|By Ambrose Evans-Pritchard, The Telegraph, 04/17/2014|
MarketMinder's View: While some of the actions theorized here are plausible, this thesis seems to take them to the extreme—there isn’t much (if any) evidence reality matches. Sanctions likely do have some economic impact, but the outcome imagined here seems exceedingly unlikely. For more, see our 3/17/2014 cover story, “Don't Go Russian to Conclusions About Sanctions.”
|By Craig Torres, Bloomberg, 04/17/2014|
MarketMinder's View: While the obsession with Janet Yellen’s comments and the Fed’s future plans continues, in our view, trying to game the next move is a fool’s errand. Fed jawboning is supposed to be vague, and their moves are unpredictable. Investors can only judge their actions after the fact.
|By Staff, Xinhua, 04/17/2014|
MarketMinder's View: While cutting the reserve requirement ratio for some rural banks and expanding some tax breaks are small moves, they’re all in line with China’s recent efforts to shore up growth and the ongoing restructuring—and evidence of officials’ commitment to maintaining a robust growth rate in 2014 (read: no hard landing).
|By Tim Clift, Market Watch, 04/17/2014|
MarketMinder's View: While we agree the outlook for stocks is bright, it’s not because the recent pullback eliminated some “froth.” Volatility does help keep sentiment in check, but broader markets weren’t in bubble territory when the year began and aren’t now. Sentiment was already far from the euphoric heights typical of bull market peaks. For more, see our 4/15/2014 cover story, “A Q&A on Recent Volatility.”
|By Michael P. Regan, Bloomberg, 04/17/2014|
MarketMinder's View: The measure referred to is the “Rule of 20”—if the sum of a price-to-earnings ratio and the rate of inflation equals 20, valuations are fairly priced. Anything above or below 20, then, suggests stocks are either over or undervalued. But bizarre and arbitrary methodology aside—why not 19 or 25?—valuations don’t predict future returns. They use backward-looking data. They can illustrate sentiment, but that’s about it. Stocks are forward-looking and have plenty of fundamental reasons to keep marching higher.
|By Brendan Conway, Barron’s, 04/17/2014|
MarketMinder's View: While we’ll leave the fraud debate to legal minds, this study illustrates a key point about many newfangled Exchange Traded Funds (ETF). They’re based on new, manually constructed indexes, with stocks weighted according to their book value, trailing earnings, sales or any number of quantitative characteristics. Then, their performance is “backtested” using historical return data. Problem is, the past doesn’t dictate the future, and many tests are tweaked until they yield the desired result—which probably doesn’t mirror the real world.
|By Bill Conerly, Forbes, 04/16/2014|
MarketMinder's View: “High frequency trading [HFT] is secretive and mysterious, but not at all evil.” Reading other HFT articles these days may tempt investors to think differently, but this article explains HFT’s often overlooked benefits well: By buying frequently, quickly and in large quantities, HFT makes markets more efficient and liquid—better and more quickly evening out price changes large institutional investors can cause when trading huge sums and narrowing the bid/ask spread. For long-term investors, that matters most.
|By Staff, EUBusiness, 04/16/2014|
MarketMinder's View: Extending the Markets in Financial Instrument Directive (MiFID II) post Europe’s financial crisis is well-intended—and the ideals behind it, like increasing transparency, seem noble. But the notion more regulation makes markets less “crisis prone” disregards history, both in the distant past and present. In regulating, often times politicians address nonexistent issues. MiFID II’s high-frequency trading restrictions seem like a benign example. While the near-term impact seems limited, it’s key to understand the regulation to see issues connected to other potential changes down the line.
|By Linda Yueh, BBC, 04/16/2014|
MarketMinder's View: China growing in the 7%-8% range is perfectly fine with global growth, and that is where they were in Q1. Yes, it’s a slower rate than Q4 2013’s, but the underlying data were largely healthy, and nothing fundamental suggests that will change. The services sector’s growth is a plus, as it alludes to China’s economic growth may be broadening, a sign of its ongoing development. For more, see our 04/11/2014 commentary, “When the Growing Gets Tough.”
|By Shobhana Chandra, Bloomberg, 04/16/2014|
MarketMinder's View: In added confirmation the US economy’s cooling during January’s winter weather was temporary and not sign of a bigger trend: Industrial production beat expectations, rising 0.7% m/m. Manufacturing led the rise (+0.5% m/m), but most other sub-indexes grew, too—suggesting broad fundamental strength underlies the US expansion.
|By Laura Noonan, The Independent, 04/16/2014|
MarketMinder's View: This is a great illustration of the “damned if you do, damned if you don’t” nature of bank stress tests. The whole concept: Test how the capital banks hold would fare in a hypothetical crisis, all with the notion of encouraging increased (quality) capital in the banking system. So they boost capital, but that implies they might all pass—which some fear might imply test standards weren’t rigorous enough. All in all, this is an exercise we wish would just flat out go away, as it is feckless at best and problematic at worst (if the ECB shuts a bank for failing, for example).
