Elisabeth Dellinger

Book Review: Flash Boys

By, 04/24/2014

 

Photo by T.J. Kirkpatrick/Getty Images News.

Can the “nice guys” on Wall Street stop high frequency traders (HFT) from taking billions of dollars from the rest of us? 

Fisher Investments Editorial Staff
Personal Finance, Alternative Investments

Targeting the Wrong Objective

By, 04/23/2014
Ratings164.09375

According to a recent survey of 401k participants investing in target-date funds (TDFs), 56% believe they’ll be able to meet their retirement goals—a 15 percentage-point spread over workers who don’t use TDFs. But in our view, the TDF investors may have fallen prey to a myth and have a false sense of retirement-investing security as a result. While TDFs may seem appealing, we believe they aren’t a blanket solution—a position we aren’t alone in, it seems. The SEC is mulling over requiring TDFs to display more detailed and easier-to-understand depictions of their approach. Further disclosure would provide investors with more information—a positive, in our view. But this doesn’t change the fundamental flaw in target-date funds: Automated, cookie-cutter asset allocation tweaks based on a targeted calendar year run the risk of not reflecting your long-term goals.

Target-date funds—mutual funds often dubbed “Retirement” and a year (e.g., “Retirement 2025”)—have grown in popularity as a retirement investing tool, stemming from their seemingly easy, straight-forward approach. Invest your money in a TDF, and it will automatically adjust your asset allocation—the mix of stocks, bonds, cash and other securities—over time, based on your planned retirement date. Each TDF has a “glide path” that determines when the fund’s asset allocation changes.

For example, if you’re 40 right now and you plan to retire at age 65, your asset allocation might initially start at 80% stocks and 20% bonds. In 5 years, it may readjust to 70% stocks/30% bonds, in 10 years 60%/40%, etc. Theoretically, you “set it and forget it” and by the time you reach the targeted year, your allocation will have been tweaked to boost bonds and reduce stocks. The sales pitch argues you should just pick a TDF dated around your desired retirement year, and the deed is done.

Fisher Investments Editorial Staff
US Economy, Media Hype/Myths

Economies and Spaceships

By, 04/22/2014
Ratings314.080645


Economies aren't subject to gravity, making "escape velocity" a misnomer in economics and market analysis. Photo by Matt Stroshane/Getty Images.

Escape Velocity. In astrophysics, it’s the speed required for an object to break free of the Earth’s gravitational pull. In economics, evidently, it’s something the US has yet to reach—at least, so say many, many, many headlines in recent days. As metaphors go, it’s a bit odd—last we checked, our economy wasn’t a spaceship. Overall, though, it seems to be the latest iteration of the slow growth meme that has preoccupied headlines (and investors) since this expansion began in 2009. It’s true the US isn’t rocketing ahead (pun intended). But it doesn’t need to—or to achieve some hypothetical breakaway speed—for stocks to keep doing fine.

The “escape velocity” jitters rest on a fundamental fallacy: the notion economies are prone to laws of physics. If the US doesn’t start growing faster soon, it risks lapsing back into recession because, well, gravity. If it does grow faster, we’ll break out of the stratosphere and go to infinity and beyond because, well, momentum.

Fisher Investments Editorial Staff
Media Hype/Myths, Into Perspective

High Frequency Trade-Offs

By, 04/21/2014
Ratings382.960526

Many worry about high frequency traders’ conducting markets at the speed of light. Source: Three Lions/Stringer, Getty Images.

A new book offers a scandalous caricature. A news magazine popularizes the tale. Regulators react, opening investigations into what seems a one-sided case: What does high frequency trading (HFT) actually do and how can regulators stop it to protect investors? While we have no vested interest in HFT, we’d suggest this story is much too unbalanced to reflect how it actually impacts the investment world. Yes, there is the potential for negative behavior. But that neither offsets nor outweighs HFT’s very real positives. 

Fisher Investments Editorial Staff

A Peek at 2014 Midterm Elections’ Potential Impact on Your Portfolio

By, 04/17/2014
Ratings264.134615

Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Neither Republicans nor Democrats are favored by stocks. Believing in the market/economic superiority of one group of politicians over another can be a source of bias—and investing on biases can cause significant investment errors.

