|By Jonathan Clements, The Wall Street Journal, 05/21/2015|
MarketMinder's View: When it comes to investing, overcoming behavioral errors is paramount, and these “seven lies” exemplify two of the biggest, overconfidence and regret shunning—giving yourself way too much credit for anything that goes right and blaming others for anything that goes wrong. Understanding these tendencies, learning how to spot them in yourself and training yourself to battle them will help you make better investing decisions over time and increase your chances of success.
|By Luke Kawa, Bloomberg, 05/21/2015|
MarketMinder's View: This drastically and confusingly underrates The Conference Board’s US Leading Economic Index (LEI) in favor of focusing on how six backward-looking reflections compare to expectations. None of this suggests fundamental economic weakness. Also, if the LEI is so widely known, why didn’t the report exactly match estimates? Folks, since 1959, we’ve never had a recession start while LEI is rising. You cannot say the same of the Kansas City Fed’s Manufacturing Activity Index or existing home sales. Sorry. Heck, the KC Fed gauge cited here only has 15 years of history and several false reads in that time.
|By Neil Irwin, The New York Times, 05/21/2015|
MarketMinder's View: Well, what to make of it is that markets are volatile. Always have been, always will be. Even bond markets, which are no more rational or irrational than stock markets, despite the claims otherwise in this article. This is all just way too much searching for meaning in bouncy yields, which are actually largely flat year to date. Do yourself a favor and don’t overthink it. For more, see our 5/11/2015 commentary, “Pundits Search for Meaning in Bumpy Bond Yields.”
|By John Tamny, Real Clear Markets , 05/21/2015|
MarketMinder's View: "Not only does free trade enhance the value of every paycheck we bank, but the savings made possible by trade are a form of capital for the commercial ideas that power us into the future. Naysayers will argue that free trade destroys jobs, but then so does all economic progress. This is a happy development. If jobs are or were the sole purpose of economic activity, then the logical next step beyond closing our borders to foreign goods would be to abolish the car, the tractor, the ATM machine and the internet. All four were massive job destroyers, but as evidenced by the fact that we're not in breadlines as a result of their proliferation, economic advances that destroy jobs don't erase work; rather they reorient investment to new forms of commerce that simply change the nature of our work. This is good. Indeed, not much more than 100 years ago most Americans worked on farms. Thank goodness for the economic progress that free trade speeds up. How skillful and productive would most of us be with the backhoe?"
|By Ivana Kottasova, CNNMoney, 05/21/2015|
MarketMinder's View: Not literally killed. Just metaphorically, as their buy-when-there-is-blood-in-the-streets approach to investing in Greece is not working out very well so far. Greek stocks are down more than -20% and bond yields have spiked over the last year. Look, we’re all for going against the crowd and buying what’s unpopular, but sometimes things are unpopular for good reason. With no meaningful domestic growth drivers and a messy political situation, Greece seems unpopular for good reason. Is it possible that Greece eventually pulls through and its stocks do well? Sure, but how many other, better opportunities might you miss in the meantime? Markets usually move on what’s likeliest over the next 12-18 months (30 max), and over that foreseeable future, Greece looks quite likely to remain a basketcase.
|By Staff, Bloomberg, 05/21/2015|
MarketMinder's View: While this correctly concludes that no, Puerto Rico isn’t a threat to markets and the economy, it also vastly overrates the threat and potential implications of a Greek default. Both of these are basically false fears, and in that way, yes, Puerto Rico is America’s Greece. But you can’t easily make a portmanteau like Grexit or Grexident or Graccident or Drachmail out of anything Puerto Rico-related, so PR isn’t very Greece-like in that sense either.
|By Michael Santoli, Yahoo! Finance, 05/21/2015|
MarketMinder's View: We have no idea what “style points” mean in this context, but we are fairly certain they don’t matter for, stocks. (Architecture, furniture and fashion, yes.) We are quite certain none of the specific things mentioned here are telling. The latest market highs are not somehow dubious because certain categories are trailing. Small caps’ lagging doesn’t mean investors lack risk appetite, because small cap stocks aren’t riskier than other stocks—stocks are stocks. Transportation stocks are not a leading indicator for other stocks—stocks are stocks. That both categories have lagged of late simply means investors prefer other areas of the market. This is normal. It is also a sign of narrowing market breadth—typical of maturing bull markets. Maturing bull markets are also when small cap usually underperforms. Nothing here is unusual, folks.
