Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Dissecting Three Media Themes on Oil

By, 12/19/2014
Ratings463.967391


Oil's all the rage in the media, but it doesn't take much to drill holes in their theories. Photo by Seth Joel/Getty Images.

Since peaking in June, US and global oil price benchmarks have nearly halved. West Texas Intermediate crude is down 47%. Brent 48%.

At the risk of stating the obvious, that is a substantial decline—catching many eyeballs in the process and spurring a wide range of theories regarding what the drop means for the US economy. Most are overstated, speculation or simply incorrect. Here are the top three misperceptions underlying much of the media chatter on the subject[i]. Being aware of these themes can help you sift through the noise.[ii]

Fisher Investments Editorial Staff
Behavioral Finance, Media Hype/Myths

Vexing Volatility

By, 12/18/2014
Ratings94.388889

December began placidly enough. The S&P 500 rose a hair in the first week. Global stocks fell a smidge. Emerging Markets (EM) stocks were flat. Brent crude oil was down, but West Texas Intermediate (WTI) crude was flattish. Then volatility—in both directions—jumped. Through Thursday, Brent and WTI oil prices are down -20% and -18%, respectively.[i] The Russian ruble, which hasn’t been so hot all year, fell -32% more against the dollar in the month through Tuesday, before bouncing back some.[ii] Greek stocks (as measured by the Athex) swung from a 7% gain at the end of December’s first week to a -15% loss, before rebounding some the last two days.[iii] Chinese equities sold off big. EM, global and US stocks sold off, falling 9.4%, 4.8% and 4.5%, respectively, through the recent low on Tuesday.[iv] The market volatility index known as the VIX surged, which also means the (bizarre) VIX of VIX surged. Then stocks bounced back big, with two major rallies back-to-back—which, in typical arbitrary form, the media dubbed the “two biggest up days since 2011.” That kind of sharp swinging can be tough to stomach. Especially when many headlines point to the more extreme swings (even if they’re narrow like Greece) and fret it  foreshadows what lies ahead for stocks broadly. However, we believe now is a time to steel your nerve. Markets could always get bouncier. There is no predicting what volatility will or won’t do. But reacting to volatility is a common investor mistake. Volatility doesn’t predict, and it isn’t contagious.

The presumption volatile oil prices, currencies or far-flung indexes are a prelude to volatility elsewhere operates on the notion broad, global markets are unaware of volatility elsewhere. However, equity markets—and the billions of investors trading in equity markets—don’t operate from so different a script from bond or commodity markets. Markets, folks, are markets. If most bond or commodity investors know something, equity investors likely know it, too. You can see this in how oil prices, Energy stocks and Energy bonds are all moving in the same direction. Concurrently! That’s markets near-simultaneously moving on this widely known information. If a market doesn’t reflect big volatility from another market, that isn’t necessarily a sign of complacency. It’s a sign the broad market impact may not be there. Perhaps it’s sector, country or company specific. Heck, gold has been in a bear market since 2011. It’s a commodity. Its volatility hasn’t been mirrored elsewhere. Same with iron ore. And copper. And natural gas, earlier in this cycle. Greek stocks fell massively through June 2012. Global stocks rose. EM stocks have been really bouncy and overall lackluster since 2011. Global stocks have been booming with relatively little volatility. There is no sign volatility is contagious.

And in markets, volatility doesn’t presage more to come. Stock markets—or any market—aren’t serially correlated. Volatile times don’t necessarily mean more volatile times ahead, and less volatile times don’t mean tranquil markets ahead. If that were the case, December wouldn’t look like it has thus far. Volatile markets also don’t mean smooth sailing ahead, and vice versa. That’s a reversion to the mean argument, which also presumes the past predicts future volatility. It’s inconvenient, but volatility is totally, completely random. And volatile. You cannot use volatility to predict anything about future volatility or market direction.

