Fisher Investments Editorial Staff
Into Perspective

Banks Fail Vague Test, Blame Vagary

By, 08/19/2014
Ratings124.041667

No word on whether banks’ living wills use such fancy script. Photo by Getty Images.

Here is a rough approximation of how the dialogue between banks and regulators has gone since the Fed and FDIC gave 11 big banks an F on their living wills: “You’re vague.” “No, you’re vague.” “Well you’re not transparent!.” “No you’re not transparent!” “Yah, well, you’re the vaguest and we make the rules—no lender of last resort for you! So there!” At least, that’s how we interpret the latest rumblings from the ever-reliable unnamed sources “familiar with the process,” who said banks shouldn’t include the Fed’s discount window in their list of things they can use to make their potential failure potentially more orderly during a potential crisis in the potential future. Now, if the Fed really does close the discount window during the next crisis, it could be really bad, and we’ll get to that shortly. But for now, the news simply underscores what an opaque exercise these living wills are—and why investors shouldn’t put much stock in them.

Fisher Investments Editorial Staff
GDP, Across the Atlantic, Into Perspective

The Eurozone’s Not-So-Flashy ‘Flash’ GDP

By, 08/18/2014
Ratings134.230769

This is a big euro symbol.[i] Photo by Getty Images/Bloomberg.

Thursday, the eurozone released its preliminary or “flash” Q2 GDP reading, with the aggregate data showing no contraction in the quarter. But the aggregate also showed no growth, and this was the media’s central focus. These ”flash” releases aren’t exactly chock full of details one might want to perform a meaningful analysis of what drove the slowdown, but they give some high level numbers. And many in the punditry don’t need much more than that to jump to conclusions. In this case, they jumped to fear for Q3 due to increased sanctions on Russia and the still-tense situation in Ukraine. Others fear renewed recession generally and the potential for a lost decade a la Japan—calling for big ECB actions to head off a protracted slump. But these data don’t show much of an impact from the Ukraine situation on the eurozone economy. And the evidence a long-term slump looms in the eurozone is flimsy. In our view, this is mostly an example of the slow eurozone recovery overall and not something new and terrible for investors to be concerned about.

Elisabeth Dellinger
Into Perspective, Taxes, Reality Check

Can Korea Tax Its Way to Business Investment?

By, 08/18/2014
Ratings164.4375

Korean President Park Geun-hye is on a quest to goad big firms into spending more. Photo by Getty Images.

Here’s a popular refrain on both sides of the Atlantic: When will corporations stop hoarding cash, start investing, raise wages and make our economies grow faster? US and UK firms have nearly $3 trillion in cash and other liquid assets, and many folks are convinced that if they just started spending this mountain of idle money, we’d all be way better off. On the other side of the world, the IMF is yelling at Japanese firms to “unstash Japan’s corporate cash.” A similar chorus has rung through Korea for years, and earlier this month, officials announced plans to do something about it (uh-oh): a tax on the biggest firms’ cash balances. While they get points for realizing that if you tax something you get less of it, I can’t see how this is anything other than a big fat headwind for firms—and it’s highly unlikely they splish-splash more cash through Korea’s economy.

Fisher Investments Editorial Staff

Crooks' Common Threads: Three Red Flags to Watch Out For

By, 08/15/2014
Ratings1714.002924

A crooked Minnesota adviser bought a getaway car not unlike this one with part of the $10 million he bilked from friends’ portfolios. Source: Bloomberg/Getty Images.

These days, it seems headlines are full of one investment scam after the next. Weren’t these supposed to die down after the Bernie Madoff scandal made the world hyper-aware of financial fraud? We sure hoped so. Yet, sadly, investors are still getting duped six years later. Perhaps the saddest part of all is protecting yourself against criminals and charlatans is fairly simple if you know what to look for. If you’re familiar with three basic signs of fraud, you can easily avoid being a victim.

Fisher Investments Editorial Staff

Into the Abenomics Abyss?

By, 08/14/2014
Ratings404.4375

We’ll give you the bad news first: Japan’s Q2 GDP, released Wednesday, was terrible. It confirmed what most folks pretty much already knew: Japan’s economy took a huge hit from April’s sales tax hike. Now for the good news: For investors, it doesn’t much matter—GDP is backward-looking, and a drop was expected (and Japan’s woes don’t prevent global growth). But in a somewhat concerning inversion of recent sentiment, investors aren’t worried. They’re sure economic sunshine, rainbows and unicorns are in Japan’s future. Which, to the discerning long-term investor, is a wee bit telling. Stocks move most on the gap between reality and expectations, and in our view, investors’ optimism on Japan doesn’t square with the likely reality. That’s a strong indicator the best investing opportunities remain outside the land of the rising sun.