|By Jonnelle Marte, The Washington Post, 05/20/2015|
MarketMinder's View: Not overconfident as in “I am the best investor ever and can’t go wrong ever so I should get leveraged to the hilt and throw it all on one penny stock.” But at least confident enough to believe your retirement savings can grow if you invest them in stocks, rather than sit timidly in cash or fixed income because you don’t trust stock investing skills. That’s a fair point, though we’d argue confidence in markets—and their historical ability to bounce high after tumultuous periods—is more important. Fear paralyzes more than ignorance. Though, we’re all for improving financial literacy, as understanding even basic investment lingo like “actively managed mutual fund,” “basis point” and “vesting period” can help you defend against all the hucksters who prey on innocent folks with flashy tactics and too-good-to-be-true promises.
|By Richard Katz, The Wall Street Journal, 05/20/2015|
MarketMinder's View: As this shows, claims currency manipulation in China has robbed America of millions of manufacturing jobs amount mostly to hot air. We aren’t saying no US jobs have moved to the Middle Kingdom. Factories there make goods America stopped producing decades ago. But that says more about development here and there than currencies. Here: “It is true that after long being flat at around 17 million, the number of factory jobs in America started a steady decline around 2001, the same time China entered the World Trade Organization. This is the alleged “turning point” cited by commentators such as Robert Scott of the Economic Policy Institute. But this is like saying the sun rose after the rooster crowed. U.S. factory jobs plunged even when the yuan soared vis-à-vis the dollar. There is simply no correlation between the long-term trend in factory jobs and movements in China’s currency. The real cause of the lost jobs is improved efficiency. U.S. factory jobs have declined by 30% since 2000 even though manufacturing output rose 20%. Back in 2000 it took almost 11 workers to produce a $1 million worth of manufacturing output per year (as measured in constant 2009 dollars); now it takes just six workers. If 11 workers were still needed, then the U.S. would now employ 21 million manufacturing workers instead of 12 million.” And as for the trade deficit, that’s a nonstarter. Imports aren’t the root of all evil, and import tallies aren’t even all that accurate: “About 1% of the value of an iPhone comes from the assembly work in China. Most of the real fabrication work is done elsewhere, as in the cases of Japanese or Korean LCD screens or computer chips. Yet U.S. trade statistics count the entire value of the iPhone as an import from China.” If you really want to understand global trade, visit the OECD’s Trade in Value Added database, which shows how much country A contributes to goods made in country B.
|By Mehreen Khan, The Telegraph, 05/20/2015|
MarketMinder's View: Well that’s nice of them. Easing collateral requirements should allow Greek banks to tap emergency liquidity for a little bit longer, buying Greece a bit more time to negotiate with creditors. We wouldn’t read much into what the rumor mill says about those negotiations—or into what loudmouth politicians say on either side. Greek pols championing “deliberate default” and the end of austerity are trying to stir up support on the homefront. They aren’t the ones actually negotiating with the rest of the eurozone. Cooler heads often prevail behind closed doors. Even if they don’t this time, and Greece gets the boot, the risk of contagion here is minimal.
|By Eamonn Fingleton, The Guardian, 05/20/2015|
MarketMinder's View: As far as markets are concerned, this is all sociological—whether the UK has a manufacturing- or service-based economy isn’t important to stocks. Markets care about profits and growth, regardless of where it comes from. But to people, this is all huge—there is no arguing the UK’s commercial landscape hasn’t changed astronomically over the past 60 years. Industry in much of Northern England, Scotland and Wales is unrecognizable, and many towns once dependent on mines and collieries have never recovered. But it’s a fallacy to pin this on a “pipedream” of post-industrialism or any one politician or party—just as it’s a fallacy to say those who seek the revitalization of heavy industry in the UK want to revert to the 1950s. Britain could do a lot with high-tech manufacturing, and we’d be among the first to say the country would probably get an innovation boost from more technology being developed and produced on the isles—just as Silicon Valley gets a boost from the sheer volume and high concentration of tech being developed there. The constant collision of new ideas that happens where tech is concentrated fosters innovation. But some historical understanding here is important. In the mid-20th century, most of the UK’s manufacturing and mining industries were heavily subsidized or owned by the state, which distorted competition, while they simultaneously dealt with wage and price controls. When those controls led to runaway inflation and the pound soared as the BoE jacked up rates to tame prices, heavy industry became increasingly unable to compete globally. That left the UK government with a choice: Privatize firms and rip the Band-Aid off, or prop them up at taxpayers’ expense without guaranteed success. They chose the former, and at a macro level, it is hard to argue with the results. But at a micro level, looking at empty towns and displaced workers who couldn’t retrain? Hey, we get it. We aren’t heartless—markets are, though, and the broadest lesson here, for investors, is that sometimes you have to tune out the human impact of certain economic policies and developments and focus on what markets look at. If you don’t, you could miss opportunities. Invest with your head, not your heart (or your biases).
