|By Neil Irwin, The New York Times, 01/30/2015|
MarketMinder's View: We’ve long said falling oil and the strong dollar create winners and losers, and this shows some of each. That said, beware of reading too much—good or bad—into anecdotal evidence. Nothing here indicates a broad long-term trend, whether we’re talking investment in oil-related machinery or the strong dollar hampering exporters’ earnings. Reality is more nuanced. Take earnings. The strong dollar might hurt export revenues, but few US exporters manufacture goods with 100% domestic components. Most import parts and raw materials, and the stronger dollar makes those cheaper. A lot of this just cancels. Company reps might not say this on earnings calls, because currency swings are an easy way to rationalize a slowdown without panicking investors, but most of that is just marketing spin. As for oil equipment, just consider Q4’s GDP breakdown. Business investment in equipment indeed fell -1.9%, but investment in structures and intellectual property (e.g., software and R&D) rose 2.6% and 7.1%, respectively, and total business investment rose 1.9%. Looks like the winners more than offset the losers.
|By Mitch Tuchman, MarketWatch, 01/30/2015|
MarketMinder's View: Buried in this sports analogy that we are incapable of following is a brief argument that most folks are better off with passive investing. We aren’t sure how that’s meant to “protect” your portfolio from the investing equivalent of a bizarre episode of deflated footballs, but never mind. Analogies aren’t our forte. Investing is, however, and we think this misses a key point on that front. Yes, research overwhelmingly shows broad indexes beat active strategies a lot of the time. But precious few investors are innately passive enough to get these long-term returns. They flip in and out, and the lack of discipline can be costly. We aren’t anti-passive in theory—we just aren’t convinced true passive investing has ever been done in the real world.
|By Morgan Housel, The Wall Street Journal, 01/30/2015|
MarketMinder's View: This is great. Read it, and you’ll find a pithy, clever indictment of some of the most annoying industry gobbledygook—a user’s guide for investors who are tired of spin and doublespeak. Hear, hear for the crusade against oxymoronic industry jargon, meaningless platitudes and the spread of baseless mythology!
|By Kenneth Corbin, Financial Planning, 01/30/2015|
MarketMinder's View: Look, we’re all for transparency and encouraging advisers to put clients’ interests first, always and everywhere. Some of these “best practices” are a fine way to improve disclosure and limit conflicts of interest (and some seem more like ways for the practitioner to limit their own liability, and some are just plain unhelpful, like encouraging more professional designations). But no rule, certification or checklist can ensure any adviser puts investors first. Especially if the adviser or broker receives compensation from investment sales, which creates conflicting incentives. That is one reason we encourage all investors to look beyond regulations and certifications and do thorough due diligence to discover an adviser’s values—and how they use their values, resources and knowledge to put investors first. For more, see Todd Bliman’s column, “The Compass.”
|By Erik Holm, The Wall Street Journal, 01/30/2015|
MarketMinder's View: This is great fun, but we wouldn’t take it to the bank. Or our online trading platforms. No correlation without causation, after all, and the study even shows companies with Super Bowl commercials don’t always outperform over the pre/post-game window in question. Plus, markets effectively discount broad opinions and widely known information. With tens of millions of folks watching the Super Bowl globally, it is exceedingly unlikely any commercial gives you an opinion of the company that isn’t already broadly held. This isn’t a good way to try to get an edge. But still, Super Bowl fun!
|By Jason Zweig, The Wall Street Journal, 01/30/2015|
MarketMinder's View: This starts off fine, with data showing stocks have historically done fine amid rising rates. But the study it highlights—which claims bonds often outperform stocks when rates aren’t falling—can lead long-term growth investors to a weird place. One, it segments Fed moves in three buckets: expansive (rates falling), restrictive (rates rising) and indeterminate (discount and fed-funds rates moving in opposite directions. The “indeterminate” category is bizarre, considering the Fed has historically moved the discount rate down below the fed-funds rate to stoke liquidity. So that sort of throws the analysis of stock returns into question. Plus, the whole thing kind of tempts investors to flip from stocks to bonds when rates rise, which is an odd strategy if you’re investing for long-term growth and stocks are going up—there is no set relationship here. We think folks are best off viewing the bigger picture, which shows the first hike in a tightening cycle doesn’t usually trigger bear markets or invert the yield curve. The latter depends more on how aggressively the Fed tightens (and what markets are doing to long-term interest rates), which the study doesn’t even try to measure.
|By Staff, EUbusiness, 01/30/2015|
MarketMinder's View: Yes, headline CPI sank to -0.6% y/y. But that’s mostly because energy prices fell -8.9%. Excluding energy and food, core inflation slowed just slightly, to 0.6% y/y. So prices for most goods and services are rising. Which makes sense, with broad money supply continuing to accelerate. The eurozone isn’t getting sucked down a well of depressionary deflation. It’s just seeing broad energy price declines and slow, uneven growth.
|By Anna Andrianova and Agnes Lovasz, Bloomberg, 01/30/2015|
MarketMinder's View: The Central Bank of Russia (CBR) cut rates from 17% to 15%, and the ruble promptly fell 4% as capital flight accelerated—proving central banks under political pressure are more prone to erratic decisions and undermining confidence. Last month, the CBR hiked to stem the ruble’s drop. Now they’re cutting because politicians and oligarchs are pressuring them to, and local markets are freaking out. This doesn’t have much impact on global stocks, considering Russia’s problems are uniquely domestic and its economy is less than 3% of world GDP, but it shows why investors should pay attention to how central banks function when deciding where to put their money.
|By Staff, Jiji Press, 01/30/2015|
MarketMinder's View: Good news for Japan, but not necessarily a sign the recession is finished. For one, it’s one positive read in a longer-term choppy trend. Two, other reports released today showed household spending fell again in December as April’s sales tax hike continued weighing on big-ticket purchases, and November’s CPI report saw inflation slow again—yet more evidence monetary policy alone can’t pull Japan back into growth.
|By Kevin Kingsbury, The Wall Street Journal, 01/30/2015|
MarketMinder's View: This really isn’t about Visa. You could insert any Dow company with a stock split in the headline and get the same story, which shows why price-weighted indexes like the Dow are useless. Forget the broken Dow—broad, capitalization-weighted indexes like the Russell 3000, S&P 500 or global MSCI World give a much more accurate view.
|By Mehreen Khan, The Telegraph, 01/30/2015|
MarketMinder's View: First of all, go Spain! Second of all, we just find this take interesting, as most other coverage of eurozone economics claims falling prices are some massive economic headwind. The truth is more or less in the middle, as falling energy prices help consumers and hurt oil producers. (Though, the point about falling prices eventually putting the brakes on consumer spending is largely grounded in myth.) And third of all, go Spain!
|By Bill Militello, InvestmentNews, 01/29/2015|
MarketMinder's View: Add this to the list of misperceived takes on the fiduciary standard: That it incents advisers to take too little risk, increasing the likelihood an RIA won’t achieve sufficient growth to reach client goals. But this totally miscasts the fiduciary standard, right out of the gate. The fiduciary standard does basically two things. It requires disclosure of conflicts of interest (in ADV IIs, normally) and it states that the adviser must have a reasonable basis for believing his/her/their recommendation puts their clients’ interests ahead of their own. That’s it, folks. If the market falls and folks’ returns are negative as a result, that on its own doesn’t say anything about the fiduciary standard. As we have written here many times, the rule doesn’t make the adviser, the adviser’s values make the rule meaningful. For more, see Todd Bliman’s 11/14/2013 column, “The Compass.”
|By Anjani Trivedi, Josie Cox and Carolyn Cui, The Wall Street Journal, 01/29/2015|
MarketMinder's View: The term “currency war” has been tossed around lately due to recent moves by different central banks. Though attention-grabbing, it seems inappropriately applied. A currency war—or, technically, a competitive devaluation—is a country’s deliberate effort to weaken its currency and make its exports cheaper, theoretically boosting growth. In addition to the underlying fallacy here—countries in today’s globalized economy usually can’t increase exports without imports rising, negating that “advantage”—there isn’t evidence a competitive devaluation is actually happening. Singapore, cited here as a player in an alleged currency war due to its announcement that it would weaken its dollar, has always used currency valuation as its primary monetary policy tool—it doesn’t use a target overnight interest rate, as opposed to the US Fed, which uses fed-funds. And Switzerland, which made the most news recently when it stopped defending its currency floor, deliberately strengthened the franc, not usually what happens in a currency war. Finally, the US and UK both ended quantitative easing some time ago, currencies strengthened and their economies lead the developed world growth. Where is this evidence a weak currency is so growth goose-y?
|By Jeff Benjamin, InvestmentNews, 01/29/2015|
MarketMinder's View: Err … President Obama’s proposal to tax 529 college savings plans lasted a week before he dropped it—it didn’t get far. Now we aren’t saying it’s impossible for Congress to change tax laws and remove some of the advantages of education and/or retirement savings accounts. Tax laws probably won’t be identical to today’s 20 or 30 years from now. But, trying to predict what tax rules—or anything—will look like in the distant future isn’t a useful exercise for investors, given markets don’t look any further than 30 months out (and focus more on the next 12-18 months). A retirement planning reality is that there isn’t certainty about anything 20 or 30 years from now. Traditional IRA tax benefits could vanish. The entire annuity industry could blow up. Every pension the world over could become insolvent. Those are all possibilities, but the probability any of them happen—or that Roths suddenly get hit with a sweeping tax—is extremely low today.
|By Staff, The Economist, 01/29/2015|
MarketMinder's View: Some correct and some off-base views here. We’ll start with the good stuff: The discussion of maturity transformation and how the difference between banks’ funding costs and loan-interest revenues weighs on their margins is good and rare in media. But the rest of this piece is overwrought and off. For one, quantitative easing (QE) doesn’t erase the threat of deflation in the eurozone—it actually amplifies deflationary pressures because it weighs on banks’ profit margins. Unless you think eurozone banks have all of a sudden gone Marxist and aren’t profit motivated (they haven’t), you can probably see this discourages lending, and without lending, money supply doesn’t grow—dis- or deflationary. Also, weakening the euro may make exports more attractive but it also makes imports more expensive—and for businesses competing in the global economy, the effect is largely zero sum. QE didn’t work in the US or UK and it hasn’t worked in Japan—and we don’t see the eurozone being the exception to the rule.
|By Justin Yifu Lin, Project Syndicate, 01/29/2015|
MarketMinder's View: So this is a different—though still misperceived—spin on slowing Chinese economic growth. The argument here posits that China’s potential growth is still substantial—due to theoretical robust domestic demand—but the rest of the world’s slower growth prospects hamper the Middle Kingdom. While we’d agree a slowing China isn’t as concerning as popularly perceived, it isn’t because the world outside China is going to torpedo their growth. Rather, we look at the economic reality: China growing around 7% in 2014 added more to the global economy than China growing in double digits in 2006. Oh and most of this argument avoids the fact the slowdown in China isn’t due to a slow-growing global economy hurting Chinese exports or a lack of growth-boosting public spending and investment. It’s more due to the government’s long-term goal of transitioning from an export-driven economy to a more sustainable services- and consumer-based one.
|By Steven Rattner, The New York Times , 01/29/2015|
MarketMinder's View: This piece nicely highlights some of the structural headwinds facing the eurozone, though it seems to suggest they are a reason the eurozone’s recovery hasn’t equaled the US’s or UK’s. Now, these issues—like Italy’s byzantine labor code and France’s somewhat problematic tax policy—are problematic in the medium to long term, but they aren’t new or a big bad surprise to markets. They haven’t stopped uneven eurozone growth over the past six quarters either. While reforms boosting the eurozone’s competitiveness wouldn’t bear immediate fruit, they would be a mid- to long-term economic positive—and are a heck of a lot more sensible suggestions than the monetary non-stimulus the ECB announced last week, which likely just flattens the yield curve, discouraging bank lending by reducing banks’ loan profit margins.
|By Daisuke Segawa and Kazumichi Shono, The Yomiuri Shimbun, 01/28/2015|
MarketMinder's View: “Though the yen’s depreciation was expected to boost exports under the government’s scenario for economic growth, it is difficult to say tactics have progressed smoothly.” The excessive trade deficit mumbo-jumbo here misses the point—plenty of vibrant economies like America’s run trade and current account deficits. Rather, the notion we think you should take from this is that the weak yen hasn’t stimulated growth. And we didn’t expect it to, because in today’s globalized economy, few if any exports are entirely domestically produced. In Japan’s case, raw materials and energy products are heavy imports for industrial Japan, and a weak yen makes those input costs higher. Additionally, the same factors hit Japanese consumers. Weak, strong, whatever—currency valuations merely create winners and losers.
|By Ron Insana, CNBC, 01/28/2015|
MarketMinder's View: The allegedly scary thing is the possibility the ECB loses money on assets it purchases, either through interest rate fluctuations or an outright sovereign default. We would suggest this is wide of the mark. For one, contrary to the assertion in this piece, the ECB plan targets longer-term bonds, which aren’t at negative yields anywhere in the eurozone. Now then, if rates do rise, it’s true the ECB could take a loss. But should they do so, it’s not like you would get a financial panic—they could simply print more money. You might yelp, “That’s inflationary!” But that’s kind of the point of the ECB’s plan anyway. Now then, we agree ECB bond buying isn’t the right medicine for the eurozone, but it isn’t for any of the reasons included here, or for any of the reasons this piece lauds US quantitative easing (QE): QE, no matter which side of the Atlantic you are on, flattens the yield curve (the spread between short-term and long-term rates, and a proxy for bank lending’s profitability). A flat yield curve has never been shown to stimulate an economy, because less profitable bank lending likely means less plentiful money. A steep yield curve, on the other hand, has long been an indicator of positive economic growth ahead.