Fisher Investments Editorial Staff
Currencies, Media Hype/Myths

The Red Scare

By, 12/17/2014
Ratings264.615385

Russia is a mess. The ruble is in free fall. Russian stocks are sagging. Inflation is surging. The central bank is projecting a nasty 2015 recession. Russian “President” (read: dictator; strongman; would-be tsar) Vladimir Putin—fresh off being named Russia’s “Man of the Year” for the 15th consecutive year and finishing second to Janet Yellen in a poll seeking to identify the “Most Important Person to 2014 Capital Markets”—says a downturn is looming but will only last two years. While Russia likely has a tough time in the near future, this isn’t 1998. And, 1998 or no, we don’t see this as a real global economic threat.  

Here is the Reader’s Digest version of the ruble’s woes. At 2014’s start, one dollar would buy you 33 rubles, hovering around that mark until late June—not coincidentally at Brent Crude’s high for the year. As oil prices began falling in late June, the ruble started weakening (Exhibit 1). Falling oil prices aren’t good for an oil-dependent economy.

Exhibit 1: Brent Crude Price and Russian Ruble in 2014

Elisabeth Dellinger
Monetary Policy, Media Hype/Myths, Reality Check, Interest Rates

Considerable Wrangling Over Considerable Time

By, 12/17/2014
Ratings314.596774

“‘Considerable time’ is about yea big, so you know, we’ll hike in about 12 inches worth of time,” is not what Janet Yellen said at this moment in today’s press conference. Photo by Alex Wong/Getty Images.

It’s Fed Day, folks, and after months of speculating, the FOMC finally removed the phrase “considerable time” from sentence four of its policy statement’s paragraph on interest rates … and moved it to sentence five. (Then they gave you some wishy-washy econo-gobbledygook that Harry Truman would hate.) Instead of pledging to keep the fed-funds target rate near zero for a “considerable time” after quantitative easing ended, they believe they “can be patient,” which they say is “consistent” with that previous “considerable time” thing. Whew! Stocks jumped and headlines went into speculative overdrive, but we wouldn’t make much of it at all—it’s just evidence Fed head Janet Yellen is getting good at using a lot of words to say a lot of nothing, just like her predecessors. None of it tells us when rates will rise.

Fisher Investments Editorial Staff
Politics, Media Hype/Myths, Reality Check, Developed Markets

Now What?

By, 12/16/2014
Ratings184.638889


Shinzo Abe is all smiles after his party's latest landslide win. Photo by Bloomberg/Getty Images.

Japan hit the polls Sunday, and the results were a decisive boost … for the Japan Communist Party, which jumped from eight seats to 21. Oh, and Prime Minister Shinzo Abe’s Liberal Democratic Party (LDP) and partner New Komeito maintained their supermajority. This, we are told, gives Abe’s “Abenomics” reform agenda a “second wind.” Abe vowed to “push ahead” and “give top priority to the economy and bring the warm winds of economic recovery all over the country.” And even though Japanese stocks fell Monday, closing at a one-month low, optimists say it’s only because global growth jitters just barely, temporarily outweighed investors’ election cheer. As ever, we’re skeptical. Talk is cheap, and nothing has fundamentally changed on Japan’s political scene. Japanese stocks might get a temporary sentiment-driven boost as hopes for change resurge, but it seems highly unlikely Abe can deliver enough to meet investors’ high expectations. Longer term, we still think investors are best off outside Japan.

Before the election, Abe’s coalition had a 67.7% majority. Post-election, they’re up to 68.6%—they gained one seat while the lower house shrunk from 480 seats to 475. So for them, this election confirmed the status quo. For all the talk of the contest being a referendum on Abenomics, Abe’s stump speech looked a lot like his first two years in office: lots of general pledges to revive the economy, few (if any) specifics. No proposed legislation to cut agricultural tariffs, complete free trade deals or overhaul the feudal labor code. The Trans-Pacific Partnership—a multination free trade deal-in-progress—which was a cornerstone of his 2012 campaign, barely got a mention. Taxes got some attention, as Abe reiterated plans to delay next October’s sales tax hike and bring the corporate tax rate below 30% within a few years, but those are a drop in the bucket. More competitive corporate taxes would be a positive, but they’re far off, not yet law, and only a small step to improving Japan’s economic structure.

Fisher Investments Editorial Staff
Personal Finance

Hey, Hey, USA Stocks All the Way?

