Today's Headlines

By , Bloomberg, 10/31/2014

MarketMinder's View: So we have this sneaking suspicion that these moves—¥10 trillion more in “quantitative and qualitative easing” (QQE) and boosting the national pension fund’s equity allocation—are coordinated, as Shinzo Abe sought a buyer for all those bonds he’s about to sell. But aside from that! These moves clearly stimulated sentiment, but they likely won’t stimulate actual output or Japanese stocks. The pension thingy has been telegraphed nearly two years now, and it would be bizarre if markets hadn’t already (mostly) discounted it. As for QQE, it was a negative at ¥70 trillion annually and is still a negative at ¥80 trillion. It hasn’t done anything but boost bank balance sheets and flatten the yield curve.

By , The New York Times, 10/31/2014

MarketMinder's View: After deliberating for a couple years, the BoE finally set the leverage ratio for UK banks. For most banks, the minimum will be 3% (capital to total assets, not risk-weighted) by 2018. The biggest banks will have a higher threshold (unspecified, but estimated at just under 5%) and earlier deadline (2016). Most expected tougher, but this makes the BoE a touch more flexible than the Fed. The biggest banks are also pretty near compliant already and should be able to get there in time without unplanned capital raises. As ever, we don’t think this spells the end of bank failures—you can’t de-risk finance!—but it shouldn’t be a huge headache either. Considering this has been in the cards for years, banks (and markets) have had plenty of time to prepare.

By , The Telegraph, 10/31/2014

MarketMinder's View: Not just World War I bonds! (And actually they’ll still have about £2 billion in open-ended WWI debt outstanding after this.) This also closes the book on—wait for it—the  taxpayer bailout of the South Sea Company in 1720. And you thought TARP took too long! Her Majesty’s Treasury is also paying off debt used to fund Irish famine relief in 1847, the Napoleonic Wars and the Crimean War. All of which helped ratchet UK debt-to-GDP up to nosebleed levels. And they’re just now paying it off! (And not even paying it off, because they’re probably rolling it over to lower-yielding gilts—this is just smart financial management.) Ladies and gents, if you ever needed proof high debt doesn’t doom, this is it. (Also: They don’t make posters like they used to.)

By , Bloomberg, 10/31/2014

MarketMinder's View: The theory here, of course(!), is that that markets can’t get enough cowbell quantitative easing (QE). However, the market has known since May 2013 US tapering was approaching—and even a reality at the end of 2013. Yet stocks went up a lot. The correlation shown in the chart included is not convincing. There was a little matter called “The Global Financial Crisis” that hit in 2008 that made the chart look like that. It was not the end of Japan’s 2001 – 2006 QE, which occurred two years before the bear hit.

By , MarketWatch, 10/31/2014

MarketMinder's View: So, this seems a lot like a longstanding bear doubling down on an earlier call that hasn’t materialized. But can we share a little insight about the “three components” this “leading indicator” the call is based on—the “CCT”?

  1. “The strongest component is the duration of buying versus the duration of selling. A healthy bull market sees mostly buying, indicated by the NYSE tick.” But wait. There is a buyer and a seller in every single transaction, forever and always. So, whaaaaaaaa?
  2. “A second component of the CCT focuses on the NYSE “big block” buying and selling in isolated segments of time. This is different than the duration component, as it measures isolated situations of what fund managers are doing. A strong bullish market has numerous big blocks of buying. A print on the NYSE tick in excess of +1000 signifies fund buying by numerous entities, which accompanies a healthy bull market.” So no managers sell big blocks when they expect a bear? No fund managers are ever wrong and buy into a bull? Evidence like 2000-2 suggests that is flat wrong. Further, why is the NYSE the only market cited? The US is dotted with trade venues. What if the fund—as most do—uses a dark pool?
  3. “A third and final component is the cumulative number of the NYSE tick. Each day I record the amount of total plus tick, less the amount of minus tick, on the NYSE. A bull market has a tight correlation of a up day for stock prices corresponding to a plus day in the cumulative NYSE tick.” Not if market breadth is falling, which is typical in a maturing bull and has been ongoing all year. But again, why only look at the NYSE? This is not how the market functions.
By , Bloomberg, 10/31/2014

MarketMinder's View: We are not saying the tensions in Ukraine are over, but the payment deal between Ukraine and Russia should help alleviate one potential concern: Russia turning off the gas to Europe because of Ukraine siphoning it for its own use.