|By Paul Ziobro, Josh Mitchell and Theo Francis, The Wall Street Journal, 01/28/2015|
MarketMinder's View: The headline would be more accurate if it read, “Strong Dollar May Squeeze Some US Firms to Some Extent.” Consider: What about input costs for US firms that might import some intermediate goods or raw materials? For them, wouldn’t a strong dollar expand profits? Oh, and we’d suggest markets are well aware of the dollar’s strength. The likelihood it derails the bull market is exceptionally low, just as it didn’t when the dollar was quite strong in the 1990s.
|By Szu Ping Chan and James Titcomb, The Telegraph, 01/28/2015|
MarketMinder's View: Greek Prime Minister Alexis Tsipras’s new government is up and running, and some suggest it is poised to take a hard-line stance against its EU/IMF/ECB creditors, as evidenced by his nominating extremely anti-austerity cabinet ministers, ending privatizations and issuing rhetoric against EU foreign policy. But we would caution against reading a lot into the first three days of Tsipras’s government. This isn’t the first Greek government to start negotiations with the troika by saying they won’t just tuck their tail between their legs. History suggests concessions and comprises between Greece and its creditors are likely eventually. For more on Greece, see our 1/27/2015 commentary, “Greek Government Theatrics and Other Reruns.”
|By Jill Treanor, The Guardian, 01/28/2015|
MarketMinder's View: We are highly skeptical a US $34 billion fiscal stimulus package is going to offset the massive hits the Russian economy has taken from having banks shut out of global capital markets due to sanctions, and from the government’s cash cow—Energy, which yields over half of Russia’s tax revenue—suffering from cratering oil prices. With all that said, the situation is likely confined to Russia, given the fact few other nations suffer from these same factors.
|By Peter Spence, The Telegraph, 01/28/2015|
MarketMinder's View: So the use of the yuan in international payments surged 102% to total less than 5% of global payments. That shows you that yes, China’s economy is ascending. But the common fear the yuan will overtake the dollar is so wide of the mark that it’s laughable. Plus, for the yuan’s climb to continue, the Chinese government will have to open its capital account to foreign cashflows, a very slow, long-term process. Ultimately, we guess a bigger Chinese economy with a more open capital account would be good not only for the yuan’s use internationally, but the global economy.
|By Wallace Witkowski, MarketWatch, 01/27/2015|
MarketMinder's View: So this basically argues stocks in industries that aren’t cutting-edge like utilities or bank stocks outperform others, because the others’ valuations are bid up by investors seeking The Next Hot Thing. But who is to define boring? Were bank stocks boring in 2008? What about during the regional bank merger craze in the 1990s? There is no permanently superior industry, category, sector, size, style, country or individual company. Stocks aren’t boring or flashy. They are stocks.
|By Megan McArdle, Bloomberg, 01/27/2015|
MarketMinder's View: So this all builds off a now-scrapped proposal included in President Obama’s State of the Union address last week to tax certain 529 plan college savings accounts, eliminating their current tax-shelter status, extrapolating this to mean all tax-advantaged savings accounts are at risk. Yet the 529 tax proposal didn’t even survive a week. The likelihood this or any administration succeeds in taxing Roth IRAs is exceedingly low. On a sensible note, as the article indicates, this shouldn’t really affect your saving behavior either way, because you know what? Living the retirement you want may require you to finance a good portion of it.
|By Szu Ping Chan, The Telegraph, 01/27/2015|
MarketMinder's View: Total GDP growth slowed, but as this shows, it was largely due to a drop in construction. Services, which are about 80% of GDP, held steady at 0.8% q/q. Production fell -0.1%, but that drop was largely driven by energy production (e.g., North Sea oil)—manufacturing output rose 0.1%. While data on spending (consumers, business investment, trade etc.) won’t be available until the second estimate, this limited glimpse doesn’t seem to reveal a weakening UK economy.
|By Danielle Kurtzleben, Vox, 01/27/2015|
MarketMinder's View: As ever, the CBO’s updated long-term economic and fiscal forecast has little (to no) use for investors. Its assumptions about debt, deficits and GDP are based on straight-line extrapolations of recent trends and reversion to historical means. It doesn’t and can’t account for the many things that could change between then and now, like economic cycles, interest rates, legislation and technology. It also uses flawed theory, like potential output—a textbook model that has little application to the real world. These issues are why the CBO’s long-term projections usually don’t have the best track record. Plus, even if they end up correct about far-future debt and growth this time, they can’t know whether higher debt will be unaffordable, which is what ultimately matters. America and Britain have shouldered much higher debt loads in the past because debt service was relatively cheap. Today, it’s super cheap.
|By Jon Hilsenrath, MarketWatch, 01/27/2015|
MarketMinder's View: We’re just a little confused by the parallel here, which compares today’s nor’easter with last year’s Polar Vortex, claiming the Fed couldn’t decide for months whether Q1 2014’s slowdown was solely weather-related and this indecision somehow impacted policy. Thing is, the Fed continued tapering quantitative easing bond purchases the whole time they were supposedly uncertain. So that doesn’t hold water. As ever, we wouldn’t waste time speculating about what the Fed might do or how they might adjust forward guidance. Their guidance is obtuse marketing spin, and their actions are unpredictable. Besides, the first rate hike in a tightening cycle has no history of turning bull markets into bears.
|By Terrence McCoy, The Washington Post, 01/27/2015|
MarketMinder's View: The plot of this alleged spy ring resembles cheap pulp fiction, save for one piece: Evidently, these supposed Russian operatives were investigating how they could use ETFs and stock trading algorithms to “destabilize markets.” This is driving fears of “algorithmic terrorism,” wherein foreign agents could supposedly cause another “flash crash” or worse. Now, this all sounds like a bad James Bond movie or episode of The Americans, but sometimes truth is stranger than fiction, so we guess it’s technically possible. But it’s highly improbable. Even if the bad guys could set a malevolent tradebot loose on the market, it would be one actor among millions. Other bots and humans would have arguably more influence. Also, stocks swiftly recovered from the flash crash—hence the name—making this all rather moot.
|By Andrew Ross Sorkin, The New York Times, 01/27/2015|
MarketMinder's View: Dodd-Frank required the SEC to write a rule ordering publicly traded firms to reveal the ratio of CEO pay to their median worker’s pay. Nearly five years on, the SEC is still hemming and hawing and appears to be watering the rule down quite a bit. Whether you love or hate the rule, this probably doesn’t make much difference. Median worker pay is difficult to calculate for all the reasons described here, and the statistic is subject to a lot of manipulation. Plus, the law’s aims were largely sociological. Investors wouldn’t gain much from this disclosure.
|By Mohamed A. El-Erian, Bloomberg, 01/27/2015|
MarketMinder's View: Here is what S&P downgrading Russia’s sovereign credit rating actually means: The fact that Russia is heavily oil dependent, currently a sanctioned pariah on international markets and very likely to enter recession has dawned on S&P. Considering Russia has enough forex reserves to cover 2015 debt maturities three times over, we’d suggest speculation of big credit market fallout or default are off base.
|By Bret Stephens, The Wall Street Journal, 01/27/2015|
MarketMinder's View: This perhaps goes a bit too far and is too negative, in the sense that we’re fairly sure some politicians in Greece aren’t just “freeloading off of someone else,” but the history and story of business practices in Greece is an illuminating illustration of the competitiveness issues inherent in the Greek economy. And, this is a very entertainingly written article to boot.
|By Liz Alderman and Jim Yardley, The New York Times, 01/26/2015|
MarketMinder's View: As expected, Alexis Tsipras’s Syriza party took Sunday’s Greek parliamentary election, though they narrowly missed winning an outright majority (and formed a coalition with a small right-leaning anti-bailout party). Some suggest the anti-austerity party winning risks renewed euro crisis, as their rhetoric could roil stocks or even result in Greece exiting the euro. However, we’d suggest this isn’t truly a game-changer for stocks. For one, not only is the outcome here the expected, Greece’s issues themselves are five years old, widely known, the country is too small to materially sway the global economy or markets and its troubles are mostly unique to Greece. Ultimately, it is highly likely Syriza’s campaign talk turns out like campaign talk in most countries: Lies and overstatements designed to curry voters’ favor. There is also no guarantee this government has staying power, given the ideological divergence of its members. Now, this article also oddly claims Tsipras’s demands are “unrealistic and rife with the potential to drive Greece to default” which is strange because Greece has already defaulted twice and a third isn’t a unique demand of Syriza’s. It has been openly discussed with lenders for months.
|By Veronica Dagher, The Wall Street Journal, 01/26/2015|
MarketMinder's View: Most of these are unrelated to investing—ways your brain can trick you into saving less and spending more. The one investment-related piece comes at the end, and it kind of misses the mark. It claims to address “overconfidence,” but what’s really at work in this anecdote is classic regret shunning—blaming any and everyone else for any investment decision that doesn’t work out. For instance, say Jim and Judy Investor buy a stock and it promptly tanks. They could see it as a learning experience and chance to evaluate their methods—that’s how you benefit from mistakes. Or, they could shun regret, as many people do. Say it’s the broker’s fault for recommending it. Or their neighbor Bob’s fault for hyping it up when he and Jim were golfing. Or the CEO’s fault for setting too-high expectations. The hypothetical client in this article blamed his portfolio’s 2008 losses on his financial adviser, rather than learning and accepting how the financial crisis blindsided most. Acting on these impulses was the root error here.
|By Katie Allen, The Guardian, 01/26/2015|
MarketMinder's View: By “running out of steam,” these forecasters mean they think GDP grew 0.6% q/q in Q4, all of 0.1 percentage point slower than Q3’s 0.7%. If that turns out to be true (first estimate hits this week), it’s awfully hasty to say Britain is losing steam. Economies never move in straight lines, and 2014 growth is still widely expected to be the fastest of this expansion. As for the “unbalanced” recovery chatter, which argues consumer-led growth is unsustainable and bad for Britain, there is no evidence this is true. A dominant service sector is a hallmark of most advanced, evolved economies. Manufacturing powerhouse China has said it would love to have a robust service sector leading growth. That folks broadly see a positive—robust service sector growth—as a negative for Britain suggests sentiment there remains too dour.
|By Yao Yang, Project Syndicate, 01/26/2015|
MarketMinder's View: Yes. It can. Neither China nor the world faces dangerous “deflationary pressure.” They face falling commodity prices. China’s producer price index (aka wholesale inflation) is falling because commodity prices are down—steel mills are paying less for iron ore, energy costs are lower, factories are paying less for raw materials. This is generally good for their bottom lines. Meanwhile, consumer prices are rising benignly, alongside fast economic and broad money supply growth.
|By Staff, Reuters, 01/26/2015|
MarketMinder's View: We highly doubt Greece’s new government is going to pay that much attention to a ratings agency threatening to have an early meeting at which they might change their rating from already junk territory (B) to something slightly junkier. But we also guess this means S&P’s stated outlook for Greece’s rating (currently, “Stable”) is a misnomer. We’d suggest taking this as a friendly reminder of the typically nonsensical nature of credit ratings agency opinions.
|By Elaine Moore and Philip Stafford, Financial Times, 01/26/2015|
MarketMinder's View: While this overestimates quantitative easing’s (QE) theoretical benefits, it raises some key points about the challenges of doing it in the first place. For instance: How many banks will really be willing to sell bonds with positive yields in return for central bank reserve credits carrying negative yields? As this points out, the ECB could buy bonds from mutual funds instead of banks, but then how would the newly created reserves be channeled into the banking system to spur lending? Between these issues and the fact QE weighs on Europe’s already-flat yield curves, which in turn discourage lending, we see very little likelihood that QE stimulates the eurozone.
|By David Enrich, Viktoria Dendrinou and Francesco Guerrera, The Wall Street Journal, 01/26/2015|
MarketMinder's View: Apparently the ECB is wrapping up last autumn’s stress tests by sending every bank under its purview a letter containing their very own, unique capital requirements and orders to raise more money based on whatever risks the stress tests uncovered. This isn’t terribly surprising, as the ECB long ago reserved the right to base different banks’ capital needs on qualitative factors as well as quantitative. Evidently this will happen annually, and banks don’t like it, claiming the rules are a moving target and the process isn’t transparent. That’s probably true, but the debate is also sort of moot for now. Banks probably weren’t going to lend aggressively anyway, with yield curves quite flat. It’s also sort of convenient that the ECB does all this at the same time they launch a campaign to build up bank reserves through quantitative easing (QE). We always sort of wondered if the Fed’s real goal with US QE was building bank balance sheets—seems rational to wonder the same for ECB QE, too.