|By Frank Jordans, Associated Press, 04/16/2014|
MarketMinder's View: This is a notable development. In the short term, Ukraine likely benefits from greater access to natural gas as it faces cut-off threats from Russia’s energy giant Gazprom. Long term, though, this and other potential gas re-selling plans could increase and improve EU natural gas infrastructure and alleviate the dependence on Russian gas. This is a potential long-term positive coming out of a short-term negative, Russian/Ukrainian tensions.
|By Jim Puzzanghera, Los Angeles Times, 04/15/2014|
MarketMinder's View: For now, this is all talk—without firm plans or comments on specific proposed measures, speculation over what the Fed does and how Financials react is futile. That said, we aren’t sure how tougher capital rules would make credit more free-flowing during a financial crisis. If anything, they’d encourage banks to hoard more cash, not lend to each other. While there is no counterfactual, we suspect having bigger capital buffers in 2008 would have only delayed the inevitable for Bear Stearns and Lehman Brothers—as long as creditors had no faith in the value of the collateral Bear and Lehman posted, they probably wouldn’t lend, forcing these firms to draw down capital buffers and eventually declare insolvency once liquidity dried up. Regulators have already addressed the underlying issue here (the misapplication of fair-value accounting to illiquid, held-to-maturity assets).
|By Michael Hayman, The Telegraph, 04/15/2014|
MarketMinder's View: While this piece in some ways looks too long term, this is a key point: “Far from championing the extraordinary progress and momentum of the [tech] sector, observers are jumping on the ultimate red herring: the post-float price. Rather than acknowledging that short-term share setbacks are often the worst possible indicator of long-term trajectory, experts have piled in to pronounce the second coming of the dotcom bubble.” And, we’d agree, tech sector’s short-term volatility isn’t a gauge of its overall viability—in our view, tech’s prospects in the foreseeable future still appear strong. For more, see our 4/9/2014 cover, “Popping Tech Bubble Fears.”
|By Jim Brunsden, Bloomberg, 04/15/2014|
MarketMinder's View: We’re just not quite sure what this will achieve—limiting fund managers’ bonuses won’t prevent another Bernie Madoff-style Ponzi scheme—but it does discourage fund managers from operating in the EU. That doesn’t mean the industry disappears—investor demand is too great—but it could very well cause some managers to leave the market, reducing competition and investors’ choices.
|By Cotten Timberlake and Matt Townsend, Bloomberg, 04/15/2014|
MarketMinder's View: March’s retail sales experienced a solid jump (+1.1% m/m), but people are still focusing on the past (i.e., January and February). Sure, retail didn’t have the best couple of months due to chilly weather, but those were just two months—they have no bearing on future results.
|By Li Yang, China Daily, 04/15/2014|
MarketMinder's View: This piece from China’s state-run news agency likely provides a glimpse into policymakers’ mindset. Not only does it underscore the unlikeliness of sweeping stimulus, it also strongly suggests the ongoing slowdown is at least partly engineered—a byproduct of efforts to battle industrial supply gluts and shaky shadow banking. Officials seem to believe the underlying economy is strong enough to weather these efforts, and we agree—China probably slows further, but the oft-feared hard landing should remain a myth.
|By Staff, Independent.ie, 04/15/2014|
MarketMinder's View: This is largely a rubber-stamping of what markets have long known—the ECB will regulate the region’s largest banks, creditors and depositors likely have to take losses when banks fail, and insured deposits (€100,000 or under) are backstopped by a €55 billion fund, paid for by bank levies. This might help bolster investors’ confidence in the euro’s long-term viability, but it isn’t a panacea for eurozone banking, and key questions remain.
|By Josh Boak, Associated Press, 04/15/2014|
MarketMinder's View: Inflation is running at a very tame 1.5% year-over-year—below the Fed’s target, but that’s not a risk to economic growth. Slow inflation isn’t deflation—it’s just a side effect of weak lending and anemic money supply growth. Which, perversely, is the result of quantitative easing bond buying—while this piece and the Fed say it’s stimulus, it really saps growth by flattening the yield curve and weighing on the quantity of money.
|By Volodrymyr Verbyany and Sangwon Yoon, Bloomberg, 04/14/2014|
MarketMinder's View: Yes, the drama continues in Crimea, with increasing violence along the Russia-Ukraine border. In our view, it’s likely this hotspot continues garnering headlines for some time. However, regional conflicts have little to no history of impacting market direction materially. The former Yugoslavia in the 1990s, the Iraq and Afghanistan Wars in the 2000s and the Middle East pretty much since always are just a few examples. Barring huge and surprising events approaching World War proportions, global market impacts from the conflict are likely minimal.
