Elisabeth Dellinger

Even in Virtual Currencies, 'Too Good to Be True' Is Reality

By, 09/21/2017
Ratings1103.881818

This bitcoin token isn’t real money. It’s just a prop on display at the British Museum. Photo by Elisabeth Dellinger.

Apparently, bitcoin finally hit the bigtime. No, it isn’t suddenly money—or anything other than a speculative fad. But those are mere footnotes to its new starring role in a Ponzi scheme. If the word “cryptocurrency” made your eyes glaze over, this is at least 30% of the reason crooks were able to get away with bitswindling their marks for two years. While the bitcoin wrinkle is fresh, everything else about this fraud is textbook: The scammers took custody of client assets, shrouded their alleged strategy in meaningless jargon and advertised impossible returns. The trifecta! Understanding how they pulled it off can help you avoid being a victim of wrongdoers.

Fisher Investments Editorial Staff
Politics

A Preview of Germany’s Election

By, 09/21/2017
Ratings353.771429


Win or lose, German pols can follow up Sunday’s election with a ride on the Ferris wheel at Oktoberfest. Photo by Christopher Wong.

Europe’s year of falling political uncertainty takes another step Sunday, when Germans vote on their next parliament and chancellor. Incumbent Angela Merkel of the Christian Democratic Union (CDU) is seeking a fourth term, and public polls suggest she will succeed, with her party taking the most seats but falling short of an outright majority. The Social Democrats (SPD), her current coalition partner, are a distant second but several points ahead of smaller parties. Outside some foreign-meddling intrigue, there is more drama surrounding third place, as a smaller party could help form the next government. They are already jockeying for position. The free-market Free Democratic Party (FDP), for example, is suggesting they won’t enter any coalition with Merkel if it cannot name a finance minister. While the possible coalitions are myriad, the probable result is political gridlock—a bullish development. In our view, Germany’s likely legislative gridlock is a positive that adds to the eurozone’s year of falling uncertainty—a reason to be bullish toward European markets. 

At 2017’s onset, many political analysts feared a populist wave washing over the Continent—particularly after 2016’s Brexit vote and Donald Trump’s surprising presidential election. Germany’s populist answer is the far-right, euroskeptic Alternative for Germany (AfD) party. After failing to garner the necessary 5% of the vote to enter the Bundestag in 2013, AfD has steadily built up its representation at the local level. It looks poised to win a few seats in the Bundestag this year, and while it is still a minority party, some worried broader European populist momentum could boost AfD even higher.

Fisher Investments Editorial Staff
Monetary Policy

The Fed’s Slimdown Is No SlimFast

By, 09/20/2017
Ratings644.0625

This person’s diet plan was faster than the Fed’s—and likely more impactful for stocks. Photo by Champja/iStock.

Well there you have it. In among the least-surprising central bank moves of all time, the Fed just announced it will begin unwinding quantitative easing (QE) next month, using the plan previewed in June. Unless you zoom in to about 1000x normal on a chart of the S&P 500, markets took the news in stride, which seems right to us. Not only was there zippo surprise power, but this is about the most gradual unwinding imaginable. This isn’t Marriner Eccles jacking up reserve requirements in 1937 or Alan Greenspan inverting the yield curve in 2000. It is perhaps the slowest, most boring not-really-tightening of monetary policy in Federal Reserve history.

Fisher Investments Editorial Staff
Currencies

Weak Theories About the Weak Dollar

By, 09/19/2017
Ratings144.392857


Pound for pound, currency theories punch below their weight. (Photo by SrdicPhoto/iStock by Getty Images.)

Surprise! Eight-plus months into 2017, the dollar is among the weakest currencies globally. After rallying last year—and the vast majority of the time since 2013—the dollar, on a trade-weighted basis, is down -8.2% through September 15.[i] Predictably, pundits who fixated on the strong dollar before now assume the “weak” dollar is the be-all, end-all markets story. Some presume the weakness is a prelude to a stock decline. Others argue it is sure to goose certain sectors and assets. And sure, there is some influence. But put into proper perspective, currency gyrations just don’t mean as much as investors often presume.

