Elisabeth Dellinger
Into Perspective, Media Hype/Myths

About Those European Banks

By, 02/12/2016

Editors’ note: MarketMinder does not recommend individual securities. The below is simply a broader theme we wish to highlight, not a recommendation to buy, sell, hold, sell short, free deliver, gift or otherwise transact in any securities mentioned.

By now, you have probably seen the headlines. There is “a bitter cocktail of concerns swirling around Europe’s banks.” Many fear the industry is “facing its own Lehman Brothers moment.” “Deutsche Bank’s hybrid bonds are locked in a death spiral,” the Stoxx Europe 600 bank index “hit multi-year lows” as Societe Generale plunged another 14% on Thursday, and it’s all about to come crashing down “like a game of Jenga.” But before you brace for September 2008 redux, take a deep breath, have a glass of something comforting, and stick with me. I’m not about to argue everything is hunky dory[i] in European Financials, but the issues at hand are widely discussed and not the sort that wipe a few trillion off global GDP before anyone realizes that’s happened. The sector’s fundamental outlook hasn’t vastly worsened this year, and there are some key differences between now and 2008.

Here, as best I can summarize them in a short space, are the various, loosely related fears that have snowballed. Most visible to Americans are flattening yield curves, which heightened fear of shrinking (or even negative) net interest margins, which could whack loan profits and threaten earnings. Adding another wrinkle, falling high-yield bond markets and trouble in commodity-related sectors drove jitters over credit quality and future loan losses. Less discussed here are the regulatory issues—namely, the implementation of Europe’s system for winding down failing banks by “bailing in” shareholders, creditors and large depositors (instead of bailing them out with taxpayer money) and the adoption of Basel III’s highest capital requirements in 2019. The latter is fairly simple: Eurozone banks are a bit behind US and UK banks at building capital buffers, and investors worry they’ll have to issue new equity to get there (presuming flat yield curves will give them few earnings to retain), further diluting earnings per share. To say shareholders are fatigued with bank equity issuance is probably an understatement. Since 2007, Banco Santander has doubled the number of shares in circulation, diluting earnings by half. Standard Chartered has 50% more shares out there. Deutsche Bank has an astounding 140% more.[ii]

Fisher Investments Editorial Staff
US Economy

How Has Oil Impacted Retail Sales?

By, 02/12/2016

Gasoline station sales are dropping.  Photo by Martin Divisek - Bloomberg/Getty Images.

Here is a tautology we believe some are overlooking, skewing their view of the US economy: People spend money on oil and oil products.

Fisher Investments Editorial Staff
Corporate Earnings

Overlooked Earnings

By, 02/12/2016
Ratings464.130435

If you’re a regular consumer of the news, you may notice it seems more bleak than usual.[i] Fears about crashes, banking woes and the global economy overall dominate. That, coupled with sharp volatility, can test the patience of even the most disciplined investors. But to borrow a message from a presidential hopeful,[ii] perhaps we can shed some light in an overall dour and pessimistic environment: Despite all the hubbub, Corporate America continues besting low expectations. Now, growth isn’t uniformly gangbusters, but the focus on the well-known struggles of a handful of sectors overlooks how the majority are doing—a sign of how dour sentiment is.   

As of February 10, 345 S&P 500 companies have reported their Q4 2015 numbers. Earnings growth is -3.8% y/y while revenue growth is -3.7% y/y.[iii] Those figures may seem bad at surface level, but consider how they stack up on a relative basis. Just a couple weeks ago, with 200 companies reporting, earnings were down -5.8% y/y,  revenues -3.5% y/y.[iv] Earnings improved by two whole percentage points while revenues were a smidge lower. And compare that to Q4 expectations at the reporting period’s onset, when estimates had earnings growth at -4.4% y/y and revenues growth at -3.0% y/y.[v] Obviously, though, on an absolute level, both are still negative and revenues have dipped a bit more than initially expected, prompting murmurs about the “r” word.[vi] But here is the real kicker: the headline figures don’t tell the whole story.

