Elisabeth Dellinger
Into Perspective, US Economy, Media Hype/Myths

America, the Liberated

By, 03/04/2015
Ratings144.285714

America's economic prospects are as cheery as this little fella. Photo by FPG/Hulton Archive/Getty Images.

It is no secret this expansion is America’s slowest since World War II. It is also no secret folks are frustrated with sluggish growth and keen for a boost—never mind the fact GDP growth beat its postwar average in four of the last six quarters. But that doesn’t mean America’s economy is a problem that needs fixing. Stocks have already proven they can rise fine amid slow growth, and efforts to fix what isn’t broken often do more harm than good.

Fisher Investments Editorial Staff
Into Perspective, GDP

A Second Glance at Growth

By, 03/04/2015

Is the global economy slowing down? Seems many think so, based on concerns over US growth’s downward revision and the UK’s “unbalanced” expansion, for example. However, these widely reported headline figures don’t tell the tale; data overall confirm global growth is continuing apace.

In the US, Q4 2014 GDP was revised to 2.2% seasonally adjusted annual rate (SAAR), lower than the 2.6% preliminary estimate. However, this revision says more about GDP’s statistical quirks and limitations than faltering growth. Higher imports and leaner company inventories were the downward revision’s main drivers. Yet rising imports indicate healthy domestic demand—a positive! And leaner inventories are subject to interpretation. Are companies forecasting bad times ahead, or were shelves depleted by healthy demand? Given consumer spending rose at the fastest clip since 2010 and business spending also advanced, healthy demand seems more likely—suggesting possible future restocking. A look at the purely domestic private sector measures combined—personal consumption, business spending and real estate—shows accelerating growth.

While a second look at October-December 2014 growth won’t tell you about current—let alone future—prospects, other data suggest the US is chugging along. The Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) highlight the private sector’s strength. February’s Services PMI increased to 56.9 while Manufacturing hit 52.9—readings over 50 indicate more businesses saw growth than contraction. Likewise, the New Orders subindexes for both Services (56.7) and Manufacturing (52.5) allude to future economic activity. Some were downright perplexed when low oil prices didn’t goose consumer spending, which fell -0.2% m/m in January—particularly the -0.1% m/m durable goods spending drop. But consumers don’t exclusively spend on goods—services spending rose 0.5% m/m, and the headline negative is dragged down by the very same falling oil prices—adjusted for inflation, headline spending rose 0.3% m/m. The durables drop shows a similar influence, rising 0.2% in real terms.

Fisher Investments Editorial Staff
Media Hype/Myths

Aversion to the Mean

By, 03/03/2015
Ratings334.575758

Stop us if you’ve heard this one before: What goes up must go down, and what falls the furthest bounces the highest. If you are Galileo or Sir Isaac Newton and referring to physics, then yes. But in stocks, not so much. The statement assumes Extreme A is followed by an equal and opposite extreme, maintaining the long-term average—also known as reverting to the mean. But stocks don’t do that. If you see a forecast assuming they do, you can probably tune it out.

We’re compelled to point this out because stocks did great in February. The S&P 500 rose 5.7%.[i] The MSCI World Index rose 5.9%.[ii] Right on cue, some pundits are warning March will probably stink, mostly because of February. One seemed surprised history doesn’t actually support this, calling it “slightly counter-intuitive” that the S&P 500 rose during the month following nine of the ten 5%-plus moves during this bull market. But that sample size is so small, it incorrectly leads readers to believe big months mean more big returns ahead! The truth is far more boring and less gameable. From 1926 through 2014, the S&P 500 rose 5% or more in a month 179 times.[iii] It fell the next month 59 times.[iv] That is a 67% frequency of positive returns, higher than the 62% frequency of positive monthly returns overall.[v]  But that isn’t a predictive tool! It doesn’t mean big months beget positivity! It merely guts the notion stocks must mean revert after they go up nicely. Averages are just observations of history. Interesting factoids. Not objects with gravitational pull.