Theories abound over currency effects, but most are half baked. If strong-dollar bears are consistent,[ii] a weak dollar should be bullish. The argument is large US multinationals—much of the US market by capitalization—benefit because their foreign sales (in foreign currencies) translate into greater revenue and profits when converted back into dollars. More earnings = good, right? But this is too simplistic. Among other complications, multinationals typically hedge foreign exchange exposure. Good management is well aware currencies fluctuate. Occasional references to exchange rate impacts at earnings releases are most often excuses,[iii] in our view. But what’s more, multinationals’ supply chains often extend globally. A weak dollar also means rising import costs crimping margins (when insufficiently hedged).

Fisher Investments Editorial Staff

Surveys Show Warmer—But Still Mixed—Sentiment

By, 09/19/2017
Ratings594.389831

Are you feeling happy these days? You aren’t alone. As markets clock new highs, some widely watched investor sentiment surveys report widespread cheer—with one showing investors at their sunniest since September 2000. Yet before you fear euphoria has set in, another survey shows fund managers feeling a bit more blue. What to do? Looking at all the surveys and putting them in historical context, it seems fair to say investors are broadly more optimistic—as you’d expect in a maturing bull market. But pockets of skepticism indicate investors haven’t run out of worries, suggesting to us folks can get even happier before sentiment spirals out of control.

Here is a more detailed look at the surveys in question. First up, the weekly American Association of Individual Investors (AAII) survey, which reports 41.3% of investors were bullish, 36.7% were neutral and 22.0% were bearish as of September 13—above the historical average of 38.5% bullish since July 1987.

Meanwhile, the Wells Fargo/Gallup Investor and Retirement Optimism Index for August hit a 17-year high. The 98-point rise in since February 2016 is the highest rise in the index’s 20-year history. Moreover, 68% say they are “optimistic” about the market over the next year—matching the record high from December 1999/January 2000—and 25% say they are “very optimistic,” a record high. Yet institutional investors seem more skeptical, according to the September Bank of America Merrill Lynch Fund Manager Survey. The number of managers hedging against a possible correction posted its biggest jump in 14 months, and they’re holding a “higher than average level of cash.” So while individual investors may be turning more bullish, institutional investors seem to be becoming more bearish. That raises the question: Whom should we believe?

Christopher Wong
Into Perspective

Chart of the Day: When Real Estate Decided to Go Solo

By, 09/18/2017
Ratings383.75

One year ago, the smart people at MSCI and S&P who determine the Global Industry Classification Standard (GICS) declared Real Estate the 11th sector[i]—the first change to the prominent sector list since 2001. The GICS folks had pondered breaking Real Estate out of Financials since 2014, and with the growing popularity of Real Estate Investment Trusts (REITs) in recent years, it seemed like a logical decision. A month after its debut, however, Real Estate trailed both its former Financials home and the broader S&P 500 index. A year later? That lag is even more pronounced. In my view, this serves as a friendly reminder to tread cautiously when considering trendy or headline-making investment opportunities—it smacks of chasing heat, a dangerous investing approach.   

Here is a chart showing Real Estate’s relative performance compared to Financials and the broader S&P 500. When the lines are rising, Real Estate is outperforming.

Exhibit 1: Real Estate’s Relative Performance

Todd Bliman
Monetary Policy

Minding the Fed’s (Possible) Unwinding

By, 09/14/2017
Ratings484.270833

Many suspect the Fed will try make the numbers on its balance sheet smaller starting next week. Photo by Absolut_100/iStock.

Next Tuesday and Wednesday, the fun bunch at the US Federal Open Market Committee (FOMC, the Fed’s monetary policy-making folks) will get together and discuss monetary policy.[i] There is talk of rate hikes, but after Fed head Janet Yellen alluded to it in recent meetings, most speculation centers on whether or not the Fed will begin unwinding the bond purchases made under its earlier quantitative easing program (QE). “Balance sheet reduction,” in central bank-speak. Many presume this spells big trouble—higher interest rates! Less Fed “support” for stocks! However, in my view, a look at recent history and the Fed’s plan shows these fears are likely quite overdone. Beyond a possible short-term wiggle, the Fed’s reducing the size of its balance sheet doesn’t seem likely to materially impact stocks.

