Fisher Investments Editorial Staff
The Global View

The Unnecessary $2 Trillion Global Stimulus Economic Benefit Concert

By, 11/21/2014
Ratings123.875

Are the world economy’s lights flashing red or green? Photo by David Arthur/Getty Images.

Here is a memo for the G-20: The global economy is actually growing.

Fisher Investments Editorial Staff
Into Perspective

Clearing Up Bond Trading

By, 11/20/2014
Ratings143.678571

Here is a simple question that often doesn’t have a simple answer: How much did you pay to buy that bond? This week, the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) proposed amendments to their current rules that seek to make that answer easier to come by, clarifying transaction costs for municipal, corporate and agency debt securities. Their plan is a step in the right direction, in our view, but the proposed rules are still less clear than they could otherwise be.

The reason it isn’t always easy to know what you as a retail investor paid for a bond is due to  the mechanics of bond trading. With most non-Treasury bonds, your buy order must be submitted to a brokerage firm. That firm can then act in one of two capacities. The first is agent, in which the firm takes your order and seeks out the desired bonds, helping execute the trade on your behalf. (Exhibit 1) This isn’t terribly dissimilar from equity trading, in which the firm takes your order and seeks to match it with someone selling similar securities in a market or exchange. In such transactions, fees are usually disclosed plainly. However, most bond trades don’t happen this way. Most are executed with the firm taking your order acting as principal, which basically means they sell you bonds from their inventory. (Exhibit 2)They typically do not charge a commission per se, so your trade confirmation doesn’t show you an account of the broker fees involved.

Now, before you presume this means, “Most bond buying is free! Wheeeeee!” consider: Instead of commissions, firms acting as principal simply mark up the bond price (or down, if you’re selling). They are required to report only the price you paid for the bond and some description of the security, including basic information like its yield. Heck, sometimes firms even blur the line between agency and principal, selling you bonds they are actively trading in, so their “inventory” isn’t exactly bonds sitting on a dusty shelf. They may sell you bonds they just bought (plus a markup)—so-called “riskless principal” transactions. [i]

Fisher Investments Editorial Staff
The Global View

Is the World Turning Japanese?

By, 11/19/2014

Monday’s news of Japan falling back into recession continued spurring headlines Tuesday, albeit of a different flavor. They stopped expressing shock at Abenomics’ inability to spur growth and started fearing the world is turning Japanese too—and about to take stocks down with it. However, we humbly suggest the issues hamstringing Japan are the same ones that led to its lost decade. That didn’t go global, and we see little reason to think this time will be different.[i]

Japan’s struggles stem from its … ummm … unique take on capitalism, which is rather more mercantilist than Smithian.[ii] The result: deep structural issues like waning productivity, narrow labor markets, protectionist trade policy and an uncompetitive corporate sector dominated by large, horizontally integrated keiretsu—to name just a few (we could go on). These are supposedly in Japanese Prime Minister Shinzo Abe’s crosshairs, the target of long-promised but undelivered structural reforms.

But most pundits don’t acknowledge how much these structural issues muffle Japanese growth, arguing the lost decade[iii] was a product of deflation and demographics. They don’t acknowledge deflation is a signal—not a cause—of deeper problems. To the extent demographic issues are problematic, they are no match for a free, open economy. From this misdiagnosis, the experts hunt for the next economy ripe for its own “lost decade.” Today’s popular target: the eurozone.

Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings253.76

No word on whether Australian PM Tony Abbott was giving Japanese PM Shinzo Abe election tips or just making a funny. Maybe both? Photo by Ian Waldie, Pool/Getty Images.

Pop quiz: What do you get when you hit a struggling country with higher prices and a three percentage point sales tax hike? Give up? Recession! At least, according to Japanese GDP released Monday that’s what Japan got, with the second straight GDP contraction placing the archipelago into recession by one common definition. Globally, this doesn’t mean a ton—growth elsewhere is more than enough to offset Japan’s -1.6% annualized Q3 drop. But the causes and domestic fallout reiterate why we’ve long thought investors’ expectations for Japan are too high and better opportunities lie elsewhere.

