Fisher Investments Editorial Staff
Personal Finance

Lessons on Due Diligence From the Energy Sector

By, 09/23/2016
Ratings74.857143

Investors should always know what they’re buying—what drives returns, what it’s correlated with and how can you gauge performance. Seemingly comparable investments may differ dramatically—a complicating factor. This isn’t controversial advice, but now and again it’s good to have a concrete reminder of the dangers of forgoing essential research. The following case studies may help.

The first concerns Master Limited Partnerships (MLPs)—energy infrastructure-focused investment vehicles (think pipelines like this one or that one) that pay out the vast majority of their profits to shareholders. MLPs’ high dividend-like payments, coupled with their perceived safety, helped them gain great popularity during oil’s run-up. We discuss their risks here and here, but this article isn’t about that. Instead, MLPs are here to teach us how investments often diverge from investors’ expectations. Here is a Bloomberg View article about two energy infrastructure (read: MLP-centric) funds with wildly differing performance since 2013.  We’ll call them Fund 1 and Fund 2 for simplicity.[i] Fund 1 is up 9% since September 2013—great! Fund 2 is down 30%. Not as great. What gives? Well, they have wildly different investment objectives and approaches. In addition to some old-fashioned pipelines, Fund 2 also owns a bunch of exciting new Energy services MLPs whose earnings depend more on oil prices than mere transport MLPs. Fund 1’s MLP investments, on the other hand, are your old-school, move-oil-from-here-to-there type. Now, the article notes that newfangled MLP exposure hurt Fund 2’s performance, and to a certain extent it did. But no MLPs—old and boring or newfangled—escaped the downturn. How, then, did Fund 1 do so much better?

Turns out Fund 1 avoided MLPs’ struggles in large part by not owning MLPs—they made up less than half its holdings. Instead, it held boring old utilities, which surged early this year, during the correction’s steep swings.[ii] Fund 1 can also use leverage (which amplifies the effect of price movements) and write covered call options (a way of earning income by selling the right to buy your shares if their value rises to a certain level).[iii] We aren’t opining on which approach is better—Fund 1’s recent advantage could reverse at any time. We merely note the two have differences any investor must take into account. MLP funds—just like other fund categories—aren’t uniform.

Fisher Investments Editorial Staff
US Economy

Pomp and Financial Circumstances

By, 09/22/2016
Ratings174.294117

Fall is officially here, folks! This means college-goers around the country are returning to school, and (right on schedule) pundits are worrying about student loan debt. US student loans exceed $1.3 trillion and have doubled since 2009, sparking concerns of a massive, unpayable burden that might shift to taxpayers or keep grads from becoming full-fledged economic contributors. This is a politically potent issue, to be sure. But the data don’t suggest matters are anywhere near so dire overall: Few borrowers are troubled, and the majority will likely earn (and contribute) far more than they would absent an education. Investors needn’t fear a coming wave of impoverished graduates dragging down the economy or pumping up federal debt.

Tuition costs have risen rapidly in recent years, and the federal government is under increasing pressure to step in and relieve indebted students—not just those who attended now-closed private universities like ITT Technical Institutes and Corinthian Colleges, but perhaps all borrowers. Many suggest student debt is just unaffordable and, with 92.5% of student loans ($1.26 trillion) federally issued, the government is already on the hook for most losses—losses the CBO projects will rise 30% over the next decade. The combination of rising defaults and demands for Congress to intervene has many worried that taxpayers could be on the hook for tens, maybe hundreds of billions of dollars.

Congress has reacted to recent cries for loan forgiveness in time-honored Congressional fashion: by drafting several student debtor-friendly bills that are now stalled in committee until next year at least. Said differently, after the election. Who’s to say whether the 2017 Congress will resurrect the measures, or whether the new president will favor (or prioritize) them? Election-year promises and bill drafts frequently aren’t worth the paper they’re written on. In addition, the CBO’s more pessimistic projection of $170 billion in losses over the next 10 years comes out to just over half of federal spending last month. Not to be dismissive, but student loan defaults are very unlikely to lift federal debt or deficits to dangerous levels, even if the CBO’s projection proves true.