By , Quartz, 10/31/2014

MarketMinder's View: This is a mish-mosh of non-threats, late-lagging and widely known statistics and seemingly big numbers that are taken completely out of context. Here is a chart-by-chart rundown:

  1. Southern Europe’s Jobless Youth: Yep, unemployment among those ranging from high school sophomores to 24-year olds is high in Souther Europe. But that has been true since 2008. Why should it be frightening now? Especially when the overall figure is slowly falling?
  2. Japan demographics. This is another widely known factor that is a false fear. Demographics move too slowly to materially affect global markets or the economy. It is a structural shift of the sort markets adapt to easily.
  3. So this part mentions €136 billion in non-performing loans on EU bank balance sheets, but it fails to mention the eurozone banking system has assets in the tens of trillions. This is a pittance.
  4. Student loans are up. But scale is missing here, too. According to the New York Fed’s study, median student loan debt is $12,000—roughly the size of a modest car loan. And nearly three quarters of borrowers have less than $25,000 outstanding.
  5. Yes, the cost of college is rising fast, which is largely a government issue created by too much money chasing a relatively fixed supply of accredited universities.
  6. China hard landing! This fear is over four years old. The bull market has continued throughout.
  7. The Ukrainian economy’s annual output is about $175 billion, 0.2% of global GDP. The country’s annual output would make it the 27th largest state by output in the US. There are individual stocks with bigger market caps. Apple, for one, is more than three times the size of Ukrainian output. Things are not good in the Ukraine, and we can sympathize with residents impacted. But this isn’t scary for the global economy or markets.
  8. Venezuela? Argentina? Small and widely known.
  9. Canada’s housing market isn’t much of a scary threat to the world, and the reality is the US housing market didn’t cause the financial crisis in 2008—FAS 157 and the government’s haphazard behavior did that.
  10. There is no deflation in Europe. There is disinflation, largely driven by falling energy prices. But also, slight deflation isn’t bad economically. See: The US industrial revolution.

Look, are there some negatives in the world? Yes. But there always are. Whether or not they should concern global investors is an entirely different question, one requiring a more sober analysis than this article provides.

By , The Telegraph, 10/31/2014

MarketMinder's View: Hiiiiiighway to the danger zone! Sorry, but Kenny Loggins’ Top Gun anthem really is the only thing you should take away from this or any of the 100 or so other warnings October’s teensy uptick in eurozone inflation suggests the region still risks deep deflation. Economies and consumer price indexes are not like Air Force jets piloted by Tom Cruise and Val Kilmer in 1986. They do not need jet fuel and bursts of energy to achieve lift-off, and they don’t crash like Goose if they fail to achieve a certain velocity. Inflation is always and everywhere a monetary phenomenon. The eurozone’s money supply is growing (anemically, but growing), and banks might just be a wee bit more comfy lending now that stress tests are over. Those are not deflationary monetary conditions.