Mean reversion is everywhere. It’s in warnings the S&P 500’s high cyclically adjusted P/E ratio (CAPE) means stocks will soon suffer. It’s in the wallowing about above-average normal P/Es in the US putting a ceiling on equity returns. Neither of those statements are true. Both assume past performance predicts the future. They assume economic, political and sentiment-related factors stop moving stocks—the CAPE warning assumes gravity must take hold, the traditional P/E argument assumes stocks can rise only if earnings do. That ignores a long history of multiple expansion during mature bull markets as investors gain confidence and get ever-cheerier about the future.

Fisher Investments Editorial Staff
Commodities

Drilling Deep for Oil Stocks?

By, 03/02/2015
Ratings174.529412

And up in the headlines came a bubblin’ crude. Oil, that is. Texas tea. Black gold. As the oil VIX[i] hovered near 60, some called swingin’ volatility the “new normal.” Others searched for meaning in bouncy benchmarks as Brent crude more than doubled WTI’s monthly gains with one day left in February. Pundits parsed February’s rise—the first since June—for signs of stabilization, bottoms and double bottoms. Feel free to tune it all out, because all this yammering is largely meaningless for investors. None of it tells you where oil prices will go. Nor should you let it drive you headlong into Energy stocks, as some have done lately—for all the talk of “bargain hunting,” there still doesn’t appear to be much upside looking forward.

Unless you’re speculating on oil futures, there isn’t much point in stewing over short-term swings and analysts’ price targets. Volatility is just volatile. Unpredictable, too. If you’re a normal long-term investor, what matters is whether prices are likelier to rise to levels that would make Energy firms profitable over the foreseeable future—solely a function of supply and demand.

Commodity prices usually move in cycles. As prices rise, firms invest more in production, hoping to ramp up output to capitalize. But they overshoot, supply outstrips demand, and prices fall. So firms cut costs and cut investment, and supply falls. Eventually it undershoots demand, and prices start rising again. These cycles can sometimes take years to play out. Energy prices stayed low for ages in the 1980s and 1990s as firms cut investment and production. They rose throughout the 2000s, and investment and production shot back up as high prices made shale production increasingly economical. And then 2014 happened.

Todd Bliman
Reality Check, Media Hype/Myths

1,896 Days Ago, Greece Was a Mess

By, 02/26/2015
Ratings424.273809

Greek fears aren’t quite as old as these buildings, but they aren’t new. Photo by Yorgos Karahalis/Bloomberg Finance via Getty Images.

It has been 1,896 calendar days since we first documented Greek woes on December 18, 2009. Since then, we’ve frequently reminded investors small economies and markets often zig while the world zags, particularly those with big, entrenched competitiveness issues and Ottoman-style bureaucracies. Yet fearful headlines keep stoking concerns over Greece. Folks, if Greece didn’t quash the bull when it was new news, it isn’t likely to now.

Elisabeth Dellinger
The Global View, Across the Atlantic, Developed Markets

The ECB Would Gladly Pay You Tuesday for a Hamburger Today

By, 02/26/2015
Ratings314.032258

The ECB implements full-fledged quantitative easing (QE) next week, and many hope nearly €1 trillion of sovereign bond-buying will rocket the eurozone out of its supposed post-recession malaise. As we wrote here, those hopes are probably too lofty, because QE isn’t stimulus—it flattens yield curves, defying over a century’s worth of economic theory and data showing steeper curves are best, and eurozone yield curves are already crazy flat. But here’s another wrinkle: It is far from certain whether the ECB can even reach its monthly bond-buying target. The ECB’s own capital requirements and interest rate policy might shoot its plans in the foot—not an economic negative, necessarily, but evidence policy there is rather wacky.