Midterms. They aren’t just college exams—they’re also methadone for political junkies in between Presidential election years. And with Congressional election rhetoric heating up, many wonder what the contest means for markets. In our view, whether the Republicans or Democrats gain a few seats in either chamber, the likely outcome is (drumroll): Gridlock! Something stocks love.

For gridlock to end, the Democrats would need filibuster-proof majorities in both houses. This is exceedingly unlikely—structure and history favor a split Congress. The Senate contest favors a continued but smaller Democratic majority. Republicans have fewer seats to defend, and history shows the President’s party tends to lose seats during midterms. However, to gain a majority, Republicans would need to pick up six of the 21 Democratic seats up for re-election and defend all 15 of their own. Republicans’ defense looks easy compared to Democrats, considering GOP-incumbent races are largely in traditional Republican strongholds. The Democrats must defend six seats in states that voted Republican in the last four Presidential contests. Sweeping these would require the Republicans to repeat their landslide victories in 1994 and 2010—not impossible, but it would take near-flawless campaigning. In our view, the most likely outcome is a slim Democratic majority. In the House, structural factors are somewhat reversed—the likely outcome being a continued but smaller Republican majority. Since incumbents are hard to beat, the key is to look for open seats. As of April 11, 2014, the House has 18 open seats—13 Republican and 5 Democratic. For the Democrats, winning a majority would require taking all 13 Republican open seats, stealing one from a Republican incumbent and losing zero. It wouldn’t shock if the Democrats gained some ground, but the likelihood they take the House is extremely low.

Elisabeth Dellinger

Values Rule

By, 04/17/2014
Ratings353.828571

Ukraine! Biotech bubble! Crashing social media IPOs! China!

Have I got your attention? Yes? Phew. And sorry, because this article is about none of those—it’s about something critical for investors, but it’s a topic most find dry. What is it? The rules governing brokers and investment advisers. In recent weeks, SEC Chair Mary Jo White told her staff to fast-track their investigation into a potential uniform fiduciary standard for brokers and registered investment advisers, with an eye toward announcing a decision by yearend.

Her announcement accelerated a long-running debate in the financial press and industry blogosphere. One side says a uniform standard is necessary to ensure investors receive the best, most transparent advice. The other says it would hollow out the industry, leaving investors underserved and in the dark. In my view, though, both arguments—and the very idea of a uniform fiduciary standard—overlook the philosophical and historical reasons behind the current rules. A uniform fiduciary standard might create some winners and losers, but it won’t magically fix the financial services industry overnight.

Fisher Investments Editorial Staff
Across the Atlantic

New Laws for the Old Country

By, 04/16/2014
Ratings94.333333

In the time-honored tradition of college students everywhere, the European Parliament is scrambling to meet a deadline. The chamber breaks for elections in May, and with “euroskeptic” parties polling well, legislators are keen to pass as much as possible while the pro-euro crowd has a strong majority. As a result, a lot of long-awaited legislation passed this week, including a host of measures impacting Europe’s capital markets and the investment universe. Most of these aren’t front-page news, but their implications are important for anyone investing in Europe, now or in the future.

One such measure contains rules and guidelines on high-frequency trading (HFT), with the goal of preventing “disorderly” market behavior. For example, HFT algorithms now need regulatory approval and must pass tests to ensure they “cannot create or contribute to disorderly trading conditions.” Other rules include curbs to halt/constrain HFT if there are “sudden unexpected price movements” and standardizing tick size to enable “reasonably stable prices,” while allowing bid-ask spreads to continue narrowing. HFT firms who keep open buy and sell orders will have to run their algorithms for a set number of hours each day—effectively formalizing their formerly defacto role as market makers, and the law encourages rejiggering exchange fees to promote transparency and stability, including permitting exchanges to adjust fees for cancelled orders (or for firms with high ratios of cancelled to executed orders).

While it’s encouraging that lawmakers acknowledge some of HFT’s benefits, like narrower spreads, market-making and greater liquidity, some of the rules rest on the premise that HFT causes big market moves, a la the many claims HFT caused 2010’s “Flash Crash.” However, there is no evidence intraday volatility has increased materially since HFT proliferated—or that HFT caused the Flash Crash. Much more evidence exists a fat finger trade … human error … caused the wild hour or two that day. One could even argue HFT may help mitigate volatility! During the Flash Crash and last year’s Twitter crash, for example, algorithms kicked in when markets fell sharply. While some suggest they exacerbated volatility (focusing on the sell side only), it is equally as likely rapid-fire buy orders helping bid prices back up were initiated. Overall, liquidity—the ability to buy or sell readily when desired at easily discernible prices—is a good thing. The HFT curbs passed Tuesday might make markets take longer to recover from those blips.