Elisabeth Dellinger
Inflation, Monetary Policy

Fun With Uncle Milty

By, 09/14/2017
Ratings1024.328432

Will the Phillips Curve’s fecklessness ever dawn on the Fed? Photo by Elisabeth Dellinger, who asks you to pardon the lens flair.

Dude, where’s my inflation? Fed people are perplexed, unable to fathom how inflation could stay low even though the economy is at what many deem full employment. According to Fed Logic, because companies must compete for a limited pool of workers when unemployment is low, they have to raise wages—and raise prices to offset the extra expense—and thus inflation happens. The central bank’s dual mandate is based on this model. Yet, this isn’t how inflation works. It isn’t a labor market phenomenon. Nor is it a psychological phenomenon, which guts a frequent explanation for The Case of the Missing Inflation. As Nobel-laureate Milton Friedman and many others have shown over the last century-plus, it is a monetary phenomenon: too much money chasing too few goods and services. The budding Nancy Drews and Hardy Boys at 20th and Constitution don’t need fancy models, complex theory or cipher keys to crack the case. Brushing up on Uncle Milty’s greatest hits would do it. But even if they never see the light, investors can learn from their confusion.

Fisher Investments Editorial Staff
Media Hype/Myths

Calendars Help Track Time, Not Time Stocks

By, 09/14/2017
Ratings444.431818


This shouldn't guide your investment choices. Photo by in-future/iStock by Getty Images.

Every year, pundits trot out the fable September is the “Worst Month for Stocks”™ and October another minefield. Packaged with current fears like North Korea, central bank decisions and Brexit, fall’s onset looks scary—leading some to think it’s prudent to take a breather from stocks. However, in our view, there is nothing special for markets about September and October—and presuming otherwise could prove damaging for investors.

Those touting these months’ perils point to their subpar average returns: Since 1925, the S&P 500 has averaged -0.9% in September (in price returns). The Global Financial Data World Ex-US Index’s monthly average (also price returns) was better but still negative (-0.5%).[i] For both indexes, September is the only month with a negative average return.

This may be so—but the S&P 500 has risen in 45.7% of Septembers, compared to a 59.1% positive frequency for all months. (Exhibit 1) September isn’t leading the pack, but it’s far from a guaranteed negative—and we don’t see the logic in skipping a month that’s positive almost half the time.

Christopher Wong
Into Perspective, Reality Check, Unconventional Wisdom

All the News That’s Fit for Markets

By, 09/08/2017
Ratings584.405172


Which headlines make stocks move? Photo by scanrail/iStock by Getty Images. 

Have you ever wondered what news stocks care about?[i] Some seem obvious, like announcements on an earnings call or new legislation aimed at a certain sector (e.g., banking regulations). But a lot of important stuff seems lost on stocks. Like climate change. Income inequality. The opioid crisis. These issues affect many lives and garner significant real estate in the papers—why don’t they seem to affect stocks? Because these issues fall in the realm of “sociology,” and sociology doesn’t fundamentally alter stocks’ price drivers: supply and demand. 

First, a definition[ii]: When I say sociology, I’m referring to issues that impact our social, political, environmental and other societal relationships. They relate to the economy in some ways, but they aren’t expressly economic matters or drivers—though many public figures argue otherwise. (A fancy term for this is socioeconomics, but that’s jargon-y.) Though important, sociology doesn’t meaningfully affect stock supply or demand. Or, more specifically, it doesn’t affect corporate earnings—a key demand driver—in the next 3 – 30 months, which is the timeframe most relevant to markets. Beyond that, too many variables are unknown.

Fisher Investments Editorial Staff
Commodities, Taxes

Got Gold? Bitcoin? Tax Considerations for Nontraditional Investments

By, 09/06/2017
Ratings483.739583

What follows is intended to be an informational discussion of tax basics and not personalized advice. Please consult your tax advisor if you are curious about implications in your specific case.