Here are the facts: Japan’s GDP fell -6.8% q/q annualized in Q2—effectively wiping out all of Q1’s +6.1%, which was boosted by consumers pulling major purchases forward before the tax hike. In short, the hike wasn’t a zero-sum event. Predictably, results were lousy across the board—consumer spending (-18.7% q/q annualized), housing investments (-35%) and private business capital expenditures (-9.7%) all nosedived. The only thing that worked in Japan’s favor was math—and that’s no compliment. Imports detract from GDP, so their -20.5% drop actually boosted the headline number, even though cratering imports means cratering demand. Inventories, which add to GDP, rose sharply. But all this shows is goods piling up on shelves. Again, dismal demand. Not surprising, but still.

We’ve seen this movie before: Q2 1997, when GDP tanked as consumer spending dropped -3.5% after Japan raised its VAT from 3% to 5%. That was the Japanese government’s baseline for forecasting the impact of the tax hike—and they undershot. Which makes us a bit skeptical of their current forecast—namely, their belief Japan will bounce relatively quickly. And it’s not just the government. Headlines and investors broadly are still rather optimistic. Most of them for one reason in particular: Abenomics! (That’s the three-pronged economic revitalization strategy championed by Prime Minister Shinzo Abe, for those of you who have better things to do than follow this saga.) One plank of Abenomics is quantitative easing (QE), similar to the US and UK, and investors are convinced this will prevent a repeat of the 1997 recession. And if things look dicey? The BOJ will just QE some more! (Yes, we just made that a verb.) Never mind the similar tax hikes already scheduled. The BOJ has already set expectations for more asset purchases if necessary, making investors believe they needn’t fret further economic weakness. But in our view, this is a tad hasty.

Todd Bliman
Media Hype/Myths

Passive Investing’s Primary Error: It’s (Mostly) Imaginary

By, 08/12/2014
Ratings902.944444

OK, so maybe this strategy is more imaginary than passive investing, but still. Photo by Tristan Fewings/Getty Images Entertainment.

I am not a fan of writers quoting themselves generally, but I’m going to do it just this once anyway because, well, I can’t think of a new way to begin another article about passive investing.[i]          

Fisher Investments Editorial Staff

High-Yield Bond Fund Flows Are Junk

By, 08/12/2014
Ratings293.603448

This junkyard is not a visual metaphor for the high-yield bond market.

Evidently, the high-yield bond bubble started popping last month. And it’s about to take down equity and bond markets alike. At least, that’s the impression we get from the prevailing coverage of a few weeks of junk bond fund net outflows. It’s all a bit bizarre, in our view. It puts way too much emphasis on fund flows and ignores the fundamentals supporting corporate bonds and stocks. A few freaked out investors doesn’t mean a bond bloodbath—or equity bear market—is nigh.

Fisher Investments Editorial Staff

Another Fruitful Earnings Season

By, 08/11/2014
Ratings444.284091

Q2 earnings season is nearing the finish line, and it’s a good one: Aggregate S&P 500 earnings and revenues accelerated, and in a fresh twist, headlines actually noticed. And didn’t respond with a chorus of yah-buts. Publicly traded firms are making money, confidence is growing, and with the global economy on an upswing, there should be plenty more in store—powerful bull market fuel.

With 446 companies reporting as of August 8, aggregate S&P 500 Q2 earnings per share are up 8.4% y/y—the 19th straight quarter of growth—and revenues are up 4.3% y/y.[i] Growth is broad-based, with all 10 sectors in the black and half up double-digits. (Exhibit 1) Financials’ earnings were just barely positive, largely due to yet more legal and regulatory costs, but some perspective is in order. According to analysts, Q2 bank profits totaled $40.24 billion—the second highest on record and only 0.3% below the top spot—and growth is expected to snap back bigtime in Q3. This, combined with healthy revenue growth, does not paint a picture of a beleaguered banking industry.

Exhibit 1: Q2 2014 Earnings and Revenue Growth by Sector

Fisher Investments Editorial Staff
Monetary Policy, Across the Atlantic, Media Hype/Myths

Should the ECB Go Big?

