|By Editorial Staff, The New York Times, 04/22/2014|
MarketMinder's View: Economix, the Times’ pure economics blog, was created in September 2008 amid the financial crisis—a time of deep economic concern. It will be replaced by a new blog covering politics, policy, business, economics and more. Whatever you think of the reporting, the shift from pure-Econ to a wider focus illustrates to us sentiment’s continued, gradual melt-up—the Times seems likely to be shifting with changes in media consumption. Media can both influence and reflect sentiment.
|By Don Stammer, The Australian, 04/22/2014|
MarketMinder's View: A great article discussing a core reason to invest—the power of compound growth. “A potential shortcoming of compounding is that, by the time investors are old enough to have learnt for themselves the magic of compounding, it’s generally too late to make full use of it. The way around this problem is straightforward: learn from your elders!” In our view, this is a good lesson for investors of all ages.
|By Robert Powell, MarketWatch, 04/22/2014|
MarketMinder's View: Sure, more transparency might help investors make better investing decisions when it comes to holding target-date funds (a fund investing in a combination of stocks and bonds that gradually increases allocation to bonds as the target date—retirement year, typically—nears). However, that still doesn’t fix the fund’s inherent flaws: assuming an investor’s time horizon ends when retirement starts and not accounting for personal circumstances, needs and long-term goals.
|By Lucia Mutikani, Reuters, 04/22/2014|
MarketMinder's View: One weaker month of home sales shouldn’t distract folks from housing’s ongoing recovery—it’s normal for recoveries to be uneven at times. And housing is still just one part of the economy—many other parts are contributing strongly to economic growth.
|By Chikako Mogi and Kyoko Shimodoi, Bloomberg, 04/22/2014|
MarketMinder's View: Cutting corporate taxes would be an incremental plus for Japanese firms, but for now it’s just talk. And Japan still has plenty more issues to address—protectionism in foreign trade, the Energy sector, labor market reforms and keiretsu reform—to boost competitiveness. Lowering one of the world’s highest corporate tax rates would be a plus, but it’s no panacea.
|By Mitsuru Obe, The Wall Street Journal, 04/22/2014|
MarketMinder's View: We’re mighty skeptical this deal gets done. Big, sweeping deals like the multilateral Trans-Pacific Partnership usually face major hurdles to completion. This one is no exception, as support in Congress seems shaky and we doubt whether Abe has the clout or willingness to try to ram through contentious reductions to protectionist measures. Maybe this deal does happen—and freer trade is generally better. But we believe more rational expectations are it doesn’t, and the TPP talks devolve into side talks of a smaller, easier-to-execute nature.
|By Ralph Atkins and Martin Roberts, Financial Times, 04/22/2014|
MarketMinder's View: A testament to the eurozone’s ongoing recovery—foreign holdings of Spain’s debt have increased to €182 billion over the last couple years and its yields on 10-year sovereign bonds have fallen below 3.1%. Other periphery countries—Greece, Portugal and Ireland—have seen higher demand and lower yields on government debt, which speaks to major improvement in sentiment toward European peripheral nations.
|By Alan S. Blinder, The Wall Street Journal, 04/21/2014|
MarketMinder's View: The aspects critiquing the ratings agencies—particularly their issuer-pays business model—are spot on, but in our view, a more beneficial, straightforward solution would be to eliminate their status as nationally recognized statistical ratings organizations. By gutting the law that gives the big-three ratings agencies special status, the government would allow for more competition and reduce the influence of agencies who base their decisions on flawed opinions and backward-looking factors. If equity markets can function fine without an official, quasi-government sanctioned rating for every publicly traded stock, it’s pretty likely fixed income markets can, too.
|By Andrew Lilico, The Telegraph, 04/21/2014|
MarketMinder's View: Yes, the so-called austerity program probably weighed on UK growth some from 2010 through 2012—even though government spending kept rising, tax hikes hurt. However, this doesn’t explain the arguably larger headwind: The fact lending steadily declined from March 2009 on. This happened because of quantitative easing (QE), in our view. The article cites QE as a positive, but by reducing the spread between long- and short-term rates—banks’ net interest margins (profits)—it discouraged lending. As did the big regulatory overhaul. It’s no coincidence that the UK economy accelerated markedly after QE ended in November 2012.
|By Tetsushi Kajimoto, Reuters, 04/21/2014|
MarketMinder's View: Here’s an example of why a weakening currency isn’t a panacea for a slowing economy: While export values popped in early 2013, as Japan reaped the immediate fruit of the weaker yen, growth is starting to wane (and export volumes never really took off). With exports leveling and a recent sales tax hike weighing on consumption, many seem to be anticipating more monetary stimulus—but stimulus can’t fix the structural issues that have held Japan back for 17 years now.
|By Staff, RTT News, 04/21/2014|
MarketMinder's View: Driving the increase: a wide yield spread, which over a century of economic theory and evidence suggest supports higher growth. Slow-growth jitters persist, but it would be exceedingly unusual for the economy to stall while LEI is high and rising.
|By Kevin McCoy, USA Today, 04/21/2014|
MarketMinder's View: Considering other data show well over half of Americans own stocks, we find this survey a touch suspect. That said, it is a good sign sentiment remains far from the euphoria typical of most bull market peaks.
|By Christopher Emsden, The Wall Street Journal, 04/21/2014|
MarketMinder's View: The €10 billion-per-year tax cut should be a modest tailwind for Italy, though it isn’t a panacea. Prime Minister Matteo Renzi says more tax cuts, reforms and spending cuts are in store, but only time will tell whether he has the political clout to pull off more sweeping change—the tax cut was low-hanging fruit, especially with politicians eager to curry favor ahead of May’s European Parliamentary elections. For more on Italy, see our 04/10/2014 commentary, “Euro Politicos.”
|By Staff, Xinhua, 04/21/2014|
MarketMinder's View: China’s shadow banking crackdown continues as regulators write more rules governing entrusted loans. Formally putting shareholders on the hook should send a strong signal to markets that these and other “wealth management” products don’t have a government guarantee, which should in turn foster more judicious lending decisions.
|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.
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Market Wrap-Up, Mon Apr 21 2014
Below is a market summary (as of market close Monday, 04/21/2014):
Global Equities: MSCI World (+0.1%)
US Equities: S&P 500 (+0.4%)
UK Equities: MSCI UK (0.0%)
Best Country: Australia (0.0%)
Worst Country: Japan (-0.5%)
Best Sector: Health Care (+0.7%)
Worst Sector: Financials (-0.2%)
Bond Yields: 10-year US Treasurys remained at 2.72%.
Editors' Note: Tracking Stock and Bond Indexes