By , The Washington Post, 10/31/2014

MarketMinder's View: Urrrrgggghhhhh. Ok so we got a giggle out of the headline, because anyone who watched TV in the 80s fondly remembers these commercials. But that’s about the only point we can award here, because the actual analogy is juuuuuuuust a bit outside. (Sorry.) Potential GDP, as we explain in today’s commentary, is nothing more than a forward straight-line extrapolation of the average growth trend. Of course the CBO would have calculated a higher number in 2007 than today. That doesn’t mean we’ve fallen and we can’t get up! Potential GDP, you see, isn’t a ceiling or even a “where we should be.” It is just an arbitrary thing cooked up by some dude in an ivory tower one day. It has zero real-world significance—it’s an academic fairy tale and nothing more. That we’re under it today doesn’t mean the last recession made us “permanently poorer.” It just means real life has economic cycles, while that fairytale straight line doesn’t. Also? The chart, which is lifted from Harvard Economist Lawrence Summers’ commentary here, is at least six months old, because it shows the US on a downswing. Guess what! We’re on an upswing now! Actual GDP is marching closer to fairytale GDP! (Also meaningless, but still, a counterpoint is a counterpoint!)

By , EUbusiness, 10/31/2014

MarketMinder's View: Regulators are regulators, folks. The only thing backing the ECB’s statement that its brand of regulation will be superior to national regulators is hubris. They’re all people, and people make mistakes. Having one regulator to rule them all should improve consistency in theory, but that hasn’t been tested yet—and the blueprint leaves them plenty of wiggle room to do as they see fit for whatever reason in the heat of the moment. In short: This move doesn’t crisis-proof the eurozone. As for the concerns having one institution oversee monetary and regulatory policy reduces transparency and potentially politicizes monetary policy, we too are inclined to raise a skeptical eyebrow, as we are fairly confident placing the monetary policy and regulatory committees in different buildings and having them meet at different times doesn’t amount to a firewall. People can just pick up the phone or send an email, ya know? That said, the US and UK aren’t much worse for the wear for having their central banks pull double duty.


By , The Wall Street Journal , 10/30/2014

MarketMinder's View: So all the eurozone needs is Germany to stop being a stickler with the ECB’s purse strings, allow various “unconventional stimulus programs” and the region will be back on a sustainable path of economic growth? Well that’s simple! After all, we saw how fiscal and monetary stimulus returned the “economic powerhouse” label back to Japan. Errrrr. Wait. Japan remains in an economic malaise despite having the most aggressive monetary easing in the developed world and repeat fiscal stimulus. So maybe it isn’t so simple? Besides, most of the austerity in the eurozone has been incremental tax hikes, not huge spending cuts, so the German approach doesn’t really seem to be dominating the landscape. Heck, many nations missed deficit targets in recent years. We would suggest the structural reforms this article downplays plus a good solid dose of deregulation and less shifting rules around banking would probably do more over time than allowing France to spend a wee bit more.

By , The Wall Street Journal , 10/30/2014

MarketMinder's View: As this piece nicely illustrates, fears that falling oil prices will put the US’s spectacular energy boom at risk are overwrought, as many firms can remain profitable at even lower prices. That isn’t to say some companies aren’t feeling pain, though—smaller companies drilling in areas with higher costs may need higher prices to break even. But it will take time for that effect to be truly felt, and it seems unlikely (as of now) to really hit the US’s largest shale fields, like the Bakken and Eagle Ford. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?

By , The Wall Street Journal , 10/30/2014

MarketMinder's View: Though many have extolled the Fed’s quantitative easing (QE) program as a success, this take is sensibly skeptical. For one, the Fed’s bond buying may be over, but its balance sheet isn’t about to be wound down any time soon—QE’s effects will remain for a while. And two, though some point to the US’s lower unemployment and faster economic growth compared to Europe as evidence of QE’s effectiveness, this is a misleading comparison. US growth (and hiring) actually picked up as slower bond buying became a reality. Additionally, consider these two counterpoints: Japan and the UK. Japan used QE from 2001 to 2006, and yet trailed most developed nations’ growth and market returns over that period. It is also employing it on a vast scale (relative to GDP) today, yet the economic outlook is murky at best. Second, UK growth improved after it stopped its QE program—which seemingly corroborates the US’s acceleration when tapering neared. Finally, loan growth and economic growth are slow in this cycle—which is supported by roughly a century of theory stating that the money supply and yield curve are keys to growth. QE disavowed those lessons, instead fixating on low rates to spur demand, supply be damned. All in all, QE’s negatives seem to outweigh its positives.

