Fisher Investments Editorial Staff
Across the Atlantic, Investor Sentiment

Britain’s Boom Can Still Zoom

By, 07/29/2015
Ratings364.263889

The UK economy sped up in Q2, with GDP growing 0.7% q/q (2.8% annualized), powered by the mighty service sector and a North Sea oil rebound. Per-capita GDP surpassed its pre-recession peak, a nice (though backward-looking and arbitrary) confirmation of how far the UK has come since the crisis’s depths. All in all, the UK’s run as one of the developed world’s strongest economies continues. But someone apparently forgot to tell UK stocks, which trail most of the developed world and are roughly flat year to date. Some fret this is a sign of things to come, but stocks and the economy aren’t joined at the hip.[i] We suspect UK stocks are simply enduring a sentiment-driven wobble, and we think they’ll resume reflecting the isle’s strong fundamentals soon enough.

Economic fundamentals matter to stocks, but so do politics and sentiment. In the short run, sentiment can easily overpower long-term drivers. This is why bull markets have corrections. The UK’s economic and political drivers still look strong. Data and leading indicators remain largely upbeat, and Conservative Party infighting should promote gridlock, easing the risk of radical legislation—something stocks prefer. But sentiment is rocky these days. Investors worldwide are skittish over Greece and China, where domestic markets resumed sliding Monday. UK investors are further bogged down with rumblings over the Labour Party’s leadership contest and the eventual referendum on EU membership, which gave “Brexit” fears a jolt.

Neither issue is terribly relevant for stocks at the moment. The EU referendum is at least a year or two away, and PM David Cameron hasn’t even started renegotiating the UK’s role in the EU yet—and a new deal is a prerequisite for the referendum. Stocks move on probabilities, not possibilities, and the likelihood of “Brexit” is impossible to handicap for now. As for Labour leadership, euroskeptic leftist Jeremy Corbyn might have a whopping poll lead, but we’re skeptical UK polling has improved much since May’s election, and regardless of who leads Labour for now, the next election is five years away. Stocks don’t look that far out, and we rather doubt the UK goes all Syriza between now and then. But sentiment is tricky sometimes, and nervous headlines can weigh on stocks in the short term.

Fisher Investments Editorial Staff
Into Perspective

Plan B or B-Movie?

By, 07/28/2015
Ratings254.12

Greek PM Alexis Tsipras and former Finance Minister Yanis Varoufakis, in happier times. Photo by Kostas Tsironis/Bloomberg via Getty Images.

So Greece’s creditors are back in Athens to hash out bailout 3.0, and if the world were a boring place, the biggest headline would be that the EU/IMF/ECB “troika” added a fourth member—the European Stability Mechanism (ESM)—and therefore got a new name, the “quadriga.” But the world is not a boring place, and Monday’s Greek headlines read like a bad political thriller, full of intrigue and b-movie plot twists as details of Syriza rebels’ shenanigans emerged. Former Energy Minister Panayotis Lafazanis apparently wanted to raid the national mint, seize the central bank, arrest central bank Governor Yannis Stournaras and pivot toward Russia. Former Finance Minister Yanis Varoufakis hacked the general secretary of public revenues (GDDE, basically Greece’s IRS) in order to create a “Plan B” financial system in case of “Grexit.” And had revealed his plot to 84 financial industry bigwigs during a recorded conference call. Which inevitably leaked. Now opposition leaders are calling for his head, GDDE has launched an investigation, criminal charges might loom, and Syriza is hanging by a thread. With chaos mounting, early elections looking increasingly likely and quadriga officials overall pessimistic, this seems like a good time for a public service announcement: Greece’s third bailout is far from a done deal, and Grexit brinksmanship could easily return. However, Greece is just as much of a sideshow for global stocks today as it was two weeks ago, two months ago and yes, two years ago. We suggest steeling yourself against the noise in advance.

Fisher Investments Editorial Staff
Taxes, Politics

A Presidential Candidate Has Thoughts on Capital Gains

By, 07/27/2015
Ratings384.513158

Editors’ Note: Our discussion of politics is focused purely on potential market impact and is designed to be nonpartisan. Stocks favor neither party, and partisan ideology invites bias—dangerous in investing.