|By Staff, Reuters, 04/14/2014|
MarketMinder's View: March retail sales rose +1.1% m/m (+3.7% y/y), the biggest monthly gain since 2012. This puts headline retail sales growth for Q1 2014 at +2.5% versus the same period a year earlier, which should go a long way toward dispelling fears the polar vortex would chill American economic growth. Rather, it appears consumers behaved as one might expect: Frigid January saw declining month-over-month sales, but the dip was a temporary blip—which reversed itself as warmer temps (finally) arrived in the Northeast and Midwest.
|By Emanuel Jarry, Reuters, 04/14/2014|
MarketMinder's View: On the heels of new Prime Minster Manuel Valls’ proposed tax cuts and labor reforms last week, President François Hollande announced more plans to reduce the weight on corporations and boost growth. While we laud Mr. Hollande’s efforts, the bigger takeaway here is that he’s besting investors’ expectations—implementing business-friendly reforms rather than the more traditionally Socialist platform he ran on in 2012. French politics seem to be shaping up more and more as a tailwind for stocks, not the headwind some feared upon Hollande’s election. For more on France, see our 4/10/2014 cover story, “Euro Politicos.”
|By Michael P. Regan, Bloomberg, 04/14/2014|
MarketMinder's View: There isn’t anything special about the 200-day moving average. Since this bull market began on March 9, 2009, it touched the 200-day moving average in July 2009, was under it during 2010, 2011 and 2012’s corrections, and even blipped below it during November 2012’s post-election dip. In retrospect, all those seem like pretty good points to be a buyer, not a seller. No matter how you smooth recent returns, past performance is not predictive. What matters are sentiment and fundamentals, and in our view, positive fundamentals are poised to provide more bull market fuel.
|By Danielle Demetriou, The Telegraph, 04/14/2014|
MarketMinder's View: To clarify, the sales tax increase wasn’t “masterminded” by PM Shinzo Abe. It was approved by Parliament under Abe’s predecessor, Yoshihiko Noda, in June 2012. Abe’s administration merely determined whether and when to push ahead with the planned implementation. Either way, and as we expected, the tax increase is seemingly already having an impact on consumer behavior. While it’s too early to tell how things will play out in the long run, in our view, it likely presents a headwind for Japan’s fragile economy, long plagued by other protectionism, labor force rigidity and structural woes hampering competition.
|By Michael Yoshikami, CNBC, 04/14/2014|
MarketMinder's View: Whether policymakers outright say it or not, it’s a long well-known fact in the professional investment community that global currency movements tend to correlate with differences in interest rates. But the effect of this isn’t as stimulative as presumed here. Look no further than Japan, where BoJ head Haruhiko Kuroda engaged in massive easing with the explicit aim of weakening the yen—which happened—yet the economic benefit seems to have come and gone quite quickly. A weak currency attempts to pick exporters to win, “stimulating” growth. Yet imports are very often the lifeblood of an economy: fuel, raw material, intermediate goods. Making those more expensive is likely poor policy. For more, see our 4/1/2014 cover story, “Abenomics and Other April Fools.”
|By Simon Kennedy, Bloomberg, 04/14/2014|
MarketMinder's View: The idea the economy is regulated by growth of the labor force and worker productivity (output per hour worked) is a bit one-sided—what about innovation and technology? Worker productivity is the after-effect of such innovations. Moreover, the whole concept—that there is a structural ceiling to a growth rate—isn’t supported by history. That’s why the rate of “potential GDP” has been revised quite a few times over the years. And why it is generally only referred to in very academic settings, not in markets. Finally, nothing—and we mean nothing—“pressures central bankers to raise interest rates sooner than they might otherwise want.” Especially a made-up measure of long-term growth rates.
|By Katie Allen, The Guardian, 04/14/2014|
MarketMinder's View: As this piece points out, UK consumer spending has grown despite wage growth that hasn’t outpaced inflation. As is fairly typical, factors like wage growth are connected loosely to the health of the labor market. Growth creates jobs and higher wages. Looking forward, it’s nice that real wages are starting to see a boost—potentially, an additional tailwind for the UK’s already strong expansion—but we wouldn’t hold this data release out to be a watershed moment.
|By Jeremy Warner, The Telegraph, 04/11/2014|
MarketMinder's View: Why? Apparently, because the only thing keeping the globe from crashing is low long-term rates. But we think the opposite: Low long rates are why growth is sluggish. By buying up over $2 trillion in US banking assets, the Fed flattened the US yield curve—and since long-term rates globally correlate with US Treasurys, the Fed basically flattened the world. This defied over a century of evidence confirming steeper yield curves boost growth. End quantitative easing, let long rates normalize, and faster growth should follow.