By, 08/08/2014
Ratings194.31579

ECB chief Mario Draghi has it tough. Consider his role: He is responsible for guiding monetary policy for an 18-nation currency bloc (soon to be 19!). Those 18 (soon to be 19!) countries have different economic pressures, inflation pressures and more. The history of central banking is dotted with failure from around the world—and that’s for central bankers with only one country to worry about! Yet thus far into his tenure, Draghi seems to have had a fair bit of success. But you wouldn’t know it from the media coverage, which seems convinced “Dithering” Draghi is moving too slow to stanch a looming deflationary spiral—a cycle of falling prices curtailing consumption, resulting in lower prices, and so on. In our view, though, eurozone stocks and the economy benefit from Draghi ignoring calls for more monetary measures.

Too-slow-go Mario accusations rose again Thursday, after the ECB did nothing. That is, they announced target rates and facilities established in June would remain unchanged: The main overnight lending rate remains 0.15% and the deposit rate -0.10%. The new long-term refinancing facilities (LTROs) were untouched. This non-action led to a swift reaction in the punditry, some of whom have for months pointed to falling headline inflation as a sign deflation has taken hold of the eurozone. Draghi, these pundits claim, is fiddling while Rome burns. Never mind that the LTROs haven’t even kicked off yet—they were scheduled for September from Day One. How can you rule something ineffective when it hasn’t started yet? Even if the LTROs were going, monetary policy usually works at a lag—it can take months for central bank moves to start impacting loan growth and the real economy.

But you won’t hear that from the punditry, who claim June’s measures were way too small and the ECB should go big! And by “big,” most mean buying long-term bonds and injecting banks with cash they could, in turn, lend—quantitative easing (QE). This, they claim, will spur inflation and get the eurozone recovery on terra firma. But there are a fair few issues with this notion, in our view. For one: There is no actual evidence QE is inflationary. There is much more evidence it slows loan growth, and hence, dampens inflation. US loan growth was the slowest of the last five expansions before the Fed “tapered” QE. After tapering started in January, total lending rose sharply and inflation ticked up some, likely as a result. A very similar thing happened in the UK, where lending and broad money supply contracted for much of QE. Japan, in its 2001-2006 round of QE, did not see materially higher inflation.

Fisher Investments Editorial Staff

Putin’s Feeble, Timid Trade War

By, 08/07/2014
Ratings434.395349

Russia fought back against tougher US and EU sanctions Wednesday, announcing new agricultural trade embargoes against countries who put the Kremlin on their naughty list. Within seconds, headlines warned of a trade war, Finland promised to seek EU “compensation” if the embargoes caused a crisis, and the EU braced for a fruit supply glut and collapsing prices. In our view, though, these reactions are overwrought. We won’t argue Russia’s move has zero economic impact, but with a $70 trillion-and-growing global economy, it takes far more than trade barriers against a few billion in foodstuffs to end a bull market.

Russia’s new one-year ban on most meat, produce and dairy from the US, EU, Australia, Canada and Norway is the first embargo branded as sanctions retaliation, but it isn’t the first attempt to swipe back. Russia already banned Polish apples, central European beef and threatened to bar McDonald’s, citing health and safety concerns—long Putin’s favorite way to poke Europe without running afoul of WTO rules. It hasn’t much hurt Europe or other western economies in the past, and there is little chance it does so now.

Theoretically, an import ban could bite two ways. It could rob local producers of an end market, hitting exports and total output. Or, according to many in Europe, it could create a supply glut at home, driving down prices and wreaking havoc. But in reality, this hasn’t happened. Consider the humble chicken. Russia is the US’s second-largest export market for chickens. Moscow has banned US chickens three times since 2002—and chicken prices here haven’t collapsed. Foster Farms didn’t file Chapter 11. So it goes, too, for the many European products Russia has barred in recent years, Ukrainian chocolate, American beef and so many others.

Joseph Wei

China’s Balancing Act

By, 08/07/2014
Ratings594.440678

Reform. This has been the buzzword for Chinese politicians since last November's Third Plenum, where officials announced ambitious social, economic, and political reforms. That refrain has continued ever since, from March’s National People's Congress (NPC) to a litany of policy announcements from the State Council and central bank. The goals are well-known: liberalizing interest rates, establishing deposit insurance, achieving full renmibi convertibility, and opening the financial system to private banks. However, there is a wrinkle: This year's GDP growth target was pegged at "around 7.5 percent," and the economy is struggling to get there. This raises a question: Can China address persisting structural issues in its economy while maintaining speedy growth? Skeptics might be tempted to say no, pointing to a few telltale signs of government intervention, but a broader look tells a different story. Even with the occasional step back in the name of growth, officials appear to be making good on recent reform pledges—a long-term positive, and a trend that should help China become more of a market force.