Last Friday, presidential hopeful Hillary Clinton announced her plan to fix “quarterly capitalism”—short-term thinking in board rooms and on Wall Street—and promote long-term investment. The reform’s centerpiece: raising high earners’ capital gains taxes on stocks sold between one and six years after purchase, theoretically giving firms more incentive to invest in the future instead of buying back stock to pacify short-term focused shareholders. The proposal has inspired debate, and we suspect it is only the first of many tax proposals we’ll hear throughout 2016’s campaign. Cutting through the noise and sociology to take an objective look at market impact is often difficult, but for investors, it is crucial—bias is deadly. So, setting aside ideology and partisan tilt, what should investors make of Clinton’s proposal? In short, we wouldn’t cheer or fear it. Not only is it way too early to handicap whether it becomes law, but tax changes have little relationship with market returns, and the potential impact on company behavior seems negligible. 

Clinton’s plan is the latest salvo in the buybacks vs. capex debate. A growing school of thought argues “shareholder capitalism” makes firms too focused on one quarter’s earnings, doing their utmost to boost the bottom line and satisfy shareholders with itchy trigger fingers. Many blame this for the rise in stock buybacks, arguing rewarding shareholders discourages R&D investment and other long-term endeavors, putting America’s economic dynamism (not to mention productivity, wages and hiring) at risk in the long run.

Fisher Investments Editorial Staff
Trade, Developed Markets

Japan: Rising Sun or False Dawn?

By, 07/24/2015
Ratings193.710526

Japan’s trade deficit narrowed in June, with exports jumping 9.5% y/y, the fastest rate in five months—causing some to cheer. But factoring out the weak yen, export volumes stagnated, which may turn those smiles upside down. This pretty much exemplifies Japan’s recent economic and political developments: On the surface, things appear better. Underneath, troubles remain. These trade data, combined with other recent weak economic data and middling economic reform progress, suggest reality isn’t likely to live up to investor optimism. With little fundamental support, Japan’s year-to-date outperformance is likely a mirage, and in our view, other regions of the world look more attractive for the foreseeable future.

What’s behind the values/volumes disconnect? Currency conversion. The yen weakened considerably over the last year, largely due to the Bank of Japan’s alleged monetary “stimulus.” When Japanese firms convert revenues earned abroad back to yen, they get a bump up. Export growth (in value terms) can boost some export-oriented firms’ profits.

However, don’t overstate this benefit. The weak yen makes imported goods more expensive, and many Japanese manufacturers import raw materials and components, including energy. Just as the strong dollar doesn’t doom US profits, the weak yen is not a panacea ensuring big gains in Japanese firms’ earnings. Iffy profit growth the last few years further illustrates this.[i] (Exhibit 1) Many investors underappreciate the offsetting effects of a weak or strong currency.

Fisher Investments Editorial Staff
Commodities

How Silver Lost Its Shine

By, 07/23/2015
Ratings943.941489

Photo by Chris Ratcliffe, Bloomberg Finance/Getty Images.

With all eyes on gold lately, some may wonder about silver. The story here, folks, is the same: Silver is oversupplied relative to demand, and it has paid the price. The silver craze was a short-lived bubble that burst four years ago and has continued deflating since.

Elisabeth Dellinger
Currencies

The Common Currency: Cure or Curse?

By, 07/22/2015
Ratings574.140351

This is a banknote, not a shackle. Photo by Banar Fil Ardhi/EyeEm via Getty Images.

Here, as best as I can sum up, is the popular argument against the euro: It is a straitjacket on southern Europe, robbing countries of monetary policy and forcing them to tackle debt through austerity instead of currency devaluations, dooming Greece (et al) to perpetual fiscal contraction, high unemployment and stagnation. Snazzy-looking charts try to prove the point by comparing GDP growth in euro and non-euro European nations since 2007, with euro-users losing. Pundits and politicians galore argue Greece’s ticket to happiness is a one-way ride on the drachma express. And maybe for Greece in the here and now that’s true, especially if “Grexit” took the path outlined by German Finance Minister Wolfgang Schäuble last week.[i] But the euro itself isn’t the root of economic evil, nor is it destined to fail. It is simply incomplete. Its benefits are many, and while it might take the eurozone years to decide what it wants to be when it grows up, countries in the bloc can do just fine in the meantime—with many opportunities for investors.

