|By Morgan Housel, The Motley Fool, 04/30/2015|
MarketMinder's View: “People say a lot of stupid things in finance. ‘The easy money has been made’ is near the top of the list.” This is a fantastic read on hindsight bias in investing. Read it! Then read it again and remember: There is always something to worry about when it comes to investing in stocks, and fully capturing market gains is never easy. As the author notes, “The reason you make money in stocks is because you're willing to hold assets where the future is unknown, bad things can happen, and outcomes are uncertain. There is never -- ever -- such thing as ‘easy money.’ There are only hindsight perceptions, and those perceptions are twisted by time, rewritten in our heads as memories of something they weren't.”
|By Greg Ip, The Wall Street Journal, 04/30/2015|
MarketMinder's View: While leaders like Japan’s Shinzo Abe have recently been stoking hopes the Trans-Pacific Partnership (TPP)—a 12-nation free trade agreement—gets done soon, we are skeptical. And the domestic hurdles to the US enacting TPP are a major reason why. One, detailed here, is the populist idea free trade has hurt US manufacturing and caused American job losses—an intra- and interparty headwind for President Obama getting this deal done. But even if he is able to overcome that, the bigger obstacle is likely getting a host of countries in diverse regions and with different agendas, interests and economies to agree. We’re all for free trade and think TPP would be a net positive, but even if it doesn’t happen that’s not a negative either. Trade is much freer globally today than in decades past, and many times these multilateral talks’ breakdowns are a prelude to smaller, easier-to-negotiate deals that do happen.
|By Jeffry Bartash, Marketwatch, 04/30/2015|
MarketMinder's View: So the thesis here is Q1 2015 US GDP’s weak showing illustrates the harmful aspects of falling oil prices on the US economy, because “The plunge in energy-related spending early in the year was a big drag on the economy, shaving 0.6% percentage points off U.S. growth. Put another way, first-quarter GDP would have risen 0.8% instead of 0.2% if energy investment simply held steady.” But as long as we’re playing would-a been GDP, consider that if the Bureau of Economic Analysis’ seasonal adjustment were properly accounting for harsh winter, and if West Coast dockworkers hadn’t struck GDP likely would have risen more than that. Ultimately, we kind of agree that, “Sooner or later the cheaper price of gasoline that benefits consumers (and most U.S. businesses) should filter through the rest of the economy and give it a nice boost.” Falling commodities prices create winners and losers, but it’s a mistake to read much into this one report. (Also, it’s beyond a stretch to imply the energy sector drove growth in this expansion prior to now. The entire mining industry, of which oil is a subset, is just 0.2% of total US output.)
|By Jonathan Clements, The Wall Street Journal, 04/30/2015|
MarketMinder's View: The suggested moves—minimize investment costs, save as much as you can and invest globally—are smart! But the rationale here is dodgy. It’s a stretch to conclude stock returns will be modest going forward because the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPEs) is above average. The CAPE is a hyper-backward-looking comparison of today’s prices with oddly inflation-adjusted earnings over the last decade. Folks, even leaving aside the inflation adjustment, why on earth would Q2 2005’s earnings say anything about future returns? This is why, as the article notes, it has been mostly above average throughout the 2000s—it had to deal with the lagging effects of first 2001’s and then 2008’s recessions. But the further problem with CAPE is its attempt to forecast market returns over decade-long periods. Impossible! Too many factors are unknowable today to make a simple comparison of old earnings and current prices predictive—like changes in equity supply, fiscal and monetary policy and new technologies or sources of productivity. Look, follow the advice here not because of CAPE, but just because it is generally decent advice. (Although save more and minimize costs are largely overwrought clichés, but we digress.)
|By Neil Gough, The New York Times, 04/30/2015|
MarketMinder's View: While many investors falsely fret China’s slowing growth rate, steps like this have gone on with less fanfare. China stepping away from its history of unilaterally avoiding failure would be a significant liberalization to their banking system and economy generally—a positive step in China moving from a credit- and government-investment driven economy to a market-based one. Now, it remains to be seen if they’ll fully follow through—China’s leadership has waffled on this before. But, if it comes to pass as it appears likely to now, this looks like a significant reform for the Middle Kingdom.
|By Peter Spence, The Telegraph, 04/30/2015|
MarketMinder's View: The ECB began its quantitative easing (QE) program last month, and late 2014 eurozone deflation has morphed into no-flation so far this year, which some see as a positive sign. But correlation does not necessarily mean causation, and we agree with those saying the ECB’s victory dance over deflation’s end is misplaced—but not quite for the same reason. Yes, recent eurozone low- no- or de- or unflation was largely due to sharply falling energy prices, which rebounded a bit since March and were never an economic negative to begin with. So yah, hard to argue QE caused this rebound. But saying this is evidence the ECB should beware withdrawing stimulus too early misses the mark, in our view. QE is actually deflationary as it drives down long rates, flattening the yield curve. Since the yield curve is a proxy for banks’ loan profitability (wider means bigger profits), QE discourages bank lending. So a good outcome here actually would be if ECB head Mario Draghi’s offbase victory lap results in him ending QE sooner rather than later.
