Today's Headlines

By , The New York Times, 07/29/2016

MarketMinder's View: After former Fed head Ben Bernanke hung out in Tokyo with BoJ Governor Haruhiko Kuroda a few weeks ago, most figured “Helicopter Ben” would inspire the BoJ to launch a stimublitz today. Instead, the bank chose to modestly raise its quantitative and qualitative easing (QQE) program by doubling its equity ETF purchases (never mind that the bank already owns half the Japanese ETF market). The bank also announced plans to undergo a “comprehensive assessment” of its policies before its next meeting, which some interpret as an admission the bank has reached the monetary policy equivalent of the end of the Internet. We are more than a little confused over what all the fuss is about. Japan has tried to fix its economy with monetary and fiscal stimulus for years, and it hasn’t worked. We’re skeptical adding an extra Q or whatever to QQE would really tip the balance. The country would benefit most from structural economic reforms to address labor markets, bizarre corporate governance and trade barriers. The government talks a big game about that but hasn’t done much. Unless things change radically, we think investors will continue finding better opportunities outside Japan.

By , The Telegraph, 07/29/2016

MarketMinder's View: We highlight this not to throw virtual tomatoes at the IMF, but to show all the shenanigans that go into the creation of pretty much any major supranational organization’s economic reports and policy recommendations. As you will glean, they are mostly opinions. Sometimes they are the result of heated debate, and sometimes people just push their own views through irrespective of what their colleagues might recommend. Remember this the next time you see an economic forecast from one of these guys. They’re informed by biases as much as facts, if not more so.

By , Bloomberg, 07/29/2016

MarketMinder's View: First, this headline wins the Internet. Second, here is confirmation that the widely feared crash in contingent-convertible eurozone bank bonds—or CoCos—earlier this year was entirely sentiment-driven, not a sign of a brewing financial crisis. A CoCo index has fully recovered and then some. Just one more sign of falling uncertainty throughout the world—good for markets.

By , The Wall Street Journal, 07/29/2016

MarketMinder's View: We can’t stress this enough: No matter how much you love your company, no matter how well-run you think it is, no matter how profitable it is today, do not plow your 401(k) into company stock. “Your salary already depends on the health of the company you work for. So putting part of your retirement money into your company’s stock plan is piling risk upon risk.” Read this article five times, put a copy on your fridge, and see former Enron employees with any questions.

By , The Washington Post, 07/29/2016

MarketMinder's View: That 1.2% annualized growth rate is up from Q1’s 0.8%, which was revised down from the prior estimate’s 1.1%. We put that last bit in not because it’s important, but to remind readers that GDP growth is more a state of mind than anything. It is what it is according to whatever data are available and calculations (seasonal and inflation adjustments) are in favor at the time it’s tallied. Then it is continually revised, sometimes years after the fact, as new data emerge and math preferences change. According to the BEA, the average revision between the advance estimate (which is today’s) and the third estimate is 0.6 percentage point (in either direction). The average revision between the advance and the latest estimate, sometimes years later, is 1.2 percentage points. So rather than get hung up on whether GDP grew as quickly as people wanted in Q2, just know America grew, period, and forward-looking stocks have already moved on.

By , The Wall Street Journal, 07/29/2016

MarketMinder's View: Here’s a silver lining to slower-than-expected growth: Inventories were a huge detractor. Inventory changes are open to interpretation. Sometimes, plunging inventories can signal businesses are getting lean and mean in anticipation of tough times. Other times, they can signal demand exceeded production, and manufacturers will have to crank up output to restock, which could tee up growth in the following quarters. Which is it this time? This article argues for the latter, and we’re inclined to agree. While business investment did fall for the third quarter running, the oil patch again shouldered most of the blame, with a -57.8% annualized drop in investment. Other segments rose, including business spending on computer equipment (11.5%), industrial equipment (12%), software (4.4%) and research & development (5%). A broad business cutback, this is not. Meanwhile, consumer spending jumped 4.2%, which seems like a strong sign it is all of us, and not retrenching businesses, that were responsible for falling stockpiles. Seems like some restocking is in order.  

By , The Washington Post, 07/29/2016

MarketMinder's View: Here is a smorgasbord of excellent advice.