|By Paula Dwyer, Bloomberg, 01/26/2015|
MarketMinder's View: “Kickbacks” is a harsh term to use, in our opinion, to describe the traditional broker model’s inherent conflict of interests. Now, there are, of course, conflicts in the commission-based arena. But this goes too far in presuming a fiduciary standard eliminates them. It doesn’t. All it says is your adviser must disclose conflicts (a plus) and have a reasonable basis to believe their recommendations are in your interests. You might be able to make a reasonable argument for a lot of terrible products, like variable annuities and non-traded REITs. Look, our parent company is a fee-only registered investment adviser held to the fiduciary standard, so we’re not being biased when we say the assumption the government can or should clean up the industry by changing a rule is naïve. We support free choice. Let investors decide what they value and allow competition to work its magic. Also, three factual quibbles: 1) Mutual fund “revenue sharing” probably doesn’t much influence broker recommendations per se, because it isn’t paid to the broker, but the firm. 2) Churning is already illegal—no rule change is needed to prevent that. 3) It is very odd to suggest the US government should mimic Britain’s, Belgium’s or Australia’s approach to capital markets regulation when trading costs are significantly higher in all three of those countries.
|By Moming Zhou, Bloomberg, 01/23/2015|
MarketMinder's View: After news of King Abdullah’s passing, folks wondered if his successor would change tack and cut oil output to boost prices. But he said that isn’t in the cards for now, and he’s keeping the late king’s oil minister. Maybe they do change course eventually, but for now, it seems investors shouldn’t expect the king’s death to trigger a sharp rise in oil prices.
|By Jason Zweig, The Wall Street Journal, 01/23/2015|
MarketMinder's View: We don’t typically highlight purely anecdotal evidence like this, and this is admittedly an extreme case, but it is a fascinating story and illustrates a few key lessons. One, margin debt is expensive, which is why we generally suggest folks avoid margin. Two, being on margin also puts you at risk of forced sales if you get a margin call, which can wipe you out in extreme cases—another reason we generally suggest folks avoid margin. Three, always stay up to speed on activity in your account and make sure you recognize it. Four, don’t count on a broker whose compensation structure incentivizes investment sales, not client service, to alert you if something in your account looks awry. Some might! But don’t think things must be hunky dory if you don’t hear a peep.
|By Dan Moisand, MarketWatch, 01/23/2015|
MarketMinder's View: Agreed. Why? One: You’re paying extra for a redundant tax shell. Two: “Most annuity contracts provide some type of guarantee or an array of guarantees about the account value. These are often used as the heart of the sales pitch. All guarantees have a cost. The cost, in and of itself, isn't the problem. What is usually the problem is that in many cases, the costs cover guarantees you don't need or the costs aren't a good value. In addition, by buying an annuity, you are adding unnecessary complications. The insurance company, not you, offering the product decides what your investment options are going to be. If for any reason you want to move the money elsewhere, in many cases, you will have to contend with surrender charges. Many contracts also allow for fee increases at the discretion of the insurer up to specified limits.”
|By Tatyana Shumsky, The Wall Street Journal, 01/23/2015|
MarketMinder's View: This posits all sorts of reasons why investors should think about gold and silver—quantitative easing, currency volatility, inflation, past price movement, you get the gist. It’s all largely hogwash. Gold and silver are commodities. Not stores of value, not hedges against much of anything, not guaranteed to rise just because they’ve bounced some off a crushing bear market low.
|By Staff, CNBC, 01/23/2015|
MarketMinder's View: We’re all for testing preparedness for retirement and making sure folks are adequately financially savvy for their golden years. But we took this quiz, and most of the subject matter is too far afield and the advice too misperceived to be of much practical use.
|By Leonid Bershidsky, Bloomberg, 01/23/2015|
MarketMinder's View: If America has been losing a currency war with Japan since early 2013, why is US GDP growth accelerating and leading the developed world (with growing exports) while Japan is stuck in its third recession since 2009?
|By Simon Jenkins, The Guardian, 01/23/2015|
MarketMinder's View: Setting aside the sociological bent, misplaced blame on banks for the financial crisis and sluggish eurozone growth and too-dour view on Europe’s economies, this has a pretty spot-on mechanical explanation of why quantitative easing (QE) doesn’t work: “It was promised that it would yield new investment. It has not. It was promised that it would ‘pump money into the economy’. It has not. It was also feared that printing money would lead to hyper-inflation. It has not, for the simple reason that no one gets to spend the money. It is a bookkeeping transaction between a central bank and a commercial bank. It means nothing as long as banks are told to build up their reserves. Money in circulation matters.”
|By Fergal O’Brien, Bloomberg, 01/23/2015|
MarketMinder's View: Well whaddaya know: “Markit Economics said a Purchasing Managers Index for manufacturing and services advanced to 52.6 this month from 52 in December. … Services led the strengthening, with an index rising to 52.7 from 52.1, while the factory gauge slipped to 51 from 51.2.” And 50 is considered the line between contraction and growth, so goooooo Germany!
|By Caroline Binham, Financial Times, 01/23/2015|
MarketMinder's View: Looks like global regulators are thinking about slapping capital requirements on banks’ sovereign debt holdings—something regulators in Europe have long hinted at, too. Some folks are already speculating about the impact, wondering whether it will raise or dent demand for riskier sovereign debt, but that all seems premature. Any capital requirements probably would create winners and losers, but there are zero concrete plans and zero details, so guessing at how banks react is moot.
|By Peter Spence, The Telegraph, 01/23/2015|
MarketMinder's View: While this is probably a bit heavy-handed in its enthusiasm over falling oil prices, the UK enjoyed some rollicking retail sales growth last quarter. Total sales volumes rose 2.3% q/q, as did sales excluding fuel. All hail the mighty UK consumer!
|By Krista Hughes, Reuters, 01/23/2015|
MarketMinder's View: So a Senator is preparing a bipartisan bill to “stop currency cheats” and force “strict currency rules” into the multination Trans-Pacific Partnership trade agreement (TPP). “Currency cheats,” it seems, are nations that drive down their exchange rates to make exports cheaper and undercut the competition—something Japan is widely accused of—and it seems fair to say this push, if successful, would make TPP even less likely. That’s not a huge shock, because multinational deals like TPP always stand little chance of coming to fruition. Nor is it a negative, as world trade has grown fine without TPP—just the absence of a new positive. However, the piece aimed at punishing currency manipulators outside TPP seems a bit iffy. Currency wars, as we wrote here and here, aren’t really things, and they aren’t really bad for those who “lose” by virtue of stronger currencies. Weak currency makes exports cheaper abroad, which is nice, but it also makes imports more expensive, hurting consumers and businesses. Many exporters import parts and raw materials, so the weaker currency really isn’t a net benefit, as Japan has shown. So the need to “punish” manipulators through tariffs or trade restrictions seems odd. It could also invite protectionist blowback, which markets might not like. In our view, markets will probably be best off if gridlock kills this effort.
|By David Malpass, The Wall Street Journal, 01/22/2015|
MarketMinder's View: As this piece highlights—and we have argued often—quantitative easing (QE) has a glorious track record of failing to meet its objectives. Its stated aim: stimulate economic growth by reducing long-term interest rates and spurring folks to borrow. Its actual impact: Flattening the yield curve and discouraging banks from lending to anyone but the safest borrowers, which, as this piece notes, “are seldom the best job creators.” Riskier borrowers, typically, tend to take more risk, which often means spend more on growthy endeavors. Eurozone QE likely flattens an already flat yield curve—not a plus for a choppy, unevenly expanding region.
|By Kyle Caldwell, The Telegraph, 01/22/2015|
MarketMinder's View: Repeat after us: Past performance is not indicative of future returns, and the trend is not (always) your friend. The market prices in all widely known information, and the Roman calendar ranks pretty high in the “widely known” category. So why do most of these seasonal market adages have a high success rate (removing the one about gold since it is a commodity, not a stock)? Because historically, stocks rise more than they fall. Interestingly, one of the “January effect” observations acknowledges this, but then assigns causation to correlation, saying, “However, it is hard to ignore the evidence that a positive January has led to further rises more than 80pc of the time during the past 30 or so years.” If markets go up more than down, that means more months of the year—whether it’s January, June or December—will likely be up, too.
|By Katie Allen, The Guardian, 01/22/2015|
MarketMinder's View: Here is the lesson quantitative easing (QE) taught in the US and UK and is still teaching in Japan: It doesn’t boost economic growth. Consider some numbers we’ve highlighted before. Average UK growth rate during QE: 0.2% q/q. Average after: 0.6% q/q. US weekly loan growth was at a paltry 1.8% y/y before “tapering” began in January 2014, but at year’s end, it was up to 7.7% y/y. The broadest money supply measure, M4, shrank for long stretches during both QEs. And while QE didn’t cause Japan’s third recession in five years—the country is hamstrung by its quasi-mercantilist economy—it certainly hasn’t helped boost growth (and it probably hurt by weakening the yen, making consumers’ and businesses’ lives difficult by jacking up import costs). We doubt the eurozone proves an exception to the rule.
|By Matthew Yglesias, Vox, 01/22/2015|
MarketMinder's View: OK party people, what time is it? It is time to put aside your partisan hats and feelings about banks for a moment and consider the possible downstream implications of this proposal. Gridlock likely prevents Congress from passing the President’s proposed 0.07% tax on all liabilities of banks with assets over $50 billion. This piece suggests the Fed could accomplish the goal through the backdoor, working with fellow regulators to ding banks identically through regulations—perhaps with a “supervisory fee” or something similar. Now, whether you believe banks should be taxed more isn’t the issue. The real problem is that it would open the door for regulators to slap pretend taxes on any or all business without going through Congress. That is a slippery slope, and stocks might not like it. Markets will probably be better off if this doesn’t happen. Even if you love this proposal, politicizing the Fed in this way is the stuff of wayward Frontier Markets nations desperately in need of reform. If you don’t agree, consider how you’d feel if the Fed head was appointed by the party you don’t favor.
|By Shobhana Chandra, Bloomberg, 01/22/2015|
MarketMinder's View: Well actually, why those prices are falling determines if it’s a “good” or “bad” thing. The psychological deflationary phenomenon here, which implies falling prices create a vicious cycle of falling output and more deflation, is largely a myth. If it were true, we’d have had a depression during most of the 19th century’s second half, Spain wouldn’t have grown over the past year or so and we would have ample evidence of deflation preceding recession. Falling prices are bad if they result from bad monetary policy, like sucking money out of the financial system. That isn’t happening today. Money supply has been growing globally—even in the eurozone—so global deflation isn’t really a thing. Where prices are falling, it’s largely because of plunging commodity prices. This allows consumers and businesses to put their money to work elsewhere—a fine thing.
|By Heather Long, CNN Money, 01/22/2015|
MarketMinder's View: This is all way too much searching for meaning in bouncy times. Stocks and oil have long been prone to very high correlation over very short periods. It isn’t different this time! Longer term is where the correlation breaks down. Don’t overthink oil and stocks tracking closely the past two weeks. It’s just normal volatility, and the relationship is coincidental, not causal. None of this is a warning sign that the bull is in jeopardy.
|By Brian Blackstone, The Wall Street Journal, 01/21/2015|
MarketMinder's View: Here is your obligatory will-they-or-won’t-they coverage of the upcoming ECB decisions on whether to launch quantitative easing (QE) or not! Actually, it seems the speculation now isn’t even will they or won’t they, but rather, how big will they and how fast will they buy. The proposal leaked by “sources familiar with the matter” suggests the ECB will buy €50 billion of bonds monthly, which media are speculating results in total purchases of between €600 billion and €1.1 trillion through December 2016, a big range. In our view, should the program come to fruition, it would be an added headwind for the eurozone, dragging down long-term interest rates, perhaps flattening already-flat yield curves further. A flat yield curve means the spread between banks’ funding costs and loan interest revenue is puny—reducing their profits and incentive to lend. If the point of QE is to stimulate the economy through loan growth, then it has been an abject failure everywhere it has been implemented—the UK, US and Japan (twice). We see no reason to expect a different outcome in the eurozone. While we don’t think this is surprising or sizable enough a negative to derail the bull market and expansion, this isn’t a plus for stocks or the eurozone economy.
|By William J. Bernstein, The Wall Street Journal, 01/21/2015|
MarketMinder's View: This is conventional “wisdom” couched as unique advice. What is this conventional “wisdom,” you ask? Retirees must invest “conservatively,” with a heavy dose of ultra-safe fixed income. But this overlooks growing life expectancies and inflation, as well as simply looking at what your goals and objectives actually are. We are all for the reverse calculation to determine your needed cash flow, but investing too conservatively in retirement can mean you outlive your money, regardless of what happens from an investment return perspective. But also consider: Bonds are not risk free. People can and do lose money investing in bonds, in both real and nominal terms.