By , Associated Press, 10/30/2014

MarketMinder's View: First, the data: Q3 US GDP rose at an annual rate of 3.5%, led by consumer spending, exports and business investment. Wheeee! But before getting too high off this growthy-sounding number, a caveat—this is the first estimate of Q3 GDP. The first estimate of Q1 2014 GDP initially showed 0.1% annual growth, but that has since been revised to a -2.1% annual contraction. Now we aren’t trying to be a wet blanket about Q3 GDP—it could get revised higher like Q2 GDP was (first estimate of 4.0% to current estimate of 4.6%). But for investors, this backward-looking figure merely confirms what stocks have already moved on—the US economy is growing nicely, a leader in the developed world.

By , The New York Times, 10/30/2014

MarketMinder's View: Well, we doubt it will be the perfect test, which would have to weigh costs against benefits. Fraud will and does happen, Sarbox or no. Markets dealt with that risk for generations before Sarbox passed in 2002, and the fact is fraud was already illegal. As the article sensibly notes, “One reason Sarbanes-Oxley isn’t used more often may be that it overlaps with older statutes that prosecutors are more familiar with and that have been tested in court. The reform has also pushed companies to create procedures that require low-level employees to tell chief executives or chief financial officers that financials are up to snuff. That makes it tough to prove higher-ups knew of inaccuracies.”

By , The Wall Street Journal, 10/30/2014

MarketMinder's View: Here’s a fun way to see words, words, words don’t make for clearer (or better) monetary policy. Which isn’t that bad in the sense unclear and vague “Fedspeak” (as perfected by former Fed chair Alan Greenspan) keeps investors from gaming the next monetary move and doesn’t put central bankers’ credibility at risk if they decide to change their minds, which human beings tend to do. Words from the Fed often equate to obfuscation, a point investors would be well served to keep in mind.

By , The Economist, 10/30/2014

MarketMinder's View: This article posits essentially three questions about quantitative easing’s (QE) legacy: did it work?; did it have unacceptable side effects?; was the Fed right to stop? The argument here says: yes; not really; maybe. Here are our answers: no; yes; yes. When you consider that loan growth took off after the Fed began tapering its QE program, it seems clear there may be significant unintended consequences that this article doesn’t account for. Here is a tip to interpreting monetary policy: If all the article discusses are interest rate levels, the thesis may well be off target. After all, we never questioned whether QE would be a force contributing to lower overall interest rates, just that this isn’t proof money was easy, inflation boosted and growth stimulated. Increasing the money supply would do all four of those things, but that requires banks to make loans, which QE discouraged. Yes, low rates may encourage businesses and individuals to try to borrow. However, this ignored banks’ role in the borrowing relationship—thanks to a flatter yield curve and smaller rate spread caused by QE, banks had little incentive to lend to anyone but the most creditworthy. Why take on more risk when the payoff was so little? Now then, we do agree the risks of hyperinflation and a bubble were overstated, but that is largely because this program was never stimulus in the first place.

By , The Wall Street Journal, 10/30/2014

MarketMinder's View: With all the negative sentiment surrounding the eurozone recently, stories like this are overlooked—Spain is estimated to have grown 0.5% q/q (2.0% annualized) in Q3, its fifth consecutive quarter of growth. This suggests reality, while not wonderful, is better than many investors believe. That gap is fuel for continued bull market ahead, as folks gain confidence when their fears don’t materialize.

By , The New York Times, 10/29/2014

MarketMinder's View: An impressive collection of misperceived data and theories about the Fed’s quantitative easing (QE), in pictures! We’ll go chart by chart, for your convenience.

Chart 1—Fed Balance Sheet: Yep, it’s up a lot. The taper is also not going to bring it down, as they intend to reinvest maturing principal and no bonds are being sold. The discussion here is accurate.