It’s true leaders seemingly aren’t shying away from the occasional U-turn in the name of growth. For example, as trade figures fell earlier this year, the central bank (coincidentally?) allowed the yuan to weaken. The party line said it was an effort to shake out currency speculators before further liberalizing rates, but the timing was rather uncanny—it made China’s exports that much more affordable at a time when they needed a boost. Officials also passed up a chance to inject more market forces into the shadow banking sector, even after warning investors they shouldn’t assume financial products carry an implicit government guarantee. Officials had the chance in January, when a wealth management product from China Credit Trust Company was on the brink of default, but they granted a last minute bailout to the tune of RMB 3 billion in an apparent attempt to ease investors’ anxieties over potential contagion.

Yet a survey of all the government’s actions year-to-date suggests these examples are outliers, and reform remains high on the agenda. Premier Li Keqiang has tried to set markets’ expectations for both slower growth and continued reform, saying in March, “We are not pursuing GDP growth alone,” and admitting the growth target was flexible. Even as trade, industrial production and retail sales sagged somewhat, officials resisted the temptation to launch a blitz of fiscal stimulus to shore up growth. Instead, they opted for smaller stimulus measures with a decidedly market-oriented slant. So far, officials have cut taxes for small private businesses, opened infrastructure projects to private investment and tried to promote traditional bank lending to small firms and entrepreneurs—essentially promoting the private sector, not the state, as the country’s main growth engine.

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

Trying to Predict the Unpredictable

By, 08/06/2014
Ratings714.394366

Negative market volatility returned last week and continued Tuesday, running counter to the year’s overall relative calm. Hard as it may be to stomach at times, volatility is normal during bull markets. It’s also the price you occasionally must pay for stocks’ long-term returns. Staying cool amid swinging markets is usually the right move, but for many folks, this is easier said than done. Volatility can cause investors to search for bigger issues behind the moves—or extrapolate recent downside forward, both big pitfalls. We see this in the press today, with headlines wondering if the long-awaited correction is coming. Or near. Or perhaps already here. And while all are possible—corrections occur without warning—in our view, predicting corrections isn’t a viable strategy, and trying is counterproductive for long-term investors. Pundits’ efforts to do so over the two-plus years since the last correction should serve as a stark reminder of that.

Definitions of corrections vary. Some thought a volatile week in January was a correction. Others skew the opposite direction, calling 40% drops “corrections”—a magnitude we’d call a big bear market. In our view, corrections (technically speaking) are short, sharp, sentiment-driven drops of -10% or more. They usually end as quickly as they begin, and they’re a normal feature of bull markets. In contrast, bear markets are drops of 20% or more, caused by big, bad, surprising fundamental factors. They last longer than a few weeks and usually occur just before a recession. 2008’s financial panic and 2000’s dot-com implosion were bears. 2010’s -17% move, ostensibly tied to Greek fears, was a correction. Not all negativity is the same.

The last global market correction was in 2012, when the MSCI World fell -12.5% from 04/02/12 – 06/04/12.[i] Ever since, folks have hunted the next one. Here is a little timeline:

Fisher Investments Editorial Staff
Into Perspective

Banco Espírito Santo Gets a Bail-in

By, 08/05/2014
Ratings224.25

Editor's Note: MarketMinder does not recommend individual securities; the below is simply an example of a broader theme we wish to highlight. It is not a recommendation to buy, sell or take any other action.

Investors got their first look at how the EU’s new banking union will handle teetering banks Sunday, when the European Commission and Portugal’s central bank decided to wind down troubled lender Banco Espírito Santo (BES). In a refreshing turn of events, they stuck to the framework the entire EU agreed on last summer, forcing investors to absorb some losses before regulators could inject capital from a special fund. While this is a negative for the investors impacted directly, the decision does help resolve some of the lingering uncertainty around the EU’s banking union—a small positive for sentiment in the region.

As we wrote here last month, BES’s problems don’t mean the eurozone crisis is back—this is a one-off issue at one company, not a sign of deeper banking problems in Portugal, the eurozone periphery or the full eurozone. Occasional, company-specific banking issues aren’t unusual, even during a strong bull market. BES’s troubles stem from a corporate governance at its main parent company, Espírito Santo International SA (ESI)—a privately held, family-run holding company that sits at the top of the Espírito Santo Group conglomerate. ESI, which lacks the disclosure requirements typical of publicly traded firms, had some accounting irregularities and questionable financial arrangements, and BES was tangled up in its mess.

