|By Megan McArdle, Bloomberg, 07/02/2015|
MarketMinder's View: We’re somewhat ambivalent about this one. On the one hand, it highlights a few key ways the US isn’t Greece: America has a much deeper and diversified economy (as this piece quips, it’s much more than tourism and olive trees), doesn’t suffer from Greek-style corruption, has much better tax collection and can set its own monetary policy. However, we don’t believe the US has “massively unsustainable borrowing.” Though many bemoan the US’s $18 trillion dollar debt, about 102% of GDP, that figure includes the government’s holdings, which effectively cancel (it’s money they owe themselves). Net debt (held by the public) is $13.1 trillion, about 74% of GDP. Plus, the ability to service this debt is what really matters, and US borrowing costs are very low and falling. Debt service is less than 8% of tax revenue. If debt rises for years at breakneck speed and interest rates soar to nosebleed levels and stay there, then we’ll have a problem, but that risk is almost nil in the foreseeable future. Markets don’t deal with remote far-future possibilities in the here and now.
|By Neil Irwin, The New York Times, 07/02/2015|
MarketMinder's View: Why? Because the labor force participation rate fell again. Folks, the labor force participation rate is a largely meaningless statistic. Everyone focuses on the numerator—labor force—forgetting the denominator, population, has as much influence on the ratio. The labor force itself isn’t shrinking—it fell a bit in June, but May was an all-time high. Population is just growing faster, ergo, falling ratio. Don’t overthink it. Also, the labor market is a late-lagging indicator, utterly meaningless for stocks. Growth drives jobs, not the other way around.
|By Dimitris Valatsas, The Wall Street Journal, 07/02/2015|
MarketMinder's View: This piece has a clear political agenda, and we normally wouldn’t highlight something of that ilk, but we’re making an exception in this case because it has such a simple, clear accounting of Greece’s increasing hardships as the Syriza government—elected on an untenable promise of continued euro membership with much less austerity—floundered in negotiations with creditors and ultimately lost the goodwill of Brussels and many of their constituents. When Syriza won January’s election, Greece was in a nascent economic recovery. Now they are back in recession, and the downturn is almost sure to steepen. Grexit seems perhaps a stone’s throw away, and for all the pixels spilled over how devaluation could boost Greek exports and competitiveness in the long run, in the near term it will be devastating: “As usual, it is the poor who suffer the most. The Greek elites’ Swiss bank accounts aren’t subject to withdrawal limits. The rich don’t stand to lose their savings if the government forcibly converts their money into newly minted drachmas.” We can’t help but wonder how closely Spanish voters are watching and whether this will turn them off of their Syriza equivalent, the Podemos party, which is polling well as the general election there approaches.
|By Jennifer Kaplan and Joseph Ciolli, Bloomberg, 07/02/2015|
MarketMinder's View: Analysts currently expect S&P 500 Q2 profits to fall year over year—“more ammunition for bears who say equity valuations are too high.” We would quibble with this for several reasons: (1) As this notes, most of the expected decline stems from cratering Energy profits. Excluding Energy, profits are expected to grow a little. (2) Market valuations typically expand in maturing phases of bull markets, and earnings growth can slow or even turn negative without derailing bull markets. (3) Part of the reason analysts expect earnings to drop in Q2 is the strong US dollar, which supposedly hurts exports. But they said the same thing in Q1, and earnings grew—turned out they forgot a strong dollar helps lower overseas costs, offsetting much of its impact on overseas revenue, as we discussed in more detail here. And finally, (4) stocks are forward-looking. Q2 is in the past now, and stocks have already discounted all these dreary expectations. They’re looking to the next 3-30 months or so, and most expect earnings to reaccelerate in that window.
|By Asjylyn Loder and Bradley Olson, Bloomberg, 07/02/2015|
MarketMinder's View: When oil prices started falling last year, many producers didn’t immediately feel the pain because they’d locked in delivery contracts at higher prices or used derivatives contracts to hedge away the immediate risk. When oil was in the $40s in January, many drillers could still sell at $90 per barrel. But many of these arrangements will expire this year, causing many drillers’ revenues will fall sharply—yet another reason we think expectations for Energy firms remain too high and bottom-fishing for stocks in that sector remains premature.