By, 12/15/2014
Ratings334.060606

Since 2010, US stocks have overall led foreign, at times by a fairly wide margin. And, as is relatively predictable, a common media theme has popped up—especially, and oddly, among some of the scions of allegedly passive investing—that you should shun foreign stocks and gooooooooooo USA! We love America, too! Apple pie! Football (the ovally kind)! But in our view, the notion American stocks—or any region or country’s stocks—are permanently superior falls prey to both recency and home-country bias. US stocks won’t outperform forever—as it always has, leadership will rotate. Thus, the added diversification global investing brings can be a significant benefit for investors over the longer term.

Domestic and foreign stocks come into and out of favor—no one category is best for all time. As Exhibit 1 shows, domestic stocks lead in some years, foreign in others. Recency bias[i] drives many folks to forget this. After all, many remember the whopper 1980s bull market but don’t realize it was much whoppier(?) for foreign than US stocks. The 1990s were US-dominated, true enough. The truncated 2000s bull? Foreign. Heck, in the latter part of the 2000s bull market, the common claim was you needed foreign  to get good returns . (The same allegedly passive investing scion even suggested owning some.[ii]) Some folks theorized foreign was superior after the global financial crisis, based on some weird notions about unemployment. Interestingly, US stocks took the lead shortly after.

Exhibit 1: US vs. Foreign Stock Performance by Calendar Year

Fisher Investments Editorial Staff
Media Hype/Myths, Commodities

Debunking the Junk Funk

By, 12/12/2014
Ratings84.625

Does junk bonds’ funk mean stocks are sunk? Some suspect so, as the US high yield corporate debt (i.e. junk bonds) market’s recent sell-off has prompted speculation other assets—namely stocks—are about to go on a bumpy ride. Folks fret bonds are sending a warning signal that stocks are turning a blasé eye toward. However, we don’t believe bond markets possess any special insight over equity markets—both look forward and discount widely known information. Though short-term volatility can hit any sector, region and/or market for any (or no) reason, in this case, one fundamental driver seems to be behind junk bonds’ bumps: falling energy prices. While those may hit some individual firms, we don’t think the macroeconomic or broad market impact is big enough to end the bull market. Or even totally negative.  

Junk bonds have had a nice run since the financial crisis ended, with one gauge—the Barclays US High Yield Index—rising more than 160% from its 2008 low through the end of 2013. 2014 was off to another nice start, adding 5.7% through September 1. But since then, junk bonds have hit some tougher sledding, falling 4% through December 11, with most of the decline coming recently. Here is a chart.

Exhibit 1: Barclays US High Yield Index YTD

Fisher Investments Editorial Staff
Others

The Fed Taketh, Congress Giveth?

By, 12/11/2014
Ratings144.428571

Bank rule changes have popped up from both ends of the National Mall in Washington, DC in recent days, arguably cutting in opposing directions. On one end, Congress, in its zeal to get out of town for the holiday break, duct-taped a tiny Dodd-Frank amendment into a massive bill seeking to keep government from shutting down (entertainingly dubbed the “cromnibus—continuing resolution and omnibus bill”). On the other, the Fed continued its quest to make the biggest banks (again) boost capital. Both grabbed a bunch of headlines and even some punditry flak. But these are both widely expected moves—not surprises for good or ill. They may create some winners and losers, but they don’t create big headwinds for Financials stocks or markets overall.

First, the Dodd-Frank amendment—your typical “we can’t ever pass this on its own, so we’ll duct-tape it to something essential and see what happens” rider. The amendment would water down a Dodd-Frank provision requiring banks to push some derivatives trading to non-FDIC-insured units. The logic underpinning the rule goes like this: Derivatives are “risky,” some institutions that received bailouts in 2008 had some derivatives blow up, and moving them out of government-insured units keeps taxpayers off the hook for banks’ risky behavior. Banks have long hated this, arguing it impedes flexibility and jacks up operating costs unnecessarily—and decreases oversight (and therefore increases risk) since non-FDIC-insured units get fewer government eyeballs.

