Fisher Investments Editorial Staff
Into Perspective, Reality Check

The SEC Adds 60 More Bullet Points on Credit-Ratings Agencies

By, 08/29/2014
Ratings194.210526

Wednesday, the SEC continued its piecemeal approach to dealing with offshoots of 2008’s financial crisis, passing new rules on credit-ratings agencies in a 3-2 vote. In our view, this latest rater reform is a small positive, but it doesn’t really address the principal issues. It also isn’t the surefire safety device some claim. Talk of this rule “protecting investors” is likely as much puffery as the raters’ opinions themselves.

The raters, 10 firms technically called Nationally Recognized Statistical Ratings Organizations (NRSROs), letter-grade bonds based on the likelihood an issuer defaults.[i] Many might recognize them from recent hits like, “INSERT RATER HERE Cuts Argentina to CCC- on Supreme Court Decision.” Or, for those recalling 2011, “CERTAIN RATER Strips US of Top Credit Rating.” Or REDACTED RATER That Downgraded US Credit Rating Sued by US, But Certainly Not for Downgrading US, Says Government. Sovereign ratings grab most headlines, but they aren’t the lion’s share of raters’ business. Municipal, structured and corporate ratings dominate, and unlike most sovereigns, they pay NRSROs for their rating.

In the sovereign market, issuer ratings are usually considered “in the general public’s interest,” so they’re free (whee!). But corporations and municipalities pay the rater, creating a potential conflict of interest, since raters could theoretically compete on two major fronts:

Fisher Investments Editorial Staff
Forecasting, Reality Check, Deficits

Adventures in Forecasting: CBO Edition

By, 08/28/2014

The Congressional Budget Office (CBO) completed its semi-annual assignment Wednesday, releasing its updated 10-year budget projection for 2014. Some things look better than February’s forecast, some things worse, and media reactions were overall mixed. Our take? If you’re looking for a market forecasting tool, this isn’t one (super long-term forecasts never are).

The headlines focused on the big numbers. CBO raised its Fiscal Year 2014 deficit projection by $14 billion from February’s, saying it overestimated the rise in corporate tax revenue and economic growth—in other words, they had to account for Q1’s weather-related pullback. But they expect growth to bounce a bit higher from 2014 to 2017 before leveling off at 2.2% in 2018, boosting their long-term revenue estimates. Between that and a slower expected rise in interest payments, they now think 2024’s deficit will be $114 billion lower than first forecast (hooray?)—good enough to drop 2024’s projected debt-to-GDP ratio from 79.2% to 77.2%. Still benign by historical standards, and only 5 percentage points above today.

But there is little chance any of that comes true, judging by the past decade’s worth of CBO forecasts—they’re near-comically off base (and their sub-forecasts for GDP, interest rates and so many more are equally off). In 2003, the CBO thought we’d have a $508 billion surplus in 2013 and a 14.4% debt-to-GDP ratio. Reality? A $680 billion deficit and debt-to-GDP of 71.5%. Few projections fare better, as shown in Exhibit 1.

Fisher Investments Editorial Staff
Investor Sentiment

A Mixed Reaction to S&P 3635.71

By, 08/27/2014
Ratings533.867924


Or 3635. In Total Return terms. Photo by Spencer Platt/Getty Images.

The S&P 500 Total Return Index closed at 3635.71[i] on Tuesday, hitting its 115th all-time high of this bull market.[ii] But for some reason, the punditry focused on the Price Index. Probably because it closed above 2,000[iii] for the first time. Huzzah! Round number! Media frenzy time! Some are popping the champagne and ordering more for 4000  (and we’re pretty sure they aren’t eyeing the Total Return Index, though they may just like champagne). Others are less enthused, suggesting even 2100 (all of 5% higher than Tuesday’s close) won’t come for a long while. The varied opinions—from wildly bullish to sad-sack—indicate just how mixed investor sentiment still is. In our view, that’s bullish—the euphoria that commonly accompanies market tops remains far off. 

