, “Why Bond Market Liquidity Fears Don’t Hold Much Water.”
|By Staff, The Telegraph, 10/08/2015|
MarketMinder's View: In August, when China modestly devalued its currency and announced it would allow “more market forces” to determine the yuan’s exchange rate, many presumed this was the tip of the iceberg and a Beijing desperate to prop its economy was actually planning a major devaluation to boost exports. A shot in a currency war, many claimed. But the reality is quite different. The yuan has fallen by less than 3% against the US dollar since then, largely because China’s central bank is supporting it! We never really got how someone could see a 3% devaluation as major move boosting exports—too tiny. This move seems to suggest the theory this was a currency war move was wrong.
|By Mario Parker, Bloomberg, 10/07/2015|
MarketMinder's View: Coal producers are suffering not just from the global commodities downturn, but also from many electricity plants switching to natural gas power as gas prices plummeted, largely due to increased output from hydraulic fracturing. New rules imposed by the Environmental Protection Agency further dented coal usage, and as a result natural gas has surpassed coal as the top US power source for the first time in decades. This may be bad news for coal companies, but cheaper energy costs are good news for consumers and energy-intensive businesses and a still-underappreciated economic positive.
|By James Ramage, The Wall Street Journal, 10/07/2015|
MarketMinder's View: The impossible trinity refers to flexible monetary policy, free flowing capital and a fixed exchange rate, which no country can maintain simultaneously for any length of time. History is littered with examples of countries that tried but were eventually forced to abandon their currency pegs when they depleted their foreign reserves, allowing their currencies to devalue in the open market, sometimes by a lot. China is getting a lot of attention these days after they devalued the yuan by 3% in August and have dipped into their reserves ever since to support the yuan from falling further. But with over $3.5 trillion of reserves remaining, China has ample firepower to forestall a devaluation on par with Mexico (and itself) in 1994, Thailand in 1997 or Brazil in 1999. The need for monetary stimulus is probably also overstated, considering firms’ primary financing roadblocks are administrative. Measures to target loan growth in small private firms, which are overall more profitable than the large state-owned firms, could probably jolt economic activity just fine without a rate cut. There is also no guarantee the yuan would crater if allowed to float. So we are skeptical China faces significant risks on this front in the foreseeable future. This seems more like something to keep an eye on for the long term.
|By John Authers, Financial Times, 10/07/2015|
MarketMinder's View: Only 26 S&P 500 companies issued guidance for the upcoming earnings season last month, well below the average of 125 and the fewest since 2000. Meanwhile, analyst estimates have clustered much more tightly than usual, and analysts have ratcheted down their expectations en masse. This piece argues they are all flying blind, and warns that when earnings are reported stocks could swing a lot, with big surprises in either direction. Maybe that’s true, but this puts altogether too much emphasis on formal expectations and completely ignores investors’ informal expectations, which happen to be quite dreary, based on all the issues and false fears discussed in this article. The strong dollar, for example, is not the earnings killer many believe. Most expected Q2 earnings to fall a few percent, based mostly on the dollar, but in the end they fell just -0.7% y/y, and excluding Energy, they rose 5.9%. Turns out everyone failed to account for the fact a strong dollar makes imported raw material, component and labor costs cheaper too, offsetting the negative effects on sales of finished goods. That few see the positive aspects of a stronger currency is actually pretty bullish.
|By Peter Spence, The Telegraph, 10/07/2015|
MarketMinder's View: UK industrial production jumped 1.0% m/m in August, surpassing analysts’ expectations for a 0.3% rise. But on balance manufacturing growth has been tepid for some time, and some fret Q3 GDP growth will slow from Q2’s 0.7% q/q pace. Maybe it will, but if so it doesn’t mean the UK economy is in danger of weakening significantly. Services account for the lion’s share of output, and growth there has been stronger than manufacturing for years, leading GDP steadily higher since 2009. Services growth has slowed a bit, too, but growth rates routinely wobble throughout economic expansions, and with bank lending picking up and the money supply growing, the UK economy has a solid foundation for more growth.
|By Cynthia Lin, The Wall Street Journal, 10/07/2015|
MarketMinder's View: Commodity-based junk bond yields are up in the last year, and rightfully so given these firms’ declining profits and smaller producers’ increasing reliance on debt. But now yields in other sectors are up, which has some worried about corporate balance sheets throughout the economy. We think that’s awfully premature, though, as the move occurred during stocks’ correction. Junk bond prices (which move inversely to yields) and stocks tend to be highly correlated much of the time, as they have overlapping drivers. Sentiment swings would therefore logically overlap. Just as stock corrections don’t reflect broader economic fundamentals, we don’t believe a blip in junk bond yields is very telling.
|By Thomas H. Kee Jr., Marketwatch, 10/07/2015|
MarketMinder's View: The thinking here is that bond market investors are the smartest in the world, and the fact yields stayed low even as stocks zoomed higher over the last week suggests those wicked-smart bond investors see something all those stock-loving yokels don’t, so trouble must lurk ahead for stocks. Folks, there are two big fallacies here. One, all similarly liquid markets digest widely known information simultaneously, so it is highly unlikely bonds know something stocks don’t. Bond investors aren’t locked inside a Faraday cage. All information they have is available to equity investors—as are their opinions, theories and analyses, which have been parroted all over the Internet. Stocks have already discounted everything bond investors may or may not have traded on. Two, there is no such thing as smart money. Bond investors don’t have infinite wisdom the rest of the investing world lacks. People are people, people.