Bitcoin—the cryptocurrency conjuring a nearly endless stream of headlines—recently underwent a widely publicized spinoff. In an effort to increase liquidity, software developers mirrored original bitcoin’s code and handed everyone who owned one bitcoin one new Bitcoin Cash.[i] Opinions of the transaction’s merits run the gamut, but there is one opinion we think you should particularly mind: the US Internal Revenue Service’s. You see, there is confusion over how this 1-for-1 spinoff will be treated for tax reasons. Does the receipt of Bitcoin Cash count as taxable income in 2017? Or will it be treated like most equity spinoffs, with taxation deferred until sale? To this point, the IRS has been mum—leaving Bitcoin Cash owners in tax limbo. Of course, the impact here is narrow—cryptocurrencies aren’t common. But we think there is a lesson here for investors in unorthodox investments of all kinds: Get informed about potential tax implications before buying. To that end, here is an informational guide to some tax considerations for off-the-beaten-path investment products.

First, though, let’s review how taxation typically works for investors in stocks outside of retirement accounts. Gains—the difference between what you paid for the stock (your cost basis) and the sale proceeds—are subject to capital gains rates. How long you owned the asset is key. If you sell a security within a year of buying it, short-term capital gains rates apply—and these match your ordinary federal income tax rate. Gains on securities held longer than a year qualify for typically lower long-term capital gains rates—usually 15% but sometimes 20%. (An additional surtax on net-investment income associated with the Affordable Care Act can boost these a bit more.) Dividend taxation hinges on whether they are “qualified” or not. Qualified dividends (which are taxed at capital gains rates) must be issued by US-based or US-listed firms and held for at least 60 days.[ii] Everything else is unqualified and taxed as income. Those are the basics. But if you veer into unconventional assets, there is much more.

Fisher Investments Editorial Staff
Across the Atlantic, GDP

UK OK

By, 09/01/2017
Ratings304.216667

A month after the UK Office for National Statistics (ONS) released its preliminary Q2 GDP estimate—up a ho-hum 0.3% q/q—their second estimate, released last week, stayed the same. We grant you, not very exciting. But to jazz it up, the media provided some context: The G7’s laggard! First half growth worst in five years! No contributions from trade or investment! This would have you believe Brexit, the pound’s fall, rising inflation—take your pick—is finally biting the UK economy. However, we believe reality is better than sentiment supposes—a low bar for the economy to clear and boost stocks.

Lost in the doom mongering: Q2’s 0.3% q/q (1.2% annualized) growth accelerated from Q1’s 0.2% (0.9% annualized).[i] (Exhibit 1) Yes, it’s tiny and just one quarter, but it illustrates the sentiment disconnect. Pessimists bemoan the UK’s two consecutive lackluster quarters—a big slowdown from last year—to wring maximum gloom. Q1 growth did slow substantially from Q4’s 0.7%. But that happened from Q4 2015 to Q1 2016, too. Pre-Brexit! This may just be normal data variability, not a Brexit-induced recession developing.

Exhibit 1: UK GDP Fluctuates

Fisher Investments Editorial Staff
Into Perspective

Need Bonds? Here Is What to Weigh Next

By, 08/31/2017
Ratings904.066667

Need bonds? Then, like equity investors, you face a choice: Should you use individual bonds or bond funds (including ETFs)? Too often, it seems investors automatically resort to the former, presuming individual bonds are superior to bond funds because you can hold them to maturity and get your original investment back.[i] But in reality, bonds and bond funds each have pros—and cons—to consider. Applying the fallacious principle that individual bonds are better in all situations can expose your principal to more risk than you may appreciate.

Understanding how individual bonds and bond funds trade is helpful when deciding which option is best for your situation. Individual bonds trade “over the counter” (OTC), either through a dealer network where buyers and sellers trade through electronic trading systems or (get this!) by telephone. Dealers make markets in bonds, quoting prices at which they would like to buy and sell. Because they are decentralized—unlike stock exchanges—dealer networks are less efficient. For example, various dealers could quote different prices for the same bond. There are an overwhelming number of bonds on the market. While many publicly traded companies have one or two types of stock (common or preferred; perhaps voting and non-voting), a single company typically has many different bonds.