|By Alen Mattich, The Wall Street Journal, 01/21/2015|
MarketMinder's View: This article is something of a quantitative easing (QE) Rorschach test in the sense it doesn’t clearly argue QE is good or bad. Instead it offers a smorgasbord of myths about its effects in the US and Japan, letting the reader infer as he or she would like. Here are a few pieces of the “evidence” presented. For the good QE: US QE began in November 2008, just five months before the bull kicked off; Japan’s QE caused stocks to surge in its wake. We are told QE is good for earnings, particularly of Financials. But QE’s beginning is less correlated to the start of the bull market than FAS 157’s suspension—and the implementation of FAS 157 is correlated to the start of the 2008 bear, too. Moreover, there is a far better causal explanation for FAS 157—which greatly exaggerated bank losses on securitized debt—than QE, which increased bank reserves but not lending. As for the evidence ECB QE won’t be good for stocks, this suggests it’s because of eurozone equities already being relatively costly by one wacky measure of valuations, the cyclically adjusted P/E ratio, which compares oddly inflation-adjusted earnings from a decade ago to current prices. We’d suggest it’s just much simpler than that. QE could cause a sentiment-driven pop higher, but in the medium to longer term, it fails to stimulate loan growth and hampers Financials earnings because it depresses long-term interest rates, flattening the yield curve. This is supported by nearly a century of economic theory and the fundamental reality of QE in Japan, the US and UK. It is no coincidence, in our view, that growth in the latter two has accelerated with the end of QE bond buying.
|By Rachel Evans and Lananh Nguyen, Bloomberg, 01/21/2015|
MarketMinder's View: Market participants betting that rates will be relatively higher in the US than abroad is pretty fundamentally different than market participants betting a central banker will keep his or her word and maintain a currency peg that artificially depressed the Swiss franc relative to the euro by a significant amount. The former is part-and-parcel of market-based currencies. The latter isn’t market-based at all, until the reintroduction snaps these investors (harshly) back to reality.
|By Scott Grannis, Calafia Beach Pundit, 01/21/2015|
MarketMinder's View: Well, we like the charts documenting the relative dearth of lending in this expansion relative to the past. However, we think the theory this all ties to confidence is missing one major point: Quantitative easing (QE) depressed the yield spread, the gap between short-term and long-term interest rates, a proxy for bank lending’s profitability. But also, here you had a scenario where the Fed was tinkering and exerting influence over the long end of the yield curve—the Fed isn’t a gameable institution, so banks likely looked upon these actions as a driver of uncertainty. Hence, QE wasn’t meeting “demand for (hard, not lent) money” so much as it was creating it by dissuading lending. More evidence? In every country where QE has been tried, it failed (US, UK and Japan). In two where it was tried and ended (US and UK), loan and economic growth surged as QE bond buying ceased.
|By Andrew Trotman, The Telegraph, 01/21/2015|
MarketMinder's View: This article sort of highlights all the wackiness in Russia’s economy in one shot: A month ago, the Central Bank of Russia felt it necessary to hike rates 650 basis points in one fell swoop to bolster the ruble. Now, just over a month later, they are talking of cutting rates to try to revive the economy, despite high inflation. This is the quagmire of stagflation and central bank politicization, particularly in an economy highly dependent on one pretty volatile industry (Energy).
|By Natalie Andrews and Brian McGill, The Wall Street Journal, 01/20/2015|
MarketMinder's View: OK party people, what time is it? Time to set party affiliation aside to draw correct forward-looking conclusions from this infographic. The graphic depicts major policy planks announced in each of President Obama’s State of the Union addresses and scores them as to whether they were accomplished, partially accomplished or not accomplished. Now, mind you: Some cannot be so easily categorized, like the promise to save or create 3.5 million jobs via 2009’s American Recovery and Reinvestment Act (ARRA). Yes, private payrolls have more than topped that number of hires, but it is impossible to prove that the cause is the ARRA and not simply a business cycle that turned after the recession’s proximate cause (FAS 157, mark-to-market accounting, which led to a host of bizarre government actions) was suspended. Overall though, it gives a key reminder: Just because the President announces a policy aim doesn’t mean it’s going to happen. A glance at the volume of gray or red boxes will show that point. So getting too high or too low on any proposal risks being quite premature.
|By Tomi Kilgore, MarketWatch, 01/20/2015|
MarketMinder's View: Well, we just aren’t sure there is enough data here to support the thesis highlighted in the title. There are basically two data points—the current cycle and 1962. We don’t argue that what followed dividend yields exceeding 10-year yields has historically been positive equity returns. But there are many bull markets in which that hasn’t happened. Ultimately, we agree with the bullish outlook, just not necessarily this tool, which probably says much more about past interest rate moves than anything else.
|By Jonathan Kaiman, The Guardian, 01/20/2015|
MarketMinder's View: Well, technically speaking, the target was actually a range of about 7.2% to 7.5%—at least, that’s how Premier Li Keqiang put it last year—so 7.4% growth is actually right in line. Sure, it’s China’s slowest growth in 24 years, but for the world economy, 7.4% growth in a country with the second-biggest GDP is quite nice. The country still has plenty of challenges, and this piece highlights some, but those are well-known, long-term structural issues. Probably not cyclical swing factors that could cause that long-dreaded hard landing to happen. That’s what ultimately matters for global investors.
|By Matthew Lynn, The Telegraph, 01/20/2015|
MarketMinder's View: Will they? Considering only bank reserves swelled when Japan (twice), America and Britain did quantitative easing (QE), we have our doubts. For the QE money to leak out, banks would have had to lend—lending slowed in all four cases. Claiming Japan’s 2001-2006 QE go-round and the US and UK during this bull market drove “asset booms” confuses coincidence with causality. We’d still have bull markets without QE. Heck, for all we know, we could have had a bigger bull market since 2009 without QE, considering all those central bank bond purchases flattened the yield curve. So, while it would be foolish to assume the UK feels no effects if the eurozone launches QE, this piece seems quite overstated.
|By Josh Zumbrun and Daniel Nasaw, The Wall Street Journal, 01/20/2015|
MarketMinder's View: Whatever your take on these eight charts—bullish, bearish, elephantish, donkeyish—we believe it’s critical to note that you can’t attribute economic and market performance to any president in full. They can affect things on the margin, but business cycles boom and bust regardless of who’s in office. Also, most of growth in this cycle has come with a very inactive, gridlocked government, illustrating the point that you shouldn’t overrate government’s role or importance, for good or ill.
|By Chris Mayer, The Washington Post, 01/20/2015|
MarketMinder's View: We aren’t inherently pro- or anti- any sector, industry or stock. “Thrift conversions”—where depositor-owned banks go public—might be fine investing opportunities, like the anecdote here was. But don’t assume they—or any tactic—are a surefire winner. No stock ever is. Nor is a 140% return over three years a realistic expectation. It’s great if it happens! But stock investing isn’t a get-rich-quick scheme.
|By Katie Allen, The Guardian, 01/20/2015|
MarketMinder's View: We’re rather tempted to just paste last Thursday’s commentary into this space, because the IMF did the same thing the World Bank did—revised down their 2015 growth forecast because of euroland, China, Japan and Latin America, but still projected a global acceleration. Most coverage latched onto the downward revision and paid scant attention to the speedier forecast. That reaction is as bullish today as it was last week.
|By Anthony DiPaola, Bloomberg, 01/20/2015|
MarketMinder's View: So this is all pretty obvious, but for those who were at all curious as to whether the US would or even could help prop oil prices, State Department energy envoy Amos Hochstein has kindly stated the obvious: “When people ask the question ‘what will the US do?,’ it’s really the market that’s going to have to decide what happens. This is about a global market that is addressing the supply-demand curve.” The fact that oil prices are down because supply rose faster than demand—and that US oil supply is determined entirely by the private sector—is implicit in his answer.
|By Jenny Cosgrave, CNBC, 01/20/2015|
MarketMinder's View: This is the sort of thing that always make news for reasons we just don’t comprehend. Whether mutual fund managers are boosting or cutting their funds’ cash positions doesn’t signal anything. This also ignores the role market movement plays in these calculations. Even if a manager doesn’t plop more cash into stocks, the cash portion can still fall as a percentage of the fund if stock prices rise. So this isn’t even terribly useful as a sentiment indicator.
|By Gabriel Wildau, Financial Times, 01/20/2015|
MarketMinder's View: So after Chinese stocks plunged Monday in the wake of an apparent government crackdown on margin trading, securities regulators are backtracking some, saying investors shouldn’t “over-interpret” their actions, whatever that means. Neither the intervention nor the verbal backtracking should surprise much—Chinese officials have a long history of doing this. It’s just one item investors should weigh when deciding whether to own Chinese stocks. As for recent volatility, it’s normal for markets to overreact to announcements like this. Don’t overthink the ups and downs.
|By Andrew Critchlow, The Telegraph, 01/16/2015|
MarketMinder's View: Maybe? Production does move in cycles, after all, as this points out. High prices incentivize production, which raises supply, which eventually overshoots demand, sending prices lower. Then low prices incentivize cutbacks, which shrinks supply, which eventually lags demand, driving prices higher. Lather, rinse, repeat. It isn’t different this time. So yah, prices won’t stay at current levels forever. But that also doesn’t mean oil jumps to $100 per barrel any time soon. Non-OPEC output is projected to fall only a wee bit next year. Many US producers don’t have incentive to whack output just yet, because they have locked in higher prices with futures contracts AND prices aren’t way under their breakeven point (in many cases, including much of North Dakota, they’re above). Plus, many firms prefer to have at least some revenue coming in, to help recoup their sky-high upfront investment in new wells, rather than none at all. Also! High oil prices aren’t bearish. Bull markets have seen high oil, low oil, rising oil and falling oil. No material correlation over long periods.
|By Binyamin Applebaum, The New York Times, 01/16/2015|
MarketMinder's View: Slow inflation is not “a warning sign that the economy remains in far from good health.” It is a sign oil prices are way down (because supply is way up). Core inflation, which excludes energy and fresh food, is higher at 1.6% y/y—a level it has bounced around for the past 18 months. That isn’t slowing—it’s just volatility. And married with goosy growth, it creates a “Golidlocks” scenario. That’s tasty, folks. Oh, and as for the Fed, read Wednesday’s commentary to see why all this speculation is fruitless.
|By Claire Jones, Financial Times, 01/16/2015|
MarketMinder's View: Here are the latest rumors and rumblings over potential eurozone QE. Some people who are supposedly intimately involved in this say the ECB will get around EU treaty restrictions on financing governments by just directing the 19 national central banks to buy their own country’s bonds. Administrative problem solved! Now, none of this means anything until it actually happens, which isn’t certain. But, it’s interesting, and maybe it’ll be a thing next week. (Or maybe not. Really, the only thing certain in central banking land is a record of completed transactions. Not plans, rumors or words.)
|By Benjamin Solomon, Businessweek, 01/16/2015|
MarketMinder's View: So this is great fun with a wonderful cartoon, which we feature this as a preview of next week’s State of the Union address as a reminder to take it for what it is: Political theater. Dog and pony show. Rah-rah fairy tale. Don’t get too high or too low based on any promise made therein, and remember that the government is gridlocked, which means even less pie-in-the-sky ideas than those discussed here unrealistic politically.
|By Andrea Day, CNBC, 01/16/2015|
MarketMinder's View: Here is a non-Switzerland currency story. For years, scammers have used email and other marketing means to try to swindle folks into believing you can snap up the Iraqi Dinar now on the ultra-cheap, and reap a massive windfall when it surges after oil production resumes and the country revalues its currency. This is not how currency markets work, which Utah state regulators documented well in this post. If a financial strategy sounds too good to be true, you should assume it is.
|By Rakteem Katakey, Bloomberg, 01/16/2015|
MarketMinder's View: This article operates on the notion prices boom and bust but eventually revert to the long-term mean, which is wrong. But it is even more wrong since the long-term mean here is inflation-adjusted mean oil prices—subject to huge potential skew based on the inflation measure used. After all, can you inflation-adjust crude oil prices using headline CPI? Crude oil is an input in headline CPI’s energy subindex. Adjusting oil prices for oil price inflation then presuming oil prices revert to the mean is more Monty Python sketch than economic analysis.
|By Barbara Kollmeyer, MarketWatch, 01/16/2015|
MarketMinder's View: “Economists are bullish on growth, but copper’s big plunge on Wednesday appeared to be suggesting that they’re wrong. For investors, the crucial question is ‘Who is right?’” Well, we tend to side with the economists quoted at the end of this piece who argue copper isn’t really an economic indicator. All you need to do is realize that Dr. Copper peaked February 7, 2011, and it has fallen pretty steadily since. The economy has grown throughout. The bull market has continued. Yes, copper is economically sensitive and used in a lot of stuff. But that is a pure demand-side look that ignores supply developments, which have been major in recent years. Also? There is a reason metals prices were removed from the Leading Economic Index decades ago.
|By Catherine Bosley, Bloomberg, 01/15/2015|
MarketMinder's View: Since 2011, the Swiss National Bank (SNB) has manipulated the franc/euro exchange rate, installing an exchange rate floor of 1.20 Swiss francs per euro, to prevent the currency from strengthening toward parity with the euro. Wednesday, it yanked the floor, in a “surprise statement” that sent the franc surging. While the timing of the decision certainly seems unexpected—and again highlights the fact you cannot take central bankers’ words as gospel—the move isn’t shocking in the sense currency pegs when capital can flow freely are inherently unstable. This was big news Wednesday, but we doubt it really has many long-term ripples in the sense that allowing the market to decide the franc’s value is more stable and beneficial in the long term. And though the SNB’s actions may contribute to some short-term volatility in currency and equity markets, Swiss monetary policy isn’t at all likely to slow down the global expansion or bull market.