|By Paul Vigna, The Wall Street Journal , 07/02/2015|
MarketMinder's View: This is a load of unwarranted pessimism. The “green shoots” in question are the same “green shoots” then-Fed head Ben Bernanke observed in 2009. This says we are still waiting for them to “grow into stalks,” which we find confusing as all get-out considering real GDP has been clocking new highs since 2012. This is an expansion, people, not a recovery! We have a great big beanstalk already, to continue to metaphor! Listen, we get that growth has been below average throughout this economic expansion, but there is nothing magical about a 3% growth. Stocks don’t need rip-roaring growth for a bull market to continue—just a reality that beats dreary expectations. Articles like this help keep expectations low—bullish for stocks.
|By Jason Zweig, JasonZweig.com, 07/01/2015|
MarketMinder's View: Mr. Zweig, The Wall Street Journal’s personal finance guru, took to his personal blog to share this absolutely dynamite perspective on how the abundance of financial news and information can lead investors astray. It becomes all too easy to read too much into every short-term change and blip in prices. We start seeing patterns where none exist—like staring at an optical illusion for too long. Then we believe those patterns, decide they’re predictive, start trading on them—and trade too often. This is human nature: “The financial media’s habit of describing the stock market as if it were a living thing plays with the prediction circuits in the human brain. Seemingly slight changes in how reporters describe a rise or fall in the market can make a big difference in investors’ expectations. When investors looking at a rising price chart are told that an investment ‘climbed’ today, they are about 10% more likely to predict that it will go up tomorrow than people who are told that it ‘increased’ by an identical amount. Conversely, someone who sees that a stock ‘dove’ is almost 20% more inclined to predict it will drop tomorrow than somebody who is informed that its price “decreased” by the same amount. That’s because words like ‘climbed’ and “dove” imply that the market is alive — that it knows what it is doing, that it will keep doing it, and that its future course is therefore predictable.” Knowing is half the battle.
|By Jeremy Warner, The Telegraph, 07/01/2015|
MarketMinder's View: So here’s the thing about the many, many warnings the UK (and US and others) rely on fake “debt-fueled” growth: In fractional reserve banking systems, all growth is technically debt-fueled, because banks create money by lending more. In this way, savings don’t stifle spending—banks channel those savings throughout the economy, where others use them productively. Businesses use those loans to finance projects that reap big long-term returns. Households use those loans to buy homes and cars and maybe redo the kitchen and back yard, which helps create jobs for others. The charts here might imply UK growth is a credit card-driven mirage, but it just isn’t true. Another quibble: Household debt to gross income isn’t a meaningful metric. Debt is a level—an absolute amount outstanding that grows or whittles down over time. Income is a flow. A much more meaningful chart would compare like with like. Say, debt to total assets or wealth—both levels. Or debt payments to income—both flows.
|By Adam Davidson, The New York Times, 07/01/2015|
MarketMinder's View: This is just great. In terms anyone can understand, it explains quite nicely why economic statistics—useful as they are—can’t fully capture true growth, inflation, employment or how the economy impacts our overall quality of life. Official statistics have evolved little since the 1930s and 1940s, when they were created in the heyday of US heavy industry: “You could learn a lot about the wages and employment patterns of adhesive-bonding-machine operators (18,210 workers in 2014, median wage $16.28 per hour). But you’d be hard-pressed to find any guidance on whether you’d make more money learning the Ruby on Rails computer-programming framework instead of developing your graphic-design skills.” They can’t quantify intangible benefits, like the contributions of stay-at-home parents. They don’t capture Uber drivers and Etsy entrepreneurs. They can’t measure how technology improves everyday life and productivity. They can’t show, with numbers, how median-income households today might have significantly better lives than median-income households 30 years ago, even though by some measures median household income hasn’t much moved since then. Statistics, for all their mathematical rigor, are rough snapshots at best and still limited by the biases and assumptions of those who first crunched the numbers—as even the father of GDP, Simon Kuznets, so often complained.
|By Paul Vigna, The Wall Street Journal, 07/01/2015|
MarketMinder's View: No, it is a red flag for the Dow itself, which fell -1.4%, while the much much broader S&P 500 and MSCI USA indexes rose 1.2% and 1.7%, respectively (FactSet, total returns). Which better reflects US markets: Indexes with 500-600 firms, weighted according to each company’s size? Or an index with 30 companies, weighted according to each company’s share price and with zero regard for size? Also, past performance doesn’t dictate future returns, a year’s first half doesn’t predict its second half, and back-end-loaded years are common. For more on this broken index, see our 6/25/2015 commentary, “Down With the Dow.”
