Fisher Investments Editorial Staff
Emerging Markets, The Global View

Around the World in Lots of Data

By, 08/25/2016

Discussion of the developing world often focuses on the big economies, playing up their challenges, real and perceived. Today, that means China’s slowing growth and occasional debt worries, plus the damaging effects of low energy prices on oil-exporting countries like Brazil and Russia. This focus is understandable, but the media fixation may cause you to miss the broader picture. In that light, we present a roundup of recent growth reports you may have missed.[i] While challenges exist, on balance, the developing world’s economic health is better than widely appreciated—and continues supporting global growth. Heck, even Greece grew! And beyond those nations pining for the days of triple-digit oil prices, the outlook is broadly positive.

Let’s begin in Europe. The European Union’s growth slightly slowed in Q2, (0.4% q/q versus Q1’s 0.5%), but developing EU nations grew quicker. Frontier Markets Romania and Bulgaria, Slovakia, and Emerging Markets Poland and Hungary clustered at the top of Q2 growth rates, with 21 of 28 countries reporting so far. On balance, these five nations accelerated in Q2—with two flipping from slight contraction to expansion. After plunging furthest following the financial crisis, Eastern Europe’s yearly growth rates have mostly surpassed the EU as a whole.

Exhibit 1: Eastern Europe Leads EU Growth

Fisher Investments Editorial Staff
Reality Check, Media Hype/Myths

Sales, Not Surveys

By, 08/23/2016
Ratings193.210526

Something funny happened along the way from UK consumer confidence’s post-Brexit plunge to the much-predicted consumer spending shock: Consumers spent. A lot. While it’s just one month (and an incomplete look at total household spending), July’s smashing retail sales are a sign the UK recession many predicted is, so far, nowhere to be seen.

UK July retail sales volumes jumped 1.4% m/m, smashing estimates of 0.2%. This echoes a similar British Retail Consortium-KPMG survey, released August 9, which estimated July retail sales climbed 1.9% y/y, the fastest rate in six months. Per the official report, demand for discretionary items was especially strong. Sales of footwear and leather surged 13.1% m/m, clothing rose 2.5%, and watches and jewelry rose 3.1%. Meanwhile, sales of household goods inched up just 0.4%—folks weren’t just stocking up on paper towels and toothpaste. Some say shoppers merely responded to deep discounts, and maybe promotions did lure people to the shops. But they still spent more overall: Sales values rose 1.7%. Others say the weak pound likely drove foreign tourists to go on a shopping spree, artificially boosting sales. While this is true to some extent, it’s a stretch to say foreign demand is the sole reason sales rose, and there is nothing “artificial” about a tourism boost.

July is just one month, and this doesn’t necessarily mean Brexit dread won’t kill the UK economy’s animal spirits in the future, particularly if exit negotiations go south. But it does underscore a key point: Nothing fundamentally changed with the vote to make an economic slowdown necessary or automatic.  

Fisher Investments Editorial Staff
Into Perspective

A Stock Selection Lesson in Red Flag Avoidance

By, 08/19/2016
Ratings373.986486

(Editor's Note: MarketMinder does NOT recommend individual securities; companies referenced herein are merely cited as examples of a broader theme we wish to highlight.)

In selecting securities, very often the name of the game isn’t so much to find the glitziest firm you can, but rather, to avoid those with identifiable red flags. For some, it’s what they are excluding in presenting non-GAAP earnings.[i] For still others, it’s outstanding legal actions or confusing business structures. But one timely red flag, particularly in an election year: a firm that relies heavily on government policy for its sustainability.

Thursday, investors in two Real Estate Investment Trusts (REITs) were taught this lesson rather harshly, after the US Department of Justice (DoJ) announced it would cease using private prisons to house federal inmates over the next few years. From a market-wide perspective, this announcement has the weight of a butterfly. Even from a sociological or political one it isn’t huge: Only about 11% of federal inmates (~22,100 people) are housed at privately run facilities. But for Corrections Corporation of America and GEO Group, it is much larger.