Chart 2—Mortgage-Backed Securities: Yep, they bought ‘em.

Chart 3—Corporate Bond and Mortgage Rates: Yep, they’re down. Though, we’d note that corporate bonds have not been targeted outright by QE.

Here is where we get wackier.

Chart 4—The Cyclically Adjusted P/E Ratio (CAPE) is at Pre-Bust Levels: It is, but this has next to nothing to do with QE, is a poor measure of valuations and isn’t a timing tool for investing. Since it blends together earnings from the last decade, it’s currently more inflated by the recession’s slashing the “E” in CAPE than anything with QE. Stocks aren’t expensive by historical standards using better measures, and even if they were, they could still rise.

Chart 5: Inflation. QE, particularly QEs 2 and 3, is deflationary. It weighs on long-term interest rates, narrowing the spread between short- and long-term yields. This spread is a key determinant of banks’ lending profits. More narrow equals less profitable, and as a result, less plentiful lending. Those low rates discouraged loan supply. Without lending, the Fed is powerless to boost money supply and inflation.

Chart 6: Potential GDP and GDP: GDP is an imperfect reflection of the economy, and potential GDP is an imperfect extrapolation of the trend of this imperfect reflection. None of this is telling.

Chart 7: Jobs follow growth, growth has been slow in this cycle, in part due to QE.

Loan growth in this cycle has been the slowest of any on record. Growth has been too. That is not coincidence, and QE is partly to blame, not laud.

By , The Telegraph, 10/29/2014

MarketMinder's View: An enjoyable read, but the thesis here is off and the evidence less convincing when you put it under a finer lens. The Riksbank cut rates to zero because it seeks higher inflation, which is the primary role of most central banks the world over. They didn’t explicitly target a weaker currency, the aim of a currency war. But even if they did, you don’t win a currency war—you win and lose, because import prices rise, impacting businesses’ and consumers’ bottom lines. Finally, the notion, “The Riksbank faces an acute dilemma, forced to pick between the competing poisons of deflation or an asset boom” is great writing but off-target analysis. For one, they weren’t using rates to control housing prices (the perceived asset boom), they were using macroprudential policies (their own flavor of wrong). But that is also a false either/or. The debt to disposable income figures cited here as “jumping” from 120 percent to 175 percent over the past twelve years as evidence of the bubble amount to a compound annual growth rate of less than 2.5 percent per year. That’s it folks, 2.5 percent. Never mistake high quality wordplay employing a certain dramatic flair for fact-packed analysis.

By , The Wall Street Journal, 10/29/2014

MarketMinder's View: Full disclosure: We are not fans of technical analysis. But this article actually just completely argues against itself, illustrating why we don’t buy into the predictive quality of lines on a page. We are told by one devotee that, “Well, those two key technical markers having been hit, there isn’t much upon which traders can key, he said. ‘They are behind us, leaving no live formations to key off of. That and support being light means that we should be prepared for the expected volatility in the day’s final two hours.’” But here is the thing: The rest of the article shows you that technical analysis didn’t foretell anything that has happened over the last two weeks or even longer. But now we’re in uncharted territory. What were we in then? Here are the facts: Technical analysis relies on devotees’ interpretation of past price levels. But stocks aren’t serially correlated, so you can never predict returns by “drawing lines on charts and extrapolating them into the future.”