|By C.J. Polychroniou, The New York Times, 07/01/2015|
MarketMinder's View: While this probably overlooks some benefits Greece has received from euro membership, like improved cross-border trade, we highlight it for its no-nonsense explanation of why leaving the euro isn’t the surefire ticket to Greek prosperity that some suggest: “To this day, the authorities are unable to enforce even a smoking ban because so many people are unwilling to conform to the existing laws on smoking in public places. A competent Greek bureaucracy remains a chimera. … The transition from the euro to a new national currency would require that Greece become highly efficient and productive in order to survive in a globalized environment in which it now imports nearly 90 percent of all the products it consumes. To do so, it would have to embark on major public sector institutional reforms and change its political culture rapidly. But there is no evidence so far that the political class in Greece is either capable or willing to execute this task.”
|By Matt Levine, Bloomberg, 07/01/2015|
MarketMinder's View: We mentioned in a blurb yesterday that Puerto Rico’s debt troubles are much more a political and legal story than an economic one, and here is a great rundown of that political/legal story. Puerto Rico is not quite a state, not quite a municipality, and quite unable to declare Chapter 9 bankruptcy. Its constitution also requires it to make payments on General Obligation bonds before all other payments, so it is in quite a pickle as it angles to restructure debt. If you’re into the nuances of bond covenants and official debt payment statutes (as we are), this is all quite fascinating. But that’s about where the story’s significance ends for investors. Unless you own a chunk of Puerto Rican debt, very popular for its high yields and triple-tax-free status—in that case, any restructuring will have a direct impact, though markets have been pricing this in for two years, and Puerto Rican bondholders have already taken significant paper losses. (Also, as Mr. Levine highlighted in his morning linkwrap today, most Puerto Rican bonds are insured, and the bond insurers have a big incentive to do something to forestall default—and the power utility highlighted in this article reached a deal with bond insurers this morning.)
|By Ylan Q. Mui, The Washington Post, 07/01/2015|
MarketMinder's View: Here is a great example of just how skeptical sentiment remains six-plus years into this bull market and economic expansion. No one calls this a boom, even though by many measures it would qualify. Instead, like this piece, most bemoan alleged structural headwinds like aging populations, debt and the like and allege only Fed policy is driving growth and stocks. Bad news is good news because it means Fed support will stay, and good news is bad news because it means the Fed could hike rates—casting “a vote of confidence in the recovery [that] could be just the thing that ends the global bull market.” Few see all the many positives really driving stocks, like steeper yield curves, continued economic growth with or without the Fed’s “help” and a calm political backdrop. Overlooked positives are bullish. As for Greece, it is too small, widely discussed and too well-contained to put the bull market at risk.
|By Michael J. de la Merced, The New York Times, 07/01/2015|
MarketMinder's View: Over the past few weeks, we’ve seen a number of articles fretting the surge in M&A, worrying it is a sign euphoric execs are going hog wild for pricey deals without regard to risk. This piece shows an alternate—and in our view, more accurate—perspective, highlighting the overall tepid enthusiasm surrounding many of these deals. They’re still driven by a survival-of-the-fittest mentality, with many firms seeing consolidation as a way to steel themselves for some future downturn. Most deals are also funded with debt and cash on hand, not stock, so we haven’t yet reached the stage where execs and investment bankers are willing to massively dilute stock supply in order to chase hot deals—that would be true euphoria. What we see today, as the headline notes, is cautious optimism.
|By Rafael Behr, The Guardian, 07/01/2015|
MarketMinder's View: This is mostly sociological, but it is a very well-argued, even-handed look at why biased criticisms of EU institutions from both ends of the political spectrum are ill-informed and off base. One end sees Brussels as an undemocratic, austerity-obsessed autocracy that forces its principles on all member states and sees local democratic resistance as a “fly in the ointment.” The other end sees EU institutions as corrupt crony-capitalists that suffocate markets with red-tape and handouts for special interests. But the truth lies more in the less exciting middle, and ignoring that can cause people to forget just how much European integration has accomplished over the last few decades—not to mention forget why Europe began integrating in the first place—which could have dangerous side effects. “The EU could go the way of the League of Nations. An institution, conceived as the antidote to violent nationalism, where leaders gather to solve problems through negotiation and compromise, can fail. But there is no evidence that if it does the result is more democracy and better capitalism. The opposite seems more likely.” As Americans, we don’t have a dog in this fight, but it is something to think about. For all Brussels’ faults, ending the experiment probably won’t be the political or economic (or market) panacea some presume.