|By Eduardo Porter, The New York Times, 05/20/2015|
MarketMinder's View: Actually, this argument lies on a weak foundation: faulty data! Like this: “Investment in research and development has flatlined over the last several years as a share of the economy, stabilizing at about 2.9 percent of the nation’s gross domestic product in 2012, according to the National Science Foundation.” Yah, but, if the broad economy is growing, and R&D’s share is stable, then guess what, R&D is growing too! And also! While we don’t know where the National Science Foundation gathered their data, the Commerce Department’s data show US R&D spending’s share of GDP rising from 0.20% in 1929 to an all-time high of 1.8% in Q1. Even during this expansion, R&D spending has grown way faster than the economy. And faster than it did during the alleged military-industrial complex’s mid-20th century heyday (when it really did flatline as a share of the economy, hovering around 1% for nearly two decades). No disrespect to XEROX Parc or the other research giants of the 1950s-1970s, but firms today are doing it fine, thankyouverymuch. No, they aren’t publishing their findings in academic journals, but that’s a petty ivory tower concern. Research is still research even if it isn’t blessed by academigods, printed on acid-free paper, bound in leather, and stored in the sixth-floor stacks of a university research library. Nobel winners, published academic studies and whatnot are not really evidence firms aren’t investing in R&D. They are arbitrary measures of ivory-towerness that have shown little relationship to economic growth.
|By Staff, The Yomiuri Shimbun, 05/20/2015|
MarketMinder's View: Japan had an alright Q1, which is no doubt nice for them after last year’s recession, but we aren’t about to call their lost decade(s) over. Two percentage points of that 2.4% annualized growth came from inventory builds as companies restocked (following inventory declines in Q3 and Q4 2014). While this isn’t an inherent sign of weakness, it does suggest drawdowns later this year could detract from growth, leaving consumption, investment and trade to pick up the slack. Those components weren’t horribly weak—private capex grew for the first time since Q1 2014—but they didn’t soar either, and structural barriers to robust growth persist. Reform remains the swing factor for Japanese stocks, in our view, and despite a few recent small political victories for PM Shinzo Abe, progress overall remains slow as molasses. It remains to be seen whether he can fulfill investors’ very high hopes for sweeping change.
|By Steven Davidoff Solomon, The New York Times, 05/20/2015|
MarketMinder's View: Here is a great piece on efforts by France (and some US companies) to prevent hostile takeovers, plant closures and other allegedly short-termist actions. France’s solution, courtesy of last year’s Florange Law, is to reward long-term investors with double voting power, which is all well and good except that the French government holds major stakes in several of France’s major corporate giants, and the government has systematically bought up shares in certain companies to assume they don’t have enough votes to opt out of the Florange Law. Meanwhile, on our shores, several companies have gone public with a two-speed share class system, concentrating voting rights among the founders and other key interests. We have no doubt this is all very well-intentioned—France wants to protect its workers, founders here want to protect their corporate babies—but the potential for inefficiency and shenaniganery abounds. “People who speak of ‘shareholder democracy’ may not be happy with the trend away from one share, one vote, but does giving shareholders more votes improve anything? If the French plan is adopted, long-term holders like institutional investors may win. Yet the average actively managed mutual fund turns over its portfolio every year, meaning many such investors will not benefit. Shareholder activists may lose, though they may not. Instead, they would have to cater to a different set of shareholders. This may be index funds, which do hold on to shares and would have more power. The mixed results extend to management. Presumably, a high-vote structure will discourage hostile takeovers by giving management protection, but it will also make management subservient to a smaller group of existing shareholders. And so, the increased voting power may not be a good thing. It may give an advantage to more passive shareholders and those that may have special interests. … In other words, while it may seem like the cure for short-termism, high-vote shares may instead do something else, giving power to a small group of shareholders with odd interests. And whether they exercise that power vengefully or selfishly is an unknown. C’est la vie.”