By , The Telegraph, 10/29/2014

MarketMinder's View: This is a “timebomb” with an exceptionally long, slow-burning wick to ignite what could be a big ol’ dud anyway. The argument is similar to the one offered in the US about the government’s “unfunded liabilities”—long-term forecasts and projections of the impact of entitlement spending on the public debt. Suffice it to say, we strongly doubt any of the forecasts here for what UK debt-to-GDP will look like in 2061 are very reliable. But even if they are, and their worst case scenario comes to pass, we’d like to point out Britain has had debt exceeding 200% of GDP before—when it had an empire the sun never set on. Japan, by the way, has 220% debt-to-GDP right now. Now Japan isn’t exactly a shining economic star, but it isn’t because of their debt—the neo-mercantilist, anti-competitive tendencies create that issue. Britain doesn’t have those factors. Besides, we’ve seen many nations reform pensions and other benefits in recent years, and there is no reason the UK couldn’t do so at any point in the next 47 years if it were necessary to avoid a potentially bad 2061.

By , The Wall Street Journal, 10/29/2014

MarketMinder's View: Sorry, but we struggle to see why this is news at all. Of course it doesn’t end the concept. It isn’t as though the Fed is actually acknowledging the policy was wrongheaded and publicly lambasting Ben Bernanke for championing it. They are merely ending a (wrongheaded) program designed to stimulate based on the fact the recession ended 20 quarters ago. (!) But here is something to keep in your back pocket: If, and this is an if, we see a recession with deflation and the Fed launches quantitative easing, we would suggest that is a potential complication, not a benefit. Oh, and also, we are confused as to why the Fed thinks a “worst-case scenario” is one “in which the forecasts for growth and inflation were very poor and officials had already exhausted other tools to spur the economy.” We would suggest an actual deflationary depression a la the 1930s is more like the worst-cast scenario than a forecast of poor growth. And quantitative easing (QE) would not have helped then, as driving down long rates while hiking short-term rates amid an inverted yield curve isn’t likely to be a plus.

By , Bloomberg, 10/29/2014

MarketMinder's View: For one, no one has announced an “unwinding” of quantitative easing (QE), which would involve the Fed selling bonds on its balance sheet or not reinvesting securities when they mature. This isn’t part of the taper, it would be a separate, additional announcement. But also, this presumes QE boosted asset prices a bunch, which isn’t really proven using factors like price-to-earnings ratios, because they are only slightly above average presently. Soooooooooo? Last, if it is the effect—higher long-term interest rates—that some presume will tank stocks, why did they go up last year amid rising long rates?

By , Bloomberg, 10/29/2014

MarketMinder's View: Well, this is an upturn from recent months’ falling output. And it joins Japanese retail sales, which bounced in a report published yesterday. But it is premature to say this represents anything other than a dead cat bounce in light of April’s potential sales tax hike. After all, we just saw Japanese businesses and consumers respond to incentives rationally in late 2013/early 2014 with a rush of purchases ahead of the prior sales tax hike. A very similar factor could be at work as this year winds down, barring Abe declaring clearly that he won’t enact the second hike.

By , The Wall Street Journal, 10/29/2014

MarketMinder's View: A slower pace of inflows into nontraded REITs doesn’t mean “investors are backing away” from them. That would be if there were net outflows, which isn’t the case here. That being said, in our view, nontraded REITs should be a nonthing or a non-holding in your portfolio, because they are merely illiquid, high-fee and nontransparent versions of traded REITs, which are fine. Suggesting these “as bond alternatives,” as the article notes some brokers did, in our view, is a mistaken notion. The purpose of a bond in your portfolio should be to buffer against market volatility in a way you can measure, using a saleable instrument. You can’t say any of those things about nontraded REITs because you can’t, well, trade them.

By , EUbusiness, 10/29/2014

MarketMinder's View: Well, it seems the US’s fight against individual income tax avoidance has gone global. In a new agreement, more than 80 nations (including Switzerland* after 2018) will exchange information on foreign nationals banking at institutions within their borders. This is basically an agreement in principle for a global FATCA, which basically eliminates the chance there is a big global backlash to the currently US-specific law. *Switzerland kinda sorta will join, as the article notes, its agreement to this deal was hedgy. 