Fisher Investments Editorial Staff
Across the Atlantic, GDP, Investor Sentiment

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865


Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts’ estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany’s insistence risks a “lost decade.” The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove “insufficient to create jobs,” too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

Fisher Investments Editorial Staff
Emerging Markets, Into Perspective

All Aboard the Through Train?

By, 11/14/2014
Ratings294.137931

Starting Monday, foreign investors will have unprecedented access to mainland  Chinese stocks courtesy of the delightfully named “through train” program, which lets foreigners buy “selected” Chinese A-shares traded on the Shanghai exchange through Hong Kong brokerages. Many are cheery about the prospect of new demand worth tens of billions of dollars pushing Chinese stocks higher. But before you choo-choo your way over, we’d encourage you to keep a rational perspective. China has plenty going for it, but anyone expecting the through train to be the ticket to sky-high returns might end up a tad disappointed.

In recent years, Chinese A-shares haven’t quite reflected the economy’s rapid growth rate. They boomed at times during the 2000s bull market, but as Exhibit 1 shows, this was short-lived and out of step with the global bull that began in 2003. As of Thursday’s close, A-shares were still 36% under their 1/14/2008 peak. Meanwhile, China’s economy kept on chugging, taking Japan’s place as the world’s second biggest. Not that stocks and GDP should move one-to-one—that isn’t how it works ever. But it underscores how China’s political climate, capital market controls and sentiment have offset many an economic tailwind.

Exhibit 1: Chinese A-Shares

Fisher Investments Editorial Staff
Politics

What to Expect from Lame-Duck Season

By, 11/13/2014
Ratings453.844445


President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.

“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.

Fisher Investments Editorial Staff
Personal Finance

Risky Business

By, 11/12/2014
Ratings583.982759


There is more risk than just volatility (and a board game). Photo by Robert Nickelsberg/Getty Images.

Risk. This four letter word both tempts and terrifies investors. Some folks think it’s the ticket to sky-high returns. Others find it scary or uncomfortable. Both mentalities lead many to an effort to measure it. Because if you can quantify something (e.g. this stock is risky based on this metric), you can understand what you’re dealing with—and understanding things is nice. Don’t want much risk? Avoid the thing with the higher risk number! But as one stellar paper we recently read thoroughly explained, you can’t reduce investment risk to a single number or set of figures. Most investment risks aren’t actually quantifiable. Believing they are can lead to truly risky portfolio decisions. 

When quantifying “risk,” many folks confuse volatility with risk. These aren’t synonymous. Volatility—price movement down and up—can be tracked, measured and plotted relative to an index. Short-term volatility reminds us of the risk of loss that comes with an asset, but it doesn’t quantify risk. Measures like standard deviation, beta and the Sharpe Ratio[i] tell you how much something moved (note: past tense) relative to the market—backward-looking descriptions of price movement, not very helpful in assessing future volatility or performance. They are not permanent attributes of a strategy, security, fund, manager, tactic or squirrel. (Just kidding. Beta may be a permanent attribute of squirrels.) They do not necessarily differentiate between more and less risky strategies—especially without understanding why those figures might be higher or lower.

Fisher Investments Editorial Staff

Mark Carney Wants Big Banks to Save More—in Bullet Points!

By, 11/11/2014

The Financial Stability Board released plans to make banks less “too big to fail”[i] Monday,[ii] continuing their long-running effort to prevent governments from ever profiting off failing banks again.[iii] Or taking losses. Or just bailing them out in general. Starting in 2019 or so, a few dozen of the world’s biggest banks must hold at least twice as much “loss absorbing capital” as normal banks so they can replace bailouts with “bail-ins,” Cyprus-style. Regulators, led by BoE chief Mark Carney, believe this will allow the system to deal with failing banks in an orderly way, without triggering panic, and without governments stepping in. We are skeptical.