Fisher Investments Editorial Staff
Emerging Markets

Brazil’s Impending Impeachment Hangover

By, 09/21/2016
Ratings164.0625

Brazil has been a bit of a Dickensian tale in recent years. In the last two years, it’s been mostly the worst of times: The deepest and longest recession in generations; political scandals, including one that resulted in a sitting president’s ouster; high inflation; Ryan Lochte.[i] Given this scenario, one might expect Brazilian stocks to have significantly underperformed the broader MSCI Emerging Markets Index. And for a time, this was true. From mid-September 2014 through late January 2016, the MSCI Brazil underperformed the MSCI Emerging Markets (EM) by more than 30 percentage points.[ii] But, since then, the worst of times has become the best of times for Brazilian stocks, up 87% since January 25 and outperforming EM by a whopping 59 percentage points.[iii] The question, however, is: Is this sustainable? In our view, the answer is no.

Brazil’s economy and stocks were mostly ravaged by the commodity downturn. Brazil’s economy relies heavily on commodity production and exports—particularly iron ore, soybeans and oil. All these have seen very weak prices in recent years, weighing on Brazil’s economy and markets. This is especially true of Energy—EM Energy stocks and the MSCI Brazil’s relative returns have been tightly linked until very recently. The correlation coefficient—a statistical measure of the relationship between two data series ranging from -1 (exact opposites) to 1 (move in lockstep)—was 0.70 for most of the last two years.[iv] As one would assume, when Energy stocks lagged badly due to declining oil prices, Brazil lagged right along with them. However, in January, oil prices touched their low and rallied. Energy stocks—and Brazil—rallied as well.

This is all as one might presume. It’s quite unsurprising that a commodity-heavy country’s relative performance would show heavy influence from one of the world’s primary commodities. However, relative returns sharply diverged starting in early June. During this span, EM Energy stocks (like their developed-world counterparts) floundered rather directionlessly, underperforming broad markets. Brazilian stocks have shot higher. The correlation coefficient flipped from 0.70 to -0.73.[v] What gives?

Timothy Schluter
Interest Rates

Bank of Japan Beefs Up Policy With Three More Letters

By, 09/21/2016
Ratings334.469697

The BoJ threw some extra letters at Japan’s stagnant economy Wednesday, tweaking its quantitative easing program after the bank’s “Comprehensive Assessment of Monetary Policy” identified the flattening yield curve, which is crimping banking profitability, as the primary negative resulting from its policy decisions. Officials made no changes to short-term negative interest rates (-0.1%) or planned asset purchases (¥80 trillion in Japanese Government Bonds, aka JGBs; ¥6 trillion in equity ETFs; ¥90 billion in REITs). However, they set a new interest rate target of 0% for 10-year JGB yields—an effort to steepen the yield curve. The BoJ’s standing program is now called “Quantitative and Qualitative Monetary Easing With Yield Curve Control,” or if you prefer, QQEYCC. The media flipped for it, but the YCC addition doesn’t much change the calculus, as even success would ensure the yield curve remains very flat.

The BoJ called for the “Comprehensive Assessment” to examine why monetary policy has failed to stoke economic activity and reach a 2% inflation target, despite Japan’s being four years into one of the largest QE programs ever attempted. The bank also sought to examine both the positive and negative effects of its policy decisions, with intent to tweak future policy to mitigate the negatives.

The BoJ’s chief finding about QE isn’t surprising, though it is noteworthy that this is the first central bank to publicly acknowledge it. As we’ve repeatedly pointed out over the years, any benefits from QE (lower borrowing costs for households and businesses) are overshadowed by the flatter yield curve, which compresses banks’ profit margins and thus discourages lending. Negative interest rates on excess reserves, implemented in Japan in January, aimed to coax lending but instead made the yield curve even flatter, as they fueled demand for higher-yielding, longer-dated assets. This made life even more painful for Japanese Financials, which have complained bitterly about reduced profitability.

Fisher Investments Editorial Staff
Taxes

Why You Shouldn’t Overrate the 2016 Election’s Tax Policy Debate

By, 09/20/2016
Ratings364.444445

Will the next president delete the dreaded form? Image from Internal Revenue Service.

This article centers on tax policy, which can evoke emotions from both sides of the political aisle. Please recognize our sole interest here is in assessing how changes in tax policy have historically affected stocks in order to frame expectations for what may happen if taxes are changed after 2016’s election.

Fisher Investments Editorial Staff
Monetary Policy

The Fed Says Lots of Words, Words, Words

By, 09/16/2016
Ratings533.679245

Whatever Fed head Janet Yellen's opinion of short-term interest rates is, hers is only one of many. Photo by Chip Somodevilla/Getty Images.