|By Min Zeng and Lingling Wei, The Wall Street Journal, 10/07/2015|
MarketMinder's View: It isn’t just China. Foreign central banks overall—especially in resource-dependent Emerging Markets—were net sellers of US Treasurys to the tune of $123 billion in the year ending in July, the most since record keeping began in 1978. Their economies have weakened amid the global commodities slump, and after years of accumulating US debt, they are now selling to support their own currencies. But bond yields have fallen lately as demand from others—pension funds, banks, insurance companies and private investors—more than offsets central bank selling. Despite fears foreigners are losing faith in the US’ financial situation, the US remains the world’s lowest credit risk. As evidence: “In the 12 months to July, foreign private investors bought long-term Treasury debt at the fastest pace in more than three years.” For more, see our recent 9/18/2015 commentary, “Fisher Investments Research on China and US Debt.”
|By Tom Petruno, Los Angeles Times, 10/06/2015|
MarketMinder's View: We’ve discussed the alleged risks highlighted in this article numerous times in recent months, so we’ll spare you the repetition and zero in on the personal finance advice here. By encouraging investors to consider only how much money they can afford to lose, it takes too narrow and myopic a view. Risk tolerance is important, but we think long-term goals and time horizon—the length of time your money must be invested to reach your goals—are the best starting point. If your goals require enough compound growth to sustain cash flows over the next couple decades, then you might feel differently about the concept of keeping three to five years’ worth of expenses in cash just in case stocks fall. You might decide it makes more sense to keep a smaller buffer, knowing bear markets historically last 16 months on average, and allocate more to stocks (and maybe bonds, depending) so you can have more of your wealth working toward your goals. There are always tradeoffs, but going heavy into cash now could reduce your returns over time, making your goals harder to reach.
|By Charles Riley, CNN Money, 10/06/2015|
MarketMinder's View: As in “crashing on the,” not “Scotch on the.” In our view, Abenomics—Japan Prime Minister Abe Shinzo’s plan to boost the economy with a mix of monetary and fiscal stimulus and economic reforms—was always a rocky endeavor. The Bank of Japan’s quantitative easing program doesn’t stimulate the economy; instead it limits growth by lowering long-term rates and flattening the yield curve, discouraging banks from extending more loans. Fiscal stimulus—public investment projects—provide a quick jolt out of recession but not a lasting boost. Economic reforms to address Japan’s uncompetitive economy were the kicker. But as this points out, reforms passed to date only scratch at the surface of what really ails Japan, where labor markets are only mildly more modernized than the Meiji Era. Now, with Abe a lame duck and members of his own party starting to distance their agenda from his, jockeying for the eventual leadership contest, Abe likely lacks the political capital to pass additional reforms. And with growth now sagging, it looks like the sky-high sentiment that boosted Japanese returns earlier this year is starting to fall to Earth.
|By Andrew Osterland, CNBC, 10/06/2015|
MarketMinder's View: Smart beta funds attempt to achieve the best of both worlds: combining the low cost aspect of index funds with market-beating returns one can only get from active management. They do this by tracking an index whose constituents are weighted according to things other than market capitalization, like momentum, book value or sales or profits. Look, we aren’t married to any one investment style but there are two glaring problems with these newfangled funds. One, they’re all based on flawed assumptions that one style works for all time. Not true! Growth and value, big and small, foreign and domestic, high valuations and low valuations—all swap leadership periodically. Two, most of these funds have no performance history to speak of. Their allure is all based on back-tested hypothetical returns, which is frankly no Bueno. Survivorship bias, the arbitrary timing of hypothetical rebalances and other factors can skew returns dramatically from what they would have been in the real world. So tread with caution, friends. And for more, see Elisabeth Dellinger’s commentary, “Monkeying About.”
|By David Chance, Reuters, 10/06/2015|
MarketMinder's View: The International Monetary Fund (IMF) now expects the global economy will grow 3.1% this year and 3.6% in 2016, the second downward revision this year. But this isn’t a negative for markets, which have watched the IMF ratchet down its forecasts for years now. Nor did the IMF say anything new—they just cited widely discussed issues like the global commodity slump and slower Chinese growth. On the bright side, tepid forecasts from the IMF and other supranationals help keep expectations low, extending the wall of worry for stocks to climb. When expectations are dreary, even modest growth can be a big happy surprise.
|By Krista Hughes and Kevin Krolicki, Reuters, 10/06/2015|
MarketMinder's View: “Five years in the making, it would reduce or eliminate tariffs on almost 18,000 categories of goods.” Great! The Trans-Pacific Partnership (TPP) finally coming to fruition would be a big plus for the global economy. But as this article mentions, there are several hurdles for it actually becoming a reality—like ratification by the US Congress and other participant countries’ governments. Fast-track trade authority, which Congress renewed earlier this year, means the President can submit trade legislation to Congress for a quick up-or-down vote, no amendments, but that doesn’t guarantee passage. That said, even if TPP never becomes a reality, it wouldn’t be a negative for markets—just the absence of a longer-term positive. For more, see our 10/05/2015 commentary Pacific-Rim Politicians Play ‘Let’s Make a Deal’.
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Market Wrap-Up, Monday, October 12, 2015
Below is a market summary as of market close Monday, 10/12/2015:
Global Equities: MSCI World (+0.0%)
US Equities: S&P 500 (+0.1%)
UK Equities: MSCI UK (-0.5%)
Best Country: New Zealand (+1.3%)
Worst Country: Portugal (-3.4%)
Best Sector: Utilities (+0.5%)
Worst Sector: Energy (-1.0%)
Bond Yields: 10-year US Treasury yields were unchanged at 2.09%.
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.