The media response to the last nice round number (1900) was rather ho-hum. But this one has, you know, an extra zero. And it starts with a two. Reaching 2000 just sounds so much more epic. Perhaps that’s why there was a bit of euphoria in some corners of the Internet. Like the “it’s going to 4000” champagne poppers. Don’t get us wrong—we’re bullish, too!—but we also don’t believe it’s possible to forecast markets more than 18 months or so out, and it seems a wee bit of a stretch to assume the S&P 500 doubles by then. Same goes for the pundit claiming we’re five years into a 20-year bull, saying, “When you really think about this, this is an elongated business cycle. You’re going to have fair value through most of it. You’re not going to get a lot of overvaluation.” This is also way premature. Maybe this bull does last longer than most! But you can’t know that today. You also can’t know what sort of a premium investors will place on earnings over the next 15 years.

Fisher Investments Editorial Staff

The Trouble With Surveys

By, 08/26/2014
Ratings273.814815

What do German business execs, US economists and US small business owners have in common? Like, beyond the fact that they’re all getting top-billing in the financial press because it’s a slow news day? Apparently, they all have the blues. German bigwigs believe their economy is “losing steam.” Fewer economists think US economic policy is on the “right track,” and more think it needs big “structural changes.” Two thirds of small business owners are pessimistic about future financing. But before you assume this all means the world economy is teetering, a caveat: These gloomy takeaways come from surveys. Not facts. Surveys aren’t useless, but they also don’t tell you what will happen, and we’d suggest investors take them with a big grain of salt.

To see why, let’s look at the three surveys making news today—starting with the economists, who appear about as dismal as their field’s colloquial name would imply.[i] According to the National Association for Business Economics’ (NABE) latest poll, only 53% believe “US monetary policy is on the right track,” which is more than half (yay?), but also fewer than the 57% who gave the thumbs up six months ago. Thirty-six percent say the government should use “structural policies” to address the “rise in long-term deficit-to-GDP ratio,” compared with 20% in February.[ii] In short, it would seem more of the “experts” think the US is moving in the wrong direction.

Problem is, this survey doesn’t account for the elephant in the room: economists’ biases. Many economists aren’t any more objective than other pundits. Those who believe in demand-side economics—who believe policies that boost consumer demand are the best way to drive growth—might be feeling sour simply because there is less quantitative easing (QE). Even though numerous economic indicators show the end of QE isn’t bad, and the yield curve has steepened since Ben Bernanke first hinted at “tapering” Fed bond buying in May 2013. If your bias is pro-demand-side, then you’re biased to hate the taper. On the flipside, adherents of supply-side economics—the school of thought believing if folks can create and produce freely, demand (and growth) will fall into place—are probably apt to be among the 39% saying policy is “too stimulative,” because they’d prefer the feds just get out of the way and let the private sector do its thing.

Fisher Investments Editorial Staff

QE Noise

By, 08/25/2014
Ratings304.283333

Quantitative easing (QE) is winding down, but QE chatter isn’t. And there is no shortage of conflicting views, which is where we come in—to help investors see past the noise.

As a refresher: QE is the Fed buying long-term assets from banks, ostensibly trying to lower interest rates, thereby spurring demand for loans—in theory, stimulating the economy with added capital. When the Fed buys a bond, it credits the account of one of the 19 primary dealer banks with electronic credits—reserves—it hoped would underpin new lending. The first round of bond buying was announced in November 2008 and began in early 2009. A second round was announced in late 2010, after inflation trended lower. This was followed in 2012 by QE3 and what we affectionately call QE-infinity, which basically said the Fed would buy bonds at an $85 billion monthly pace until they sorta felt like not buying at that pace any longer, a point Ben Bernanke first alluded to in May 2013. The official “taper,” or slowing of bond buying, was announced in December 2013, and there have been five rounds since. The bond buying is on course to cease in October, which the Fed acknowledged recently.[i]   

The effect of QE, in our view, has been less than favorable. As Exhibit 1 shows, while the monetary base (M0) went gangbusters, the amount of money in circulation (M2) was tepid—rising M0 alone doesn’t boost economic activity if the money sits on the sidelines. As Exhibit 2 shows, while excess reserves have jumped, lending hasn’t.