|By Ambrose Evans-Pritchard, The Telegraph, 05/20/2015|
MarketMinder's View: Ok, but so what? Even if Portugal’s equivalent of Syriza leads the government after this autumn’s election, Portugal isn’t Greece. It isn’t back in recession. It isn’t still trying to negotiate emergency bailout funding. It isn’t effectively locked out of capital markets. Its debt insurance costs haven’t soared to the high heavens. Its banks aren’t hemorrhaging deposits or securing ECB liquidity with only their own lousy commercial paper as collateral. Portugal is standing on its own two feet. If a profligate regime takes over, maybe that’ll bad for Portugal’s economy, or maybe it will be fine. Any predictions at this point are opinions only, driven by bias, not fact. But if they start violating the eurozone’s debt and deficit limits, our guess is officials will deal with them the same way they deal with France, Italy and every other country that has ever violated their arbitrary, toothless limits—a lot of finger-pointing, verbose letters and empty threats to collect fines.
|By Yannis Behrakis, Reuters, 05/20/2015|
MarketMinder's View: This is fascinating, but as a public service announcement, no photo gallery like this will ever give you an accurate depiction of how any country, state or city’s economy is doing. We could make photo essays like this of pretty much every major city in America, including boomtowns like the San Francisco Bay Area. Investors would gain nothing from them.
|By Ewen Cameron Watt, Financial Times, 05/20/2015|
MarketMinder's View: While the term “safe asset” makes us tired, as truly safe assets are nonexistent (everything has risk!), this is an otherwise great look at what is driving bond prices these days: supply and demand! Central banks have hoovered up supply, and new bank (Basel III) and European insurance (Solvency II) regulations have forced firms to beef up their holdings. Bond yields aren’t historically low because investors are behaving irrationally, piling into a “momentum-driven trade that will end suddenly.” These are natural forces of supply and demand. Our only other quibble is with the ending, which theorizes that the reversal could be sharp when quantitative easing (QE) ends. We guess that’s possible, but considering the end of QE in the US and UK hasn’t seen either nation’s central bank’s balance sheet shrink, it seems everyone has learned from Japan’s mistake in the mid-2000s, when the BoJ cut its balance sheet way down after ending QE. That didn’t go well for them. More likely, QE nations just let the bonds on their balance sheets mature gradually, which is probably a 10-year process. 10-year processes usually don’t move markets. And again, central bank supply-hogging is just one factor. Bank and insurance demand won’t change unless Basel III and Solvency II become looser—possible, technically, but improbable in the foreseeable future and impossible to handicap in the long term.
|By Andrew Ackerman, The Wall Street Journal, 05/20/2015|
MarketMinder's View: Regulators long ago decided the solution to the invented problem of “too big to fail” is paperwork, so it’s no shock their way to address this in the mutual fund industry is—ta-da—paperwork! Step one, announced today, is requiring big firms to disclose more information about their funds’ holdings, including derivatives contracts. Steps two and three, supposedly coming down the pike this year, entail requiring funds to “better manage liquidity risks,” which smacks of holding limits, and subjecting big funds to stress tests. That all sounds about as beneficial for the mutual fund industry as it was to the banking industry—a lot of headaches. For funds, it all seems a bit odd considering their role in the financial system. Unlike banks, their businesses aren’t built on leverage, and a run on a mutual fund does not hit the financial system the same way a run on a bank does. But the political winds blow where they blow, and we guess if politicians were going to do something, this so far seems preferable to more sweeping intervention, like forcing funds to shrink or break up, which would probably disadvantage investors.
|By Jamie Chisholm, Financial Times, 05/20/2015|
MarketMinder's View: If commodity prices were such a marvelous leading indicator, why did the Commerce Department chuck them from the Leading Economic Index eons ago? Yah, that’s what we thought. Is wood used in US homebuilding? Yes. Does residential real estate predict or drive US consumer spending and overall growth? No. Is steel rebar used in Chinese apartment towers and skyscrapers? Yes. Does Chinese construction drive growth? Ok yah, more there than it does here. But is demand the only driver of steel prices? No, supply matters a ton (pun intended), and supply has soared in recent years. A supply glut has weighed on metals prices across the board since late 2010/early 2011, coincidentally, right when Chinese steel rebar prices rolled over. In addition, lumber prices have been down for more than two years. Meanwhile, the global economy has grown. Seems to us this article is reading way the heck too much into a well-known global trend (and one that is not a sign of economic trouble outside of commodity-dependent nations).