|By Jon Hilsenrath, The Wall Street Journal , 01/15/2015|
MarketMinder's View: Here, Boston Fed President Eric Rosengren said, “If we don’t see any evidence in wage and price data for a year, then I’d wait a year before I’d be doing something.” Now consider Philadelphia Fed President Charles Plosser, who wrote, “We believe the economy has returned to a more normal footing, and … monetary policy should follow suit.” While neither Fed governor has a vote this year (and Plosser retires in March), these are just some of the viewpoints influencing monetary policy, which is voted on by a 10-member committee—a big reason we think gaming the next Fed rate hike is futile. For more, see our 1/14/2015 commentary, “Data-Dependent Forward Guidance.”
|By Alessandro Speciale and Rainier Buergin, Bloomberg, 01/15/2015|
MarketMinder's View: This is a headline we think most people would be surprised by given extant sentiment toward the eurozone. We aren’t suggesting Germany and the eurozone are booming, but things are just not as bleak as so many seem to think.
|By Scott Grannis, Calafia Beach Pundit, 01/15/2015|
MarketMinder's View: We don’t agree with all of this, but some big plusses that make it a worthwhile read. For one, it nicely explains the “why” and “so what” behind the small fall in December retail sales, and it puts the 0.3% drop in sales ex. gasoline station sales (likely heavily affected by falling oil prices) in perspective. “A normal range for this monthly change over the past 15 years is -0.5% to +0.5%. So a one-month change of -0.3% for retail sales ex-gasoline is nothing at all to worry about.” Our major quibble? We think it puts a little too much emphasis on job growth as a leading economic indicator. It also suggests lower commodity prices boost consumption overall when they merely shift it. Though this is a very sensible conclusion indeed: “Today's weaker commodity prices say much more about prolific commodity supplies than they do about weaker global demand.”
|By Cody Williard, MarketWatch, 01/15/2015|
MarketMinder's View: Not only does this seemingly conjure currency wars where none truly exist, it presumes the Swiss Central Bank’s move to remove its exchange-rate floor against the euro is a “trebuchet” (catapult) shot in one. This completely miscasts what a currency war even is. A currency war is often known as a competitive devaluation, a race to have the lowest valued currency relative to major trading partners. Switzerland’s move eliminates a monetary move that artificially depressed the currency’s value. If this is a move in a currency war (it isn’t), that would amount to Switzerland waving a white flag. Hey! Maybe they can go be currency neutral now!
|By Mehreen Khan, The Telegraph, 01/15/2015|
MarketMinder's View: So the World Economic Forum (WEF) has 28 global risks for 2015, this article claims it has four, but we really found only two. Let us explain by critiquing the four in this article one by one:
1.) State conflict. Geopolitical tensions, regional saber-rattling and outright war have long existed. While tragic for those impacted, there is no history of regional conflicts derailing global stocks or the economy. Historically, only surprising and huge conflicts hit markets materially.
2.) Water shortages. This is couched as an environmental concern, but it really isn’t the way it’s explained. They suggest this, too, is a regional geopolitical trigger, particularly in the Middle East. But folks, if fighting breaks out in the Middle East in 2015—over water, religion, oil, gas, food, literally anything—will anyone be surprised?
3.) State collapse to a non-state. Yet more regional geopolitical concerns.
4.) Unemployment. Unemployment can cause great personal hardship, but predicting technology and slow growth will dent global prosperity and create tensions seems overstated. Unemployment and employment follow innovation. Which is also why the fear of technology destroying jobs is just as overwrought now as it was when the flying wheel and spinning jenny displaced weavers.
|By Josh Zumbrun, The Wall Street Journal, 01/14/2015|
MarketMinder's View: The US federal budget deficit keeps falling despite slight increases in spending. While $488 billion may seem big on an absolute level, it’s about 2.8% of US GDP—down from about 10% of GDP in 2009, and not high by historical standards. And it has mostly been achieved on the back of rising revenue, tied to an accelerating economy (and yes, some from rising taxes in prior years). All in all, this should provide some solace for both those who fear the government is spending too much and those who think austerity threatens growth. Something for everybody! But this also means less new Treasury bond issuance, which could tighten supply. When you combine this with the news Germany ran a surplus in a nation that already had negative interest rates out to five-year maturities, you start seeing pressures potentially weighing on interest rates in 2015.
|By Simon Kennedy, Bloomberg, 01/14/2015|
MarketMinder's View: Pollyanna! The theory here is the US Fed is the only thing that can stop the present expansion, as evidenced by the fact the yield curve typically inverts before US recessions, and the Fed controls the yield curve’s short end. But here is the thing: It is overly dismissive to suggest there is no influence on long rates from global factors, and it’s too simplistic to presume a Fed hike is behind 85% of inverted yield curves. In 2008, for example, falling long-term rates were primarily behind the yield curve’s inversion, as this graph shows. Since the market normally controls the long-end of the yield curve, non-Fed factors—US and foreign—can influence the yield curve dramatically. No, China, Europe and Russia haven’t much affected US markets. But that’s because they are either false fears, too small or both. One should not interpret that to mean you only have to focus on the US, much less just the US Fed, much less Janet Yellen.
|By Josef Joffe, The New York Times, 01/14/2015|
MarketMinder's View: There are some sensible aspects to this piece, particularly its characterization of the ongoing politicking between Greece’s would-be Prime Minister Alexis Tspiras, who pumps his ability to cancel austerity and reward his supporters with an avalanche of deficit spending, and German Chancellor Angela Merkel’s government. But the concluding part of this presumes Greece is a prelude to a broader eurozone decline, a very misleading comparison. When has Greece ever been a competitive economic power? When has the Greek state ever taken a back seat to the private sector? What globally competitive private companies are in Greece? What major European nation has been in default for 50% of its independence? Which one has defaulted twice in the past four years? Which other eurozone nation has seen its primary stock index fall -90%? Which has lost nearly a third of its already small GDP? The conclusion you ultimately reach when you answer all these questions is: Greece’s problems are emblematic of nothing more than Greece. For more, see our 12/10/2014 commentary, “The Greek Gambit, Redux.”
|By Jeff Cox, CNBC, 01/14/2015|
MarketMinder's View: The theory here is that the volatility we’ve occasionally seen lately (the current, in October and December 2014) is due to the Fed ending its quantitative easing (QE) bond buying. As are the flattening yield curve and sharper decline in commodity prices. After all, the end of QE was announced in October, and we have all been repeatedly told some permutation of, “Stuff happens when QE ends.” But here is some more realistic perspective: Oil prices have fallen overall since 2011, due to supply increases, mostly. QE didn’t pump oil or cause OPEC to maintain production quotas. Bond yields were expected by most to rise after QE ended. They’ve fallen, flattening the yield curve. But that decline started in January 2014, not October. And the thing is, the point of QE was to lower rates—that was supposedly stimulus, remember? So why the consternation rather than celebration now? Oh and that bond blip on 10/15 reversed the next day, as did stocks’ pullback. Without Fed intervention, too. And the theory there was no volatility before QE ended is just wrong. What about the five corrections from 2010 through 2012? October’s equity volatility didn’t even make it to technical correction territory. And … US stocks rose nicely in Q4 2014, hitting an all-time high on December 29. Between then and yesterday, the S&P 500 is down -3%. There have been 18 declines of -4% or greater in this bull market alone. Where is the evidence things are so wacky now that QE is over? Bull markets are normal. Not unusual, ethereal, fleeting factors fueled only by the Fed. Where is the evidence this one is any different?
|By Russell Gold, The Wall Street Journal, 01/14/2015|
MarketMinder's View: Well, this documents the interesting, if a bit speculative, parallel between the mid-1980s US oil bust and today’s decline, claiming it may take years for oil prices to recover. Though, as the article notes, technology may make that much shorter, in the sense firms have more ability to ratchet oil production up and down than they did then. But it also misses the elephant in the room: The mid-1980s oil bust began in 1985. The next recession was 1990, and 1987’s short-but-sharp recessionless bear market wasn’t related to oil. Enjoy with that in mind.
|By Mohamed El-Erian, The Guardian, 01/14/2015|
MarketMinder's View: Here is the alleged “triple whammy”: Growth isn’t uniform; policy mistakes can happen; folks may still take on too much risk. But when, in world history, has there been uniform growth worldwide—or even just within major regions? When were policy mistakes eliminated from possibility? When did the human beings who make up markets stop being human beings? Ultimately, all this article succeeds in doing is using overly flowery language to describe gripes and complaints one could make at any point in world history, even the best of times.
|By Michael Sincere, MarketWatch, 01/14/2015|
MarketMinder's View: So we have two major quibbles with this article: First, the title is misleading—this is not a “How to…” piece, it’s just a bearish rant citing three pieces of evidence. Second, those three pieces of evidence are shoddy. 1) Yes, perhaps 2014 saw record inflows into ETFs. But that class of product is only a little over a decade old, so there is no reliable history to know if it is a telling sentiment signal or not. Besides, claiming folks are frenzy-buying these on margin requires more than an assertion, it requires data showing spiking margin balances. That doesn’t exist. 2) Where was the Fed in October or December? They ended QE in October. They didn’t do much of anything in December. 3) We presume the “1,000 point rallies and plunges” referred to here are Dow Jones Industrial Average points. If so, then we are talking about roughly 5% moves, based on a Dow at 17,500. That is normal, and the Dow is a broken index to boot.
|By Staff, EUBusiness, 01/14/2015|
MarketMinder's View: Growth isn’t hot. It isn’t uniform across the eurozone. But this is the third straight month of growth, and the headline rate would have been better if not for a -0.9% m/m dip in Energy production, which is kind of a theme the world over. Interestingly, Italy—the laggard among major European economies in recent reports—posted 0.3% m/m growth.
|By Irwin Kellner, MarketWatch, 01/13/2015|
MarketMinder's View: The annualized four-month change in the monetary base does not indicate massively shrinking money supply. It means quantitative easing (QE) is over. When the Fed stopped buying bonds in October, the monetary base blipped down, then back up, and is currently at mid-June levels. That isn’t tight. Also, we saw similar blips at the end of QEs 1 and 2, and excess bank reserves have largely followed suit. So this is a long-known thing—QE’s end—showing up in data. Meanwhile, broad M2 money supply kept rising. As did the even broader M4 money supply. And loan growth. Nothing here is tighter.
|By Victoria McGrane, The Wall Street Journal, 01/13/2015|
MarketMinder's View: This is not a recommendation to buy, sell or do anything else with the stock in the headline. It is simply a look at how one big insurer’s quibble with the government’s decision to name it too-big-to-fail (TBTF)—and expose it to super-tough regulations—could impact the future of these designations. As this shows, the TBTF deliberations happen behind closed doors and the criteria are opaque and qualitative. Will this challenge yield more transparency? Will it chip at Dodd-Frank? Time will tell, but things are getting interesting, and the outcome could have some implications for all Financials (banks and non-banks alike).
|By Sydney Ember, The New York Times, 01/13/2015|
MarketMinder's View: Here is a great look at how supply and demand impact markets—and how prices impact supply and demand. What happened to Bitcoin isn’t unlike what happens in oil, metals, equity and other markets. When demand outstrips supply, prices rise, but soon supply catches up and then surpasses demand, and prices fall, lather, rinse, repeat. Manias and crashes might seem unprecedented, but some things never change.
|By Staff, Reuters, 01/13/2015|
MarketMinder's View: Supply and demand, part two! Germany ran a surplus in 2014, which means this: “The government had planned to take out €6.5bn (£5bn) in net new debt last year but ended up not needing to take any, and even managed to pay off old debts worth 2.5 billion euros.” In other words, the supply of German bunds shrunk by €2.5 billion, while demand stayed firm—up went prices, down went yields! Now, other outlets suggest debt issuance will slow or stop across much of the eurozone next year, which makes us wonder: If the point of quantitative easing is to reduce long-term bond yields, will the ECB notice supply factors are already largely taking care of this? We suspect markets will be better off if they do, as yield curves are already really flat, but it’s impossible to handicap.
|By Peter Spence, The Telegraph, 01/13/2015|
MarketMinder's View: Well, if we’re being technical, anything is always possible—probabilities simply vary. But yes, falling headline CPI is now likelier than it was several months ago, because headline CPI includes energy and food prices, both of which nosedived in Britain. And while headline CPI slowed to 0.5% y/y, core CPI, which excludes food and energy, accelerated to 1.3% y/y. There is just no evidence weak demand is a factor here. Nor is this anything to fear. As this notes, it’s all smashing news for consumers, and there is no such thing as a deflationary mindset (where folks continually delay purchases in hopes of a better deal). The UK still has a “Goldilocks” economy—moderate growth and benign inflation. Pretty sweet.
|By Kyle Caldwell, The Telegraph, 01/13/2015|
MarketMinder's View: And we’d add a tenth: Never let an adviser take custody of your assets. If your money is in an account in your name at a well-known, third-party brokerage firm, then a shady fraudster would have a very difficult time stealing it. For more, see our 8/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Allan S. Roth, Financial Planning, 01/13/2015|
MarketMinder's View: Indeed, “unpopular” companies, sectors and countries often have higher upside looking ahead than the popular things. But blindly buying what others ignore or hate isn’t enough—there has to be a fundamental reason it will exceed expectations. Sometimes things are unpopular for a reason. Plus! Buying unpopular things doesn’t mean you get extra return without extra risk. That doesn’t exist, folks, no matter how many academic theories and models with little (or no) real-world applicability purport to show otherwise. There is no such thing as a less-risky or more-risky stock. Stocks are stocks. Period.