|By Kathleen Madigan, The Wall Street Journal, 07/01/2015|
MarketMinder's View: Growth!
|By Staff, Reuters, 07/01/2015|
MarketMinder's View: And more growth! Any PMI (purchasing managers’ index) reading over 50 indicates expansion, and JP Morgan’s global manufacturing PMI hit 51 in June. That is down a smidge from May’s 51.3, which most assume means growth slowed, but PMIs don’t measure growth rates. They measure how broad-based growth is. If slightly fewer firms grew in June than May, but they grew faster, then overall growth could speed. So don’t overthink PMIs—just look at the headline and new orders, and if they’re in growth trends, that is usually good enough.
|By Lauren Davidson, The Telegraph, 07/01/2015|
MarketMinder's View: Hey, sometimes laughter is the best medicine. Enjoy the chuckles.
|By Gabriele Steinhauser, Viktoria Dendrinou and Nektaria Stamouli, The Wall Street Journal, 06/30/2015|
MarketMinder's View: Time for your daily Greece update! In today’s edition, it is official: Greece missed its €1.5 billion IMF payment. Until it pays up, it can’t receive any further IMF funds. But other bailout lifelines remain open—like the European Stability Mechanism (ESM), the eurozone’s official bailout fund, from which Greece just requested €29 billion over the remainder of this year and next. PM Alexis Tsipras fired off his request today, citing Greece’s upcoming debt payment schedule, poor financial situation and lack of access to capital markets, citing all the ESM treaty requirements Greece fulfills. He also asked to restructure Greece’s repayment schedule with the EFSF, which was the ESM’s predecessor, in a way that “secures the viability of the Greek economy, growth and social cohesion,” which seems like the same things Greece has been arguing for since January: a third default and less austerity. Eurozone leaders will get together and talk it over tomorrow, and if you believe the latest rumblings from Athens, Tsipras might U-turn on his pledge to campaign for a “no” vote in Sunday’s referendum on whether to accept creditors’ austerity terms. Though that is all speculation, and someone could refute it soon enough. Oh and Germany already said it wouldn’t negotiate anything until after the referendum. So stay tuned—and know that the global market risks here remain small.
|By Peter Eavis, The New York Times, 06/30/2015|
MarketMinder's View: We are quite ambivalent on this one. On the one hand, it is a great look at why faith in central banks is often misplaced—they simply aren’t as powerful as most perceive. Bond buying through quantitative easing and its ilk can help reduce long-term interest rates (and therefore government borrowing costs), but they can’t make high debt loads go away. Greece and Ukraine can attest to this. However, it also seems to overestimate the amount of debt problems in the world right now. High debt doesn’t mean problematic debt, especially as long as low rates allow countries to refinance cheaply and kick the can down the road, as China is doing. That buys plenty of time to grow their way out. Also, you might argue places like Italy and Spain could benefit from modestly higher long-term rates, as this would steepen their yield curves and boost loan growth, which is still struggling there.
|By Megan McArdle, Bloomberg, 06/30/2015|
MarketMinder's View: This occasionally veers into sociology, but the last two paragraphs are well worth the journey, as they make an important point about fixed currency regimes like the euro. Fixed exchange rates (or in the euro’s case a common currency) can boost trade and help stabilize bond markets, but they aren’t fireproof. “Moving to a fixed exchange rate protects bond-holders from one specific sort of risk: the possibility that inflation will erode the real value of your bonds. But that doesn't remove the risk. It just transforms it. Now that the government can't inflate away its debt, you instead face the risk that they are going to run out of money to pay their bills and suddenly default. That's exactly what happened to Argentina, and many other nations on various other currency regimes, from the gold standard to a currency peg. The ability to inflate the currency had gone away, but the currency regime didn't fix any of the underlying institutional problems that previous governments had solved with inflation. So bondholders protected themselves from inflation, and instead took a catastrophic haircut. In financial markets, it is easy to move risk around and change who is bearing it. On the other hand, it's very hard to actually get rid of the risk.”