Elisabeth Dellinger

Searching for Meaning in Bouncy Bonds

By, 08/25/2014
Ratings363.333333

Here are some sentences that don’t make sense: “German two-year debt yields held close to 15-month lows just below zero on Wednesday, with record low money market rates and expectations of easier ECB monetary policy underpinning demand at an auction of similarly dated bonds.” “Eurozone government borrowing costs sank to historic lows on Thursday as investors increased bets that the European Central Bank would take aggressive action to avert a deflationary slump, following early data indicating that the region’s recovery slowed in August.” “Portuguese and Spanish government bonds rose, with two-year notes leading euro-area rates to new lows amid speculation stubbornly low inflation will prompt the European Central Bank to extend stimulus measures.” Here is why these sentences don’t make sense: If you expect the ECB to increase inflation, you probably don’t want to own low-yielding bonds. Or bonds paying no interest during their two-year lifespan.[i] In reality, bond buyers could be speculating the ECB won’t do anything! But you won’t get that theory from the media’s misperceived explanations for short-term market movement—usually something you can’t tie to any one, two or three things. It’s a timeless lesson but particularly apt these days, with the punditry desperately searching for meaning in the recent slide in US Treasury yields.

It is human nature to want to know why markets move the way they do. It is also human nature to want an answer more specific than “because,” even though “because” is right the vast majority of the time.[ii] To most folks, “because” feels like a cop out. I promise you it isn’t.

This is why: Billions of shares change hands each day, via several million unique transactions. That means millions of people (and computers) trading for millions of reasons.[iii] Fund managers buying and selling to accommodate additions and redemptions. High-frequency traders buying because a price moved a certain way or because a certain economic data point moved up or down. Retirees selling a few shares just to fund their living expenses. Workers buying to put new 401(k) contributions to work. People panicking. People buying because they think panic is overblown. Taking stop losses. Buying on the dips. Cashing in so you can buy a house. Selling your house and reinvesting the proceeds. I could come up with loads more, but you get the drift.

Fisher Investments Editorial Staff
Reality Check, Into Perspective

The Joy of All-Time Highs

By, 08/22/2014
Ratings834.048193

Acrophobia abounds. Rejoice in it.

The S&P 500 hit its 112th and 113th new all-time closing high of this bull market Wednesday and Thursday.[i] Cue the acrophobia[ii] and claims you’d be certifiable to buy stocks at these supposedly lofty levels. But there is nothing about an all-time high that says stocks can’t get much, much loftier before a bear market begins. And perversely, that new all-time highs are greeted mostly by concerns—not celebration—is a sign these highs aren’t the bull market’s peak.

In a development that strikes us as pretty much the norm for the preceding 111, there was no shortage of fearful warnings that this all-time high—THIS!—signals the end is nigh. They point to Ukraine. Gaza. Iraq. The Fed and a supposedly more hawkish tone in meeting minutes released Wednesday—the Fed could hike rates sooner than the unknowable date pundits speculated was likely! Or certain investor sentiment surveys that allude to bullishness bubbling up, a contrarian warning sign, in their view. It’s that eurozone’s troubles are supposedly back, in the form of a deflationary depression. The US is still not growing at a lightning fast pace. Or it’s Japan’s falling GDP. Oddly, one of the most-read articles on a major financial news website rehashed fears from basically 2009, that the withdrawal of stimulus (monetary and/or fiscal) would yank the one supporting pillar from underneath the bull. Others presume the trouble is a distorted measure of valuations (the cyclically adjusted price-to-earnings ratio, or CAPE) has reached a level it last saw in July 2004, smack in the middle of the last bull market.

Fisher Investments Editorial Staff
MarketMinder Minute

MarketMinder Minute - Do Retirees Need to be Conservative?

By, 08/21/2014
Ratings463.706522

MarketMinder's Editorial Staff debunks the common investor myth that retirees must be conservative.

Fisher Investments Editorial Staff
Reality Check

Statista: The Countries Hit Hardest By Russia’s Trade Ban

By, 08/21/2014
Ratings373.513514

In our daily perusal of websites we came across this bar graph from Statista and thought we’d share. The point here is relatively simple: Russia’s feeble ban on certain food imports totals $6.8 billion. It won’t be pretty for Norwegian fisheries, but the macroeconomic or stock market fallout of such a tiny ban is unlikely to amount to much more than a blip.