Fisher Investments Editorial Staff

Investors Want to Have Their Cake and Eat It, Too

By, 08/18/2016
Ratings924.097826

After a long, frustrating flat run, stocks are now partying like it’s 1999! And, somewhat predictably, investors are celebrating by … worrying? Now, far be it from us to tell anyone how they should feel, but we like it when stocks rise. Yet the worried reaction to stocks’ latest all-time highs reveals a common theme of this bull market. Pundits bemoan one perceived negative, but when they get what they want, they conjure reasons to fret that, too! In our humble estimation, this is a prime example of folks wanting it both ways, and things don’t really work that way.[i] Here are three stories investors have flip-flopped on recently—evidence people are still looking for clouds in a silver lining and illustrating sentiment still has lots of room to improve as this bull market progresses.

Fretting the Flats or Fearing Heights?

Before the latest stock market records, headlines mostly focused on the market’s inability to hit a new high since May 2015. However, after that flat point-to-point spell, driven in part by a long correction, the S&P 500 finally claimed a new record about a month[ii] ago, and it has continued to charge higher since. Though global stocks haven’t recovered completely yet, they aren’t far off, either.

Elisabeth Dellinger
Politics

Clinton, Trump and … Linus Van Pelt?

By, 08/18/2016
Ratings1744.077586

Eighty-three days from now, America will pick someone to spend four years signing laws and speechifying. In those 83 days, we will see increasingly more campaign theatrics and media dissections, and most all of it will be hot air. True political wisdom will be a precious commodity, but I know where you can find it: You’re Not Elected, Charlie Brown, which will air back-to-back with It’s the Great Pumpkin, Charlie Brown at some point in October.[i] It teaches a time-honored lesson—and a vital one for investors—more simply than any history lesson or political science textbook can.

Our hero is not everyone’s favorite hapless reject, Charlie Brown, but his loyal, blankie-toting best friend, Linus Van Pelt—brother to Lucy, not-quite paramour to Sally, faithful believer in the Great Pumpkin. In this special, Linus is running for student body president. Like all politicians, he makes sweeping campaign promises—all frightening or exhilarating, depending on one’s perspective:

If I am elected student body president, I will purge the kingdom! My administration will release us from our spiritual Babylon! My administration will bring down the false idols in high places! If I’m elected school president, I will demand immediate improvements! I will demand across-the-board wage increases for custodians, teachers and all administrative personnel! And any little dog who happens to wander onto the playground will not be chased away, but will be welcomed with open arms! If I’m elected, I will do away with cap-and-gown kindergarten graduations and sixth grade dance parties! In my administration, children will be children and adults will be adults! If I’m elected school president, my first act will be to appear before the school board. … (Lucy comes up and whispers in his ear) … I’m sorry, I will not be able to appear before the school board, they meet at 8 o’clock, and I go to bed at 7:30.

Jamie Silva
Alternative Investments

Non-Traded REITs Are No Treat

By, 08/17/2016
Ratings954.089474

Although US capital markets were pretty developed in the mid-20th century, one sector was still tough for the little guy to break into—real estate, where access generally required buying whole buildings or properties. So in 1960 Congress created Real Estate Investment Trusts (REITs), which offer ownership of large, income-producing real estate ventures to the investing public in tradeable share form. Investors were jazzed! By law, REITs are taxed specially—if they pay out at least 90% of their income to shareholders, the REIT isn’t taxed at the corporate level. That can mean high “dividends,” sometimes with special tax wrinkles. These perks aren’t as great as they look, for reasons I’ll get into, but let’s not quibble—if the mission was to open the gated community[i] of real estate investing to all, well, mission accomplished. REIT shares today are highly liquid, traded on public exchanges and more or less function as stocks. In fact, this October they’ll say goodbye to their longtime home as a community in the Financials sector, and bravely venture out as their own, independent Real Estate sector.  

So far, so successful. But there is another, shadier type of REIT—the non-traded kind. They’re touted as exclusive opportunities, even higher-yielding than their boring cousins (4-6% vs around 3%) and a hedge against volatility.  Which might sound great, but this kind of pitch—higher than market yields with presumably less volatility—is a red flag of epic proportions. Sure enough, non-traded REITs are chock full of downsides, restrictions and caveats that catch many investors by surprise. They are The Money Pit of investment products.