|By Maureen Farrell, The Wall Street Journal, 06/30/2015|
MarketMinder's View: Puerto Rico’s debt problems aren’t a macroeconomic or broad bond market risk. At about $100 billion, Puerto Rico’s GDP is about the size of Austin, TX or the entire state of Mississippi. Detroit is about twice Puerto Rico’s size, and when it went bankrupt in 2013, it didn’t cause contagion throughout US municipal bonds markets—investors knew Detroit wasn’t the US then, and they know Puerto Rico isn’t a bellwether today (particularly since markets have been pricing in Puerto Rican troubles for the better part of two years). But there is a lesson here for investors. Puerto Rican bonds have long been popular for their high yields and favorable tax treatment, and they have a great presence in several bond funds. Always remember: Free lunches don’t exist, high risk accompanies high reward, and it is important to understand how your fund’s income is generated. If it is through a concentrated position, think long and hard.
|By Mason Braswell, Investment News, 06/30/2015|
MarketMinder's View: Here, dear readers, is another example of why the fiduciary standard alone isn’t a good reason to hire an investment firm: It does not erase conflicts of interest. (Nothing can do that—they’re inherent in this industry.) In this case, some Registered Investment Advisers (RIAs) receive trail commissions (also known as revenue sharing) for recommending certain mutual funds—ironically, a practice the Department of Labor wants to stamp out with its own forthcoming fiduciary standard for anyone advising on a retirement account. Trail commissions are a conflict of interest: They give advisers an incentive to recommend a fund that may not be optimal for a given client, either because it isn’t managed well or because there is a comparable cheaper product available. But this is allowed under the fiduciary standard provided the RIA discloses the arrangement and acknowledges the biased recommendations it might create. The onus is always on the investor to do thorough due diligence to discover how their adviser is paid and what influences their recommendations. Incentives and values often govern behavior much more than rules do.
|By Staff, The Associated Press, 06/30/2015|
MarketMinder's View: The passage of Trade Promotion Authority (aka fast-track authority) and Trade Adjustment Assistance (funding and training for those whose jobs are presumed displaced by trade) should help boost the chances of Congress ratifying the big trade deals presently in the works, including the Transpacific Partnership (TPP). But first, Congress must have something to ratify, and that is as far from certain as ever. As this notes, “trade experts” expect a finished TPP by autumn, but the deal still faces several roadblocks. The US alone has differences with Japan over agricultural and auto tariffs, Vietnam over its textile imports and many more. Getting 12 different nations to come together and agree on every detail of a trade bill is a tall order. So while TPP would be a big long-term positive for the global economy and markets, keep your expectations rational. (Though, a deal not getting done isn’t a negative, just the absence of a new long-term positive—a positive this bull market has done fine without.)
|By Staff, EUbusiness, 06/30/2015|
MarketMinder's View: Don’t read too much into the latest inflation data—it remains skewed by oil prices’ big fall. Oil peaked last June, skewing the year-over-year calculation (month-over-month, prices were basically flat). Inflation data will probably be noisy and not especially telling for the next several months, as last year’s higher prices (and early 2015’s much lower prices) work their way through the math. To get a better read, view core inflation, which excludes food and energy (and slowed a smidge to 0.8% y/y, compared to May’s 0.9%), or look at money supply growth. Eurozone M3 money supply is growing swiftly (5% y/y in May), which suggests prolonged deflation doesn’t loom. For more, see our 6/17/2015 commentary, “Deflating Inflation Stats’ Importance.”
|By Bob Ivry and Yuji Nakamura, Bloomberg, 06/29/2015|
MarketMinder's View: On June 30, atomic clocks will add one second to make up for the slight difference between standard time and the earth’s rotation—a practice done every few years (2012 was the last one). However, this will be the first “leap second” to happen “during trading hours since markets went electronic.” (We presume “electronic” alludes to high-frequency trading, or HFT, and not the use of actual electricity, which has been around for a long time.) In our view, this is much ado about a non-issue for markets. For one, technical glitches have happened occasionally (squirrels, lack of heat, computer issues) yet their impact was fleeting. And two, with the adjustment scheduled to take place at 8pm eastern time, markets aren’t even open unless you’re day-trading in Asia. Instead of fretting, we suggest using that extra second toward something more fun, like enjoying the summer weather.