Ergo, the rider to water it down. Banks are happy. Politicians and pundits seeking to prevent another 2008 less so. In our view, the change is really a whole lot of nothing. It probably does reduce banks’ costs incrementally, but the added flexibility is likely overstated. Most swaps (almost 95%) were still allowed to stay in-house—interest rate swaps, foreign exchange and cleared credit derivatives were never pushed out. All things banks use for hedging normal operations. Only equity and commodities derivatives, uncleared credit default swaps and so-called structured finance swaps had to move. Under the proposed change, only structured swaps used for hedging and risk management get a reprieve. Which seems logical and incremental—the net notional value outstanding is tiny. Plus, all that shifting doesn’t change much from a bailout standpoint. Non-bank subsidiaries could still get government support if the Fed deems necessary for the good of mankind. Besides, the push to move certain activities to a subsidiary as a protective move is untested theory that largely presumes a parent company would be totally unaffected by the goings on. So this is the elimination of a rule that wouldn’t have much impacted 2008 anyway.

Fisher Investments Editorial Staff
Media Hype/Myths, Politics

The Greek Gambit, Redux

By, 12/10/2014
Ratings384.342105

Is the euro crisis back?

Did it ever leave?

Those were two common sentiments in the press Tuesday in the wake of a broad selloff across the continent, with Greek political drama seemingly at the nexus. The Athex Composite (a capitalization-weighted gauge of 60 stocks listed on the Athens Exchange) closed the day down nearly -13%—that is not a typo; there is no missing decimal point. Many headlines shouted over what amounts to the index’s biggest single down day since 1987, which is really saying something for Greece, considering the harrowing -91% (also not a typo) bear market in the Athex from October 31, 2007 through June 5, 2012. The big volatility seems to have stoked fears of a renewed eurozone crisis, with potential global implications. In our view, though, there is little evidence substantiating the fear.

Fisher Investments Editorial Staff
Emerging Markets, Currencies, Media Hype/Myths

Some Solace From a Quantum of Fear

By, 12/09/2014
Ratings353.685714

The most powerful, destructive piece of paper in the world? Photo by Elisabeth Dellinger. And that is her money, so keep your grubby mitts off it.

Here is example #3934823895 of why jargon is evil: “This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets.” We pulled the sentence from the Bank for International Settlements’ latest quarterly report, where it was tucked at the end of a passage droning on about monetary policy, volatile markets and the strengthening dollar. These all imply “more than a quantum of fragility” in markets today. And we don’t know what that means! Because definitions of “quantum” as a noun include all of the following:

Fisher Investments Editorial Staff
US Economy

Now Hiring: Reasons to Be Optimistic

By, 12/08/2014
Ratings284.339286

All eyeballs seemed glued on the US Bureau of Labor Statistics (BLS) last Friday, eagerly awaiting the November US Employment Situation Report, more commonly known as “The Unemployment Report.” Financial media had countdown clocks ticking away the seconds to 8:30 a.m. (EST), when the data are publicly released. TV networks had a guessing game of folks staking out numbers, with most basing their guesses loosely on the consensus estimate that nonfarm payrolls would rise by 230,000 new jobs. But when the number hit, it blew them all away: 321,000 new jobs in November , the  record 50th straight month of growth. The unemployment rate held steady at its postwar average, 5.8%. Media reaction was uncharacteristically sunny: The recovery is finally hitting home! Growth is finally showing up in the “real economy,” a newfangled ray of sunshine for Main Street. And hey, it is positive news! But the cheery reaction seems to treat the good news as if it’s, well, new. Yet these late-lagging data points merely confirm what we’ve long suggested: The US economy is far stronger than most folks appreciate. For investors, basing a rosier outlook on lagging indicators like job growth isn’t so sensible, but more forward-looking and coincident data suggest a positive outlook is justified either way.

As we’ve said before, employment tends to lag broader economic growth —in some cases by many months . It can be dangerous for investors to track the labor market closely. Stocks look forward, and if your outlook hinges on lagging indicators, you could miss cyclical changes. But beyond the jobs report, other recent data support the notion the US is growing nicely. See both exports and imports rising (1.2% m/m and 0.9% m/m, respectively) in October. Headlines cheered a falling trade deficit (something that isn’t a threat), but we’d suggest the real applause should be for rising total trade (exports plus imports). Rising total trade shows healthy demand for our exports abroad, and healthy demand in general at home. Elsewhere, the Institute for Supply Management’s (ISM) November purchasing managers’ indexes (PMI) for manufacturing and services showed continued expansion. Manufacturing hit 58.7, a bit lower from October’s 59 reading but still well above 50[i]. Services rose to 59.3, above the prior month’s level of 57.1. October consumer spending ticked up 0.2% m/m, extending its long-term rise. And none of this is new, as Exhibits 1 through 5 show.