For starters, they aren’t traded on public exchanges. Instead, they’re often sold by independent dealers, who may in turn contract with outside parties who sponsor, advise on, manage or market the product. Predictably, they cost a lot: Fees can run as high as 15% all told, which should take the shine off those extra-high dividends. What if you want to sell your chunk of a non-traded REIT before the end of the up to eight year-long holding period? Sorry, but since they aren’t traded, finding a ready buyer is tough. The original seller can take it off your hands, but only for a steep discount—up to 10%

Fisher Investments Editorial Staff
Commodities

Oil Supply Glut Still Saps Energy Earnings

By, 08/17/2016
Ratings284.464286

What’s down, up, down, then up again? Oil in 2016!  After WTI crude bottomed out in the $20s in February, it surged past $50 in early June, pulling Energy stocks along for the ride. Then came a summer swoon, sapping enthusiasm, before an August rebound. Yet this time, some say, sentiment has turned, making Energy stocks a prime contrarian play. Hedge funds betting on another dive, high inventories and record output hog headlines, and few seem to expect significantly higher prices for a year at least. But before you start seeing dollar signs all over the oil patch, a word of caution: While expectations do seem a tad more reasonable, on balance, supply and demand drivers suggest oil probably bounces around today’s low levels for the foreseeable future, keeping the squeeze on Energy earnings. Even if a new plunge isn’t in the cards, we wouldn’t expect lasting Energy outperformance any time soon. 

From February to early June, the media played up oil’s rebound and Energy’s outperformance, and most extrapolated those trends forward. However, the summer slide drew more attention to the supply glut, resetting expectations somewhat—especially after OPEC output hit another record high in July at over 33 million barrels a day, about 7% more than its 2014 monthly average. An IEA report highlighting high global inventories of refined oil products like gasoline drew countless eyeballs, as did its forecast for slower demand growth. At the same time, however, the report sowed seeds of optimism for higher prices, as it projected declining global crude production later this year as firms draw down those stockpiles, chipping away at the glut and helping prices recover. For real this time.

While this hypothesis might seem plausible, hold your horses. Other, less-noticed factors should keep supply elevated for quite some time. Prices might not plummet anew, but they don’t seem likely to soar either. First, oil and gas firms today are doing more with less as they adapt to a prolonged period of depressed prices. The aggressive push to trim fat includes fewer new exploration projects, job cuts and contract renegotiations with suppliers, to name a few.[i] These efforts are paying off: Global breakeven prices for proven but untapped reserves are down $19 since 2014 to just $51, so producers can survive longer and pump more even if prices remain low—a powerful supply support not just today, but in the future.  

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Five Fallacies About “Overvalued” Stocks

By, 08/16/2016
Ratings894.41573

Death and taxes might be life’s only certainties, but one of this bull market’s trends gives them a run for their money: As soon as stocks hit a record high, pundits start warning of “too-high” valuations and imminent malaise. They’re doing it now, on the heels of Friday’s fantastically arbitrary milestone, the first simultaneous record high in the S&P 500, Dow and Nasdaq since 1999. Some point to traditional P/E ratios, some to the ever-trendy cyclically adjusted P/E (CAPE), and some to less splashy metrics like price-to-book ratios. All make the same error: presuming the past predicts the future. And all who heed their warnings make another error: confusing fact with opinion. Yes, “stocks are overvalued” is an opinion, based on one interpretation of some numbers. Stocks discount all widely known information, including widely held opinions, and often surprise everyone by defying them.

Contrary to popular myth, no level of valuation is inherently too low, too high or just right. Many presume a given metric’s long-term average is “just right,” but that is just wrong. Sorry. Historical averages can help you put today’s valuations in context, but they are not some mean today’s valuations must revert to. For stock prices, there is no such thing as fair value. Stocks’ value is always and everywhere what investors are willing to pay for them.

As the next few charts show, no valuation today is wildly out of kilter with its long-term average. That, on its own, doesn’t mean stocks aren’t overvalued. But if you view valuations as a sentiment indicator, as we do, it does suggest we haven’t yet seen the runaway increase in confidence that typically marks a bull market’s peak. Valuations’ modest drift higher is mostly consistent with the gradually improving sentiment that’s typical of maturing bull markets.