By , The New York Times, 07/29/2016

MarketMinder's View: Here, from the author of our Econ 1 textbook, is an interesting read on one potential reason voters’ attitudes on free trade diverge so sharply from its actual economic implications, which are overall and average a big net positive. It’s only a hypothesis, but it’s worth considering, especially as we enter a general election where both candidates are pandering to anti-trade sentiment. It’s premature to say whether globalization takes a U-turn (which markets would probably frown on), as politicians make a career out of saying one thing and doing another. But if you’re curious on the sociological reasons why it might be a risk (albeit a distant one), check this out. 

By , The Telegraph, 07/29/2016

MarketMinder's View: Evidently, UK exporters started adapting to life after Brexit well before the vote even happened: “The figures suggested that the country's exporters were already moving towards non-EU markets ahead of this year's EU referendum result. While Britain has sold slightly more goods outside of the EU than within it for the last four years, the share of exports heading out of the customs union increased sharply in 2015. UK businesses sold £151bn of goods to countries beyond the EU last year, compared with just £134bn purchased by EU members.”

By , BBC News, 07/29/2016

MarketMinder's View: Meh. Very little actual surprise here, and basically par for the course. Eurozone growth has been moderate and uneven since the recovery began 13 quarters ago. But growth is growth, and the bloc continually defies double-dip dread. Most observers expect Brexit to stifle eurozone growth for some time, and with sentiment so dour, it shouldn’t take swift growth for markets to be pleasantly surprised.

By , The Wall Street Journal, 07/29/2016

MarketMinder's View: An interesting observation, and nothing more—stocks and economic growth have never been joined at the hip, as the past seven-plus years overwhelmingly demonstrate.


By , Reuters, 07/28/2016

MarketMinder's View: This report on the findings of a survey that showed investors sold stocks and increased cash holdings in the days around June 23’s Brexit referendum, for fear it would trigger a market crash, reads as though time stopped on June 28, when markets were deeply negative. That is quite obviously a fallacy, illustrated by the tortured data here: “Year-to-date, euro zone and UK stocks have lost some 10 percent and U.S. equities are just 2 percent in the black - a consequence also of stubbornly weak economic growth, U.S. rate rise expectations and fears of a sharp slowdown in China.” We explored this claim, which is far removed from what most observers would call “accurate,” by denominating multiple gauges in various currencies. The only index exceeding a -10% year-to-date drop of the nine we tested was the FTSE 250 Index (a gauge of small British firms with a domestic focus and 35% Financials sector weight). And to get that, you had to denominate it in either dollars or euros, because it’s up in pounds—the most meaningful currency, considering it’s their home country and these are, again, domestically focused stocks. Here’s a more accurate take: US and global stocks (the S&P 500 and MSCI World in dollars) and UK stocks (MSCI UK in sterling) are all above pre-Brexit levels by 1.0%, 2.7% and 6.7%, respectively, as of July 27. All three set year-to-date highs (US stocks set record highs) after the vote and are up, not down, on the year. The four gauges of British stocks we tested—the MSCI UK, FTSE 100, FTSE 250 and FTSE All-Share x Investment Trusts—are all up in 2016 when measured in pounds. Even in US dollars, broader British gauges like the FTSE 100, MSCI UK and FTSE All-Share are only down a couple percent apiece. Eurozone stocks are still down since June 23, but by a paltry half a percent, and year-to-date they are only slightly negative too. To put a bow on it: This wasn’t a crash, though you might not know it from reading coverage like this piece.

By , Bloomberg, 07/28/2016

MarketMinder's View: Many things wrong here. Here are five biggies:

1) Italian banks' pile of nonperforming loans isn't a new crisis. It's a long known issue that isn't sneaking up on anyone.
2) The stress tests won't reveal much that we don't already know, except regulators’ (who have never forecast a crisis successfully) viewpoint of #1.
3) The banking system is far better capitalized as a whole than it was in 2008, and there is presently no FAS 157 mark-to-market accounting requirement on illiquid assets, a rule that unintentionally triggered a negative feedback loop forcing banks to book large losses on trillions in assets in 2008.
4) This argues the traditional tools to fight a crisis—those allegedly deployed in 2008—now are unavailable. But it then offers as evidence a bunch of things that aren’t “traditional crisis management tools” at all. Managing the yield curve (term premium) isn't a counter-crisis tool, it's called monetary policy. Neither is banks’ earning their way out of capital shortfalls. A traditional tool is a) shotgun weddings between healthy and troubled institutions, b) cutting discount rates (primary borrowing costs for banks to take funds direct from the central bank) below overnight rates or c) generally acting as lender of last resort. All those are available now, and most were never used in 2008.
5) The scaling of subprime then vs. Energy loans now is horrifically flawed here. Subprime then is overstated, and calling all Energy loans now troubled is so ridiculously simplistic as to make us harrumph. And, with that, harrumph.