By , The New York Times, 10/28/2014

MarketMinder's View: Whatever your view of income distribution, let’s be clear: The wealth gap isn’t due to anything the Fed has done, which presumes low rates disproportionately benefit the wealthy, as they own more stocks and we all know low rates are good for stocks (sarcasm alert). There is no real evidence things like quantitative easing boosted stocks. But the article here raises the sound points that the Fed attempting anything with respect to the wealth gap is a bigger risk than benefit, particularly since it is far outside their mandate. Again, whatever you think of income or wealth distribution, you don’t want government agencies skewing far outside what they are legally permitted to do. Disagree? Answer this: What if the agency were controlled by someone you categorically disagree with?

By , Bloomberg, 10/28/2014

MarketMinder's View: Recently, there has been a lot of debate over whether falling oil prices will hit US oil production, principally tied to shale producers. The logic here is unconventional oil production has higher costs, and therefore needs higher oil prices to retain profitability. And that is true, to an extent. However, before people jump to conclusions, we’d suggest considering the following salient points this article raises: Price swings aren’t unusual. “The oil industry already has demonstrated it can generate solid profit at lower price.” Firms are becoming more efficient. Finally, we’d note prices typically must stay low for some time to hit production. We aren’t saying they won’t, but it seems premature to presume they will right now tied to a couple months' big volatility.

By , The Wall Street Journal, 10/28/2014

MarketMinder's View: Yes, debt is rising. And the article even provides a fun factoid to illustrate that: “That [$5 million in gifts] covered the growth of the debt for less than six minutes.” But the article completely ignores something very important when it comes to government debt—is it affordable? And it is! The US doesn’t need big donations from citizens to finance the debt, because it is plenty affordable as is. And that is a good thing, because if we were Uncle Sam, we would not bank on getting big donations from civic-minded people. As long as the government can afford interest payments on its debt and has access to markets—something unlikely to change in the foreseeable future—the debt isn’t a real risk to the economy or markets.

By , Bloomberg, 10/28/2014

MarketMinder's View: Georgia’s ports—Savannah and Brunswick—are major hubs for US import activity, and the state has been reaping benefits: "Together, the two ports contributed $32.4 billion to Georgia’s economy in 2011, or 7.8 percent of the total, according to the most recent University of Georgia study. They were responsible for 352,146 jobs, including 37,000 in Savannah’s home Chatham County." Rising imports just aren’t job or growth killers. Next time you read imports detracted from economic activity, remember this article.

By , Bloomberg, 10/28/2014

MarketMinder's View: Currency markets are no smarter than stock or bond markets. They are markets, and markets are markets. Period. Volatility in one is not predictive of moves in another. As an aside, the MOVE index (along with the other volatility gauges cited here) is quite flawed. Simple fact here, friends: Volatility does not predict future volatility, just as past performance does not dictate future returns. Period.

By , The Wall Street Journal, 10/28/2014

MarketMinder's View: Consumer confidence surveys are a tiny snapshot of sentiment—in this case, suggesting optimism is growing—but that’s about it. They don’t predict stocks, the economy or consumer behavior since they reflect how people felt at the time they took the survey, not what they’ll actually do. And how they felt has a tendency to be impacted by recent economic news and market action. So it might be a bit of a stretch to say the reading “should be a welcome sign for retailers.”

By , USA Today, 10/28/2014

MarketMinder's View: Speculation continues surrounding rate hike timing and the end of quantitative easing (QE). Will the Fed choose to keep the “considerable time” language intact? Heck. We don’t know. But it doesn’t really matter either way—central bankers’ speak is about as reliable as politician speak, which is to say, not reliable. Instead, we should assess their actions. And historically, the first rate hike in a tightening cycle hasn’t been materially bad for stocks. Also, all the QE / Taper Tantrum talk presumes this meeting is sneaking up on people, which it isn’t. The end of QE, should they follow through as expected by many analysts, would not be a surprise. (Nor is it a very big deal—it’s a positive step in a series of positive steps bringing deflationary, non-stimulative QE to a close.)