The ECB plans to buy €60 billion in bonds monthly—€13 billion in asset-backed securities and covered bonds, and €47 billion in sovereign debt. That €47 billion will be split between 18 of 19 eurozone member-states[i], dished out according to each country’s portion of the bloc’s population and GDP. People who have done all the math say German bunds will account for nearly 25% of the program, with France, Spain and Italy close behind.

Two Wall Street Journal articles published Wednesday highlighted some of the obstacles the ECB faces. One, “ECB Faces Struggle in Sourcing Enough Bonds for QE,” shows how supply is limited:

Fisher Investments Editorial Staff
Into Perspective, Market Cycles

Around the World in All-Time Highs

By, 02/25/2015
Ratings144.321429

Stock indexes worldwide continue climbing to new heights. The FTSE 100 hit a new high this week, its first in 15 years. The Nasdaq is a rounding error from 5,000, itself a rounding error from its early 2000 record. The Nikkei 225 isn’t close to an all-time high, but it too is near levels last seen in April 2000.[i] The MSCI World, S&P 500 and Germany’s DAX have added to records set earlier in this bull market, too. This record-breaking flurry has spurred comparisons to the early 2000s, when the tech bubble popped. Nasdaq, FTSE and Nikkei price levels might be similar, but today’s environment doesn’t resemble 2000’s—all-time highs are just what you get in a rip-roaring global bull market. They aren’t evidence of a bubble or bull market about to die.

The Nasdaq’s current climb toward 5048 doesn’t resemble the last one. In 2000, technology was ushering in the “New Economy.” Pundits cheered the 1990s’ growth, saying, “there is no end of that success in sight.” A CNN roundtable debated whether “boom and bust” was over forever. “Dot-Com” initial public offering (IPOs) hit fever pitch, with mom and pop investors clamoring to get in. Yet many of these companies were slop, pushed by investment banks to take advantage of rising investor optimism. As a New York Times article noted, “instead of repelling investors, a lack of profits, past performance or history of any kind appears to be an enticement these days.” According to the University of Florida’s Professor Jay Ritter, 72% and 73% of IPOs in 1999 and 2000 had less than $50 million in sales. 2014? 48%. (Exhibit 1)

Exhibit 1: IPOs Categorized by the LTM (Last Twelve Months) Sales, 1990-2014

Fisher Investments Editorial Staff
Into Perspective

The DOL Gets a Homework Assignment

By, 02/24/2015
Ratings504.18

As always, our political analysis is non-partisan and ignores ideology and sociological factors. Our aim is solely to assess how the proposed rules impact investors. Oh and full disclosure: MarketMinder’s parent company, Fisher Investments, is a registered investment adviser held to the fiduciary standard.

President Obama gave a big speech at AARP on Monday and made the announcement the world was waiting for: He had picked up his AARP card. Kidding![i] He said he told the Department of Labor to write rules requiring any investment professional advising on a retirement account to “put the best interests of their clients above their own financial interests.”[ii] He goes on: “You want to give financial advice, you’ve got to put your clients’ interests first. You can’t have a conflict of interest.” And not to be overly literal, but we have a hard time seeing how a uniform fiduciary standard, as outlined on The White House Blog Monday, will do this—or solve any of the issues described in Obama’s speech. A fiduciary standard can’t eliminate conflicts of interest or ensure investors receive top advice. Well-intended as these plans seem to be, they won’t fix all that ails the brokerage industry, and the onus will remain on investors to look beyond rules and designations when picking an adviser. 

According to the White House: “Under our current system, your advisor can accept a back-door payment or hidden fees for directing you toward a retirement plan that’s not in your financial best interest. … Right now your financial advisor—someone who’s supposed to be acting in your best interest—can direct you toward a high-cost, low-return investment rather than recommending a quality investment that works better for you. That’s because those lower-return investments come along with hidden fees that benefit their Wall Street firms on your dime. On average, these conflicts of interest result in annual losses of about one percentage point for affected investors.”