|By Christian Oliver, Financial Times, 01/13/2015|
MarketMinder's View: No shock there—public discontent over the Investment State Dispute Settlement (ISDS) provisions, which allow companies or investors to take governments to arbitration if national laws run afoul of the free trade agreement’s terms, has long simmered on both sides of the Atlantic. It is impossible to handicap what happens from here, though this piece notes some of the difficulties in changing or removing the ISDS language. But if the Transatlantic Trade and Investment Partnership bites the dust, it isn’t a negative. Stocks would like freer trade, but the lack of a deal doesn’t mean protectionism is rising. It just means 29 nations can’t agree on removing the final administrative hurdles to their already largely tariff-free trade.
|By Tim Gray, The New York Times, 01/12/2015|
MarketMinder's View: While we don’t get the dog metaphor, this highlights some target-date funds’ (TDFs) lack of transparency. Each TDF’s allocation “reflects differences in philosophies” among investment companies and managers—not all (Random Date) TDFs are created equally. One could have equities and fixed income only. Another could have commodities, derivatives and who knows what else. How else can you explain why two funds with identical target dates had vastly different performance in 2008? IF you’re going to own one of these, understanding the underlying investments and why they’re there is paramount. Don’t fall for marketing spin. That said, we’d think twice about owning TDFs in the first place, as we think they’re flawed. They ignore the time value of money and wrongly assume your retirement date alone should determine your asset allocation. For more, see our 8/20/2014 commentary, “Still Off Target.”
|By Simon Nixon, The Wall Street Journal, 01/12/2015|
MarketMinder's View: How? If politicians reneg on austerity commitments and don’t repay the IMF bailout loans due in March, the ECB would cut off Greek bank lifelines, apparently requiring Greece’s government to print money to fund the banks. Voilà, Grexit! But that’s awfully speculative. There is no guarantee an anti-austerity government takes power after this month’s election. Even if Syriza wins the most seats, their leaders are already moderating, and they’d likely have to form a coalition with whatever-it-takes-pro-euro parties. Is the scenario in this article possible? Yes! But investing is about probabilities, not possibilities, and it seems improbable. For more, see our 01/06/2015 commentary, “That Often Rumored, But Rarely Seen Grexit.”
|By Dan Strumpf, Saumya Vaishampayan and Alexandra Scaggs, The Wall Street Journal, 01/12/2015|
MarketMinder's View: Well yes, falling oil prices probably hammer earnings and revenues in the price-sensitive Energy sector. But Energy earnings have looked sad for most of the past eight quarters, without derailing the bull market or overall earnings growth. With so many positive forces supporting earnings in other sectors—domestically and globally—the likelihood that changes now seems low.
|By John Ficenec, The Telegraph, 01/12/2015|
MarketMinder's View: So the framing here is mostly a distraction—markets aren’t “defying gravity,” as stocks and earnings don’t have a one-to-one relationship, and “golden rules” in theory are timeless. The rules here that hit the mark are rules for all time, not just supposedly jittery times. But not all this advice is sage. Let’s go one by one. 1) Indeed, investing isn’t gambling—no casino pays out over 70% of the time and stays in business. 2) Compound growth is magical (and real). 3) Nope! Sorry, investing long-term cannot “protect capital.” Capital preservation and growth are mutually exclusive—riskless return doesn’t exist. 4) Yes, don’t over-concentrate in few sectors or stocks. But! We wouldn’t call this the “biggest mistake.” Others (ignoring opportunity cost, ignoring your long-term goals, incorrectly estimating your time horizon) are arguably bigger. 5) Allocation is indeed key, but as described here. A 50/50 portfolio doesn’t offer gains up to 24% while at the same time reducing “potential loss to just 1%.” See point 3! And asset allocation starts with your goals. 6) Yep, ETFs make bonds easier to buy than ever! 7) Keep calm and carry on, indeed. Where capitalism exists, markets can always recover from even the worst beatings. So if you’re caught in a major downturn, don’t give up hope.
|By Isabel Reynolds, Bloomberg, 01/12/2015|
MarketMinder's View: By “loses regional poll,” they mean Abe’s Liberal Democratic Party (LDP) lost the regional election in Safa prefecture—a rural, farm-heavy constituency—to the Japan Agricultural Cooperatives candidate, 56% to 44%. That is some powerful evidence of voters’ displeasure with Abe’s efforts to reduce tariffs and free trade—cornerstones of his economics reform agenda. This is the first of many regional contests early this year, and the LDP must win most of them for Abe to stand a chance of winning re-election as party leader this September. With so much politicking ahead—and so much voter opposition to deep reform—it is difficult to envision any material progress over the foreseeable future.
|By Tom Mitchell, Financial Times, 01/09/2015|
MarketMinder's View: So there is a widely circulated report today warning China’s falling wholesale prices will trigger three dastardly Ds: “deflation, devaluation and default.” This piece is a counterpoint to that doom-and-gloom prophecy, quite rationally pointing out how falling commodity and factory prices give Chinese authorities a chance to abandon the price controls they’ve long promised to scrap, without inflicting immediate damage on consumers. That’s an overall economic positive and pushes China further down the path of market-oriented reform. And as for rumored deflation? Seems to us China is in the same (fine) boat as the US and (yes) Europe: Energy and other commodity prices are down, pulling down headline price indexes. It’s just more pronounced in China, where producers source far more raw materials than developed-world factories, which are mostly sourcing high-tech components and intermediate parts—and not so much iron ore and copper. Meanwhile, China’s GDP is growing at a 7-ish percent clip, broad money supply is growing double digits, and broad lending is humming. Doesn’t really look like deflation.
|By Editorial Board, The New York Times, 01/09/2015|
MarketMinder's View: To help you understand why we don’t think the allegedly stumbling, tumbling euro doesn’t spell disaster for euroland, here is a reverse outline of the argument in this piece:
The weak euro signifies that the eurozone is an economic quagmire
Quagmire is largely due to austerity/lack of economic stimulus measures from eurozone governments, particularly in the periphery
The periphery has returned to growth
But the periphery’s problems have spread
Which you can see in the faltering euro
That is stimulative for the eurozone.
We have nothing to add. The article debunks itself in an utterly confused fashion.
|By Nikos Chrysoloras, Jenny Paris and Antonis Galanopoulos, Bloomberg, 01/09/2015|
MarketMinder's View: Hey, whaddaya know—Greek politicians want to stay in the euro! Opposition leader Alexis Tsipras, the anti-austerity firebrand, has already toned down his rhetoric quite a bit. Now it looks like regardless of which party he’d have to govern in coalition with (if he even wins a plurality and assuming, based on polls, his Syriza party doesn’t win an outright majority), he’ll have to moderate further, because that’s what coalition-negotiating party leaders have to do in order to form a government. That’s a big reason fears of Grexit are likely greatly exaggerated.
|By Neil Irwin, The New York Times, 01/09/2015|
MarketMinder's View: Well, wage growth as calculated in the BLS’s Employment Situation Report (average hourly earnings of all employees) doesn’t look stellar. But there is more than one way to skin a cat. If you look up “wages and salaries” by industry at the BEA, you’ll find private-sector pay has grown between 4% and 6% y/y all year. Back out inflation, and that’s real wage growth between 2.5% and 4.5% y/y. The only place real wages are falling is in the public sector—largely consistent with federal, state and local governments’ long-running cutbacks. (The public sector is also 15.6% of the current total job market.) Seems to us worker pay growth is actually fairly consistent with strengthening labor markets.
|By Richard Evans, The Telegraph, 01/09/2015|
MarketMinder's View: Here are eight simple steps to protecting yourself against online (and phone) fraud. Be discerning, and don’t give your personal information away! The more you know!
|By Joseph Lisanti, Financial Planning, 01/09/2015|
MarketMinder's View: No. Past performance and hopes for reversion to the mean aren’t valid reasons to buy any stock ever. We’re all for buying when there is blood in the streets, in theory! But you must have strong, forward-looking, fundamental reasons to do so. Considering Energy sector revenues depend on prices, not sales volumes—and knowing how much oil supply growth has outstripped demand growth in recent years—sustained earnings growth will be a tall order for Energy firms. For more, see our 1/2/2015 commentary, “The Dodgy Dogs of the Dow and Other Backward-Looking Gimmicks.”
|By Paul Sullivan, The New York Times, 01/09/2015|
MarketMinder's View: Yes, do! But this doesn’t really tell you how. It shows some traits of advisers who put their clients first, like a willingness to have difficult conversations and a refusal to be a “yes man,” but it doesn’t give much guidance on how to do a thorough search for the right adviser for you. It’s just a bunch of snippets and anecdotes from a few in the industry. (Also! There is no guarantee an adviser held to the fiduciary standard will but your interests first always and everywhere. The rule doesn’t mandate it, and values govern behavior. For more on that, see Todd Bliman’s commentary, “The Compass.”)
|By Kristen Scholer, The Wall Street Journal, 01/09/2015|
MarketMinder's View: Actually, markets are just volatile. Searching for meaning in bouncy wages is a fool’s errand.
|By Henny Sender, Financial Times, 01/09/2015|
MarketMinder's View: The points here about oil and deflation are largely spot on—they are indeed false fears, as we explain more here. However, the accompanying theory—that investors are ignoring US economic risk and a strong likelihood of weak earnings—is largely off the mark. It’s the same “earnings growth came from buybacks only” fear we’ve seen for ages now—a widely circulated argument, by the way, not an ignored one. Here are some facts to counter it and the claim stocks are too detached from earnings and a weakening US economy. 1) Total sales at S&P 500 firms are rising. 2) Total net income at S&P 500 firms, which has zero skew from buybacks (which merely reduce the denominator in the earnings-per-share calculation) is rising too. 3) Stocks and earnings often don’t move in lockstep over short periods. 4) Valuations usually expand as bull markets mature, sometimes an awful lot, before they imply investors might be euphoric. 5) High-P/E markets aren’t any riskier than low-P/E markets. 6) The Conference Board’s Leading Economic Index is high and rising. 7) Durable goods orders, cited here as a sign US firms aren’t investing, aren’t a foolproof measure of business investment.
|By Liam Pleven, The Wall Street Journal, 01/09/2015|
MarketMinder's View: No. Maybe? But for other reasons, any other reason than that, because as this article points out, there are some pretty big chicken/egg issues with this study showing companies whose CEOs own a bunch of their stock perform better than the rest. And correlation doesn’t prove causality. And widely known observations like this get priced in quickly. And the past doesn’t predict the future. And other studies show there really isn’t any link between CEO trading and returns moving forward.
|By Alen Mattich, The Wall Street Journal, 01/09/2015|
MarketMinder's View: By which this means, is the ECB shooting itself in the foot by putting strict restraints on the quantitative easing (QE) program it is reportedly considering? That’s the wrong question. The right question: Does QE of any sort, regardless of funky restrictions added to placate unenthusiastic member-states, ever work? Our hunch is no, because it has failed all four times it was used in a major way (Japan, US, UK, Japan). Flat yield curves, weak lending and falling broad money supply are evidence of QE failing. True regardless of how big the QE program in question was. Seems to us QE itself is sabotage-ish, though unlikely to be strong enough in the ECB’s case to derail global growth.
|By Carl Richards, The New York Times, 01/08/2015|
MarketMinder's View: While we aren’t entirely sure “risk creep” is a thing in investing (skiing, maybe—we don’t do metaphors), our quibble here is the complete omission of the most important factors to any investor’s asset allocation: their long-term goals and time horizon. The advice here about tempering expectations, preparing mentally for volatility and remembering stocks can fall is fine. But how can you determine how much of your portfolio should be in stocks if you don’t think about what that money needs to do for you and how long you need it to work for you? Focus too much on risk and guarding against downside, and you could end up with a portfolio that stands little chance of getting growth you might need.
|By Alen Mattich, The Wall Street Journal , 01/08/2015|
MarketMinder's View: So this says markets are certain all of the world’s economies are likely on a high-speed train bound for deflation or default. And you know what, markets are pricing in that view! Sentiment impacts bond markets too folks, and sentiment toward Europe is very deflationy—and defaulty toward Ukraine, Venezuela, Russia and Greece. The real question is whether those expectations are warranted. We think not. Well, at least regarding the deflation part, anyway, considering broad money supply is growing in these noted hot spots. Plus, there are other, fundamental, non-deflationy reasons for western-world yields to be low—like the fact the ECB and Swiss National Bank now charge banks to hold reserves, driving demand for ultra-liquid, ultra-stable short-term assets like German bunds, UK gilts and French bonds. Meanwhile, stiff capital requirements for US banks cranked up Treasury demand on our side of the pond. And there has been a lot of talk suggesting the ECB will launch quantitative easing buying up eurozone sovereign debt, which would lower rates. So yah, reality just doesn’t square with this thesis.