|By Jon Hilsenrath, The Wall Street Journal, 05/20/2015|
MarketMinder's View: There is a big part of us that wants the Fed to hike in June just to show everyone how utterly unreliable forward guidance is. We reckon you, dear reader, are probably tired of seeing us caution that whatever central bankers say and foresee is subject to change, and you can’t predict how 10 humans (we think) with varying biases and opinions will interpret the latest economic data (which isn’t predictable either). It would be so convenient if they just showed this instead. It might not be so great from a Fed credibility standpoint, and we guess that’s like bad and all, but we do like convenience.
|By Mitch Goldberg, CNBC, 05/19/2015|
MarketMinder's View: So the theory here is stock prices in typically high dividend-paying sectors have been inflated to very expensive valuations by the global low interest rate environment, because investors have sold low-yielding bonds and cash-like investments in favor of these stocks. It goes on to forecast trouble for Consumer Staples, Utilities and Telecom as a result, meaning you should sell out of these stocks and hold cash instead. However, if this were true, there should be some evidence it is so. Yet net inflows into bonds are higher than inflows into stocks in this bull. Price-to-earnings ratios—a signal of sentiment—should be inflated for the three sectors cited. While Consumer Staples’ 12-month forward P/Es are above average, the other two are below, and none are at euphoric levels. Moreover, if this theory that so many folks are stampeding into high-yielding stocks is so true, why have the MSCI World High Dividend Yield and MSCI USA High Dividend Yield Indexes trailed their non-high-yield counterparts since 2012 began? Finally, this also overstates the impact of a rate hike, which historically aren’t bearish. Now, let’s be clear: There is a time to reduce equity exposure, but it’s when you see a fundamental negative risk others don’t. Not when you fear a narrative data just don’t support.
|By Scott Hamilton, Bloomberg, 05/19/2015|
MarketMinder's View: Yep, the UK just posted its first negative year-over-year CPI read, following the US and eurozone into deflationary territory. However, like in the US and eurozone, falling food and energy prices were the big contributors. Excluding those two, prices rose. What’s more, this is a function of big price drops last year in those two categories—month-over-month, CPI rose 0.2%. While deflation isn’t the bogeyman many presume, it’s also likely to prove fleeting barring another big drop in oil prices. As for what this means for a potential rate hike, we don’t think it is possible to intuit much of anything about monetary policy from these data, considering they are subject to the potentially biased interpretations of the BoE’s Monetary Policy Committee. And, ultimately, it is rather futile to try, as initial rate hikes in the UK (as in the US) have no history of derailing bull markets and expansions.
|By Neil Irwin, The New York Times, 05/19/2015|
MarketMinder's View: Well, this is a near-perfect illustration of still-present banker bashing, showing sentiment is not euphoric by any stretch. Here, high-paying finance jobs in an industry that has sharply rebounded from the financial crisis are a bad thing not a good thing because the Financials sector is presumed to be a leech on the actual economy. Look, it may be a bit uncouth to say this these days, but banks are good. Without banks, capital doesn’t get allocated. Without capital markets, banks would struggle to fund themselves or businesses downstream. The evidence a strong Financials sector is a drag on the economy at large is limited at best. Is the industry free of all wrongdoing? Heck no. But no industry is. (P.S.: We are guessing those who understand the crisis was caused by the unintended consequences of an accounting policy and the government’s schizophrenic attempts to deal with the fallout would see this entirely differently.)
|By Jon Hilsenrath, The Wall Street Journal, 05/19/2015|
MarketMinder's View: Actually, this is more like the phrase of last month. Or last quarter, because the debate is all about whether Q1 US GDP data were skewed by a flaw in the Bureau of Economic Analysis’ seasonal adjustment that accounts for winter weather distortions. For econonerds (like us), it’s an interesting statistical debate, but for investors it isn’t of much consequence: Q1, weaker or stronger, is over. Stocks look forward, not back. However, contrary to the assertions cited here, there is plenty of evidence suggesting the economy is rebounding after a Q1 slowdown, like the robustly growing Services industry and surging imports, for two.