Fisher Investments Editorial Staff
Politics

Greece U-Turns, Declares Victory

By, 02/23/2015
Ratings354.014286

Greece’s self-proclaimed libertarian-Marxist Finance Minister, Yanis Varoufakis, dons a not-so-austere scarf for his meeting... Photo by Jasper Junien/Bloomberg via Getty Images.

After yet another week of stalemates, ripped-up agreements and live-blogging, Greece and its creditors reached a deal to keep Greece and its banks funded (and Greece in the eurozone) through June. Yes, they kicked the can! This isn’t some whopping positive for stocks, but it should help ease “Grexit” dread and boost overall sentiment.

Fisher Investments Editorial Staff
Into Perspective, Media Hype/Myths

Random Stock Market Factoids 35 Days Into 2015

By, 02/20/2015
Ratings594.152543

Here is our look at markets between the Roman Calendar’s New Year and the Lunar New Year. Photo by Anthony Kwan/Getty Images News.

At just past the halfway point of Q1, many might wonder where things stand. After all, if you don’t live and breathe markets, you might focus on the headline items (Greece, oil, the dollar,[i] etc., etc., and so forth) and miss the actual action. Here is a quick roundup to update you on some interesting market movements year to date.

Fisher Investments Editorial Staff
The Advisor's Corner

A Q&A on Passive Investing: How Pactive Are You?

By, 02/19/2015
Ratings593.559322

The passive versus active debate is heating up again, with many going so far as to claim 2014 shows passive investing—the notion markets are unbeatable, so give up, mirror a selected index and never make moves—has won the day. Yet, true passive investing is rare. More often than not, folks are making active investment decisions even though they claim to be passive, rendering them pactive.[i] There is no real evidence pactive investing is superior to active. Here is a Q&A to illustrate this point.

Q: How did you determine your asset allocation?

A: Before you even elect to go passive or active, it’s crucial to determine which mix of stocks, bonds, cash and other securities to employ. Studies have shown this decision alone accounts for between 70% and 90% of your longer-term investment results. (That dwarfs any active or passive decision’s impact.) So how did you get your allocation? Did you subtract your age from 100 to get the percentage you invested in stocks? Use another method? Did you take your time horizon and other long-term financial factors into account? Did you answer a risk tolerance questionnaire?  No matter which method you chose, this is a choice. And often, investors choose allocations that aren’t in keeping with their goals, focusing too much on volatility, fear or greed. Right out of the gate there is significant room for error—and an inherently active choice. But even if we overlook this active choice, passive investing’s problems don’t end.

Fisher Investments Editorial Staff
Media Hype/Myths, Reality Check

Braking Down Subprime Auto Loan Concerns

By, 02/18/2015
Ratings194.157895

Are the seeds for the next financial crisis being planted today? Some believe so based on some recent trends in auto lending. The New York Fed’s latest report shows auto loan delinquencies rose in Q4. Subprime auto loans have supposedly mushroomed, driving fears of 2008 redux. However, a quick then-and-now comparison and examination of auto loans shows a subprime auto loans are exceedingly unlikely to trigger a crisis.

The quarterly uptick in auto loan delinquencies isn’t wonderful, but it also impacts a very small share of total loans, bank balance sheets and overall output. Yes, both auto loan and student loan delinquencies ticked up—but overall delinquency rates were unchanged, and Q4 borrowing rose $117 billion (1.0%) q/q. Out of $11.83 trillion total debt, auto loans comprise $955 billion or about 8%. Just 3.5% of that $955 billion—$33.4 billion—is delinquent. In our roughly $75 trillion global economy, it would take at least a couple trillion worth of problems to cause a recession and derail the bull market.