Overall corporate earnings reflect the struggles primarily of one sector—and its struggles are no surprise. As we have often written, the Energy sector has been slammed as ultra-low oil prices whacked revenues (which more price-sensitive than volume-sensitive). In Q4, Energy’s earnings have plunged -74.3% y/y, while revenues have dropped -34.6% y/y. Here is a chart showing how much Energy’s performance stands out relative to the other sectors. (Exhibit 1) Even Materials, which has faced some of the same headwinds as Energy, has not been hit as hard.

Elisabeth Dellinger
Monetary Policy, Reality Check

Sweden’s Central Bank Pushes Harder on String

By, 02/11/2016
Ratings484.729167

The view from Seat 34A. Photo by Elisabeth Dellinger.

Greetings from the sky, where yours truly is spending her 6 AM flight poring over the latest market maelstrom, powered by three cups of coffee and in-flight wifi. Banks have replaced China as the epicenter of financial fear, with Thursday's jolt coming courtesy of Sweden's central bank, which cut rates deeper into negative territory. Even though Sweden's economy is growing just fine. And even though negative rates haven't stimulated anything, anywhere, ever. But in a fresh twist, investors are starting to realize all this monetary gimmickry is feckless—an about-face from seven-ish years of central banker deification. Seeing the emperor in his underpants is scaring the, um, pants off the market, but in the long run, I suspect it can only be good. If markets shift focus to the too-long-forgotten yield curve, central banks just might do the same, perhaps ending the monetary madness and getting back to growthy basics.

Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Behind the Baltic Drop

By, 02/10/2016
Ratings504.28

Costs to book freighters like this one are way down lately. Photo by Ian Forsyth/Getty Images.

A low-cost Baltic isn’t just for Monopoly anymore.

Fisher Investments Editorial Staff
Politics, Market Risks, US Economy

Presidential Change Has Limited Range

By, 02/09/2016
Ratings454.111111

As always, we favor no candidate or party and assess politics solely to analyze how it may impact markets. We believe political bias is blinding and dangerous for investors.

Dissolving NAFTA. Breaking up big banks. Capping prescription drugs prices. Eliminating the federal Department of Education. These are just a few policies this year’s crop of Presidential candidates propose, and there is probably something for any voter to love or hate. But while candidates often promise big, sweeping changes when campaigning, the realities of American politics constrain them once they become President, and few of their extraordinary proposals end up coming to fruition. Populist campaign rhetoric might stoke volatility, especially as the candidate field narrows, but the risk of actual, radical change appears low.

Across the political spectrum, candidates are proposing bold moves they believe will win them votes and build their base. Perhaps some even believe these ideas are good, steering the US in a better direction. Nevertheless, our list above contains ideas many would consider radical. Donald Trump said he would either renegotiate or axe the North American Free Trade Agreement (NAFTA), believing it caused US jobs to move to Mexico.[i] He also vowed to impose a 45% tariff on imports from China, to compensate for the supposed economic advantage China gets over the US by devaluing their currency. Bernie Sanders proposes universal health care and free college tuition, as well as a tax on financial transactions to help pay for it. He also said he would break up big banks to end “too big to fail.” Hillary Clinton promises to force pharmaceutical firms to spend more on R&D and less on marketing, and both she and Trump want Medicare to re-negotiate drug prices with pharma companies. Ted Cruz wants to abolish a slew of federal agencies, including the IRS and the Departments of Education, Energy, Commerce and Housing and Urban Development.[ii] 

Fisher Investments Editorial Staff
Personal Finance, Into Perspective

Are Markets Retesting Your Mettle?

By, 02/09/2016
Ratings1754.214286

Global markets retested the correction’s lows Monday, and with the volatility came more dreary headlines. We had Wall Street strategists cutting their S&P 500 forecasts, pundits warning about slowing capex, chart-watchers finding scary things in charts, and banks and tech stocks replacing oil and China as the nexus of fear. Odd as it might seem, this is all quite encouraging—freakouts and a vain search for fundamental cause are normal in corrections, and capitulation often escalates as a correction’s end approaches. The further sentiment falls, the easier it is for any bit of positive news to be a pleasant surprise—the sort of pleasant surprise that buoys stocks. While no one can know when this correction will turn around, we believe now is a time for steely nerves and patience.