|By Cullen Roche, Cullen Roche, Pragmatic Capitalism, 05/19/2015|
MarketMinder's View: Here is an excellent piece highlighting the limitations of Tobin’s Q ratio as a timing tool: “The Q ratio has been well above its historical average for most of the last 25 years. If you sold stocks when the ratio was above its historical average you’ve missed out on some huge gains. If you BOUGHT the S&P 500 in January 1996 when the ratio passed 1 you would have never lost a dime over the ensuing 7 years including the tech bubble.” Folks, no matter how you slice ‘em, valuations aren’t predictive.
|By Staff, Reuters, 05/19/2015|
MarketMinder's View: As Trans-Pacific Partnership (TPP) talks progress, they continue to highlight examples of why deals like the TPP often aren’t completed—like the fact not all parties can agree on major provisions. Many US policy makers continue to insist on including language that would penalize trade partners determined to be “manipulating currencies” to make their exports more competitive. Now they are pursuing a vague agreement “in the context of” a trade deal, which has yet to be defined. Also yet to be defined are “overvalued” or “undervalued” currencies, which no one has determined a means of calculating, because fair value isn’t really a thing. This disagreement risks the deal if it gains steam, one reason we are skeptical the TPP gets done any time soon, particularly when there is a little US election next year. Few would-be presidents or other politicians wish to expose their flanks to attacks claiming they favored a deal permitting “currency cheating.” Mind you, we’re all for the TPP, we just aren’t holding our breath. For more, see our 4/23/2015 “Will Free Trade Ring the Pacific?”
|By Tyler Cowen, The New York Times, 05/18/2015|
MarketMinder's View: It’s hard to take any of this at face value considering it proffers two options for the current state of the economy: “cyclical downturn” and something even worse. Last we checked, the US was still growing, which is a cyclical upturn, and the high-and-rising Leading Economic Index suggests growth should continue. We also aren’t sure what “normal” is, considering no two expansions are exactly alike, averages aren’t predictive, and the only evidence that this one isn’t “normal” is a smattering of sociological anecdotes. Plus, the predictions here are all very long-term and extrapolate the recent past—always a mistake. For example, while wage growth isn’t booming (though we wouldn’t call it weak, either), plenty can change between now and some far-future “later.” Stocks usually don’t look beyond the next 30 months or so and focus most on the next 12-18 months—and they don’t move on sociological factors. The likely economic reality in that window looks far better than suggested here.
|By Simon Kennedy, Bloomberg, 05/18/2015|
MarketMinder's View: About half of this article’s problems vanish if you swap “bull market” for every mention of “bubble,” because the text foolishly equates the two. They aren’t synonymous. Bubbles sometimes form at the tail end of bull market, but not always. Today’s stock market doesn’t look anything like a bubble, considering the global economy and earnings are growing overall, leading economic indicators are on the rise, expectations are on the low side and valuations are just slightly above average, nowhere near levels that would imply runaway sentiment. But even if you make that handy linguistic change, this still errs in assuming rate hikes ever have a direct market impact—saying trouble begins on hike number three isn’t any more correct than saying it begins when the Fed first acts. Short rates alone don’t determine how loose or tight credit markets are. That (and how happy stocks are) depends much more on the yield curve spread—the gap between short- and long-term rates. Trouble usually doesn’t begin until the Fed hikes short-term rates above long rates, inverting the yield curve—and even that isn’t an immediate trouble-trigger. On average, since 1970, the yield curve has inverted 13.8 months after the first rate hike in a tightening cycle, and bull markets have continued for another year-plus after that.
|By E.S. Browning, The Wall Street Journal, 05/18/2015|
MarketMinder's View: Here is the central misperception: “Stocks do best in a world of low interest rates and share prices and steady earnings gains. With interest rates rising and stocks expensive, the market depends more than usual now on earnings.” Well, if that’s so true, how do you explain stocks’ tendency to rise swiftly from bear market lows, when valuations are usually quite high and earnings still falling? Or the fact P/E multiples usually expand as bull markets mature? When P/Es expand, that means stocks are growing faster than earnings, which we tend to think implies the opposite of dependence on earnings growth. This is all just one heaping load of wrong. Stocks don’t move one-to-one with earnings. They move most on the gap between expectations and reality, and expectations are so low that even a small earnings decline would be a positive surprise.