Exhibit 1: US Total Trade

Fisher Investments Editorial Staff
GDP, Reality Check, Media Hype/Myths

No, China Is Not Number One.

By, 12/05/2014
Ratings664.083333


Who's number one? Photo by Wesley Hitt/Getty Images.

Here is a newsflash that some in the media latched onto Thursday, churning out headline after headline:

According to the International Monetary Fund (IMF), this year China’s economy will be bigger than the US’s, $17.6 trillion to $17.4 trillion.

Fisher Investments Editorial Staff
Taxes, Deficits

The UK Might Do Some Things to Taxes and Spending

By, 12/04/2014
Ratings104.25

UK Chancellor George Osborne leaves 11 Downing Street to deliver the Autumn Statement. Source: Getty Images.

UK Chancellor George Osborne delivered the annual budgetary theatrics known as the Autumn Statement  on Wednesday, and depending on your point of view, this package of pledges and fiscal tweaks that may or may not make next year’s actual Budget [i] was a) an austerity nightmare or b) a supply-side economic reform miracle with an unfortunate side of bank bashing. Ah, ideology. In reality, though, it’s about what you’d expect for a government’s last fiscal hurrah before general election: 108 pages of charts, bullet points, tax tweaks and spending plans that create a few winners and losers, strike a populist note and overall do a whole lot of nothing. Whether you think these plans are a blessing or curse, the likely economic and market impact here is small.

Fisher Investments Editorial Staff
Forecasting

Priced Targets

By, 12/03/2014
Ratings484.15625

In the wake of oil’s recent plunge, analysts’ new favorite pastime seems to be attempting to pinpoint the bottom. These types of short-term, myopic forecasts are a loser’s game—no one (to our knowledge) can actually identify the very bottom or top for commodities, stocks or anything else with any repeated precision.[i] Yet this has never stopped sell-side research analysts from issuing recommendations with a price target, a practice that is largely noise distracting investors from more important market trends.

Not all investment analysts are the same—in fact, there are two major categories in the industry. Buy-side analysts, who work largely for money managers or funds and analyze with the intent to guide investment decisions the fund or firm may actually make. And sell-side analysts, who tend to work for brokerage houses. The latter are probably best known for rating stocks, setting and adjusting price targets and the like. They slap a buy/sell/hold rating on it and tell you how high or low they think it’ll go. Which sounds like very actionable help!

Price targeting provides what we’d call an “aura of precision”—something that has the appearance of real, hard analysis, but is actually just a guess. Consider: In this industry, you’re a legend if you forecast broad market direction right about 60%-65% of the time. What’s the likelihood an analyst nails a specific price? And are many investors, media types or others actually keeping score? For example, we found few articles weighing the simple fact few oil analysts calling a bottom now forecasted oil’s recent fall. So how useful are these new targets anyway? It’s plain and simple—no one holds a crystal ball. But this is the way the business operates the world over. We aren’t hating the player, we’re hating the game.[ii]

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Fisher Investments Editorial Staff
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Dissecting Three Media Themes on Oil

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Now What?

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Global Market Update

Market Wrap-Up, Thursday Dec 18 2014

Below is a market summary (as of market close Thursday, 12/18/2014):

  • Global Equities: MSCI World (+2.0%)
  • US Equities: S&P 500 (+2.4%)
  • UK Equities: MSCI UK (+2.0%)
  • Best Country: Norway (+4.9%)
  • Worst Country: Singapore (-0.2%)
  • Best Sector: Information Technology (+2.8%)
  • Worst Sector: Telecommunications (+1.4%)
  • Bond Yields: 10-year US Treasurys rose .07 to 2.21%.

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.