So why the 2008 comparison? Some loans in question are subprime auto loans with astronomical, unaffordable interest rates. And these loans have been securitized and snapped up by yield-hungry investors—a contemporary version of 2007 and 2008’s supposedly toxic collateralized debt obligations (CDOs), some say. But this, too, falls short. Again, we’re talking $33.4 billion, not all of which is subprime. Compare that to the approximate $240 billion[i] in subprime-related loan losses during the 2008 financial crisis. Plus, those losses alone aren’t what caused financial panic. Rather, it was the mark-to-market-accounting rule, which snowballed those $240 billion in actual losses into nearly $2 trillion in unnecessary paper losses, known as “write-downs” in industry lingo, creating the vicious cycle that felled Bear Stearns, Lehman Brothers, Washington Mutual, Fannie Mae, Freddie Mac and AIG—and inspired one of the most haphazard government responses ever. For banks, mark-to-market accounting no longer applies to illiquid, held-to-maturity assets like CDOs or collateralized subprime auto loans. To the extent banks even own any in this post-Volcker-rule America, the bank needn’t take a loss as long as it plans to hold the security to maturity.

Fisher Investments Editorial Staff
GDP, Across the Atlantic

Eurogrowthy

By, 02/17/2015
Ratings394.333333

Eurozone GDP grew 1.4% annualized in Q4—its seventh straight quarter of growth and beating expectations—and the way many headlines tell it, you’d think this is just terrible news. Growth “masks a broken eurozone” where wages are sputtering and living standards falling. The acceleration is powered by Germany, which is leaving France behind, “creating a worrying two-speed tension at the heart of the eurozone” and a “lopsided” recovery that “raises political stakes.” Who cares about the rest when Italy is a “ticking time bomb.” Looks like eurozone sentiment is still way too dour. The region isn’t in wonderful shape, but with folks this negative, it doesn’t need to be—choppy growth should easily surprise the skeptics.

Yes, the eurozone is the slowest-growing major region. Yes, Germany led the charge while France slowed and Italy endured its 14th straight no-growth quarter. Yes, there are political differences as countries lobby for pro-growth measures. But that’s all whatever the negative equivalent of window-dressing is. Global markets generally don’t care whether some nations grow faster than others—the aggregate, and how that influences earnings globally, matters more. Nor do eurozone stocks much care whether France grows 0.1% q/q (non-annualized), as it did, or 0.7% like Germany. Stocks aren’t linked one-to-one with GDP. Economic growth matters, but not in a vacuum. The gap between sentiment and reality is the kicker. And in France, where services and manufacturing purchasing indexes spent most of Q4 in contraction, even slight growth was a happy surprise.

For all this talk of a broken Europe where only Germany is chugging, the country-specific breakdown looked pretty alright. As Exhibit 1 shows, of the 15 countries reporting so far, 11 grew. The three that contracted comprise about 4% of eurozone GDP. If the world could weather an 18-month eurozone contraction from Q4 2011 through Q1 2013, we daresay stocks can survive if only Greece, Cyprus and Finland shrink.

Fisher Investments Editorial Staff
Politics, Media Hype/Myths, Repeatable History

Gumby, Greek Politicians and Other Bendy Things

By, 02/13/2015
Ratings234.565217

Greece and its creditors had some meetings this week, and at first, they did not go well. No compromises. No credible written proposals for reforms. Not even a joint statement after Wednesday’s meeting of Finance Ministers, because supposedly one of Greece’s reps ripped it up. Now websites have snazzy clocks counting down until Greek banks lose funding and the euro implodes. But wait! Thursday’s summit between Greek Prime Minister Alexis Tsipras and EU leaders was, apparently, a love fest! But still, no compromise, and stalemate dread is spiking. The world is on tenterhooks, live-blogging the standoff like it’s 2012. And we can’t help but wonder why—perhaps everyone has forgotten this is how things went in 2011 and 2012? Back then, mere plans to have plans to have plans were seen as thrilling signs of progress—and ultimately led to compromise. And this week’s theatrics did yield a plan to have a plan to have a plan. Anything is possible, but a Greece-stays-in-the-euro compromise looks likely this time, too.