|By Swaha Pattanaik, Reuters, 05/18/2015|
MarketMinder's View: Folks, repeat after us: A “risk-free return” doesn’t exist. As finance theory dictates, if you want growth, you must take risk, and if you take risk, you also must accept the risk of loss. Securities like bonds tend to experience less short-term volatility compared to equities, but that doesn’t mean they can’t experience volatility or loss—even in the most stable fixed income securities, like German bunds or US Treasurys. Investing always comes with the risk of loss. What bond markets are doing today isn’t some unprecedented new era. It’s just bond markets being bond markets. For more, see our 2/12/2015 commentary, “Safe Haven Found! It’s in the Fiction Aisle.”
|By Chuck Jaffe, MarketWatch, 05/18/2015|
MarketMinder's View: What folks should really do is nothing, because as this shows, “sell in May and go away” is nothing more than an old wives’ tale. Try hard enough, and you can find “segments and indexes that justify it,” but even then: “No one can really say why it works. At best, that makes the theory little more than a coincidence; at worst, it’s horse-puckey.” Markets don’t move on seasonal adages, so we suggest not making portfolio decisions based on them. Nor, however, do we encourage anyone to trade in or out of stocks for comfort or to avoid feeling nervous. Trading on emotion is usually as problem-prone as trading on calendar pages.
|By Nikos Chrysoloras and Vassilis Karamanis, Bloomberg, 05/18/2015|
MarketMinder's View: In the latest update from Greece, Greek banks will max out on emergency central bank assistance in three weeks—though the ceiling could hit sooner or later depending on whether the ECB adjusts collateral requirements (and depending on whether depositors continue fleeing at the same rate, slow down or speed up). So the stopwatch is ticking down again, and with that comes all the requisite hype, handwringing and unconfirmed rumors—this time of the European Commission chief’s direct involvement in negotiations. Round, round and round they go, and where they’ll stop no one can know. Either way, markets have been trading on euro collapse fears for years now, and whatever results from this saga will carry minimal surprise power.
|By Ben S. Bernanke, The Brookings Institution, 05/15/2015|
MarketMinder's View: The discussion here of the potential implications of a recent bill that would astronomically increase the interest rates charged to troubled banks is spot on, and raises an often-overlooked point about the reason the Fed exists. Hint: It isn’t to keep inflation at 2% and maximize employment. “The lender-of-last resort concept is centuries old. Walter Bagehot, the English economist, discussed the lender-of-last resort policies of the Bank of England in his famous 1873 tract Lombard Street. Bagehot famously advised that, in a panic, the central bank should lend freely, at a penalty rate, against good collateral. By providing liquidity—for example, to banks facing runs by their depositors—the central bank can help end a panic and limit the economic damage. Indeed, the Federal Reserve was founded in 1913 in large part to serve as a lender of last resort and thereby reduce the incidence of banking panics in the United States.” Now then, we would quibble with the application of these lessons to 2008, in which the Fed and Treasury acted haphazardly and stoked panic, but the theory is spot on and for that we award points.
|By Ben Steverman, Bloomberg, 05/15/2015|
MarketMinder's View: Here is the good news: “The good news is that company stock is shrinking as a share of 401(k)s, so a bankruptcy or an industry downturn will hit many fewer American workers with that double whammy. Company stock holdings made up 11 percent of 401(k)s at the end of last year, data provided by Aon Hewitt show. That’s less than half their concentration in 2005 and down from more than 30 percent in the 1990s.” But, to us, the bad news is plans still have 11% of their balances invested in company stock. In our view, this number should be closer to zero. If you have a 401(k) or other plan that grants you shares of employer stock, we suggest you diversify that position as soon as company policy permits, regardless of your outlook for the company, our outlook for the company or Warren Buffett’s outlook for the company. Owning employer stock in a retirement account is a no-no. Period.
|By Greg Ip, The Wall Street Journal, 05/15/2015|
MarketMinder's View: Here is an excellent article making the uncommon point that few consider the actual costs of increased financial regulation in terms of lost credit, jobs, direct compliance costs and more. “The costs of financial regulation go beyond what banks and their shareholders must pay for more compliance personnel. By making credit more expensive and restricting its supply, new regulations can ding growth, especially at times like the recent past when the Federal Reserve can’t compensate by lowering interest rates, which are already near zero. One hint of these costs comes from a study by the Federal Reserve Bank of Richmond that found just four new banks started up between 2011 and 2013, compared with a yearly average of 100 from 2002 to 2008.”