Fisher Investments Editorial Staff

A Q&A On Recent Volatility

By, 04/15/2014
Ratings1693.997041

Fact: Volatility can be pretty, well, volatile sometimes. It’s also a normal, healthy feature of any bull market—dips and dives help keep sentiment in check. They keep fear alive, lowering expectations and extending the proverbial wall of worry. The market’s recent (and ongoing) gyrations are just normal—the price we pay for getting market-like long-term growth over time.

Most headlines won’t tell you this. In our daily survey of the more than 100 worldwide websites, pundits’ and economists’ blogs we cover, we’ve seen precious few (if any) outlets putting stocks’ recent ride in perspective. Some wonder when and whether technical indicators will tell us to brace for a bear. Others warn it’s 2000 all over again, with bursting bubbles in Biotech and social media about to take down the world. A handful look at sliding “momentum” stocks (whatever that means) and wonder whether they’ll rebound or another category will take their place atop the leaderboard. Most are written in such hyperbolic tone that you’d never know the S&P 500 was down only 3.9% since its April 2 peak as of Monday’s close. Or that for every person “dumping” formerly high-flying stocks, someone else is eagerly snapping them up.

Yes, having a little perspective can make all the difference. So without further ado, we give you the MarketMinder view on the current slide.

Fisher Investments Editorial Staff

Greece Makes a Comeback

By, 04/14/2014
Ratings143.821429

A brand new security took markets by storm last week—and we aren’t talking about some hot IPO. Nope, we’re talking about the first new Greek long-term bond since pre-bailout times. On Thursday, Greece put a little over €3 billion in five-year bonds on the auction block—and demand was sky-high. Sure, it’s just one bond—but the clamor speaks to just how far Greece has come. Investors’ confidence, so shattered during the sovereign debt crisis, has firmed up, putting to rest fears of the eurozone’s untimely collapse.

To say Greece has had a long, hard road is an understatement. Its first bailout came in 2010, but its economy started to tank in 2008. What happened after is a true Greek tragedy. A quarter of its economy wiped out during six years of full on depression. Borrowing costs soaring above 30%. Two bailouts. Two defaults. Massive job losses. Political turmoil, complete with a violent fascist uprising courtesy of the neo-Nazi Golden Dawn party. Even one year ago, it seemed the troubles would never end. Leaders were mulling a third default. EU officials said the country still had to make tough adjustments. 10-year yields were still double digits. At the end of 2013, when Greece’s Prime Minister said his country would exit its bailout plan on schedule in 2014, most thought he was nuts. But, as the old proverb goes, it’s often darkest just before the dawn.

The first rays of sunlight appeared in January, when Greece’s manufacturing PMI showed growth for the first time in 53 months. Public finances showed signs of improvement, with officials tipping a primary budget surplus for 2013, and that bailout exit suddenly didn’t seem so crazy. Early this week, Greece auctioned off €1.3 billion in short-term bonds at 3.01%—more than half a point lower than last month’s sale.

Elisabeth Dellinger
Media Hype/Myths, Into Perspective

Too Big to Fail: Money Management Edition

By, 04/11/2014
Ratings373.310811

Are too-big-to-fail money managers a risk to the global financial system?

The Bank of England’s financial stability watchdog, Andy Haldane, seems to think so. In a recent speech at the London Business School, he warned the crowd the mutual fund and asset management industries are increasingly “run-prone”—funds and firms are getting too big, owning too many assets, and if investors lose confidence in the managers and exit en masse, it could trigger huge asset fire sales, causing a vicious circle of failing funds and falling markets. If a fund were big enough, even something as innocuous as rebalancing could launch a panic!  

He isn’t the only one saying this. In January, the global Financial Stability Board (FSB)—regulatory chiefs from around the world—released a consultation paper on identifying and regulating globally systemically important non-bank non-insurance financial institutions. Translated from Bureaucratese, that means too-big-to-fail investment firms. These are firms whose failure, regulators believe, “would cause significant disruption to the global financial system and economic activity”—liquidation of assets could “impact asset prices and thereby could significantly disrupt trading or funding in key financial markets, potentially provoking losses for other firms with similar holdings.”