Fisher Investments Editorial Staff
Commodities

Gold: The Pyrrhic Hedge

By, 07/22/2015
Ratings814.061728

Gold is down.

Yes, we know, you don’t need to come here to find that pithy, to-the-point observation. That is all over the news, triggering a wide array of ruminations about what it all means. But the thing we find striking is that the media seems to think this is new, surprising, big news. It is none of those, of course, and we continue to believe gold has little-to-no place in a long-term investor’s diverse portfolio.

For years, gold has been a hot topic among investors. Newsletter writers hock it. Pundits and commentators speculate wildly on how high it will rise. Some even try to divine the true size of China’s unpublished gold holdings (in metric tonnes, of course). Yet for all the talk since 2009, owning gold versus stocks during this bull market has most often been the wrong move. That’s right, gold—something we’re often told has an inherent value[i]—hasn’t added value during most of this bull market.

Fisher Investments Editorial Staff
Others

An Earnings Season Replay?

By, 07/20/2015
Ratings503.73

It appears analysts have been slow to react to the lesson economics taught them just a few months back: The strong dollar may ding revenues, but it has some pretty big bottom line benefits, too. This was the lesson taught in Q1, when S&P 500 earnings handily beat too-dour expectations. It’s early, but with about 12% of S&P 500 companies having reported for Q2, the same is happening. Thus far, Q2’s earnings reality suggests profit expectations remain too low, possibly setting up more positive surprises going forward.

At the end of Q1, just before firms began reporting earnings for the quarter, analysts were dour, expecting S&P 500 profits to drop -4.6% y/y—down from +4.1% projections as the quarter began. The dour outlook was largely based on the strong US dollar, which many feared would materially dent both the quantity and value of US exports. A strong dollar makes US goods more expensive to foreigners, causing some to choose cheaper alternatives. And if US firms don’t adjust prices, a stronger dollar means lower revenues after conversion.

Yet the expected decline didn’t come—earnings ended up growing +0.8% y/y (+8.6% excluding the Energy sector). It appears analysts didn’t quite account for the fact the strong dollar means firms’ foreign-sourced input costs fall, too: labor, raw materials, components and transportation. In addition, while many fixate on weak oil prices’ potential impact on consumers, they miss the direct positive impact on producers’ profits—lower energy and shipping costs are an immediate boon for profits. All simple “on the one hand, on the other hand” economics Harry Truman probably would have hated.[i]

Fisher Investments Editorial Staff
Into Perspective, Across the Atlantic

Greece Gets Some Euros

By, 07/17/2015
Ratings314.193548

The deal everyone seems to hate is a step closer to becoming reality: Greece seems to have secured a short-term loan providing three months’ time to haggle over a third bailout. However, we sincerely doubt Greece is all of a sudden fixed and never to return to headlines. So use this opportunity to see that even as close as Greece was to exiting the euro lately, there isn’t evidence Greece poses an actual threat to the global economy.

Overnight Wednesday, Greek Prime Minister Alexis Tsipras managed to cobble together support from 229 of Parliament’s 300 members and pass the tough austerity measures required by the EU, IMF and ECB (the troika) as a precondition for a potential third bailout. To say this wasn’t exactly a broadly popular move is quite an understatement indeed. Violent protests erupted in front of Parliament. Thirty-two Syriza MPs voted “no,”[i] six abstained and one boycotted, leaving Tsipras with just 124 votes from his own coalition. Greek parliamentary procedures stipulate a government must secure at least 121 votes from its own bloc on major legislation to prove it hasn’t lost its mandate, so Tsipras was just four rebels away from a confidence vote. Many of the rebel MPs say they still support Tsipras and the government despite their rejection of bailout terms, and with a cabinet reshuffle underway, Tsipras should be able to hang on for the near term, but many suspect he’ll be forced to hold early elections sooner rather than later.

Meanwhile, the EU agreed in principle to provide Athens a €7.16 billion bridge loan from the European Financial Stabilization Mechanism (EFSM)—the EU’s (not eurozone’s) temporary bailout fund designed on the fly in 2010 to deal with Greece, Portugal and Ireland. As an arm of the EU, this fund includes contributions from non-eurozone nations like Britain and Denmark, both of which have ongoing notable anti-Brussels movements. This was thought to be a hurdle initially, but the eurozone effectively guaranteed non-euro countries they won’t be exposed to loss, winning their support.