Fisher Investments Editorial Staff
Inconvenient Truths

Myopic Media Mind Tricks

By, 08/01/2014
Ratings1024.220588

Thursday, investors were barraged with two things we at MarketMinder make every effort to innoculate readers against: Myopic, skewed headlines and sharply volatile markets that give them fear-induced credence. Volatility such as the -2.0% S&P 500 return on Thursday can be tough to stomach, but it’s a mistake to read too much into one day’s action.[i] Virtually anything can cause stocks to wobble to this extent and fact is the S&P fell -2% or more in a day an average of once every 30 trading days in the thirty years from 1982 – 2013.[ii] This is not to dismiss volatility; it is to say big moves aren’t so abnormal that there must be some bigger meaning behind them. But that doesn’t stop the media from trying, which is bad for investors but a plus for us because, you know, it gives us something to do. We at MarketMinder scan north of 100 websites from around the world, apply Fisher Investments’ unique, proprietary research and try to leverage the perspective of a global money manager to bring you a financial professional’s insight. Act as a media filter, if you will. This requires digging deep beneath headlines, and we generally aim for those stories not from one site, but repeated ad nauseum so they seem like everyone who’s anyone agrees. (Or those stories no one is talking about, but we believe should be.) Now, mind you, the media’s quest for meaning isn’t their fault—without eyeballs, their ratings go poof. But taking these headlines at face value is dangerous for investors, as we’ll show.

Argentina was downgraded to Selective Default by Standard & Poor’s late Wednesday, the nation’s eighth default. The immediate ripple effects, as covered aptly by our own Elisabeth Dellinger here, are pretty much nil. But still, this drove the commentariat nuts, with some oddly claiming Argentina would lose big. Tying this to stocks presumes no one was aware. Default, however, was the widely expected outcome.

While the Argentine story grabbed the most headlines, it was not alone nor the most off-base news. The ISM Chicago Business Barometer (a Purchasing Managers Index, or PMI) came out Thursday morning, and it really laid an egg.[iii] July’s reading showed a 10.0 point drop from June, which was quickly dubbed The Biggest Drop Since October 2008. And it was! But that isn’t the full story. You see, October 2008’s reading fell 19.2 points—nearly double July 2014’s—to 37.8 (readings below 50 are contractionary, so this is a deep dive) during the height of the global financial crisis. July 2014’s dip put the index at a still expansionary 52.6. In that way, it seems much more in line with May 2005’s 11.7 point drop to 53.6. Looking at those big drops during expansion should be your sign to question whether a regional output gauge is really worth all the pixels it got. Consider Exhibit 1, which shows the monthly change in the index (orange bars) against the index level (blue line). Those bars are all over the map. It’s a regional gauge and this is a PMI—a survey—attempting to study the breadth of growth in a narrow area. Volatility comes with the territory. 

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Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

Banks Fail Vague Test, Blame Vagary

By, 08/19/2014
Ratings124.041667

Is the Fed about to cut off a traditional lifeline for banks?

read more
Fisher Investments Editorial Staff
GDP

The Eurozone’s Not-So-Flashy ‘Flash’ GDP

By, 08/18/2014
Ratings134.230769

Does eurozone GDP’s Q2 stall portend a protracted slump?

read more
Elisabeth Dellinger
Into Perspective

Can Korea Tax Its Way to Business Investment?

By, 08/18/2014
Ratings164.4375

Korea’s plans to goose business spending by taxing the cash on corporate balance sheets probably won’t work out so well.

read more
Fisher Investments Editorial Staff

Crooks' Common Threads: Three Red Flags to Watch Out For

By, 08/15/2014
Ratings1714.002924

If you’re familiar with three financial fraud red flags, you can easily avoid getting duped.

read more
Fisher Investments Editorial Staff

Into the Abenomics Abyss?

By, 08/14/2014
Ratings404.4375

Most investors don’t seem to be fazed by Japan’s negative Q2 GDP reading and expect better days ahead. But do their expectations square with reality?

read more

Global Market Update

Market Wrap-Up, Mon Aug 18 2014

Below is a market summary (as of market close Monday, 08/18/2014):

  • Global Equities: MSCI World (+0.8%)
  • US Equities: S&P 500 (+0.9%)
  • UK Equities: MSCI UK (+1.0%)
  • Best Country: Ireland (+2.0%)
  • Worst Country: New Zealand (-0.2%)
  • Best Sector: Industrials (+1.1%)
  • Worst Sector: Utilities (+0.2%)
  • Bond Yields: 10-year US Treasurys rose .05 to 2.39%

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.