Fisher Investments Editorial Staff
Emerging Markets, Media Hype/Myths, Reality Check

When the Growing Gets Tough

By, 04/11/2014
Ratings184.361111

Amidst trade wobbles, Chinese Premier Li Keqiang focuses on future growth. Source: Lintao Zhang, Getty Images.

About a month after slowing retail sales and industrial production added to China’s great wall of worry, poor trade data refreshed fears China’s hard landing is nigh. We won’t sugarcoat things: Falling exports and imports probably do indicate China is weakening some, but it’s likely a side effect of officials’ efforts to reengineer and open the economy. Growing pains aren’t pleasant, but they aren’t a crash.

Fisher Investments Editorial Staff

Euro Politicos

By, 04/10/2014
Ratings433.744186

Structural reforms in Italy? Pro-business policies in France? Ask any investor if these were likely a year ago, they’d almost surely have said no. Italy is gridlocked! France’s President is a Socialist! But reality often enjoys taking an ironic turn. Italy’s firebrand new Prime Minister is shaking things up with a new reform-minded budget, and France’s new cabinet is continuing President François Hollande’s drive toward moderation. How far either initiative gets remains to be seen—it’s politics, after all!—but both illustrate how investors operating on political biases and assumptions alone often end up blindsided by a better-than-expected reality. 

Our tale begins in Italy, where new PM Matteo Renzi has promised ambitious economic reforms since his February appointment. But save for some local government bloat-trimming and the 151 ministerial luxury cars hawked on eBay, it was all talk until Tuesday’s three-year budget agreement. Considering Renzi has spent months calling for looser fiscal policy to boost growth and famously called the EU’s budget stability pact a “stupidity pact,” most expected some growth spending plans. But Renzi took a different tack. Along with €7 billion in tax cuts for lower-income workers—the largest tax cuts in two decades—came €5 billion in spending cuts to reduce Italy’s public debt and comply with the EU’s 3% debt-to-GDP limit. And topping it off was acknowledgment 2014 growth will likely slow from initial projections of 1.0% to just 0.8% as a result.

Counter-intuitively, this is an encouraging sign. It indicates Renzi is in it for the long-haul, resisting the urge for a short-term fix in order to undertake structural reforms—and accepting slightly slower growth in the near term as a tradeoff for building a foundation for more sustainable growth. Renzi’s proposals probably aren’t big enough to bring about some earthshattering changes that turn Italy into, say Germany, and it’s a three-year plan. But hey! You’ve got to start somewhere. The same goes for the labor reform efforts Renzi launched last week, which includes plans to revamp the unemployment welfare scheme, improve employment agencies and establish a new employment contract that eases some of the restrictions on employers. Here, too, it’ll be a slow-go. Renzi estimates it’ll take up to a year to pass the legislation given the many vested interests in the way. But if politicians see things through, Italy would benefit over time.

Fisher Investments Editorial Staff

Popping Tech Bubble Fears

By, 04/09/2014
Ratings623.645161

Have you heard? The Tech party is over—get out before those out-of-touch valuations fall to earth and that frothy IPO scene dries up!  At least, that’s the impression you’ll likely get from headlines bemoaning the Technology sector’s recent slide. In our view, though, it seems a big stretch to interpret the sentiment-driven wobbles typical of bull markets as a bubble bursting. Yes, sector-specific volatility is as normal in a bull as broad market gyrations, and while Tech could very well wobble a while longer, the sector’s long-term prospects still look strong.

Many observers see Tech’s slide as confirmation their long-running “Tech Bubble 2.0” fears are right. Some point to companies with super high valuations getting punished, while others highlight weakness in some formerly high-flying recent IPOs. However, the sector hasn’t exactly been partying like it’s 1999. IPOs are more plentiful than in recent years, but investors aren’t bidding them up with reckless abandon—today’s first-day median returns are less than a third of what they were 15 years ago. Lofty valuations for a handful of companies might be a sign sentiment toward some firms is on the high side, but it’s difficult to argue the entire Tech sector is riding high on euphoria. Exhibit A: the near-consensus belief Tech’s recent slide is the beginning of a popping bubble. In 2000’s euphoric environment, most pundits deemed every pullback a buying opportunity. Even as Tech slid right down the slope of hope, many believed the “new economy” couldn’t stay down. Today, we see the opposite—a sign of lingering investor pessimism, not euphoria.