Fisher Investments Editorial Staff
Emerging Markets, GDP, Into Perspective

China Hits the Target

By, 07/16/2015
Ratings374.608108

Chinese GDP officially grew 7.0% y/y in Q2, matching Q1’s pace and the government’s target and beating expectations for 6.9%. But the good news hasn’t quieted those long-running “hard landing” fears. They just morphed again, this time into jitters over how mainland stocks’ crash will impact China’s economy from here on. Wild Chinese markets or no, we wouldn’t be surprised if China’s economy continued its modest slowdown for the foreseeable future, but a hard landing still appears highly unlikely—we think investors can still expect China to contribute meaningfully to global growth.

China skeptics claim the trouble in A-shares (which we discussed here) could hurt economic activity on two fronts: financial services and consumer spending. The consumer spending fears center on the supposed “wealth effect”—the belief rising stock markets make folks feel wealthier, driving spending higher, while falling markets make folks feel less rich and thus inspire them to tighten the purse strings. The financial services angle is a little more straightforward: Trading volumes jumped during the mania, boosting financial firms’ growth, and falling back to more normal trading volumes could drive a setback in the industry, hurting China’s service sector—the sector officials are counting on to offset the continued slowdown in heavy industry. There is probably a kernel of truth here, though the impact likely isn’t as great as feared. The consumer spending angle, however, doesn’t wash.

Industry-level data for China’s Q2 GDP aren’t yet available, but analysts crunched the numbers for Q1 and found financial services contributed 1.3 percentage points to China’s 7.0% headline growth rate, way up from its 0.7 percentage-point contribution in all of 2014 (when China grew 7.4%). Considering service sector growth accelerated sharply from 7.9% y/y in Q1 to 8.4% in Q2—and millions of investors reportedly opened brokerage accounts in the quarter—many suspect financial services drove the acceleration. Fair enough, and probably fair to assume things ease off a bit when the frenzy dies down (as we write, many companies’ shares remain halted, so activity is slowing). But the broader impact seems limited. As of 2014’s end, the financial industry comprised just 5.3% of Chinese GDP—about even with real estate, and smaller than retail/wholesale trade and (by a mile) heavy industry. Property sales have picked up lately, and a continued rebound there could help offset any potential iffiness in finance.

Fisher Investments Editorial Staff
Into Perspective, Commodities

Assessing the Iran Deal’s Investment Impact

By, 07/15/2015
Ratings604.391667

Tuesday, the US and five other world powers reached a nuclear agreement with Iran: If Iran constrains its nuclear program as agreed, the six will lift economic sanctions. The agreement, which now goes to Congress for review and approval, has sparked passionate reactions—many centered on regional geopolitical and military what-ifs. Those are valid points to weigh sociologically, but for investors, they aren’t really the right considerations. Markets care most about the conditions affecting the private sector over the next 12-18 months or so, and it is highly unlikely anything related to this deal snowballs into a major global conflict within this window. Trying to look much further out is sheer speculation, which markets don’t discount. So the right question, in the here and now, is: What are an Iran deal’s foreseeable implications for corporate profits and the global economy? Some already debate the impact on oil prices and the Energy sector. Should the deal go through—i.e., Iran pass nuclear inspections, sanctions ease and Iran fully returns to global oil markets—crude oil supply would probably increase. But those are a lot of ifs, and any assessments of the impact are pure speculation at this point. Regardless of whether Iran puts an additional weight on oil prices, though, Energy stocks still face many headwinds, and in our view, better investment opportunities exist elsewhere.

Should Iranian oil exports come back online, they would add to an already oversupplied global market—the question is how much and when. Iran currently exports about 1.4 million barrels of oil per day (mbpd), compared to 2.6 mbpd before sanctions were imposed in November 2011. Estimates for a post-sanctions export jump range from 200,000 to 500,000, though Iranian oil minister Bijan Namdar Zanganeh said his country could increase exports by 500,000 barrels a day (bpd) once sanctions are lifted and add double that in the following six months. However, 500,000 bpd equals just 0.6% of total world production. For comparison, the US’s Bakken shale alone produces about 1.2 mbpd, and the Eagle Ford shale churns out about 1.5 mbpd. Iran’s forecast may be overly optimistic, too, as its ability to ramp up production remains to be seen. After getting cut off from export markets, Iran slowed production by 1 mbpd, and it’s unclear when old wells will be ready to produce again. (Exhibit 1) They have every incentive to move quickly and goose exports as much as possible, given how sanctions have hurt Iran’s economy, but sometimes technology trumps will.