We often pick on the media a bit for peddling fear during corrections, but chances are your biggest enemy isn’t the headlines. Most likely, it is your brain. The human psyche is hard-wired to respond to volatility with a fight-or-flight mentality. When the going gets tough, survival instincts kick in, telling us to stop the bleeding—or, in other words, to sell. It’s a myopic instinct, making people forget their time horizon could stretch 10, 20, 30 years or more, depending on where they are in life. It’s all too easy to forsake the future for instant comfort in the now.

This instinct is often magnified by a behavioral phenomenon called myopic loss aversion—our tendency to feel the pain of a loss far more than we enjoy an equivalent gain. When paper losses mount during a correction, most folks feel it far more than they feel equivalent paper gains during a rally. Not knowing when the correction will end sows further discomfort, as it means not knowing when that pain will end. Hitting the “sell” button seems like the solution.

Elisabeth Dellinger
The Global View

About That ‘Brexit’ Pounding

By, 02/05/2016
Ratings313.983871

What happens if these two break up? Photo by Toby Melville – Pool/Getty Images.

Stop me if you’ve heard this one before: If the UK leaves the EU, the pound will plunge, interest rates will soar and the economy will crater, because foreign investors will stop funding the current account deficit. Financial Armageddon will ensue, and probably a plague on humanity. Or something—I might have exaggerated for dramatic effect.[i] BoE Governor Mark Carney and others have warned of this dismal chain reaction, and the sirens got louder after the first draft of Britain’s renegotiated EU membership landed with a resounding thud, giving Brexit advocates more momentum. But it is far too early to fear the worst, and not just because the vote could easily go either way. These warnings are dubious on their face and frankly misunderstand how capital markets work.

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Survey Says … Growth!

By, 02/04/2016
Ratings1043.850961

In today’s upside-down financial press, what’s fair seems to be foul. For instance, a January survey reported more businesses grew than didn’t in the US’ robust “non-manufacturing” sector, which includes industries ranging from Retail Trade and Mining to Health Care and Construction. The UK’s own burgeoning services sector experienced a similar January. Sounds grand, right? Not if you read the news coverage. Headlines bemoaned services growth at its slowest pace in two years in the US, while another pundit declared the “UK’s economic recovery is a shadow of its former self.” All this left us a wee bit confused, especially when the media attempted to pin stock market volatility on reported output last month. While old January data don’t mean much for forward-looking stocks, this also overlooks the larger point: The latest non-manufacturing and services PMIs show growth. That so few recognize this speaks to how dour sentiment is.     

For the US, the Institute for Supply Management’s Non-Manufacturing Purchasing Managers’ Index (PMI) slowed to 53.5 in January—down from December’s 55.8. In the UK, Markit/CIPS’ Services PMI rose a tad from December’s 55.5 to 55.6. PMIs are business surveys asking whether activity in various categories rose or fell in a given month, and readings over 50 indicate more respondents grew than contracted once all the categories were aggregated. While PMIs have limitations—they don’t tell you the magnitude of growth and they’re surveys—many use them as a quick-and-dirty proxy for business growth since they hit within days of month-end.

Considering both surveys were well in expansion, we’re a little perplexed by the near-uniform gloom. Even though ISM’s non-manufacturing PMI is at its slowest level since February 2014[i], it still indicated growth—as does Markit/CIPS’ Services PMI. And while monthly data can be pretty darn volatile, the longer-term trends suggest nothing out of the ordinary for both the ISM and Markit/CIPS PMIs. (Exhibits 1 and 2)

Fisher Investments Editorial Staff
Politics, Media Hype/Myths

That Raucous Iowa Caucus

By, 02/03/2016
Ratings294.258621


As his thumbs up seemingly indicate, Martin O’Malley is out. Photo by Steve Pope/Getty Images.

As always, we favor no candidate or party and assess politics solely to analyze how it may impact markets. We believe political bias is blinding and dangerous for investors.