By , The Wall Street Journal, 07/28/2016

MarketMinder's View: This highly confused piece argues asset prices (homes, bonds, stocks—wealth) have a much bigger influence on consumption now than they did a couple generations ago, and collapsing asset prices in 2000 (tech stocks) and 2008 (houses) caused recessions. However, this is mistaken. We didn’t get downturns in either of those timeframes because asset prices fell—or even because consumer spending fell. In both cases, business investment and exports fell dramatically more than consumption. Now, perhaps one argues falling stocks influence investment. But none of that tells you why stocks are falling and therefore fails to explain the recession’s cause. 2000 was a case of malinvestment against a backdrop of weakening credit markets. 2008 was the byproduct of a financial crisis wrought by a well-intended-but-disastrous accounting rule change and the government’s haphazard attempt to help. Besides, throughout history, stocks have led the economy. Don’t confuse a leading indicator with a cause. (As an aside, this piece also inaccurately attributes much of stocks’ rise in this cycle to interest rates, continuing the media’s long tradition of fearing rising rates will torpedo stocks.)

By , Strategy + Business, 07/28/2016

MarketMinder's View: If you mean folks on payrolls, yes, which folks often take to mean the industry is in decline. However, this isn’t the case. Manufacturing output is a better measure of that, particularly considering the increasing automation and high productivity of US firms. That is key, as this article highlights: “But the decline of employment isn’t the whole story. Not by a long shot. In fact, in many significant ways, U.S. manufacturing is thriving. The point of manufacturing is to make stuff that people and companies will buy and use, not to employ people to make stuff. And by the former measure, U.S. manufacturing is actually doing quite well.”

By , Reuters, 07/28/2016

MarketMinder's View: Two of GDP’s quirky components came out Thursday, and both suggest a drag on Q2 GDP growth (which is widely expected to reaccelerate from Q1’s slowdown, to varying degrees). Neither, however, is actually an economic negative. Both are just quirks. First, inventories didn’t rise much (0.5% m/m), and since inventory growth adds to GDP, this means a small contribution. Second, the trade deficit was bigger than expected, and since GDP uses net trade, this detracts. However, inventory change is subject to interpretation: Smaller growth could mean more restocking ahead as inventories are too lean. And, that bigger-than-expected trade deficit obscures the fact both exports and imports grew—the latter just grew more. Rising imports signal healthy domestic demand. The fact net trade is used in GDP is erroneous economic thinking.

By , Bloomberg, 07/28/2016

MarketMinder's View: A thorough documentation of how Italian retail investors came to be major holders of banks' subordinated debt, at issue now due to Italian banks' nonperforming loans. Now, these investors aren't "on the hook" for a bailout presently, although they may be if Italy applies the eurozone's "bail-in" rules requiring investors to take losses before government money is injected into struggling banks. That being said, that outcome isn't assured and the scope here may not be all that big. It might not be bigger than Parmalat's 2003 failure! But as a primer on how Italy got into this situation, this is fine.

By , The Associated Press, 07/27/2016

MarketMinder's View: The -4.0% m/m slide is indeed the biggest monthly drop since August 2014, but a -58.8% m/m drop in commercial aircraft orders—a hugely volatile component that doesn’t reflect the broader economy—was the primary culprit. Core capital goods orders, which many consider an early read on business investment, rose 0.2% m/m, the first gain in three months. Durable goods have been volatile this entire expansion, without derailing growth.