Fisher Investments Editorial Staff
The Big Picture, Investor Sentiment

Stocks’ Rational Rally

By, 08/15/2016
Ratings1234.069106

What do you get when you combine US stocks at record high levels with recent economic data that appears weak? Some say this is a sign investors have adopted a “don’t worry, be happy” attitude, writing off shaky fundamentals. They suggest this bodes ill for stocks, as unwarranted optimism tends to be a warning sign for markets. But near as we can tell, any nascent optimism isn’t unwarranted—it’s rational. The economy today is better than most feared when the year began, and stocks move on the difference between reality and expectations. When expectations are meh, stocks don’t require amazing results. In our view, stocks simply reflect a brighter-than-expected reality, and the bull market should have plenty of room to run.

Stocks rising alongside perceived negatives doesn’t necessarily mean investors are irrationally exuberant or even complacent. If that were true, then investors were exceedingly optimistic in 2009, 2010, 2012 and 2013—all years where stocks zoomed higher while investors stewed over all manner of allegedly bad news like record federal deficits, the so-called “fiscal cliff,” government shutdowns and eurozone debt. Stocks tend to climb a wall of worry throughout bull markets, clichéd as that may be. It’s just hard for many to fathom at the time, which is why too many people miss out. If leading indicators pointed toward worsening economic data, we’d agree with those inclined to raise an eyebrow. But a few dreary trade, manufacturing and earnings reports don’t qualify. All are backward-looking, not forward-looking, and developed-world economies are predominantly service-based. Plus, stocks don’t move in tandem with economic data. They move on the gap between reality and expectations, and a fair amount of these allegedly weak data beat even weaker expectations. Earlier this year, investors feared a recession loomed in the wake of weak manufacturing data, low oil prices and falling profits. Stocks thus reflected these fears. Recent data, while not astounding, suggest these fears were overstated. Now investors are readjusting their view for the better. Hence, stocks rise to reflect a much less dour outlook. Considering leading indicators point positively, that seems like a rational stance.

Many called stocks’ performance following the Brexit vote a prime example of complacency—but here, too, folks feared the worst at first, then rationally reset expectations once they realized that worst-case-scenario probably wouldn’t happen. While pundits use every seemingly bad isolated data point as evidence Brexit is already a disaster, there is plenty of evidence otherwise. None of it, on its own, is telling. But disaster is far from a foregone conclusion. Markets see all the data and surveys, good and bad, and form expectations accordingly. One recent survey provides a timely example. According to the Royal Institute of Chartered Surveyors, home prices slowed and home sales fell in July—something one could interpret as more Brexit bad news if they so choose. But the same survey showed sentiment has improved markedly, with most participants optimistic about home prices and sales over the next 12 months. Surveys aren’t predictive, but what happens next is infinitely more important to stocks than what just happened. What many call complacency could just be markets realizing this whole Brexit thing won’t be as bad as everyone thought seven weeks ago.

Fisher Investments Editorial Staff
Into Perspective

A More Productive Way to Look at Productivity

By, 08/12/2016

Are we in a productivity recession? Per the Bureau of Labor Statistics, labor productivity has fallen for three straight quarters—the longest slump since the late 1970s—after experts anticipated a gain in Q2. Cue the related concerns about productivity and the potential knock on overall economic growth. However, though the media portrays weak productivity as a sign of broader weakness—a common meme throughout this bull market—the gauge itself isn’t very telling, and it isn’t predictive for stocks.

Folks focused on nonfarm business labor productivity, which contracted -0.5% annualized in Q2. A quick primer: To calculate labor productivity, divide output by hours worked. Output of nonfarm businesses comprises approximately 75% of US GDP, while hours worked refers to time spent producing goods and services in those related sectors. Both inputs rose in Q2, but hours worked rose more (1.8% vs. 1.2%).