Here is a quick outline of the FSB’s plan:

Who: “Globally Systemically Important Banks,” aka G-SIB—the 30 biggest and/or most interconnected banks globally.[iv] Here is the 2014 list.[v] Here is the geographical breakdown:

Fisher Investments Editorial Staff
US Economy

The Employment Sentiment Trap

By, 11/10/2014
Ratings214.761905


There are plenty of reasons to cheer the US economy's prospects, but unemployment isn't one of them. Photo by Thomas Starke/Bongards/Getty Images.

October’s jobs report was another dandy, as payroll gains topped 200,000 again and the unemployment rate ticked down from 5.9% to 5.8%, its post-war (1948) average. We’re inclined to spare you the bells and whistles and say, “here’s more confirmation the economy grew recently.” Headlines, however, claim sunnier labor markets mean the economy is improving and has momentum—reasons to be bullish. Public Service Announcement: Unemployment, a late-lagging indicator, is pretty much never a reason to be bullish or bearish. Assuming it is can lead investors to a dangerous place.

Interested in market analysis for your portfolio? Our latest report looks at key stock market drivers including market, political, and economic factors. Click Here for More!

Fisher Investments Editorial Staff
Politics

Goldilocks Gridlock

By, 11/06/2014
Ratings614.254098

 
We vote for gridlock. Photo by Scott Olson/Getty Images. 

A reminder: This article deals with politics, which we are told is often a contentious topic. Please note we don’t favor any political party—Republican, Democrat, Tory, Labour, Green, LDP, DPJ, Fidesz, etc.—and believe that ideology is blinding and quite dangerous to your portfolio’s health. All (excluding maybe Fidesz) have done good and bad things for stocks over time.

Hey! Did you hear? The US midterm elections are over, with the Republicans logging a lopsided win to wrest Senate control from the Democrats and increase their House majority. Well, of course you did. Additionally, the GOP took the majority of the gubernatorial races, in what amounts to an electoral trifecta (or tri-terror, depending on your point of view). We admit, we were modestly surprised by the victory margin. As we wrote here and here, the structure of this year’s midterm tilted Republican all along, but we expected a Senate sweep would require a virtually perfect campaign. Ah well, the outcome is the same either way—gridlock, which stocks love. In fact, we got even more delicious gridlock than we expected. We would suggest tuning out the media speculation over what it all means and where the two parties can agree. Celebrate instead this bigger, material positive for stocks.

Fisher Investments Editorial Staff
Into Perspective

Regulatory Vagary’s Real Life Impact

By, 11/05/2014

Trivia time! What is the primary reason the Fed was created in 1913? Many today will probably say, “to balance employment and inflation!” But this is only the Fed’s congressional mandate tied to 1978’s Humphrey Hawkins Act.[i] The Federal Reserve was actually created to act as lender of last resort—the backstop to forestall the 19th and early 20th centuries’ endemic bank runs. With that in mind, we noted how odd it was that 11 banks failed the Fed and FDIC’s “living wills” test last August in part for presuming the Fed would be available as lender of last resort via the discount window. Both sides charged each other with being vague, and a big, mostly academic squabble broke out. However, the lingering regulatory vagary has prompted some banks to treat a hypothetically absent Fed as a potential reality, and they warn it could shrink credit supply. While this isn’t a big threat for investors today, given the cyclical factors supporting lending, it shows how regulators’ behavior can impact the business world, even if they don’t pass rules.   

As a refresher, “living wills” originate from a provision in 2010’s Dodd-Frank Act requiring banks to submit annually a plan for the “rapid and orderly resolution in the event of material financial distress or failure of the company.” Regulators claim living wills will help them unwind a large failing financial institution by mitigating uncertainty, unlike 2008.

In our view, this is a solution in search of a problem. For one, the next financial crisis probably won’t look like the last one. A living will based on a crisis borne from regulation requiring banks to mark illiquid assets to a non-existent market price against a backdrop of fear seems a wee bit inadequate if the issue is totally different. For example, Lehman’s “ideal” living will would have forecasted the scenario that blew it up—and known in advance, it would be driven bankrupt simply for lacking liquidity, even though total assets exceeded liabilities. If they had that much detail, wouldn’t Lehman just bypass the outcome, rendering the living will obsolete? The catalyst for big failures, big market outcomes and big recessions is pretty much always what folks don’t anticipate—not what they do foresee. Plus, announcing a bank’s Armageddon plans introduces front-running risks. If a bank comes under some short-term stress, and nervous shareholders and depositors know exactly how and when they’ll be wiped out if the bank fails, they flee early. That could make a bank run a self-fulfilling prophecy.