By , Bloomberg, 07/27/2016

MarketMinder's View: Japanese Prime Minister Shinzo Abe telegraphed an economic stimulus package after his coalition won a supermajority in the upper house on July 10, and now some details are emerging. The package will total ¥28 trillion ($265 billion), nearly half of which will consist of “fiscal measures” (specifics like the amount of direct government spending will arrive next week). While this might provide a near-term boost, it is highly unlikely to foster sustained growth—just as Abe’s prior stimulus packages amounted to a brief sugar rush only. As we’ve long said, fiscal and monetary stimulus alone can’t fix what ails Japan’s economy. Structural reforms to modernize labor markets, improve corporate governance and remove trade barriers would be far more beneficial. Stimulus might cheer markets in the short run, but absent reform, investors will likely find better opportunities outside Japan.

By , The Wall Street Journal, 07/27/2016

MarketMinder's View: This piece seems very confused. It argues a supposedly reliable indicator of a looming recession (a flattening yield curve—a smaller spread between short-and long-term interest rates) is a false read this time because economic weakness isn’t responsible for falling long rates. Rather, they’re low because ultra-low and even negative rates outside the US are causing investors to buy higher yielding US debt. On the one hand, this is bizarre logic and illustrates complacency—explaining away negatives for illogical reasons is the sort of thing you see near a cycle’s end. Contrary to this piece’s assertion, it doesn’t matter why the yield curve is less steep. The shape is what counts, because it’s a proxy for banks’ willingness to lend. But in this case, the thesis is just wrong. A flattening yield curve isn’t wonderful, but it isn’t contractionary. The real warning sign would be an inverted curve, where short rates exceed long rates.  The yield curve today isn’t inverted: There is a 1.18 percentage point spread between the 10-year and fed-funds rates. Even then, an inverted yield curve doesn’t necessarily mean a recession lies imminently ahead. There are often lags between the two events, sometimes lasting over a year.  

By , Bloomberg, 07/27/2016

MarketMinder's View: The UK economy grew 2.4% annualized in Q2, beating expectations and accelerating from Q1’s revised 1.8% pace. Services, which account for the lion’s share of output, grew 0.5% q/q, and industrial production clocked its highest quarterly growth rate (2.1%) since 1999. It’s all good news, if backward-looking, but this piece attempts to find a cloud in a silver lining by pointing out that most of the growth occurred in April and arguing several indicators suggest the UK economy weakened after the Brexit vote. But it’s premature to make either claim. As the article notes, the preliminary estimate is based on a half-completed dataset. Most of the June numbers are guesstimates. Maybe the guesstimates are too low? As for the supposed post-Brexit weakening, it is based on all of one and a half data points, which isn't telling. After all, if a strong April can precede a weaker May and mild June, why should we presume whatever July data show is repeated in August, September and beyond? In our view, that so many have a gloomy take on reports of solid UK growth is evidence investor sentiment remains far from the euphoric levels that typify late stage bull markets, a sign the current bull likely has further to run.

By , The Reformed Broker, 07/27/2016

MarketMinder's View: According to a recent survey of US restaurants, year-over-year comparable sales growth slowed by 1.5 -2 percentage points so far this year. Some suggest this is a harbinger of a looming recession because restaurant sales typically fall in advance of broad-based economic declines. Their evidence: “In the 3-to-6-month periods prior to the start of the prior three US recessions, Restaurants have declined an average of -23% vs. the S&P 500’s -10%.” First, three data points don’t prove anything. Second, um, restaurant sales aren’t falling! They are slowing, but growing. (A rhyme, in time!) Third, it neglects to say how restaurant stocks are doing now, which seems kinda crucial? Fourth, the logic is flawed. It assumes slowing sales must soon become falling sales and falling restaurant stock prices. But that isn’t a given at all. As this piece points out, “What happens if restaurant comps start improving / accelerating out of nowhere?” Moreover, it isn’t as if falling restaurant sales cause recessions. Yes, people cut discretionary spending when times get tough, but that is a symptom, not a cause. Absent a fundamental cause, like tightening credit conditions, there isn’t much reason for folks to suddenly tighten the purse strings.  With money supply and bank lending expanding, an economic downturn seems unlikely to develop for the foreseeable future.