Each new issue is unique from the same company’s previously issued bonds. Take Exxon for example—currently there are 19 different Exxon bonds available.[ii] Though they are all Exxon bonds, different covenants (terms in the agreements), maturities, call options and other factors can make analysis daunting. Conversely, bond funds—especially ETFs—are easier to trade. Many target specific factors you can use to build your fixed income exposure according to the general criteria you want.

Fisher Investments Editorial Staff
Taxes

Time to Talk About Tax Reform

By, 08/31/2017
Ratings754.16


Important reminders go on Post-it notes. Photo by alfexe/iStock by Getty Images.  

President Donald Trump made an unscheduled trip to Texas on Tuesday to support those afflicted by Hurricane Harvey. However, the president’s return flight to Washington wasn’t nonstop—he had a layover in Missouri to kick off and rally support for the GOP’s big tax reform plan. White House officials and GOP congresspeople have squawked about “simplifying the tax code” for a while, and media have fired off loads of analysis in response. As we monitor the latest, we remind investors to not overstate every “breaking news” development—not only is tax reform difficult to accomplish, but it isn’t automatically bullish even if it becomes reality.  

A group of White House officials and congressional Republicans known as “The Big Six[i] have led the charge for the GOP’s current tax reform plan. On the individual side, the plan keeps popular deductions like charitable donations, mortgage interest and retirement savings. The first two are especially common: According to the IRS, out of the approximate 44 million individual returns with itemized deductions in 2013, 82% claimed charitable donations and 77% claimed mortgage interest.[ii] The plan also wants to raise standard deduction caps—among other personal deductions—while getting rid of estate taxes (colorfully known as “death taxes”). On the corporate side, the GOP is proposing a lower corporate tax rate (level unspecified) as well as a “territorial system” so American corporations won’t pay more taxes when bringing future foreign profits home. (They are also pitching a holiday for companies to bring back profits held abroad at a special low-low rate.) Congress’s House Ways and Means Committee is shaping the legislation while Trump tries to rally support for the plan. The goal: passage this year.

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Recent Commentary

Elisabeth Dellinger

Even in Virtual Currencies, 'Too Good to Be True' Is Reality

By, 09/21/2017
Ratings1103.881818

Investors who bought into a hifalutin bitcoin trading strategy promising super-high returns with no risk just found out the strategy was virtual.

read more
Fisher Investments Editorial Staff
Politics

A Preview of Germany’s Election

By, 09/21/2017
Ratings353.771429

What should investors make of Germany’s upcoming election?

read more
Fisher Investments Editorial Staff
Monetary Policy

The Fed’s Slimdown Is No SlimFast

By, 09/20/2017
Ratings644.0625

The long-awaited balance-sheet unwinding has begun!

read more
Fisher Investments Editorial Staff
Currencies

Weak Theories About the Weak Dollar

By, 09/19/2017
Ratings144.392857

Not too long ago pundits sweated a strong dollar; fretting the opposite now still isn’t compelling.

read more
Fisher Investments Editorial Staff

Surveys Show Warmer—But Still Mixed—Sentiment

By, 09/19/2017
Ratings594.389831

Surveys show investors are getting happier—one sign of the optimism that can linger a long while in maturing bull markets.

read more

Global Market Update

Market Wrap-Up, Thursday, September 21, 2017

Below is a market summary as of market close on Thursday, September 21, 2017:

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.3%)
  • UK Equities: MSCI UK (-0.3%)
  • Best Country: Ireland (+1.0%)
  • Worst Country: Australia (-2.5%)
  • Best Sector: Energy (+0.1%)
  • Worst Sector: Telecommunication Services (-1.2%)

Bond Yields: 10-year US Treasury yields fell 0.01 percentage point to 2.27%.

 

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. S&P 500 returns are presented including gross dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.