|By Michael Fletcher, The Washington Post, 06/29/2015|
MarketMinder's View: No, it likely won’t trigger a crisis. Some have loosely compared Puerto Rico’s struggles to Greece’s, and there are similarities. Both are not new news (Greece’s saga is five years old, Puerto Rican bonds have traded like junk debt since at least 2013). Even ratings agencies have both rated below investment grade. Both are too small to materially affect US or global markets. Bonds issued by Greece and Puerto Rico aren’t widely held by banks. And both are more feared than they should be. If the commonwealth can’t meet its immediate debt obligation payments, the government and its creditors will likely enter talks to hash out a deal—probably a long, bureaucratic process that won’t surprise markets (and, as Bloomberg’s Matt Levine quipped this morning, won’t include the Fed and Treasury booting Puerto Rico from the dollar). A potential haircut will be painful for bondholders left holding the bag, though it’s impossible to game that right now. However, for investors, Puerto Rico’s tale does hold an important lesson: No security should ever be considered “safe.” Puerto Rican debt is popular for its high yields and tax exemptions, but the risk of loss comes with any and every investment—no exceptions.
|By Larry Elliott, The Guardian, 06/29/2015|
MarketMinder's View: Sorry, but comparing recent developments in Greece with the assassination of Austrian Archduke Franz Ferdinand in 1914 is beyond a stretch. Europe’s great powers were entangled in a web of alliances, and the Archduke’s assassination militarized these alliances—spurring World War I and the deaths of millions of people. That is a far cry from the allegation here, which is that Greece potentially leaving the euro would fundamentally change the single currency by eliminating the view it is irrevocable. Which is perhaps true if Greece leaves, but why is that necessarily negative? If the eurozone becomes 18 nations who choose to use one currency, does that make the union stronger or weaker? Would it increase or decrease the chances of systemic crises? (We think decrease by localizing them.) And, consider: If the troika would have backed down from their demands and rejiggered long-since agreed-to bailout terms, couldn’t that spur a backlash from euroskeptics in northern Europe? What message would such moderation send to anti-austerity groups elsewhere in the periphery? Couldn’t one actually argue Greece’s leaving would strengthen the euro by weakening these groups? Is it possible that is why there are few signs of contagion across the continent? Look, we are sympathetic to the Greek citizenry’s plight, but we are darn skeptical Greece calling a referendum is on a par with an assassination that led to tens of millions killed.
|By James Fontanella-Khan, Arash Massoudi and Joe Rennison, Financial Times, 06/29/2015|
MarketMinder's View: Thing is, firms have financed most of these deals with cash and bonds, not secondary stock offerings. A rush of stock-financed deals would warrant a raised eyebrow, as it would dilute stock supply and imply investment bankers were perhaps out over their skis. But a rush of deals that destroys stock supply is actually fairly positive. It doesn’t require smokin’ hot earnings growth to pay off—just earnings yields that exceed today’s ultra-low bond yields. That’s exactly what we have today. This fear is just another brick in the wall of worry bull markets love to climb.
|By Lu Wang and Jennifer Kaplan, Bloomberg, 06/29/2015|
MarketMinder's View: This is one of those arguments claiming there is too little cash on the sidelines (too few buyers) to drive stock prices up, and thus, expectations for future returns should be muted—a misperceived argument, in our view. Stocks don’t depend on investors rotating from fixed income to stocks, nor do they need more investors to go higher—it takes only one buyer to bid prices up. And as sentiment becomes increasingly optimistic, we expect investors to keep bidding stocks higher—a run that could last for a while. This doesn’t mean returns will be more modest in the maturing stages of a bull market, either: See the late 1990s, when global equity returns were above their long-run 10-ish % average from 1995 – 1999, including three 20% years.
|By Robert Samuelson, The Washington Post, 06/29/2015|
MarketMinder's View: So there are some sensible points here: One is the admission economists don’t know nearly as much about what makes growth go as is often let on. And the other is that financial crises are usually surprises. Think 2008, when the unintended consequences of a well-intended accounting rule and the ensuing haphazard government response roiled the global economy and triggered a big bear market. However, the “warnings” from the Bank for International Settlements (BIS) and Organization for Economic Cooperation and Development (OECD) revolve around one big false fear: low interest rates and their potential consequences, from artificially boosting Emerging Markets to threatening the solvency of pension funds and insurers. Sorry, there is just no evidence a massive heap of cheap money made its way into Emerging Markets, setting up a potential bloodbath when rates rise, or that pensions are in trouble (long-term projections are wrought with inaccuracies). Yes, it is likely a matter of when, not if, the next financial crisis will hit, but we don’t see anything with that potential in markets today—most fears are either misperceived or widely discussed, weakening their surprise power.