After a relatively quiet summer, the Fed has returned to the forefront, especially after Republican presidential nominee Donald Trump intimated Fed chair Janet Yellen is playing politics with monetary policy. Most of the chatter, though, centers on the Fed’s meeting next week and the $64,000 question: Will they hike or not? We don’t profess to know the answer, but rather than wade through the myriad analyses out there, we present to you the voting members’ latest public comments about a rate hike, and you can try and decipher yourself which way they’ll go. In our view, the varying opinions highlight how difficult—and ultimately, futile—it is to game how a group of people will interpret data and answer one question. 

Fisher Investments Editorial Staff
MarketMinder Minute, Politics

MarketMinder Minute - Presidential Authority Has Limited Power

By, 09/15/2016
Ratings633.523809

This MarketMinder Minute evaluates the limited authority and potential market impact of a newly elected president.

Fisher Investments Editorial Staff
Developed Markets

Fiscal Stimu-less?

By, 09/14/2016
Ratings653.538461

Quick—what’s the best way to perk up a slack economy? Since 2008, “vigorous and creative monetary policy!” was the popular response, and central bankers heeded the cry. The results: Rock-bottom (even negative) interest rates in the world’s largest economies. Quantitative easing in the eurozone, UK, US (now over), Sweden and Japan, where the central bank is buying virtually anything under the sun. Yet growth rates mostly lag past expansions. So now, there is a new fashionable response to the opening question: Monetary stimulus is no longer effective, and fiscal stimulus needs an at bat. Even central bankers seem to agree! In our view, however, this “new consensus” misses a few key points. Fiscal stimulus is handy during an actual recession, but it isn’t a sustainable growth-boosting tool, and overall and on average, the world economy doesn’t need it now. Investors shouldn’t fall into the trap of thinking government aid today is necessary to keep this expansion—and bull market—humming.

First, to be clear, we aren’t ideologically opposed to fiscal stimulus. Fast-acting tax rebates and new spending can jumpstart demand during a recession by putting new money into the economy when banks aren’t lending and businesses are retrenching. Consumers and businesses get a small boost, a temporary jolt to speed the recovery. The private sector eventually has to do the heavy lifting to get the new expansion going for real, but stimulus can be a nice salve in the meantime.

Likewise, a sharp pullback in spending or an onslaught of taxes in anemic times adds to economic pain. Tax hikes and spending cuts likely worsened the eurozone crisis in 2012, for example, by sucking resources out of the economy.[i] Waiting for data to confirm a recession before ramping up stimulus isn’t necessarily required either—acute problems in industries that represent a huge swath of the economy can also be valid reasons to prime the pump a bit. Australia's government is responding to declining commodity prices via aggressive fiscal stimulus, even though the country hasn’t experienced a recession in a quarter-century. While not crucial, the move is arguably a reasonable response to genuine headwinds, as natural resources play a heavy role in the Land of Oz. One could make a similar case for Russia, Brazil or Canada.

Fisher Investments Editorial Staff
Personal Finance, The Advisor's Corner

Money Market Reforms, Libor and You

By, 09/13/2016
Ratings363.847222

Money market funds typically get little coverage in the financial press because, except under extreme circumstances, they don’t rise or fall in value. Boring! But that’s about to change, as new rules will soon require institutional prime money market funds to report their real-time market value and hold more liquid assets. Many worry this will dry up short-term funding markets, as money market funds are one of the primary investors in commercial paper. Sure enough, Libor rates have risen lately, driving fears of "stealth tightening" in credit markets. While the nervousness is understandable, it’s unlikely major turmoil lies ahead.

The London Interbank Offered Rate, better known as Libor, is the average rate banks pay to borrow from each other over short time periods. It is also the reference rate for many bank loans—hence why people are worried about the apparent spike. The volatility is quite simple to trace to the money market fund reforms, which take effect on October 14. Money market funds have long invested in commercial paper for its yield (which exceeds T-bills), offering investors a way to hold “cash” with a higher return than a plain old bank deposit. But the looming rule changes will require prime institutional money market funds to have floating net asset values instead of being fixed at $1 / share—regulators’ attempt to prevent a repeat of the panic that ensued when one huge money market fund “broke the buck” in 2008, triggering a run on money market funds.[i] The rules also impose liquidity requirements and tighter restrictions on portfolio holdings, and many fund providers have decided to switch from prime funds to funds that invest primarily in government debt, which regulators treat with more leniency. As a result, banks and other firms that issue commercial paper have had to raise rates a tad to attract buyers.