By , The New York Times, 07/27/2016

MarketMinder's View: This fine and interesting article highlights a risk many investors simply don’t consider. In showing the deleterious impact of shifting regulation on homeowners who installed costly solar panels with an eye toward reaping the benefits of regulated pricing, it demonstrates the fact that an investment made on a government policy, subsidy or other regulatory quirk is subject to change with potentially disastrous impacts. We’re not saying avoid at all costs, but rather than look to such things as a thesis to own a stock, one should consider them a risk to the investment.

By , Bloomberg, 07/27/2016

MarketMinder's View: We guess we’ll just keep on featuring corporate announcements like this one to illustrate how British corporations’ actions speak louder than pundits’ fearful claims that a vote to Brexit would quash investment or reduce Britain’s competitiveness. Stay tuned for more.

By , Reuters, 07/26/2016

MarketMinder's View: Ahead of the UK’s vote to leave the EU last month, many worried mergers and acquisition activity would dry up with a Leave vote, as potential foreign buyers abandoned plans to invest in UK plc. Chalk this up as another Brexit fear that didn’t materialize. While the 60 deals inked in the month after the vote is less than the 79 the month beforehand, it is still nothing to sneeze at. While many of the deals are small, SoftBank’s $32 billion deal for chip designer ARM—a hefty premium—epitomizes the confidence foreign firms still have in Britain. With today’s news that Belgium’s ABInBev is upping its bid for Britain’s SABMiller, it’s clear foreign investors aren’t scared off. Note, also, many thought the weak pound would make the UK less attractive to foreign investors—turns out the opposite happened. People always love a bargain.

By , The Washington Post, 07/26/2016

MarketMinder's View: There are plenty of political shots here, which we ask that you ignore—party bias is blinding in investing, and we favor no ideology or candidate. The titular allegation is that the “real” unemployment rate is far higher the headline number, and the Bureau of Labor Statistics is intentionally obscuring labor market weakness to support the presidential administration. While it singles out the scion of a certain presidential candidate, he is not the first to presume official employment statistics are massaged and false—this is a long-running meme. This article does a nice job of detailing why these claims lack evidence: The BLS has not adjusted its definition of “unemployed” for over two decades, numerous reforms have firewalled it from the White House since Nixon tried to stack the organization with his people, and it releases a range of other measures of labor market health that add plenty of context to the headline rate, from labor force participation to the underemployed and long-term unemployed. This looks like transparency to us—not a great idea if the goal is to hide the facts. Don’t get us wrong, it’s perfectly valid to question all data, whether from government or private sources, but in this case, the fudging seems limited to the usual seasonal adjustments and survey extrapolations—par for the course in econometrics, not cooking the books. Oh, and this isn’t actionable for investors anyway—jobs numbers lag stocks and the economy.

By , The Telegraph, 07/26/2016

MarketMinder's View: This story is a microcosm of how groundbreaking innovations change the world, become commonplace and finally give way to yet more previously unfathomable advances. Moore’s Law, which states the number of transistors on an integrated circuit should double every two years, has been roughly true for over half a century. Computer chips today can hold billions of switches each, powering the hyper-speedy electronics (we know, they don’t always feel speedy) we use every day. A new report, however, suggests that by 2021, it will no longer be economically viable to shrink transistors further, and that’s probably true—and whether or not the limit comes in 2021, the fact remains that you cannot split the atom without, um, dire consequences.  But computing power may keep growing anyway—chip companies are now working on “3D processors,” which skirt space limitations on individual processors by stacking transistors on top of each other. Maybe quantum computing is the next big thing—who knows? Regardless of what tomorrow’s technological leaps look like, history shows they have the potential to boost productivity and living standards beyond what folks thought possible. Remember this next time you hear laments of perma-slow growth or secular stagnation.

By , MarketWatch, 07/26/2016

MarketMinder's View: In a word, yes. And while this isn’t a perfect explanation of why, it still makes the case. While the US’s multiyear outperformance has folks questioning, “why foreign,” past performance doesn’t dictate future returns. Leadership shifts. Global diversification isn’t about investing abroad only when recent returns look attractive. It’s about capitalizing on all available opportunities—which is where we quibble with this article, which implies there are no benefits to global diversification when the US leads foreign. Not true! US outperformance doesn’t preclude strong performance elsewhere. While the US has led non-US cumulatively since mid-2010, it wasn’t the developed world’s top-performing country in any year during that stretch. Don’t let averages blind you. Plus, over time, the differences between foreign and US returns tend to even out, giving investors a smoother ride to similar long-term returns. “Investors with a long investment time horizon shouldn't become over anxious during times of volatility or when the benefit of owning international stocks seems to disappear. Immediately following the Brexit referendum, global stocks temporarily declined in a selling frenzy driven by panicked traders who guessed wrong. Yet for long-term investors, Brexit is a non-event.” Hear, hear! For more, see our recent commentary, “Think Global, Invest Global.”