|By Ann Marsh, Financial Planning, 06/29/2015|
MarketMinder's View: But it won’t settle anything, because it completely ignores what individual investors do with these funds. Academic studies and industry data show investors don’t hold index or actively managed funds long enough to reap the benefits of long-term investing. They flip in and out, following trends, chasing heat and occasionally panicking—often trading at the wrong time, knocking their personal return below the fund’s return. More data on fund performance is all well and good, but it’s really just trivia. The real issue here is investors’ inability to stick with either passive or active funds—and the fact owning a fund can’t instill discipline.
|By Sofia Horta e Costa and Imyoung Hwang, Bloomberg, 06/29/2015|
MarketMinder's View: Folks, look: For all of Greece’s current economic struggles and political flubs, it isn’t a poorly developed kleptocracy where the rule of law is non-existent. The comparison here is super surface-level: Technically speaking, MSCI considers the imposition of capital controls—measures restricting the flow of capital out of a country and reducing investors’ access—a step disqualifying a nation from inclusion in its Emerging Markets index. Greece’s imposed capital controls over the weekend to quell asset movement in the wake of announcing the country would hold a referendum on the bailout. This is basically a procedural requirement, not a paradigm shift. Also, MSCI index membership isn’t a market driver. To us, Greece has bigger fish to fry than what MSCI wants to call it.
|By Lingling Wei, Chao Deng and Shen Hong, The Wall Street Journal, 06/26/2015|
MarketMinder's View: China’s domestic or A-share markets have fallen sharply all week, and the typical cheerleading from officials published in Xinhua is conspicuously absent, leading some to fret the government is cooling on promoting stock market investing as an alternative to real estate and dodgy wealth management trusts (basically, securitized loans). But the impact of this is likely very limited. For one, the A-share market is largely off limits to foreign investors, who buy mostly domestic shares listed in Hong Kong (H-shares). While H-shares have gone up nicely in the last 12 months (~50% at their peak), that is a far cry from A-shares 162% peak gain. Similarly, while A-shares entered Friday down -12%, H-shares were down -2.5%. Domestic Chinese investors may have been swept up in the big returns, but foreigners remain skeptical. And contrary to the article’s assertion that “Regulators are keen, however, not to spark a prolonged fall, which would have repercussions for the broader economy,” A-share markets are notoriously volatile and do not act as much of a forward-looking economic indicator. There have been two bear markets in Chinese A-shares since 2009. The economy has grown at a solid clip throughout, even accelerating during the first, which ran from mid-2009 through mid-2010. A-shares’ big swings don’t have a global reach.
|By Helene Fouquet and Patrick Donahue, Bloomberg, 06/26/2015|
MarketMinder's View: Yeah, well, maybe this weekend is “decisive” and maybe it isn't. After all, as has been widely reported, missing Tuesday’s IMF repayment will not qualify as a default, technically. The next payment is due to the ECB by July 20, and it is probably more important. Besides, there is also the distinct possibility the troika kicks the can forward and extends the existing bailout by five months, teeing up a Grerun or Grepeat in the fall. Either way, though, we'd suggest not overthinking this one—there isn't any sign Greece is contagious, and absent that, it should have roughly the market impact of the 2013 Detroit default: minimal.
|By Mark Schoeff, Jr., InvestmentNews, 06/26/2015|
MarketMinder's View: Well, we aren’t so sure the House and Senate slapping an amendment onto an appropriations bill that hasn’t been voted on by either full chamber is so “unstoppable,” particularly considering the White House backs the DoL proposal and President Obama can simply not sign the law. But either way, we’d suggest most of the claims brought by both sides in favor of and against a broad fiduciary rule are overwrought. The DoL’s rule isn’t “sweeping” at all—it permits all forms of compensation and waters down the SEC’s version. The impact to small account holders is likely nil. And the DoL’s version will do very, very little to better “protect investors.” The fiduciary standard in even the SEC’s form requires advisers to reasonably believe they are putting clients’ interests first. A subjective standard! Investors must do the requisite due diligence to understand the values, structure, experience and expertise of the firm they are working with. There is no shortcut to ensuring the advice you’re getting is adding value.
|By Jonathan Weisman, The New York Times, 06/26/2015|
MarketMinder's View: This is the second trade-related bill to make its way through the House in recent days, this one expanding the trade-adjustment assistance program, which aims to retrain and compensate American workers deemed displaced by trade. It is likely to become law, as trade-promotion authority already did. However, we’d suggest some of the other nuggets noted in this article—the discussion of currency manipulation and anti-dumping bills—support the notion any deal on the Trans-Pacific Partnership (TPP) still faces a stiff fight. And that assumes the 12 nations in the talks actually come to an agreement. While we would welcome being wrong here (because the TPP would be good for stocks and the economy, in our view), we are skeptical the TPP becomes a reality soon.