Yet there is a large gap between incrementally higher funding costs due to a structural change in the marketplace and an actual, acute funding squeeze. For one thing, despite the clamor, Libor remains low by historical standards. (Exhibit 1)

Fisher Investments Editorial Staff
Developed Markets, Media Hype/Myths

Brexit Boo-Hooing Seems Like a Bust

By, 09/09/2016

10 weeks after the Brexit referendum and speculation about its impact has yet to simmer down. Besides the usual politicking and theorizing, the occasional threat grabs headlines too. However, the latest data show the fear and hype surrounding Britain’s decision to leave the EU hasn’t yet materialized into a certifiable economic downturn—a timely reminder for investors that the media’s “big market negative” often isn’t so. 

On Tuesday, Markit reported its August UK services purchasing managers’ index (PMI) rebounded to 52.9 from July’s 47.4—the biggest month-on-month gain in the survey’s 20-year history. This news followed similar bounce-back stories in the UK: Retail sales turned around from -0.9% m/m in June to 1.4% in July, smashing expectations of 0.2%. Markit’s August manufacturing PMI rose to 53.3 from July’s 48.3. Now, we would be remiss if we didn’t include our standard “one month isn’t telling” language.  We cautioned investors against equating the UK services’ PMI record drop in July with evidence of economic doomsday. Likewise, this positive report doesn’t mean Brexit lacks economic impact whatsoever and all those prognostications were dead wrong (more on this later). Rather, we recommend looking at this latest report like any economic metric: See what it measures, evaluate the data in context, and assess the popular interpretation of the news.

On that note, the Markit/CIPS UK services PMI is a survey,[i] covering six service sector categories, that tabulates the percentage of respondents reporting improvement/deterioration/no change from the previous month. Readings over 50 purportedly indicate expansion; below 50, contraction. PMIs provide a rough, quick assessment of the breadth—though not magnitude—of business growth. Beyond the record-making reports of the past two months, here is a broader look at the UK’s services PMI.

Fisher Investments Editorial Staff
Into Perspective

September Is Still Just a Month

By, 09/08/2016
Ratings574.061403

Here we go again! September has arrived, and with it, warnings to buckle your seatbelt because, historically, September stinks. And yes, it’s true, poor September does boast the lowest average S&P 500 return of any month, and some Septembers have been truly awful. It’s easy to see how September gained notoriety as the start of the legendary “financial hurricane season.” But it doesn’t deserve the bum rap. Bad Septembers are a freakish coincidence. We’ve seen plenty of fine Septembers, too, but these don’t win headlines. September isn’t special, for good or ill.[i] It is just a month, and not automatically bad for stocks.

True, since 1926, the S&P 500’s average September return is -0.7%, and September is the only month with a negative average return.[ii] But here is your first clue that the average is skewed by a couple outliers: The median return is 0.1%.[iii] Positive. Within spitting distance of zero, but positive, which tells you we’ve had more good Septembers than bad, even if just barely.

Exhibit 1 shows the distribution of September returns over the last 90 years. Unsurprisingly, it’s pretty darned bell curvy. More Septembers qualify as “modestly positive” than any other return bracket. There are more really bad Septembers than really good Septembers, but most of these abysmal Septembers occurred during pre-existing bear markets, not out of the blue. Only one bear market—the 1929-1932 bloodbath—began in September, and it wasn’t because the calendar turned.

Fisher Investments Editorial Staff
Monetary Policy

Cozying Up to Negative Yields

By, 09/08/2016
Ratings334.212121

Familiarity might breed contempt in some cases, but as it pertains to negative interest rates, it seems more like it is reducing uncertainty.

In early 2016, following the Bank of Japan’s announcement it would cut its main overnight rate below zero, negative interest rates (curiously) became one of investors’ primary sources of angst. As was often noted, there is little history of central banks cutting rates below zero, so there isn’t much precedent to guide one’s expectations. Hence, uncertainty.

Now, that is all understandable enough except the timing, which is why we say it “curiously” drew investors’ ire. Japan wasn’t the first country to implement negative rates. It wasn’t even the second, third or fourth. After all, Denmark first cut deposit rates into negative territory in July 2012. After briefly returning to positive territory in early 2014, Denmark again went negative that September. The ECB cut rates into the red in June 2014 and Sweden followed suit a month later. In early 2015, Switzerland announced a negative interest rate policy (NIRP). Yet none of these moves seemed to garner the media furor that accompanied Japan’s moves this year.