|By Nils Pratley, The Guardian, 01/08/2015|
MarketMinder's View: We’ve said it before, and we’ll say it again: Quantitative easing (QE) is B-A-D. Heck, we’ll take a stab at quantifying it. Average UK growth rate during QE: 0.2%. Average after QE: 0.6%. US weekly loan growth fell to a dismal 1.8% y/y before the Fed began “tapering” QE in January. By last year’s end with QE finished, it was back up to 7.7% y/y. And let’s not forget US and UK yield curves flattened during QE, then steepened as markets priced in its end—over a century’s worth of theory and data say this is G-O-O-D. Considering flat yield curves already hamper the eurozone, QE likely exacerbates matters. Now whether ECB President Mario Draghi actually implements a full-scale QE program or not is still unknown, but just because he has alluded to it constantly doesn’t guarantee it will happen either—Draghi has a history of saying he’ll do “whatever it takes” without actually doing anything.
|By Nils Pratley, The Guardian, 01/08/2015|
MarketMinder's View: We’ve said it before, and we’ll say it again: Quantitative easing (QE) is B-A-D. Heck, we’ll take a stab at quantifying it. Average UK growth rate during QE: 0.2%. Average after QE: 0.6%. US weekly loan growth fell to a dismal 1.8% y/y before the Fed began “tapering” QE in January. By last year’s end with QE finished, it was back up to 7.7% y/y. And let’s not forget US and UK yield curves flattened during QE, then steepened as markets priced in its end—over a century’s worth of theory and data say this is G-O-O-D. Considering flat yield curves already hamper the eurozone, QE likely exacerbates matters. Now whether ECB President Mario Draghi actually implements a full-scale QE program or not is still unknown, but just because he has alluded to it constantly doesn’t guarantee it will happen either—Draghi has a history of saying he’ll do “whatever it takes” without actually doing anything.
|By Ben McLannahan, Financial Times, 01/08/2015|
MarketMinder's View: Here is a crazy statistic: For all the rampant investor optimism over Japan, just 2.9% of people surveyed here think Japan’s economy can grow. At all. Their incomes are down, prices are up, policy is stagnant and their expectations for reform are low—which all seems pretty darned rational. Meanwhile, investors’ hopes remain sky high. Now, those 97.1% of respondents who believe Japan can’t rebound from the current recession (its third of this bull market) are probably too pessimistic. But stock investors are on the whole too optimistic, having irrational faith in reforms that, as this piece highlights, stand little chance of actually happening. Hence why better investment opportunities lie elsewhere, in our view. For more, see our 12/16/2014 commentary, “Now What?”
|By Staff, EUbusiness, 01/08/2015|
MarketMinder's View: So the news here is nice: Eurozone retail sales rose 0.6% m/m in November, countering all those slow-growth jitters. We just find the context provided a bit bizarre: November’s rise indicates “European shoppers have not yet given in to the gloom made worse by market worries over snap elections this month in Greece.” Thing is, these data are from November. Greece’s government collapsed in December, and the election was like just scheduled. Look, we aren’t saying it will be a huge economic negative or anything, but this theory jumps the gun by at least a month. Being optimistic for the wrong reasons can be dangerous.
|By Mark J. Perry, AEIdeas, 01/07/2015|
MarketMinder's View: Now here is a good article about Energy! With charts, too! As you read through this, consider what it illustrates: Recently falling oil prices result from this boom, not faltering demand. Now, you might fret this tailwind for the American economy slowing due to those recently falling oil prices, but we feel compelled to point out that this is likely a winners and losers scenario, where other industries benefit from consumers deploying cash differently than on Energy.
|By Lananh Nguyen, Bloomberg, 01/07/2015|
MarketMinder's View: Here is a major problem with this theory: The data alluded to here don’t back out currency fluctuations, and the dollar surged against virtually all other major reserve currencies around the world. You CANNOT determine whether central bankers and reserve fund managers are dumping the euro unless you look at the amount of euro held, not the quantity of euro held converted to USD. That introduces another variable that just doesn’t prove the point. And when you do that (we did!—all you need are the data here and a hand calculator), what you find is euro holdings in allocated official reserves fell by … wait for it … -0.23% in Q3 2014. That’s it! -0.23%! Seem like widespread dumping to you? But also, the article makes the same error in citing the dollar as the only reserve currency to see holdings rise. Adjusted for dollars that’s true, but in local terms, holdings of four other currencies rose, too. (As an aside, dollar holdings did in fact rise nicely, which should provide some solace for those fretting the US dollar will be dumped as the world’s primary reserve currency, a long-lasting false fear peddled by many, including some newsletter publishers of questionable repute.)
|By Min Zeng and Nick Timiraos, The Wall Street Journal, 01/07/2015|
MarketMinder's View: Yes, Treasury yields are down. But the dour take here suggests the world outside the US is teetering on the edge of a deflationary doom, which ignores a few things: Like the fact the eurozone is growing, albeit modestly; China is growing at a 7% clip; the Emerging Markets outside China are largely growing at healthy rates; and the UK is also growing. Yep, Russia and Japan aren’t. Neither is Ukraine. But to expect the global economy to all grow in lockstep at similar rates is an expectations problem, not an economic one.
|By Paul Hannon, The Wall Street Journal, 01/07/2015|
MarketMinder's View: Well there is a word missing in the headline, which is, ironically, "Headline." As in "Headline Consumer Prices Fall," because stripping out a massive -6.3% decline in energy prices, core CPI rose 0.6% y/y. The largest sector of the eurozone economy (Services) saw prices rise 1.2% y/y, which may not match the ECB’s arbitrary target but seems basically fine to us. That sector, in fact, hasn’t really even seen disinflation (a slower pace of still-rising prices) in the past six months, much less deflation. So yes, this is the first year-over-over deflationary CPI read since the global financial crisis, but this is pretty far from a deep deflationary spiral a central bank should try to break: It's mild and should actually cause some spending on energy to simply move elsewhere.
|By Michelle Jamrisko, Bloomberg, 01/07/2015|
MarketMinder's View: The trade deficit (exports minus imports) itself is not economically meaningful, as rising imports are a sign of healthy demand. What’s more interesting is to look at why November’s trade gap fell. Exports fell -$2.0 billion (-1.0% m/m) while imports fell -$3.2 billion or -2.2%. The import angle of this month’s report is heavily skewed by oil. Imports in barrel terms were the lowest since 1994, an illustration of the vast increase in US domestic production that has outstripped slower-rising demand. But the price drop that goes along with this vast supply increase also exacerbates the influence in reducing import values. All in all, we’d suggest recent Energy price volatility is a stark reminder of the importance of taking a longer term-view. 2014 export and import values through November are up 2.9% and 3.3% respectively—the latter including oil, which was down during the period.
|By Paul Krugman, The New York Times, 01/07/2015|
MarketMinder's View: So we don’t really have a horse in this race, but we’d suggest there is a logic flaw with the chart providing the supporting evidence for this: GDP tallies government spending as an automatic positive, and it isn’t really exactly equivalent to the economy (for a variety of reasons tied to calculation quirks). So this is what Excel would probably reject as a circular reference. But all in all, fight on, Keynesians and Austrians, we greatly enjoy the debate. For investors, it’s a bit too ideological to get very wrapped up in, and one that—without a counterfactual taking into account that “stuff happens”—will likely rage on forever and ever.
|By Erin Ailworth, Russell Gold and Timothy Puko, The Wall Street Journal, 01/07/2015|
MarketMinder's View: Well, actually, most oil firms just don't respond this fast to sharply falling prices. But yes, perhaps some small cap, highly leveraged, pure-play Energy producers with higher production costs are on the losing end of low oil prices.
|By James Titcomb, The Telegraph, 01/07/2015|
MarketMinder's View: So no market impact from this story per se, considering it details events that occurred just over 84 years ago. But the BoE releasing the correspondence from when the Bank advocated abandoning the gold standard in 1931 adds perspective to a debate over “hard currency” that pops up from time to time and the notion that there was a currency war in the 1930s, with nations rushing to devalue. The reality seems rather different when you look at central bankers’ actual words. Seems more like they advocated leaving the gold standard because it was untenable, given falling reserves.
|By Mark Schoeff, Jr., Investment News, 01/06/2015|
MarketMinder's View: In the wake of recent reporting by several sources showing disclosures in the retail brokerage world were lacking information, the Financial Industry Regulatory Authority (Finra, the retail brokerage world’s self-regulator) brought a proposal requiring firms to "reasonably search public records" in order to confirm new hires’ claims. This all seems well intentioned (if overdue) to us, though as ever, we doubt regulators' ability to ferret out all wrongdoing and wrongdoers from this or any industry. Ultimately, investors need to arm themselves with reasonable expectations and a due diligence process to protect themselves from those who aren't totally aboveboard. Like this cat that Finra barred from the industry, only to see him come back and steal more money from investors. Always and everywhere know that if you give an advisor carte blanche access to your money via a discretionary manager having custody, you are taking a risk.
|By Ambrose Evans-Pritchard, The Telegraph, 01/06/2015|
MarketMinder's View: So this is a fun read, full of intrigue and a hyperbolic comparison of Greece’s latest political stalemate to the onset of World War I. We happily give style points! And the first half has a nice rundown of all the politicking between Greece’s opposition leader and the euro establishment. Yes, Alexis Tsipras has moderated significantly, and he probably is more willing to play in the sandbox with the other kids than he lets on. And yes, Angela Merkel very well could be trying to spook Greeks into voting for the mainstream parties. But, the fallout should all this not work is probably not nearly as immense as outlined here. Markets have long since realized Greece isn’t Spain isn’t Italy. How else can one explain the fact Spanish and Italian yields have fallen since Grexit fears resurged? Not the ECB’s Outright Monetary Transactions (OMT) program, which allows them to buy bailed-out nations’ debt to keep yields low (and which Germany actually hasn’t ruled unconstitutional)—OMT hasn’t been used once, and Spain and Italy aren’t even eligible (since they haven’t received or needed bailouts). Seems to us markets are just well aware we’ve seen this movie before.
|By Jill Treanor, The Guardian, 01/06/2015|
MarketMinder's View: So yah, in theory, releasing historical BoE meeting minutes increases transparency, and releasing minutes from the financial crisis—kept under lock and key along with minutes from every meeting between 1913 and April 2013. But, just how transparent are minutes that have been redacted? How much can you really learn if Mark Carney took a Sharpie to key names and information? We suspect not much, and we just really don’t get any of this. Nothing ill has come from the Fed releasing full transcripts of every meeting and conference call, albeit at a five-year delay. The insight market participants gain is tremendous. That’s real transparency! We suspect investors seeking insight on the inner workings of UK monetary policy would feel the same way if the BoE went open kimono instead.
|By Joe Carroll and Tara Patel, Bloomberg, 01/06/2015|
MarketMinder's View: A few things about this: It all hinges on a forecasted $1.6 trillion in lost Energy sector revenue, which is one analyst’s outlook based on the assumption oil prices average $62 throughout 2015. But also! The theoretical figure is the estimated daily lost revenue ($4.4 billion) annualized, which is straight-line math that won't really work in markets, even if the estimated daily impact is right. Energy stocks are already off sharply. Is it possible they are reflecting this factor now? Finally, from a macroeconomic point of view, since falling prices are tied mostly to rising supply, there isn't much of a comparison between now and 2008, when demand fell off a recessionary cliff. Revenues lost by oil firms are likely a windfall for some other industries.
|By Mark Schoeff, Jr., InvestmentNews, 01/06/2015|
MarketMinder's View: The Financial Industry Regulatory Authority (Finra) released a 17-page letter Monday documenting its regulatory priorities for 2015. Some aspects are rather standard, like scrutinizing the sales practices of complex products like variable annuities and non-traded real estate investment trusts. Most of this is your standard, rather par-for-the-course discussion of regulatory priorities and the need for controls. But one aspect stood out to us. It is this: “A central failing FINRA has observed is firms not putting customers’ interests first. The harm caused by this may be compounded when it involves vulnerable investors (e.g., senior investors) or a major liquidity or wealth event in an investor’s life (e.g., an inheritance or Individual Retirement Account rollover). Poor advice and investments in these situations can have especially devastating and lasting consequences for the investor. Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers—and reduce their regulatory risk—by putting customers’ interests first. This requires the firm to align its interests with those of its customers.” (Boldface ours.) We are in complete agreement with the message here, though we are skeptical a regulator can enforce values. Values come only from within. Which is also why the fiduciary standard vs. suitability standard debate raises the question of how to act best for clients. For more, see Todd Bliman’s commentary, “The Compass.”
|By Tom Beardsworth, Bloomberg, 01/06/2015|
MarketMinder's View: Both production and new orders remained solidly expansionary in December, albeit at a slower pace than in November. This suggests growth continued in the month, but, contrary to the reporting herein, it is not a "disappointing" sign the UK is losing "momentum." Economies aren't subject to the laws of physics, so momentum is just not a thing. Also, while it may be true that this is "the slowest reading since May 2013," that factoid adds the opposite of perspective, considering it pays zero reference to the fact that occurred during a period when the UK was near the forefront of developed world economic growth rates. That is how you add perspective, not through a random factoid.