|By David Rosenberg, The Financial Post, 05/15/2015|
MarketMinder's View: Wednesday, US retail sales posted a flat monthly headline read and only 0.1% m/m growth excluding auto sales, missing expectations of 0.5% m/m growth and triggering a tsunami of headlines fretting over the supposedly weak rebound from Q1’s US slowdown. This article, however, provides vastly underreported perspective: Namely, that consumer spending on services is surging, which isn’t captured in the retail sales report. Here is a snippet, but we suggest reading the whole thing: “Here’s the rub: the above-mentioned services that are not part of retail sales represent one-quarter of all consumer spending in the aggregate and they are rising at nearly a 6.5-per-cent annual rate — or double the overall trend in consumer spending, not to mention nine times the pace of headline retail sales.”
|By Niall McGee and David Berman, The Globe and Mail, 05/15/2015|
MarketMinder's View: Canada’s Finance Minister claims the Volcker Rule’s trading limits on banks buying foreign sovereign debt violates the free-flowing capital aspects of the North American Free Trade Agreement (NAFTA). And hey, maybe he’s right, but his predecessor made precisely the same claim to no avail, echoing the concerns of many foreign officials when Volcker was first debated. (Although the watered-down version Congress enacted isn’t as objectionable to them.) We are a little skeptical this goes anywhere anytime soon, but it’s an interesting debate and this is the best coverage we’ve found of it.
|By Edward Robinson, Bloomberg, 05/15/2015|
MarketMinder's View: Total peer-to-peer lending (P2P), as noted herein, is valued at $77 billion. That’s not $770 billion or $7 trillion. Most of the rest of the numbers are in the millions. While we would not turn you down if you wanted to give us $200 million out of the goodness of your heart, $200 million in economic or loan activity going poof is not a fundamental threat to markets. So even if P2P is a bubble ready to burst right now, the negative market implications are basically zero. It takes a negative shock in the multi-trillions—or about 50 times the size of P2P’s total value—to quash a bull market. Also, securitization—depicted here as a threat—was not the root of 2008’s financial panic. How FAS 157 (the mark-to-market accounting rule) required banks to account for illiquid securitized assets was. Banks wrote down over $2 trillion worth of securitized assets back then, writedowns that largely have proven excessive since then. That is a key distinction because held-to-maturity assets are not required to be marked to market any longer.
|By Andrey Ostroukh, The Wall Street Journal , 05/15/2015|
MarketMinder's View: Here is another hugely unsurprising outcome of falling oil prices: Russia’s economy contracted -1.9% y/y in Q1, and most economists aren’t expecting a big rebound. The Russian budget being nearly 50% funded by the Energy sector, a 50% whack to oil prices was always going to sting a little bit.
|By Ben Leubsdorf, The Wall Street Journal, 05/15/2015|
MarketMinder's View: Just as you shouldn’t judge a book by its cover, you shouldn’t judge this article by its title. Yes, many economists expect contraction when Q1 US GDP is revised later this month, and it might happen. But that says much more about GDP’s skew than it does actual economic conditions on the ground. “The key reason not to worry too much: The contraction reflected a drop in net exports related to the resolution of a labor dispute at West Coast ports, the firm said.” But, hey, if you read our site regularly (as you absolutely should!), you knew that over a week ago.
|By Lucia Mutikani, Reuters, 05/15/2015|
MarketMinder's View: Yes, headline industrial production did fall for the fifth straight month (by -0.3% m/m), but the drop seems to be due to energy, which is a) widely known and b) not a sign of broad economic weakness. Here is a picture. Non-energy industry output was basically flat and has trended sideways in recent months. Which isn’t great, but the services industry has been leading the expansion for some time now, so this isn’t shocking.
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Market Wrap-Up, Wednesday May 20, 2015
Below is a market summary as of market close Wednesday, 5/20/2015:
Global Equities: MSCI World (+0.0%)
US Equities: S&P 500 (-0.1%)
UK Equities: MSCI UK (+0.5%)
Best Country: Finland (+0.8%)
Worst Country: New Zealand (-1.0%)
Best Sector: Telecommunications Services (+0.5%)
Worst Sector: Consumer Staples (-0.1%)
Bond Yields: 10-year US Treasury yields fell -0.04 percentage point to 2.25%.
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.