In our view, Tech’s pullback is just normal, sentiment-driven volatility—typical of healthy bull markets. Pullbacks help keep sentiment in check, lowering expectations and extending the proverbial wall of worry. And in our view, Tech has plenty of reasons to keep on climbing. The explosive adoption of mobile and cloud computing is driving demand for a whole host of gadgets, equipment, components and services. Continued Emerging Markets growth is opening up new markets and driving Tech demand growth globally. US firms are launching long-delayed IT systems and software upgrades—business investment in these areas hit all-time highs in Q4 2013.Larger tech companies also tend to have strong balance sheets with healthy cash balances, allowing them to continue to develop and grow.

Fisher Investments Editorial Staff
Corporate Earnings, Media Hype/Myths

Beating the Earnings Blahs

By, 04/08/2014
Ratings634.317461

Spring may be here, but headlines are warning investors to brace for a nasty storm: Q1 earnings season. Most expect it to be a stinker, with consensus forecasts for a -1.4% drop in aggregate S&P 500 earnings from Q1 2013. Some say the expected weakness is a blip, with stronger earnings growth on tap in 2014’s second half; others claim it’s a sign firms can no longer offset weak revenues by cutting costs. While we side more with the optimists, we take a different view overall: Expectations are just expectations. Reality isn’t guaranteed to follow, and even if earnings are weaker, it doesn’t mean the bull must end.

Weak forecasts are nothing new. For most of this bull market, analysts’ expectations have started the quarter reasonably positive, then fallen steadily as firms lower their guidance, reaching rock-bottom levels just before companies start announcing. But once earnings season begins, a funny thing usually happens: Firms broadly beat expectations, and the final tally ends up higher than most anticipated. Those lower expectations, so widely feared before companies report, end up creating a positive surprise down the road.

This is largely why companies lower their guidance. Think about the typical headline on a company’s earnings results: “Company X Earnings Beat on A, B and C!” or “Company Y in Earnings Miss on D and F!” The actual direction of earnings is rarely mentioned—the headline win or loss gets all the attention and, by extension, is what influences investor sentiment. So companies are incentivized to set expectations as low as possible, simply to raise the likelihood they beat. That’s how you regularly get over two-thirds of companies beating expectations every quarter. They purposefully set the bar low for themselves.

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Recent Commentary

Elisabeth Dellinger

Book Review: Flash Boys

By, 04/24/2014

Michael Lewis’s latest is proof good guys still exist on Wall Street, but it doesn’t quite capture the complex reality of high frequency trading.

read more
Fisher Investments Editorial Staff
Personal Finance

Targeting the Wrong Objective

By, 04/23/2014
Ratings164.09375

While the SEC mulls whether target-date funds require more disclosure, there is a much bigger flaw in these investments.

read more
Fisher Investments Editorial Staff
US Economy

Economies and Spaceships

By, 04/22/2014
Ratings314.080645

Some say the US has to achieve “escape velocity” for the expansion and bull market to continue, but laws of astrophysics don’t apply to the economy (or stocks).

read more
Fisher Investments Editorial Staff
Media Hype/Myths

High Frequency Trade-Offs

By, 04/21/2014
Ratings382.960526

High frequency trading is back in the spotlight—how do its pros and cons really weigh?

read more
Fisher Investments Editorial Staff

A Peek at 2014 Midterm Elections’ Potential Impact on Your Portfolio

By, 04/17/2014
Ratings264.134615

Midterm elections are still roughly seven months away, but the election’s structure can hold clues to the potential outcome and associated stock market impact.

read more

Global Market Update

Market Wrap-Up, Wed Apr 23 2014

Below is a market summary (as of market close Wednesday, 04/23/2014):

  • Global Equities: MSCI World (-0.2%)
  • US Equities: S&P 500 (-0.2%)
  • UK Equities: MSCI UK (-0.4%)
  • Best Country: Japan (+1.2%)
  • Worst Country: Sweden (-1.1%)
  • Best Sector: Energy (+0.2%)
  • Worst Sector: Information Technology (-0.8%)
  • Bond Yields: 10-year US Treasurys fell .01 to 2.70%.

Editors' Note: Tracking Stock and Bond Indexes