And then there were 12. Former Governors Martin O’Malley (MD) and Mike Huckabee (AR) dropped out of the Presidential race after Monday’s Iowa caucus[i], which saw Democrat Hillary Clinton edge Bernie Sanders in a photo finish, while Ted Cruz trumped[ii] pollsters and The Donald on the GOP side. Kentucky Senator Rand Paul, who finished fifth on the GOP side, suspended his campaign early Tuesday.[iii] Pundits are slicing and dicing the caucus results, and if you’re into that sort of thing, there is entertainment and wonkery galore. But for investors, there are really only two main takeaways at this juncture: Polls are terrible at predicting primary races, and it’s too early to handicap who wins the Republican nomination. That means it’s too early to assess how November’s vote will impact markets.  

Fisher Investments Editorial Staff
Into Perspective

Did the US Economy Have a Case of the Mondays?

By, 02/02/2016
Ratings1044.091346

The latest US manufacturing and consumer spending numbers hit Monday, and if you take most coverage at face value, it wasn’t pretty. “Cautious consumers hold back on spending in December as concerns rise about US economy,” said one headline. “Consumer spending cooled in December as Americans padded savings,” said another. Manufacturing “continued to contract,” and the Institute of Supply Management’s report had a “weak tone.” It all left folks wondering how worried we should be and if the long-feared recession is nigh. None of these headlines really give you the full scoop. As it happens, ISM’s survey showed manufacturing output and new orders rose, and when adjusted for inflation, so did consumer spending. But the widespread effort to find a cloud in a silver lining shows where sentiment is: still in the doldrums. It shouldn’t take much for US growth to beat expectations and give stocks some positive surprise.

Consider manufacturing. The headline Purchasing Managers’ Index (PMI) hit 48.2 in January—higher than December’s 48.0, but still below 50, therefore indicating contraction for the fourth straight month. That fed the long-running narrative of a manufacturing recession that’s poised to take down the US economy. But if you look at the PMI’s components, it doesn’t exactly look recessionary. New orders and production moved back into expansion at 51.5 and 50.2, respectively. New orders’ rise is particularly noteworthy, as today’s orders are tomorrow’s production—it’s the most forward-looking component. The biggest detractors were inventories—always open to interpretation—and employment, which is always and everywhere a late-lagging indicator. While one month doesn’t make a trend, January’s report has plenty of reasons for optimism.

Plus, for all the handwringing about this being the longest contractionary streak since the recession ended in 2009, the actual decline is small—much smaller than you usually get in a recession. As Exhibit 1 shows, it looks much more like the 10 or so false reads since 1948. There were deeper, longer declines in the 1980s and 1990s. But last we checked, there were no recessions in 1985, 1995 or 1998. ISM’s report even says that while manufacturing has hit a soft patch, the numbers are still consistent with a broad economic expansion.

Fisher Investments Editorial Staff
GDP, Media Hype/Myths

Drilling Deep: How Did Energy Influence US Q4 GDP’s Slowdown?

By, 01/29/2016
Ratings1124.107143

Friday morning, the US Bureau of Economic Analysis (BEA) announced US Q4 2015 GDP grew a meager 0.7% annualized, slowing from Q3’s 2.0%. With this seemingly jiving with fears of a slowdown or worse, the deceleration stole headlines in short order. The Wall Street Journal dubbed it “anemic.” The New York Times said, “The American economy barely grew last quarter, finishing the year much as it had started and stoking concern about its momentum in 2016.” And many blame Energy, suggesting oil’s drop is hamstringing the US economy. While the report is indeed a slowdown, we’d suggest that the details allude to an economy that was on fine footing at 2015’s close—and that Energy isn’t likely to derail growth looking forward.

First, to be clear, this report isn’t stellar. But it also isn’t a surprise. Wall Street analysts’ forecasts ranged from 0.0% to 2.3%, with the consensus being +0.9%. So this isn’t shocking anyone. And before you figure this raises doubts about the US economy’s “momentum,” consider that laws of physics do not really apply in econometrics. The simple fact of the matter is this is a backward-looking reflection of one slightly wonky, incomplete attempt to tally US economic performance. It is also one quarter—annual 2015 GDP data, also published Friday, showed GDP grew 2.4%, matching 2014’s rate.