Those concerned about productivity posit growth is a product of increased hiring—more bodies doing work—and therefore a mirage, not a sign of a robust economy firing on all cylinders. However (and excuse the tautology), growth is growth, and productivity normally ebbs and flows. It would be unrealistic to expect businesses to make efficiency gains quarter in, quarter out. Often, when a firm upgrades software or equipment, they get a near-term efficiency boost and then live off it for a while, until the time comes for a new upgrade or until circumstances force them to get creative. Necessity is the mother of invention, after all. Firms usually cut costs and find ways to do more with less when times are bad, so productivity gains tend to be highest at the beginning of a recovery. (Exhibit 1)

Michael Hanson
Personal Finance

Book Review: The Engineer’s Investing Mindset

By, 08/10/2016
Ratings1224.131147

Applied Minds: How Engineers Think – Guru Madhavan

It’s often said engineering is the bridge between theory and reality, from concept and abstraction to tangible and physical things. It’s fine to know a bit of math, but can you use it to build a suspension bridge?

In my early years, I often thought of investing as a kind of engineering—the bridge between all the economic and financial theories I’d learned versus the chaotic, messy truths of wading through the markets and creating successful strategies.

Fisher Investments Editorial Staff
Corporate Earnings

People Don’t Like Q2 Earnings, but Stocks Do

By, 08/09/2016
Ratings724.416667

Q2 earnings season is nearly over, and things are looking up! With 451 S&P 500 firms reporting as of 10:24 AM PST on Tuesday August 9, 71.6% have beaten expectations. Total earnings growth is negative for the fifth straight quarter at -3.5% y/y, but that’s better than Q1’s -6.7% y/y. Excluding the long-beleaguered Energy sector and its -82.1% y/y drop, profits in the other nine sectors are up 1.5%, rebounding from Q1’s drop.[i] This is all good news. All of it. Really. Yet most observers don’t see it that way. We’re told earnings beat only because analysts ratcheted down their expectations too much. Or that companies are deliberately setting guidance lower so their pitiful results can look shinier by comparison. Or that we shouldn’t get excited over Q2 since analysts now expect a Q3 drop. (Have fun squaring that with the first yah-but.) Newsflash: None of this is bad for stocks, which move on the gap between reality and expectations. All these negative interpretations are bullish, not bearish.

The naysayers’ observations are fair enough. Companies do have a long history of dialing down their earnings guidance so they have a low bar to clear. Analysts have spent most of this bull market reducing their estimates as earnings season approached, and they indeed did so again during Q2. On March 31, analysts thought earnings would fall just -3.2% y/y. Fast forward to June 30, and they expected a -5.6% y/y drop. Now they’re doing it again. On March 31, analysts pegged S&P 500 earnings growth at 3.2% y/y for Q3 and 1.3% for the year. Now, they see a -2% y/y Q3 drop and -0.3% y/y for the year.[ii] We wouldn’t be shocked if those estimates fell further.

But this is all good for stocks, not bad. Seriously. Stocks don’t move one-to-one with earnings. There is no preset relationship. Rising earnings aren’t automatically bullish, and falling earnings aren’t automatically bearish. What matters is whether the results—positive or negative—are a happyish surprise or a disappointment. If everyone expected earnings to soar, and they rose only a little, stocks would probably be unhappy. They would have pre-priced those lofty expectations, and unless they had every rational reason to believe gangbusters growth was truly around the corner, they would probably have to reset. Conversely, if everyone expects earnings to stink up the joint, and in reality they carry only a faint odor, stocks are generally relieved and happy. They priced in the overly dour expectations already, and less-bad-than-feared is a positive surprise. Positive surprises are bull markets’ favorite underpinnings.

Fisher Investments Editorial Staff
Into Perspective

Japan Goes Back to the Stimulus Well

By, 08/05/2016
Ratings323.375

Photo by Brendan Hoffman/Getty Images.

Pop quiz, dear reader. If you’re a struggling economy, do you:

Fisher Investments Editorial Staff
Monetary Policy, Unconventional Wisdom

The BoE’s Monetary Bazooka is a Squirt Gun

By, 08/05/2016
Ratings513.460784

In perhaps the least surprising central bank move of all time, the Bank of England tried to blast Brexit fears with monetary stimulus Thursday. Rates cut to all-time lows! (Again!) More quantitative easing! Regulatory tweaks that don’t make snappy soundbites! According to the BoE’s marketing spin rationale, these measures should just barely stave off recession, which will allow central bankers to take all the credit for the UK’s resilience. As for us, we’re sort of disappointed, as now we’ll never know how Britain’s economy would have coped with Brexit on its own. But now is not the time to mourn the loss of a counterfactual. Now is the time to examine the market impact—or lack thereof—of the BoE’s rescue package. It’s a mixed bag overall, with some potentially helpful moves and some hindrances, but it’s also small, which should limit the impact for good or ill.