By , The Financial Times, 07/26/2016

MarketMinder's View: In an effort to stave off a bank run last June, Greece’s government closed banks, restricted cash transfers out of the country and limited depositors to withdrawals of just €420 each week. Under new, looser rules, depositors have access to twice that amount every two weeks, which sounds semantic, but the change allows folks to make fewer trips to their local branch, which is nice. There are other changes as well: Any new deposits are redeemable in full, and withdrawals for loan repayments are permitted too. These freedoms are meant to encourage Greeks to return some of the €45 billion they pulled from their banking system in last year’s first half, an estimated €15 billion of which is still floating around the Hellenic Republic. It’s an incremental positive, and if it proves successful, it will be a noteworthy milestone on Greece’s slow crawl back from the brink—a welcome contrast to the hysteria of years past.  Though, as always, we wouldn’t dare presume we’ve seen the last of Greek brinksmanship.

By , Associated Press, 07/26/2016

MarketMinder's View: The US Treasury’s assessment of Brexit’s impact on the US financial system looks to us like one more official body hopping aboard the “if Brexit goes badly, that would be bad” train. The IMF, G-20, Bank of England and some ratings agencies have all chimed in to let markets know that risks exist—and they certainly do. But contrary to the assertion here that “markets may be underestimating the risks,” all the hype and warnings issued before and after the vote make this basically impossible. Stocks discount all widely known information, including dire predictions, opinions and forecasts. Maybe, just maybe, stocks see through all this rhetoric and realize it’s just impossible to handicap this early. Or, maybe they realize that as the long, slow exit process unfolds, they will have time to slowly digest the likely changes, which may not be so very bad at all.

By , USA Today, 07/26/2016

MarketMinder's View: It’s hard to get much more myopic than this. Whether stocks rise or fall a couple tenths of a percentage point on average during Republican and Democratic party conventions is A) very likely mere randomness, B) too tiny to matter, C) not actionable and D) 100% irrelevant to investors with plans for long-term growth. Tune in for the speeches, funky hats or balloon drops if you like, but market implications here are nil.

By , The Wall Street Journal, 07/25/2016

MarketMinder's View: While we are rather mixed on this article overall, it does contain some tried-and-true advice for long-term investors, especially those with fixed income exposure: Don’t invest for yield alone, as doing so can lead you to take outsized risks. An asset’s yield is just one part of total return to consider, and it alone shouldn’t determine its place in your portfolio. Higher yield intuitively means the investor must take on more risk to reap the reward, and those risks (e.g., higher likelihood of failing to return your capital, illiquidity) may put investors in a tough spot. As this piece advises, the more successful—and difficult—strategy is to remain patient and disciplined and resist the lure of short-term relief, opting instead to stick to your long-term plan. That said, we are much less high on the discussion of high-yield corporate bonds, which can still play a handy role in diversified fixed income portfolios. We wouldn’t go hog wild or anything, but it is a myth that they (or bonds in general) are in a bubble. Actually, considering credit spreads tend to narrow as rates rise, corporate and high-yield bonds might reduce volatility relative to a Treasury bond portfolio if rates rise from here. Also, while we are also fans of taking “homemade dividends” from a stock portfolio, it is a myth that you should only sell your “losers.” Price movement alone should never influence a transaction. Be more tactical, thinking about risk management (paring back positions that grew to comprise an outsized portion of your portfolio) and a company’s future potential.