Talia Hosenpud
Reality Check

SEC Catches Self Proclaimed Pirate Running a Very Real Ponzi in Virtual Currency

By, 11/05/2014
Ratings993.929293

Pirates just aren’t trustworthy. Source: Henry Guttmann/Getty Images.

Remember bitcoin? That still-newish, supposedly decentralized, laissez-faire digital currency? You could be forgiven for not following closely today—the former faddish gleam has largely faded, likely due to eyeball-grabbing issues like Mt. Gox’s failure or folks tiring of daily updates on its wild price swings. While the coverage wanes, the story is actually getting more interesting, in my view. Recently, one particular bitcoin story caught my eye: a Texas US district court ruled the US Securities and Exchange Commission (SEC) has jurisdiction to punish the operator of a bitcoin Ponzi scheme in SEC v. Shavers. Bitcoin “investments” are officially “securities,” giving the SEC regulatory authority. Now, you might argue this should curb the amount of fraud in bitcoin—a plus. But my thoughts on this are different. The lessons here are essentially twofold: One, for investors generally, it isn’t that hard to spot a fraud (heavy regulatory oversight or no) provided you look carefully. The second is about bitcoin more specifically—that the door is open to much greater regulator oversight of bitcoin.

Fisher Investments Editorial Staff
Into Perspective, Investor Sentiment

Taking Stock of That Great October Buying Opportunity

By, 11/04/2014
Ratings554.309091

Stocks had a wild ride in October—but that won’t be the last time we see volatility. Photo by Getty Images/Stringer.

November is here, and with it comes the end of “financial hurricane season”—that two-month stretch pundits (and purveyors of seasonal myth) tell us contains the worst month and the crashiest month. For a while, stocks seemed to follow that mythological blueprint. They finished down a bit in September and kept sliding as October progressed. But then they stopped! And bounced! High! And in the process illustrated why long-term growth investors are usually best off tuning out the noise and looking past short-term volatility—and not trying to time markets’ short-term swings.

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Recent Commentary

Fisher Investments Editorial Staff
The Global View

The Unnecessary $2 Trillion Global Stimulus Economic Benefit Concert

By, 11/21/2014
Ratings123.875

The G-20’s vague, unlikely-to-materialize stimulus plan is nice sounding, yet unnecessary.

read more
Fisher Investments Editorial Staff
Into Perspective

Clearing Up Bond Trading

By, 11/20/2014
Ratings143.678571

How far do regulators’ rule proposals go for improving transparency for bond investors?

read more
Fisher Investments Editorial Staff
The Global View

Is the World Turning Japanese?

By, 11/19/2014

Many really think so, but reality suggests otherwise.

read more
Fisher Investments Editorial Staff
GDP

Sinking Fortunes in the Land of the Rising Sun

By, 11/18/2014
Ratings253.76

Not even a recession can dent investors’ optimism for Japan. That’s a problem.

read more
Fisher Investments Editorial Staff
Across the Atlantic

The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

By, 11/17/2014
Ratings374.364865

The common reaction to eurozone Q3 growth is a sign of the times, sentiment-wise.

read more

Global Market Update

Market Wrap-Up, Thurs Nov 20 2014

Below is a market summary (as of market close Thursday, 11/20/2014):

  • Global Equities: MSCI World (+0.1%)
  • US Equities: S&P 500 (+0.2%)
  • UK Equities: MSCI UK (0.0%)
  • Best Country: Canada (+1.0%)
  • Worst Country: Spain (-1.8%)
  • Best Sector: Energy (+1.2%)
  • Worst Sector: Utilities (-0.6%)
  • Bond Yields: 10-year US Treasurys fell .02 to 2.34%

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.