By , Bloomberg, 10/27/2014

MarketMinder's View: Evidently, the reason stocks have cooled is because the market has come too far, too fast relative to GDP. And while so-so growth was good enough then, the US economy will need to show far more mojo to boost stocks looking ahead. This thesis ignores a simple, fundamental truth: Stocks aren’t GDP. GDP is a rather flawed measure of total US output—private and public sector included—that does weird things like count imports (a measure of domestic demand) as a negative. Stocks are ownership slices of publicly traded companies—pure private sector. When you own a stock, you own a share in future earnings—not a future reading of one arbitrary econometric. Earnings have grown swiftly during this bull market and appear poised to keep doing so.

By , Bloomberg, 10/27/2014

MarketMinder's View: Brazilian stocks are down big since markets realized Dilma Rousseff would likely win a second term as President, but sentiment is probably too dour. Rousseff’s recent rhetoric and actions (including replacing Finance Minister Guido Mantega) suggest she is moderating, which could provide markets some relief as her second term kicks off. She will have plenty of chances to re-earn the private sector’s confidence. The political reforms outlined here would be an incremental positive on that front, should they come to fruition.

By , The Wall Street Journal, 10/27/2014

MarketMinder's View: The thesis here? Volatility ain’t over. Why? Stocks aren’t cheap, central bankers seem less reassuring about monetary policy, the eurozone is growing slowly—so is China—and commodity demand is slowing. But none of these are exactly new or unique fears. They are more or less the same darn fears lurking for most of this bull market.  Monetary policy globally needn’t be coordinated—and that actually seems like an end of US quantitative easing fear above all else, which is and has been off target, in our view. Stocks needn’t be “cheap” to rise, or else low valuations would regularly predict returns, and they don’t. The dour discussion of global growth here is just more of the same skepticism. In our view, that folks continue to bemoan such false fears suggests pockets of skepticism remain—and the euphoria typically seen at bull market peaks is still far away.

By , The Wall Street Journal, 10/27/2014

MarketMinder's View: Emotions are one of the biggest detriments (or perhaps the biggest) to many investors’ reaching their retirement goals. According to prospect theory, we hate losses almost two and a half times as much as we like equivalent gains, so it is easy to see how volatility can get the better of some folks. Perspective (as in numbers one and six) is a valuable thing. Also, not getting sucked into the short-term-ism by not following every wiggle too closely or focusing on your goals (numbers two and four) is key. But when volatility is high isn’t a great time to assess risk. You have to think about trade-offs, and you should be thinking about that pretty much always in investing. You must take some measure of risk to earn a return commensurate with your goals.

By , Bloomberg, 10/27/2014

MarketMinder's View: Initially, 25 banks were on the ECB’s naughty list, failing to meet the new regulator’s requirements. But the data were based on information as of 12/31/2013, and as we’ve noted, banks have been stingily raising capital all year. So instead of having to come up with at least €25 billion, they must come up with only €9.5 billion over nine months to fill the shortfall. One bank accounts for half of that. That’s a drop in the bucket compared to the eurozone’s aggregated balance sheet of more than €31 trillion. All in all, the best thing we can say about these is exams is they are over. This removes one source of uncertainty and could make banks a wee bit more amenable to lending. (Though we don’t expect an explosion of loan growth in the eurozone—other headwinds, like ECB quasi-QE remain.)


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Global Market Update

Market Wrap-Up, Thurs Oct 30 2014

Below is a market summary (as of market close Thursday, 10/30/2014):

  • Global Equities: MSCI World (+0.2%)
  • US Equities: S&P 500 (+0.6%)
  • UK Equities: MSCI UK (-0.7%)
  • Best Country: Denmark (+2.0%)
  • Worst Country: Portugal (-3.1%)
  • Best Sector: Health Care (+1.3%)
  • Worst Sector: Materials (-0.9%)
  • Bond Yields: 10-year US Treasurys fell .01 to 2.31%

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.