Source: http://www.statista.com/chart/2572/sanctioned-food-exports-to-russia/

Fisher Investments Editorial Staff
Investor Sentiment

Oddly Calculated, Bizarrely Inflation-Adjusted Thing Says Stocks Are Overvalued

By, 08/21/2014
Ratings573.780702

Does today's high cyclically adjusted P/E ratio mean time is running out for this bull market? Photo by Alex Wong/Getty Images.

If you as much as skim financial news headlines these days, you’ve likely read the following: Stocks are overpriced. With many indexes bouncing back near new all-time highs (again!), the media has returned to bang the drum that investors are too rosy, setting up a fall. As evidence, many point to the cyclically adjusted price-to-earnings ratio (CAPE) being above its historical average as a sign a downturn looms. They aren’t alone. One of the CAPE’s inventors[i]—Nobel Prize-winning economist Robert Shiller—recently shared a similar sentiment in a widely read New York Times op-ed. In our view, though, there is ample evidence CAPE isn’t any more predictive today than it has been historically, and the chatter around it is a better sign investors aren’t euphoric than one they are.

Fisher Investments Editorial Staff

Still Off Target

By, 08/20/2014
Ratings114.409091

Even the arrows that hit the blue circles are closer to the target than target-dated funds. Photo by Paul Gilham/Getty Images.

Recently, some of the biggest target-date fund (TDF) providers revealed they were changing their funds’ asset allocation, increasing both their stake in equities and staying in stocks for a longer time period. But before you high-five them for finally acknowledging the time value of money, we have to break some bad news: The move has nothing to do with raising compound growth potential to position folks better for retirement. Nope, it is simply because the firms’ “research” says folks’ risk tolerance has improved, justifying a bump in equity allocation. Which is sort of a weird, misperceived reason for a product designed to be disciplined to make a change. It also underscores why, in our view, folks investing for retirement can do better: If a product alters its strategy based on a common investor behavioral mistake[i], it probably isn’t a great fit for your long-term goals.  

Fisher Investments Editorial Staff
Into Perspective

Banks Fail Vague Test, Blame Vagary

By, 08/19/2014
Ratings294.344828

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
Ratings214.071429

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

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.

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Recent Commentary

Fisher Investments Editorial Staff
Into Perspective

The SEC Adds 60 More Bullet Points on Credit-Ratings Agencies

By, 08/29/2014
Ratings194.210526

Will the new regulations targeting credit-ratings agencies accomplish much?

read more
Fisher Investments Editorial Staff
Forecasting

Adventures in Forecasting: CBO Edition

By, 08/28/2014

Whether you think they’re too sunny or sour, the Congressional Budget Office’s latest debt forecasts probably won’t match reality.  

read more
Fisher Investments Editorial Staff
Investor Sentiment

A Mixed Reaction to S&P 3635.71

By, 08/27/2014
Ratings533.867924

The S&P 500 reaching 2000 tells us more about investor sentiment than where the index is headed next.  

read more
Fisher Investments Editorial Staff

The Trouble With Surveys

By, 08/26/2014
Ratings273.814815

They give you opinions and feelings and are frequently colored by bias, which doesn’t tell you where markets or the economy go next.

read more
Fisher Investments Editorial Staff

QE Noise

By, 08/25/2014
Ratings304.283333

Commentary on quantitative easing can be all over the place—we’re here to help you make sense of it.

read more

Global Market Update

Market Wrap-Up, Thurs Aug 28 2014

Below is a market summary (as of market close Thursday, 08/28/2014):

  • Global Equities: MSCI World (-0.4%)
  • US Equities: S&P 500 (-0.2%)
  • UK Equities: MSCI UK -0.4%)
  • Best Country: Ireland (+0.2%)
  • Worst Country: Austria (-2.5%)
  • Best Sector: Utilities (0.0%)
  • Worst Sector: Materials (-0.7%)
  • Bond Yields: 10-year US Treasurys fell .02 to 2.34%

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.