By , The Financial Times, 07/25/2016

MarketMinder's View: Amid all the analyses spilled over the impact of the Brexit referendum last month, here is one positive story: Markets didn’t break despite record volumes for some trading venues, as electronic market makers stepped in to provide the needed liquidity. Despite trades happening at incredibly fast speeds due to the increased usage of algorithms, liquidity fears didn’t materialize, even though the traditional market makers providers—big banks—weren’t as prominent. As one analyst noted here, “The major banks have reduced appetite for making markets during these times of crisis. It was interesting to see that the major venues had tremendous volumes and there were no instances of negative feedback.” This should be a reassuring point in favor of algorithmic and high-frequency trading—markets operated just fine even after a well-known, sentiment-shaking event occurred. 

By , Bloomberg, 07/25/2016

MarketMinder's View: The China Minxin Manufacturing PMI, a private-sector measure of Chinese manufacturing activity, was just suspended for the second time in less than a year. Perhaps relatedly, the Chinese government has reportedly banned private-sector Internet news reporting, extending President Xi Jinping’s media crackdown as he consolidates power. For investors, these developments make it that much harder to glean actionable information from the Middle Kingdom, and they illustrate how political risks vary among different Emerging Markets. This isn’t a global market risk by any stretch, but it is something for anyone investing in Emerging Markets to bear in mind.

By , Yahoo! Finance, 07/25/2016

MarketMinder's View: We have qualms with the notion that the profits narrative for Corporate America “just got worse.” The rationale provided here: After Q1’s end, experts projected a Q3 2016 earnings growth rate of 3.3% y/y. This fell to 0.6% at Q2’s end, and today it is at -0.1% (per FactSet). Our issue isn’t with the numbers themselves, but rather, the broader narrative: None of this is new. Analysts have consistently ratcheted down their expectations, only for reality to beat them. For instance, at the onset of Q1 2016, earnings were expected to fall -8.5%. After all 500 S&P companies reported, earnings fell just -6.7%. Both figures are even better when you strip out the struggling Energy sector, which has detracted from the headline number for a while now. By no means are we saying negative earnings numbers are anything to cheer, but context is key—US companies are doing overall better than commonly portrayed. And that—the gap between reality and expectations throughout the economy—is what ultimately moves stock prices. Earnings and earnings expectations are far from the most meaningful driver, contrary to the assertions herein. Also, valuations don’t mean anything for stocks looking ahead. At best, the forward price-to-earnings ratio gives you a rough sketch of current sentiment—otherwise, it’s all just backward-looking gobbledygook that pundits spin to say something scary about markets.       

By , The Telegraph, 07/25/2016

MarketMinder's View: Monday’s edition of “Politicians Backtracking on Brexit Bombast” features European Commission President Jean-Claude Juncker acknowledging that Britain isn’t on the clock to trigger the Lisbon Treaty’s Article 50, which would initiate formal exit negotiations. This isn’t terribly surprising, given everyone knew there wasn’t a hard deadline before the referendum, but after the Leave camp’s surprising victory, Juncker loudly proclaimed that there was no reason to wait to start exit talks. Even though the Conservatives elected new Prime Minister Theresa May more quickly than anticipated, she has long telegraphed that Britain won’t be rushed into invoking Article 50—perhaps waiting until next year to do so. Our point: Always watch what politicians do—not what they say—regardless of how inflammatory their language sounds.     

By , Bloomberg, 07/25/2016

MarketMinder's View: Well, this is just one analysis (produced by the US Federal Reserve), but it does reiterate some of the Chinese yuan’s limitations as a global currency. The US dollar, the British pound, the Swiss franc, the eurozone’s euro and Japan’s yen are widely viewed as “haven” currencies because they’re easily convertible, very liquid and pretty stable—as are the institutions behind them. The yuan has been making progress, but it still has a ways to go, especially since the People’s Bank of China has shown great reluctance in letting its currency trade more freely. Even though the yuan is still on track to be included in the IMF’s Special Drawing Rights (SDR) currency reserve basket, that designation is more symbolic than anything else. For more, see our 11/17/2015 commentary, “The Yuan’s Symbolic Ascent.”      


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Global Market Update

Market Wrap-Up, Thusday, July 28, 2016

Below is a market summary as of market close Thursday, July 28, 2016:

  • Global Equities: MSCI World (+0.1%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (-0.3%)
  • Best Country: Denmark (+1.2%)
  • Worst Country: Spain (+1.6%)
  • Best Sector: Consumer Staples (+0.4%)
  • Worst Sector: Telecommunication Services (-0.4%)

Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 1.51%.


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.