Exhibit 1: Iran Oil Production   

Fisher Investments Editorial Staff
Into Perspective

Greece Kicks the Can, Now Comes the Hard Part

By, 07/14/2015
Ratings294.465517

Greek Prime Minister Alexis Tsipras and Finance Minister Euclid Tsakalotos managed half-smiles as they departed from all-night bailout talks Monday morning. Photo by Jasper Junien/Bloomberg via Getty Images.

At dinnertime in Brussels on Sunday, eurozone leaders gathered behind closed doors to determine whether to open negotiations on a third Greek bailout. After 17 hours of brutal, acrimonious talks (and, presumably, countless cups of coffee), they reached a deal. Sort of. If Greece passes a raft of new laws by Wednesday, and if Germany’s Parliament approves, Greece and its creditors will begin negotiating the specifics of a roughly €86 billion three-year loan—a process that could take months. Any eventual deal would require approval by eight national parliaments. Greece would get short-term financing to cover debt payments due in the meantime, and markets cheered the announcement, but we’d suggest tempering your enthusiasm. Monday’s agreement is a key step, but the hard part comes next, and the fragile agreement[i] could still collapse. Global risk remains minimal regardless of what shakes out, but we’d encourage all investors to keep their expectations in check.

Todd Bliman
Personal Finance

Employer Stock, and the Risk in Buying What You Know

By, 07/13/2015

Unfortunately, Enron wasn’t an isolated case. Photo by James Nielsen/Getty Images.

When I was a fresh-faced college graduate first entering the securities industry about a decade and a half ago,[i] advice many folks spouted amounted to this: Buy what you know.

Fisher Investments Editorial Staff
Into Perspective, Capitalism, US Economy

Moore’s Law Gets a New Lease on Life

By, 07/13/2015
Ratings1284.363281

Semiconductors moving through the production line in 2013. Today’s versions are even smaller. Photo by Gianluca Colla/Bloomberg via Getty Images.

Editor’s Note: MarketMinder does not recommend individual securities. The below are merely examples of a broader theme we wish to highlight.

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Recent Commentary

Fisher Investments Editorial Staff
Across the Atlantic

Britain’s Boom Can Still Zoom

By, 07/29/2015
Ratings364.263889

Don’t overthink the disconnect between strong UK GDP and wobbly UK stocks. Economic fundamentals should win out.

read more
Fisher Investments Editorial Staff
Into Perspective

Plan B or B-Movie?

By, 07/28/2015
Ratings254.12

Just when you thought Greece’s predicament couldn’t get weirder, it did—but market risks remain minimal.

read more
Fisher Investments Editorial Staff
Taxes

A Presidential Candidate Has Thoughts on Capital Gains

By, 07/27/2015
Ratings384.513158

We take a look at one presidential hopeful’s plan to address “quarterly capitalism.”

read more
Fisher Investments Editorial Staff
Trade

Japan: Rising Sun or False Dawn?

By, 07/24/2015
Ratings193.710526

Rekindled optimism over Japanese stocks seems premature.

read more
Fisher Investments Editorial Staff
Commodities

How Silver Lost Its Shine

By, 07/23/2015
Ratings943.941489

With 2011’s bubble long since popped, silver doesn’t seem so sterling anymore.

read more

Global Market Update

Market Wrap-Up, Thursday July 30, 2015

Below is a market summary as of market close Thursday, 7/30/2015:

  • Global Equities: MSCI World (-0.0%)
  • US Equities: S&P 500 (+0.0%)
  • UK Equities: MSCI UK (+0.3%)
  • Best Country: Finland (+1.1%)
  • Worst Country: Belgium (-3.0%)
  • Best Sector: Energy (+0.3%)
  • Worst Sector: Consumer Staples (-0.4%)

Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 2.26%.

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.