Exhibit 1: US GDP Growth, Quarterly and Annual Rates

Fisher Investments Editorial Staff
Into Perspective

Don’t Be Afraid of Rating Agency Downgrades

By, 01/29/2016
Ratings453.644444

Credit-ratings agency analysts have been a busy bunch lately. And not with upgrades. Last year, Standard & Poor’s downgraded more issuers than they have in six years. Separately, Moody’s placed 120 oil and gas firms and dozens of mining companies on review for possible downgrades. Fitch—the third major rating agency—has been relatively quiet thus far, but given the three agencies tend to move in lockstep, it wouldn’t surprise us if they joined the party. But while these moves took headlines recently, with many quoting Moody’s statement that this is a huge “fundamental shift” for commodities firms, these downgrades really aren’t even news. They only confirm what markets have long known: The global commodities slump has pressured many indebted resource producers. Which is par for the course for credit-rating agencies’ decisions. They have a rich history of forecasting what just finished happening, and that appears to be the case here. Investors should categorize their blanket commodities industry downgrades as noise, not news.

Credit-rating agencies base their decisions on recent and current events and other widely known information. They adjust an issuer’s credit rating only when it’s apparent fundamental conditions have actually changed—e.g., when oil prices fall far, it’s fairly clear Energy firms’ profits will  drop, but the raters wait to actually get that report. Markets, however are forward-looking. If things start looking dicey, they usually begin discounting it right away. If certain developments make it likely a firm won’t be able to service its debt in the foreseeable future, yields don’t wait for some formal announcement to start rising. They move first.

Credit markets began discounting Energy firms’ troubles long ago. Energy junk bond yields first spiked in late 2014. They recovered some in early 2015, while oil prices dead-cat-bounced, then soared—far outstripping broader high-yield bond yields. Ditto for the metals & mining industry’s junk bond yields. This was a sign markets knew oil and commodities’ sharp declines spelled trouble for many resource firms. 

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Industry Isn’t Producing a Recession

By, 01/29/2016
Ratings474.010638

As the global expansion nears its seventh birthday, many folks see worrisome signs that the “r” word—recession—looms. As evidence of weakness, they point to contracting industrial production, now down in 10 of the past 12 months—presuming industrial production is a forward-looking economic indicator. Spoiler alert: It isn’t. And that isn’t the only shortcoming to this theory. A closer look at the data reveals some other big caveats. In our view, recession doesn’t look likely.  

First, the stats behind the fear. According to one pundit, when industrial production falls at least 8 months in a 12-month period, it’s a surefire sign a recession will occur. Here is the messy chart allegedly supporting this thesis (Exhibit 1).

Exhibit 1: Does Industrial Production Foresee Recession?

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.

Recent Commentary

Elisabeth Dellinger
Into Perspective

About Those European Banks

By, 02/12/2016

European bank stocks took a pounding, but Lehman comparisons miss the mark.

read more
Fisher Investments Editorial Staff
US Economy

How Has Oil Impacted Retail Sales?

By, 02/12/2016

Two charts reveal steady retail sales growth excluding oil’s impact.

read more
Fisher Investments Editorial Staff
Corporate Earnings

Overlooked Earnings

By, 02/12/2016
Ratings464.130435

Outside Energy, Corporate America continues chugging along.

read more
Elisabeth Dellinger
Monetary Policy

Sweden’s Central Bank Pushes Harder on String

By, 02/11/2016
Ratings484.729167

Investors may be starting to notice central banks’ monetary gimmickry is misguided.

read more
Fisher Investments Editorial Staff
Commodities

Behind the Baltic Drop

By, 02/10/2016
Ratings504.28

A widely watched gauge of global shipping costs hit a record low Monday. Here is some quick-hitting perspective.

read more

Global Market Update

Market Wrap-Up, Thursday, February 11, 2016

Below is a market summary as of market close Thursday, February 11, 2016:

  • Global Equities: MSCI World (-1.2%)
  • US Equities: S&P 500 (-1.2%)
  • UK Equities: MSCI UK (-2.4%)
  • Best Country: Australia (+0.8%)
  • Worst Country: Italy (-4.6%)
  • Best Sector: Consumer Discretionary (-0.2%)
  • Worst Sector: Financials (-2.6%)

Bond Yields: 10-year US Treasury yields fell -0.01 percentage point to 1.66%.

 

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.