We will spare you a prolonged analysis of these negotiations. Plenty of pixels have already been spilled on that, with pundits galore busting out their old Game Theory textbooks, trying to get inside alleged Game Theory maestro (and Greek Finance Minister) Yanis Varoufakis’ head. We are not in his frontal lobe, so we don’t know whether he and Tsipras are serious when they say Greece wants a six-month bridge loan, a debt swap and over $150 billion worth of World War II reparations[i] from Germany—and that they’ll get Russia to help if eurozone leaders don’t pony up.[ii] We also don’t know whether German Finance Minister Wolfgang Schäuble is serious when he calls Greece’s demands nonstarters. Maybe they’re all bluffing. Who knows! But opening gambits in tough negotiations have a long history of being far-fetched.

So what do we know? Well, in their roughly three weeks in power, Tsipras and Varoufakis have flip-flopped. A lot. We documented last week’s flip-flops here. More came this week. Monday, Varoufakis told Greek lawmakers he and Tsipras have no plans to “tear up” the bailout agreement—contradicting campaign pledges to, well, tear it up. They completed another U-turn Tuesday, ordering the privatization agency to proceed with the privatization of the Piraeus Port Authority, just weeks after cancelling the sale and pledging to end state asset sales. But that encouraging flip was apparently followed by a discouraging flop Wednesday, when Tsipras’ chief of staff supposedly tore up a joint statement from Greece and eurozone officials, in which Greece pledged to explore “extending and successfully concluding” the existing bailout program in exchange for that bridge loan and other concessions. But that flop was followed by more flap Thursday, when Varoufakis slammed “dubious claims based on dubious leaks,” so who knows. This is the same guy who, in a single speech, said first that eurozone finance ministers should “contemplate breakdown” of their talks before Wednesday’s meeting, then that he and his cohorts weren’t “seeking a clash.” But then there was that lovey-dovey summit on Thursday, where Tsipras and German Chancellor Angela Merkel apparently became fast friends.

Meanwhile, the ECB has done its own flip-flopping. Last week, it stopped accepting Greek debt as collateral, essentially cutting Greek banks off from traditional financing. But it boosted Emergency Liquidity Assistance—funds channeled through Greece’s central bank at a penalty rate. Funding was supposedly increased this week and can keep going as long as Greece remains in the eurozone. Greece’s government has enough cash to last through early March. So those countdown clocks probably aren’t very meaningful.

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Recent Commentary

Elisabeth Dellinger
Into Perspective

America, the Liberated

By, 03/04/2015
Ratings144.285714

It's fashionable to say America's economic system needs fixing if we want faster growth, but some simple facts don't support this. 

read more
Fisher Investments Editorial Staff
Into Perspective

A Second Glance at Growth

By, 03/04/2015

Data confirm growth around the world.  

read more
Fisher Investments Editorial Staff
Media Hype/Myths

Aversion to the Mean

By, 03/03/2015
Ratings334.575758

Stocks’ gangbusters February doesn’t mean March must be a stinker.

read more
Fisher Investments Editorial Staff
Commodities

Drilling Deep for Oil Stocks?

By, 03/02/2015
Ratings174.529412

How are oil producers reacting to lower prices?

read more
Todd Bliman
Reality Check

1,896 Days Ago, Greece Was a Mess

By, 02/26/2015
Ratings424.273809

If Greece fears haven't derailed the bull market yet, the likelihood they do the enxt time they pop up is teensy. 

read more

Global Market Update

Market Wrap-Up, Wednesday Mar 4 2015

Below is a market summary as of market close Wednesday, 3/4/2015:

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.4%)
  • UK Equities: MSCI UK (-0.3%)
  • Best Country: Belgium (+0.2%)
  • Worst Country: Portugal (-3.4%)
  • Best Sector: Health Care (+0.2%)
  • Worst Sector: Materials (-0.9%)
  • Bond Yields: 10-year US Treasury yieldswere unchanged at 2.12%.

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.