|By Jack Ewing, The New York Times, 01/06/2015|
MarketMinder's View: Friendly tip: Don’t overthink the falling euro. It isn’t massive stimulus or sign of big bad trouble brewing. It’s just a thing that creates winners and losers. Those claiming catastrophe ignore the fact just about every currency globally has fallen against the dollar over the past six months—and it isn’t like the entire world is in crisis. Those hyping the weak euro as stimulus ignore the fact the weak yen has arguably hurt Japan more than it helped. The value of Japan’s exports rose, but they fell in volume terms, so actual output wasn’t goosed—and rising import costs whacked consumers. As for low oil prices, they do help drive down production costs, which is good, but for household consumption they’re largely zero sum. So this piece is basically much ado about nothing. And a tad too dour, considering the world overall is growing fine, as is global trade, and all indicators point to Europe’s continued ability to muddle through.
|By Karen Damato, The Wall Street Journal, 01/06/2015|
MarketMinder's View: News you can use! Particularly if you encounter brokers peddling flashy projects with nebulous strategies, funky benchmarks and buzzwords like “alternative.” Industry regulators seem concerned about that particular word, hinting that it’s too opaque and doesn’t come close to describing what any of these funds do. Similarly, funds tracking “alternative” benchmarks, also known as “smart-beta,” which tout their benchmarks as having better risk-adjusted returns over time—claims based entirely on back-testing, not real life (and not factoring in the other issues Finra notes, like lower liquidity and higher transaction costs). Whether or not they amend disclosure requirements or issue new guidance, we encourage thorough due diligence on the strategy of any and every fund you might be considering.
|By Chikara Shima and Kayo Kamimura, The Yomiuri Shimbun, 01/06/2015|
MarketMinder's View: It’s a new year, which can mean only one thing in Japan: Prime Minister Shinzo has a new metaphor for economic reform! Wheeeee! Out with last year’s “drill,” and in with a tree: “‘The [kanji character of the] sheep has the meaning that a tree has finally begun to bear flavorsome fruits, after producing branches and leaves. As this is the year of the sheep, I want as many people as possible across the nation to taste the fruits of Abenomics.’” What fun! And on top of that tasty treat, this piece has a nice rundown on Abe’s many economic policy challenges and shows why he’s darned unlikely to see the bulk of them through. He’s always too busy campaigning! First it was Parliament’s upper-house election in summer 2013. Then it was last year’s snap general election. This April? Regional elections, a must-win for his Liberal Democratic Party (LDP) if he wants to win—wait for it—re-election as LDP president in September! And then it’s upper-house election time again in 2016. Newsflash: Politicians in campaign mode usually don’t like to rock the boat, and the reforms most crucial to Japan’s long-term economic viability are pretty darned boat-rockin’. We just have a super hard time seeing Abe doing much of anything besides making grand pledges and perhaps plucking the occasional low-hanging fruit from his reform tree. (Yah, we just took his metaphor.)
|By Chana R. Schoenberger, The Wall Street Journal, 01/06/2015|
MarketMinder's View: File this one under “interesting observations with no practical real-world implications.” Maybe you could get a leg up if you bought stocks recommended by the top-tier analysts in a certain publication the instant they get that buy rating! But is that actually possible to execute in real life? For normal folks with lives and jobs who don’t subscribe to these research reports and don’t have the time to sit around and wait to click “buy” at just the right time? And for the few folks who do have all the time and subscription, is there any guarantee you can repeatedly, reliably, hit “buy” before everyone else who’s trying to do the exact same thing? Markets price in all widely known information, folks. Nothing here gives you an edge. Fun theory! But not practicable.
|By Christopher Thompson, Financial Times, 01/05/2015|
MarketMinder's View: Behold, the fallout from the ECB’s decision to begin charging banks to hold reserves last June (via a negative central bank deposit rate): Money market funds are breaking the buck (if they still call it that in euroland?), institutional customers are getting charged for big deposits, and short-to-medium term government yields are negative in several countries. This wasn’t what the ECB envisioned. They figured banks would just lend out all their reserves, creating some massive stimulus. But banks are in the risk/reward game, and with yield curves flatter and regulatory risk on the high side (compared to the US and UK), banks have largely chosen to hoard cash elsewhere and lend to only the most creditworthy. Seems to us the eurozone would benefit far more if the ECB would stop monkeying around.
|By The Editors, Bloomberg, 01/05/2015|
MarketMinder's View: This is a whole lot of speculation and a whole lot of nothing. Unconfirmed comments allegedly made by unnamed sources in Angela Merkel’s government alluding to Germany being OK with kicking Greece out of the eurozone are not evidence for anything, other than the insatiable desire for a juicy story. It doesn’t mean Greece gets booted. As for that euro’s slump to nine-year lows? We’re pretty sure it has to do with a host of factors and does not suggest “investors aren’t keen on putting their money into a currency with an uncertain future.” Like, the euro was at this same level in 2006, and most assumed the currency was a permanent fixture. It was stronger at the height of euro breakup fears in 2010, 2011 and 2012. Again. A whole lot of nothing.
|By Jill Treanor, The Guardian, 01/05/2015|
MarketMinder's View: So a couple years back, a guy named John Vickers led the UK government’s independent review on the banking system, and his commission came up with a recommendation to make banks “ringfence” their retail banking operations and ban certain derivatives and proprietary trading activity within the ringfence. This became known as the “Vickers Rule,” and it is the UK’s version of the Volcker Rule, and these things are officially bought to you by the letter V! (Except in euroland, where theirs was drafted by a guy named Erkki Liikanen, but that rule has stalled out, probably because his name doesn’t start with V.) Anyway. The Vickers Rule takes effect in January 2019, but banks submit their compliance plans tomorrow, giving them four years to negotiate with regulators and then get themselves in order. The rule itself seems a solution in search of a problem, considering 2008’s woes didn’t stem from megabanks’ trading divisions, but this also isn’t a huge headache for UK banks. The restructuring process might carry some one-off costs, but the rules are flexible enough that banks will be able to continue hedging and overall going about their daily business. They also have plenty of time to adapt.
|By Matt Krantz, USA Today, 01/05/2015|
MarketMinder's View: Hey, we think Health Care stocks are in prime position, too! But not because of any of the backward-looking technical mumbo jumbo hyped here. Momentum isn’t a thing—at least not in investing—and we’d never base any forecast on the belief “the trend is your friend.” Good trends are always good friends until they aren’t. So don’t base investment decisions on past performance. Base them on an actual outlook for the future, based on fundamental factors that support earnings. In Health Care—and specifically Pharmaceuticals—that would be things like strong demand from American Baby Boomers and Emerging Markets’ burgeoning middle classes, strong drug development pipelines, and improving sentiment as investors continue realizing the Affordable Care Act is far less costly than many initially presumed.
|By Lucy Hornby, Financial Times, 01/05/2015|
MarketMinder's View: Four years ago, this would have been big news. Now? Buried under the fold—all that brouhaha over rare earths and China’s stranglehold was just a whole lot of nothing. Prices fell a ton even while the quotas were in place. There isn’t much market impact here. It’s just a coda on an old false fear.
|By Staff, Reuters, 01/05/2015|
MarketMinder's View: So yes, when Cyprus borrowed €750 million last June, it technically achieved “the swiftest comeback of a bailed-out nation to international markets in the history of the euro debt crisis.” But really, we are talking about a sample size of four here. In a four-year stretch. Of these four, Cyprus is the smallest by a mile. Plus, speed isn’t everything. It isn’t like Cyprus is raising these funds to pay off bailout loans—unlike Ireland, which is actually rolling over some of its bailout loans by issuing cheaper bonds to raise money to repay the troika. Cyprus is just raising money to complement the existing bailout financing, which it’s still receiving—and this says nothing about how much these forthcoming bond offerings will cost Cyprus, which is kind of a key thing to know if you’re going to make grand proclamations about a historic comeback. We aren’t trying to talk down Cyprus or the eurozone or anything, but the gung-ho optimism here seems largely misplaced to us—the sort of thing you’ll see increasingly when sentiment eventually turns euphoric. (We aren’t there yet though.)
|By Shobhana Chandra, Bloomberg, 01/02/2015|
MarketMinder's View: We aren’t really sure why a 55.5 Manufacturing Purchasing Managers’ Index reading would be any more “sustainable” than 58.7, but adjectives aside, this is a sensible, rationally optimistic look at the latest and greatest in America’s factories. Growth! Yippee!
|By Ira Iosebashvili, The Wall Street Journal, 01/02/2015|
MarketMinder's View: Buried in this long collection of observations and factoids about the dollar are some pretty big misperceptions about how markets and economies work. Like this one: “A stronger greenback has also contributed to lower oil and gasoline prices, which have enhanced the spending power of U.S. consumers. Consumer spending drives U.S. growth.” Actually, oil and gas prices are falling thanks to a supply glut; lower gas prices don’t enhance our spending power, as they don’t put more money in our pocket—they merely change where we spend (or enable us to save more); and consumer spending doesn’t drive growth. It is the largest component of GDP, but it tends not to swing radically. Business investment is usually a far bigger swing factor, just as it was during the last recession. Also? Currency moves aren’t meaningful long-term market drivers. Currency conversions can impact returns in your foreign holdings over short periods, but in a global portfolio and over time, they’re largely zero sum. In other words: Don’t chase currency heat.
|By Ambrose Evans-Pritchard, The Telegraph, 01/02/2015|
MarketMinder's View: Yes, sentiment toward Europe is so bad, investors are indeed “willing to pay the German government to store their money for the rest of this decade,” and the last time that happened was indeed when Edward III wreaked monetary mayhem and the Plague raged through Europe. Given the eurozone economy is still growing and money supply growth is actually accelerating, it is pretty darned likely the foreseeable future isn’t as bad as this hyperbolic comparison would suggest. Actually, these fears create a big wall of worry for eurozone stocks to climb, making it easy for uneven slow growth to beat expectations.
|By Nouriel Roubini, Project Syndicate, 01/02/2015|
MarketMinder's View: Shucks, where do they always go? Where did America’s garment factory workers go in the 20th century? Where did milkmaids go as farming became increasingly automated? Where did field-hands go? Blacksmiths? Icemen? Footmen? Court jesters? Cup-bearers? Into other professions! Workers have retrained and moved on since about always. As a point of trivia, Cupertino, CA’s blacksmith shop became the city’s first auto service station—under the same family’s ownership all the way. Humans are pretty darned good at adapting, particularly when money is on the line. The service sector has absorbed manufacturing workers for decades, and factories absorbed agricultural workers for over a century. Has the human race really become so unimaginative and unenlightened that the creative collision of new ideas can no longer spur new commercial frontiers?
|By John Ficenec, The Telegraph, 01/02/2015|
MarketMinder's View: We would call these “Four false fears and six things that don’t say where stocks will go.” The VIX predicts nothing. US Treasury yields aren’t leading stock market indicators. Nor are corporate credit default swaps. Or the TED spread, which says more about banks’ desire for profits than credit risk. Ditto for the Libor-OIS spread in Britain. Rate hikes aren’t bearish. Age doesn’t kill bull markets. The cyclically adjust P/E ratio is a bizarrely calculated, oddly inflation-adjusted thing that signaled a market peak in 1996, four years early. Commodity markets don’t lead stock markets. And there is no such thing as “smart money” much less an index that can track the movements of smart money. The one referenced here implies “smart money” sold en masse in late 2002 and late 2008, which is not so smart considering both are about the bottom of bear markets, when it would be really bright to buy.
|By Daniel Gilbert and Alison Sider, The Wall Street Journal, 01/02/2015|
MarketMinder's View: For several years, master limited partnerships (MLP) were the Oil & Gas industry’s investment darling—high yielding, tax-advantaged investments everyone wanted a slice of. Fast-forward past a nearly 50% drop in oil prices, and many MLPs have been hammered hard—and some are considering cutting those vaunted dividends. Now, we aren’t saying there are no opportunities here, and some of these (particularly those whose long-term fortunes are less tied to oil prices) could well be over-punished. But this is a timely reminder investing for yield alone is often a fool’s errand. Yield isn’t set in stone. Dividends can go at any time. And a high dividend yield doesn’t matter real much when the price falls off a cliff.
|By Matthias Rieker, The Wall Street Journal, 01/02/2015|
MarketMinder's View: So on the one hand, we question why an Economics PhD should make someone so inherently qualified to develop a financial plan that they can just skip the CFP Board’s typical education and training requirements. Like, mastering esoteric mathematical formulae on the relationship between a dozen different variables (assuming all else is equal) really has nothing to do with whether you can pick the right long-term asset allocation for a client. These universes tend not to overlap (and might we also point out, most of the best and brightest economists don’t manage money). But on the other hand, we’ve never argued professional designations like the CFP are anything more than pieces of paper brokers use to market themselves. So why would we start now?
|By Jana Randow, Bloomberg, 01/02/2015|
MarketMinder's View: “Near stagnation” means the composite manufacturing PMI was modestly positive, while individual countries diverged—basically, the status quo. That hasn’t been some massive negative for global stocks these past 18 months—and neither was the 18-month recession—so we doubt it suddenly becomes so now. As for the stimulus angle, while the region probably would benefit from some extra juice, quantitative easing isn’t juicy. It flattens the yield curve, and flat yield curves are already a big eurozone headwind.
|By Scott Hamilton, Bloomberg, 01/02/2015|
MarketMinder's View: Hey, maybe UK manufacturing growth is slowing, as the December PMI would indicate! Manufacturing is a small slice of the UK economy and not a major swing factor. Services, which are about 80% of GDP, matter far more.