Fisher Investments Editorial Staff
Trade, Market Risks

The EU’s Taxing Behavior

By, 09/02/2016
Ratings584.034483

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

In a strange twist, it seems the world’s largest multinational free-trade zone—the EU, consisting of 28 nations—has some qualms over both expanding free trade and multinational corporate business practices. Tuesday’s headlines blared about Brussels-based bureaucrats’ plan to take a $14.5 billion bite out of a company based in Cupertino, CA. Politicians are also raising doubts about big trade deals between the union and North America. For investors, these developments are reminders that the current global environment isn’t very conducive to deal-making, and protectionism remains a factor to watch in this bull market. However, there is little proof a trade war this way cometh, and much more evidence we may simply lack the long-term positive of increasingly freer trade. 

First, the big story: The EU hit Apple with a $14.5 billion (€13 billion) bill in unpaid taxes from 2003 – 2014. Brussels cited a violation of EU state-aid rules, stemming from Ireland’s friendly corporate tax policy. Specifically, companies could book global sales and hold profits in a “head office” at an Irish address where no taxes applied. Most importantly, this was legal—Apple didn’t break any tax laws here. Rather, the EU argued the arrangement was a sweetheart deal and amounted to an illegal government subsidy. The EU’s tax grab has sparked angry reactions from Apple and the US Treasury, and after having a discussion, Ireland confirmed Friday they were outraged too.

Fisher Investments Editorial Staff
Into Perspective

Two Charts and Some Thoughts on Manufacturing

By, 09/01/2016
Ratings424.107143

It’s the first of September, and you know what that means—a new round of manufacturing surveys! Last month we flooded you with 29 countries’ worth of data to show global manufacturing appeared to be on an upswing. This month, lest we write more or less the same story again, we’ll zero in on two: America and Britain. One was not so great. The other was smashing. Both are worth noting, but we’d suggest investors not get hung up on either, for good or ill. One month does not a trend make.

First up, America, where the Institute for Supply Management’s August Manufacturing Purchasers’ Index (PMI) slipped to 49.4, implying contraction, as all PMIs under 50 do. This snaps a five-month growth streak, and forward-looking new orders contracted as well. Now, this doesn’t mean heavy industry actually shrank in August. PMIs measure how many firms grew, but not how much each grew. If fewer than half of the surveyed businesses saw higher activity, but they grew a lot more than the majority shrank, then the net result could very well be growth. PMIs are quick, fuzzy estimates, not airtight calculations. Then again, even if actual industrial output did slip, it should hardly signal the death knell for this expansion. As Exhibit 1 shows, the Manufacturing PMI shrank for five straight months in late 2015/early 2016, while manufacturing output mostly contracted. Yet the economic expansion didn’t end. GDP slowed somewhat, but it still grew, with services and consumption doing the heavy lifting. Since manufacturing is only about 12% of GDP, isolated weakness there generally isn’t enough to tip the economy into recession. It’s a headwind, but surmountable.

Exhibit 1: US Manufacturing PMIs & Industrial Production

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Recent Commentary

Fisher Investments Editorial Staff
Personal Finance

Lessons on Due Diligence From the Energy Sector

By, 09/23/2016
Ratings74.857143

No matter the investment, it pays to do your homework.

read more
Fisher Investments Editorial Staff
US Economy

Pomp and Financial Circumstances

By, 09/22/2016
Ratings174.294117

Rising student debt levels won’t slow growth or shock markets.

read more
Fisher Investments Editorial Staff
Emerging Markets

Brazil’s Impending Impeachment Hangover

By, 09/21/2016
Ratings164.0625

Brazilian markets seem at risk of suffering from weak oil prices and political disillusionment.

read more
Timothy Schluter
Interest Rates

Bank of Japan Beefs Up Policy With Three More Letters

By, 09/21/2016
Ratings334.469697

The Bank of Japan’s latest monetary gimmick doesn’t change much.

read more
Fisher Investments Editorial Staff
Taxes

Why You Shouldn’t Overrate the 2016 Election’s Tax Policy Debate

By, 09/20/2016
Ratings364.444445

All the presidential candidates want to tinker with your taxes. What does it mean for stocks?

read more

Global Market Update

Market Wrap-Up, Thursday, September 22, 2016

Below is a market summary as of market close Thursday, September 22, 2016:

  • Global Equities: MSCI World (+1.1%)
  • US Equities: S&P 500 (+0.7%)
  • UK Equities: MSCI UK (+2.2%)
  • Best Country: Norway (+4.0%)
  • Worst Country: Japan (-0.1%)
  • Best Sector: Materials (+1.7%)
  • Worst Sector: Information Technology (+0.7%)

Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 1.62%.

 

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.