After July’s purchasing managers’ indexes plunged—purportedly illustrating Brexit’s economic impact—the BoE basically had to act. Not because the economy actually needed stimulus (we suspect it didn’t, as discussed here), but because it is just not a good look for a central bank to sit on its hands at a time when many fear fallout. Lawmakers and observers have already given BoE Chief Mark Carney unkind nicknames like Britain’s “unreliable boyfriend,” which speaks volumes of his withering credibility. If the Bank stood pat Thursday, no one would have trusted him again. So he and his Monetary Policy Committee (MPC) cohorts passed a wide-ranging stimulus package. It cut the overnight lending rate from 0.5% to 0.25%, the lowest in its 322-year history. To ensure banks pass lower lending rates to consumers, the “Term Funding Scheme” (TFS) will let the BoE extend four-year loans to banks at around 0.25%. It restarted quantitative easing, with plans buy £60 billion of gilts and £10 billion of corporate bonds over the next six months. The Financial Policy Committee, which sets capital ratios, tweaked some rules to let banks exclude central bank reserves from their leverage ratio calculations, reducing their total risk exposure and freeing up more money for lending.

Of all of these, TFS is perhaps the most interesting. When the BoE cut rates to 0.5% in March 2009, banks took a lot of flak for not passing cheaper funding on to consumers. Banks were desperate for deposits, so in the months after the rate cut, they actually raised deposit rates. Great for savers! But not so great for borrowers. Banks aren’t charities. They lend for profit. Hence, to preserve profits when deposit rates were higher, they charge higher loan rates. In central bankspeak, the transmission mechanism was broken. Later on they figured this out and created a solution, called “Funding for Lending.” Accepting that banks were having trouble getting funding at overnight rates on the overnight market, the BoE and Treasury joined forces to provide that cheap funding themselves. TFS is an extension of this. As the BoE noted, it’s sort of difficult for banks to pass a 0.25% deposit rate to savers without scaring them off, which would force credit to tighten. FLS and its descendants were reasonably successful, and this seems like a mostly sensible way to ensure the rate cut does what it’s intended to do.

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Recent Commentary

Fisher Investments Editorial Staff
Emerging Markets

Around the World in Lots of Data

By, 08/25/2016

Little-noticed developing economies are contributing nicely to global growth.

read more
Fisher Investments Editorial Staff
Reality Check

Sales, Not Surveys

By, 08/23/2016
Ratings193.210526

July’s UK retail sales report is yet more evidence sentiment surveys aren’t as predictive as many think.

read more
Fisher Investments Editorial Staff
Into Perspective

A Stock Selection Lesson in Red Flag Avoidance

By, 08/19/2016
Ratings373.986486

A firm’s heavy reliance on government money is a red flag, especially in an election year.

read more
Fisher Investments Editorial Staff

Investors Want to Have Their Cake and Eat It, Too

By, 08/18/2016
Ratings924.097826

Investors' seeing the glass as half empty is a sign of persistently tepid sentiment.

read more
Elisabeth Dellinger
Politics

Clinton, Trump and … Linus Van Pelt?

By, 08/18/2016
Ratings1744.077586

Forget FOX, MSNBC, CNN, talk radio and all the rest: Everything investors need to know about this election, they can learn from Charlie Brown.

read more

Global Market Update

Market Wrap-Up, Wednesday, August 24, 2016

Below is a market summary as of market close Wednesday, August 24, 2016:

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.5%)
  • UK Equities: MSCI UK (-0.0%)
  • Best Country: Austria (+0.8%)
  • Worst Country: Canada (-1.4%)
  • Best Sector: Financials (+0.0%)
  • Worst Sector: Materials (-1.2%)

Bond Yields: 10-year US Treasury yields rose 0.01 percentage point to 1.56%.

 

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.