|By Henny Sender, Financial Times, 04/11/2014|
MarketMinder's View: The fact quantitative easing (QE) has occurred alongside slow economic growth and a raging bull market doesn’t mean QE has driven stocks higher than they should be. It means QE has created nothing but excess bank reserves, robbing our capitalist economy of the capital it needs to grow, but businesses have managed to grow and profit anyway. That last bit is why stocks have done well, and looking ahead, the fundamentals supporting private sector growth remain intact.
|By Floyd Norris, The New York Times, 04/11/2014|
MarketMinder's View: Fact: The stock market isn’t a Rube Goldberg trap, and it’s still a really big auction. It’s just an even bigger auction with many, many more players and faster, more efficient pricing. That’s a net benefit for retail and institutional investors alike, and it’s largely because of all the technological developments derided here. High frequency trading and its ilk have democratized markets, not broken them.
|By Aaron Back, The Wall Street Journal, 04/11/2014|
MarketMinder's View: By allowing Hong Kong-listed companies to trade on mainland exchanges—and vice versa—Chinese regulators give domestic retail investors much broader, freer access to stocks. Before, Hong Kong-listed shares—including many of mainland China’s biggest, most profitable private firms—were largely available only to institutional investors and were subject to strict foreign investment quotas. This change illustrates officials’ commitments to pursuing meaningful financial reforms.
|By Takashi Nakamichi and Eleanor Warnock, The Wall Street Journal, 04/11/2014|
MarketMinder's View: And rumors of increased quantitative easing (QE) will likely dog them every step. Hopes seem high for even more aggressive moves, but more QE isn’t what Japan needs. It might give folks a quick sentiment boost, but without sweeping structural reform to address the many inefficiencies and restrictions holding Japan back, the country likely won’t re-emerge as a global economic force.
|By Peter Dominiczak and Ben Riley-Smith, The Telegraph, 04/11/2014|
MarketMinder's View: Fitch claims an independent Scotland would trigger a “debt shock” and wreak havoc with the UK economy. While it’s certainly notable that a ratings agency is looking forward for once, in this case, it’s looking too far forward. Even if Scotland votes yes, that just gives its government a mandate to negotiate an independence agreement with the rest of the UK. That process could take ages, giving markets significant time to discover the winners, losers and economic consequences. For now, no one knows what the arrangement will look like or how debt markets will react, making it far too soon to render judgment (though it’s worth noting UK yields haven’t budged even as the “yes” side has gained in recent polls).
|By Staff, Xinhua, 04/11/2014|
MarketMinder's View: Another step forward in the yuan’s internationalization and China’s move toward a more market-oriented financial system—both are positive for China and capital markets globally.
|By Reiji Yoshida, The Japan Times, 04/11/2014|
MarketMinder's View: A nuclear restart is pretty critical to Japan’s economic future, but it’s exceedingly unpopular with voters. So it’s noteworthy that Prime Minister Shinzo Abe and his cabinet would approve an energy plan that won’t win them many favors at the next election—Abe will have to make many similarly tough decisions in order to complete his pledged economic reforms—but time will tell if these rough long-term plans become reality.
|By Angela Monaghan, The Guardian, 04/11/2014|
MarketMinder's View: Considering England had its wettest winter since 1776 and the Thames breeched its banks, it was pretty much a given construction would fall. February’s 2.8% drop should be a blip as its longer-term growth trend continues.
|By Ambrose Evans-Pritchard, The Telegraph, 04/11/2014|
MarketMinder's View: Scientific advancement there may be, but that doesn’t make solar a surefire investment. Right now, the technology’s market is largely driven by government tax breaks and subsidies—not actual, organic demand. Solar’s time might come, but for now, the technology just isn’t that profitable.
|By Staff, EUbusiness, 04/11/2014|
MarketMinder's View: Restarting securitization would do far more to help kickstart eurozone lending than quantitative easing, negative deposit rates or any of the other ineffective gimmicks most pundits keep lobbying for. It wrongly got a bad rap during the financial crisis, when the toxic mark-to-market accounting rule made pooled debt securities look more toxic than they really were, but it’s actually a useful tool that gives banks more balance sheet flexibility.
Market Wrap-Up, Wed Apr 16 2014
Below is a market summary (as of market close Wednesday, 04/16/2014):
Global Equities: MSCI World (+1.1%)
US Equities: S&P 500 (+1.1%)
UK Equities: MSCI UK (+1.0%)
Best Country: Italy (+3.3%)
Worst Country: New Zealand (-0.2%)
Best Sector: Industrials (+1.5%)
Worst Sector: Consumer Staples (+0.7%)
Bond Yields: 10-year US Treasurys remained at 2.63%.
Editors' Note: Tracking Stock and Bond Indexes