|By Victor Reklatis, MarketWatch, 06/26/2015|
MarketMinder's View: It wasn’t. The S&P 500 fell -0.03% on a price return basis. And volume was nowhere near as high as it was March 20th. The theory held that the Russell index series rebalancing was effective Friday, with some stocks added and others deleted. Ultimately, it really doesn’t matter much for investors, because volume has very little bearing on price movement, so we’re not sure many folks beyond specialists, market makers and traders should care.
|By Howard Schneider, Reuteres, 06/26/2015|
MarketMinder's View: We totally agree with the headline suggestion, that the Fed should ditch its relatively new practice of publishing individual staff member forecasts in an anonymous, bizarre “dot plot.” However, the notion of replacing it with a consensus staff forecast is even worse, considering this would only calcify the idea that Fed forward guidance is predictive of policy. There are ample examples—like the fact it is June 2015 and there has been no rate hike, contrary to consensus expectations—suggesting this practice has major holes. And this article encapsulates perfectly why forecasting the Fed is folly: “But the idea (of issuing a staff forecast) has always foundered at an institution whose various members give different weight to different bits of data, have different views on policy, and have a plethora of staff forecasts and models volleying around the Washington-based board of governors and 12 regional banks.” That, friends, is why we have consistently reminded investors not to try to divine the Fed’s next move.
|By Paul Vigna, The Wall Street Journal, 06/26/2015|
MarketMinder's View: Volatility doesn’t operate on schedules any more than corrections do. Merely because the S&P 500 hasn’t had a -5% move since late last year doesn’t mean we will have one soon. In early 2010, a -7.6% dip ran from January 20 – February 8. Fifty-four days later a -16.0% correction hit. Twenty-five days after that correction bottomed, a -5.6% dip began. And, beginning to end, the S&P 500 rose 12.8% (not including dividends). Volatility defines randomness and it is the cost of earning stocks’ high returns. Obsessing over attempts to forecast it is the height of folly.
|By Andrew Oxlade, The Telegraph, 06/26/2015|
MarketMinder's View: Like their American counterparts, British pundits and analysts spend an inordinate amount of time trying to divine when the BoE’s Monetary Policy Committee will hike overnight interest rates. And like Fed watchers, BoE watchers have been all over the map with forecasts of when that will happen. Read this article as a nice, if unintended, argument against the practice. Central banks are not gameable market forces, which explains why forecasts of their actions have been poor. It isn’t that economists are out of step with the post-crisis world economy. It’s that they can’t possibly know how a biased panel of economists is interpreting that data.
|By Matthew Dalton, Dow Jones Newswires, 06/26/2015|
MarketMinder's View: Yep. Because years have passed, firewalls have been finalized and banks have already taken haircuts and reduced exposure, a potential Greek euro exit today isn’t likely to carry much global impact. What’s more, it seems many who still fear a Grexit do so based on this notion: “‘They could lose something, this sense of the irreversibility of the euro, and they would never recover it,’ said Erik Jones, professor of European studies at the Johns Hopkins School of Advanced International Studies.” To which we say, OK fine, but is that necessarily bad, or would it have the effect of making potential future crises even more country-specific and not systemic?
|By Kathleen Madigan, The Wall Street Journal, 06/26/2015|
|By Staff, Dow Jones Newswires, 06/26/2015|
MarketMinder's View: Yet more evidence the eurozone’s economic revival is on track: “Lending to the eurozone's private sector rose at its fastest rate in more than three years in May, according to a report on Friday from the European Central Bank, suggesting the region's economic recovery is beginning to broaden out and boost demand for new credit.”
Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.
Market Wrap-Up, Wednesday July 1, 2015
Below is a market summary as of market close Wednesday, 7/1/2015:
Global Equities: MSCI World (+0.7%)
US Equities: S&P 500 (+0.7%)
UK Equities: MSCI UK (+0.7%)
Best Country: Austria (+2.4%)
Worst Country: Norway (-0.8%)
Best Sector: Health Care (+0.%)
Worst Sector: Energy (-0.9%)
Bond Yields: 10-year US Treasury yields rose 0.07 percentage point to 2.42%.
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.