|By C.W., The Economist, 04/30/2015|
MarketMinder's View: Actually, slowing US Q1 GDP is not literally “more bad news” on top of “stalling” investment spending and “consumers not opening their wallets,” it’s the report that compiles all that in one place—perhaps why this slowdown was widely expected by observers. And it all seems a wee bit overwrought. Sure, US Q1 growth was anemic, but this is likely based on transitory factors: Cold weather the Bureau of Economic Analysis failed to properly account for; widely known slack business investment in the oil patch; a West Coast port shutdown that hit trade hard. But winter and the labor strike are over, and the oil industry’s woes are still widely known. It is widely anticipated by economists that Q1 2015 will give way to rebounding growth in Q2, much like in Q1 2014, Q4 2012, or Q1 2011. Finally, why the lamenting over the presumption the Fed won’t hike in June? With all due respect, an initial rate hike is neither bullish nor bearish historically.
|By David Oakley, Financial Times, 04/30/2015|
MarketMinder's View: OK, folks, so here certain fund managers claim there is a bubble (based on the faulty cyclically adjusted price-to-earnings ratio, presently well above its average) and are raising cash from stocks and bonds on the expectation a fed-funds target rate hike will prick it. But there are two major problems here: One, in bull markets, stocks routinely move higher after reaching—and surpassing—long-term average valuations. No valuation measure perfectly projects an up or down market ahead. Cheap stocks get cheaper. Pricey stocks get pricier. See the period 1996 – 2000 and 2012 – the present for examples of the latter. The time to raise cash is when sentiment is euphoric and fundamentals are quietly deteriorating. Today, overall mixed sentiment doesn’t fully appreciate positive fundamentals. To us, it’s a smidge premature to declare zero-yielding cash “king” when stocks set all-time highs a handful of days ago and we’re only down a couple percent since.
|By Joseph Ciolli and Oliver Renick, Bloomberg, 04/29/2015|
MarketMinder's View: Yuuuuuuuuuuuuup: “According to [analyst Jonathan] Golub, S&P 500 companies are surpassing projections by enough that they may avoid their first quarterly drop in income since 2009. The explanation is that too much pessimism was created among analysts by the rallying U.S. currency, which along with a 60 percent plunge in oil prices spurred the downward revision in quarterly profit forecasts. Instead, companies preserved profitability by lowering costs in overseas divisions and collecting sales in dollars, Golub said. The overestimation of currency impact on earnings was a ‘real miscalculation,’ Golub said by phone. ‘The upside for companies to push margins further than people anticipate is alive and well and it’s not going away anytime soon.’” And! “About 63 percent of companies with higher foreign exposure have beaten consensus earnings estimates this quarter, compared to 50 percent for pure domestic stocks, wrote Savita Subramanian, chief U.S. equity strategist at Bank of America Corp.’s Merrill Lynch unit, in a client note.” So much for the strong dollar whacking big US multinationals! None of this is surprising, by the way—large US stocks did great in the late 1990s, when the dollar was even stronger than today.
|By Ambrose Evans-Pritchard, The Telegraph, 04/29/2015|
MarketMinder's View: Apparently the G20 has latched onto fears global carbon emission targets, if adopted, could strand trillions’ worth of coal, oil and gas reserves, which would become “unburnable,” in turn wiping out those invested in them. If this actually happened, and all at once, it would be devastating, but let’s not jump to conclusions. For one, there is no global carbon deal at the moment. Should a deal arise, that doesn’t mean $6 trillion in fossil fuel investment becomes worthless. The US adopted strict emission targets last year, and they are actually looser than the current pace of carbon reduction and planned electricity generation over the next couple decades would yield over time. It is entirely possible that a global standard would similarly amount to window dressing and not alter the long-term viability of coal, oil and gas reserves. Targets also give owners of those assets a gigantic incentive to continue long-running efforts to help fuel burn cleaner. Plus, this is all very, very long-term—the proposed limits target the year 2100, and even those who champion this fear admit any financial impact would likely be a long, slow drip that plays out over decades. Considering stocks usually don’t look more than about 30 months out, and the feared losses are far from certain, this just isn’t a market driver in the here and now.
|By Jon Hilsenrath, The Wall Street Journal, 04/29/2015|
MarketMinder's View: Well jolly good on them. But even if they weren’t so noncommittal about when they’ll hike rates, we wouldn’t make much of it. They will act when they act, and there is no way to predict when that will be. The consensus viewpoint of 10 people—influenced by their biases, opinions and emotions—is not a gameable market function.
|By Michael Corkery, The New York Times, 04/29/2015|
MarketMinder's View: The changes here amount to beefing up and standardizing disclosure of executives’ compensation, calculating shareholders’ return, and including comparisons of return to the rest of the industry for the last five years. Overall, it increases transparency, which we guess gives shareholders more to work with when they have their say on pay, though it strikes us as a solution in search of a problem. While John Q. Public might grouse about all them high-paid CEOs, believing them rent-seeking leeches, Sally Z. Shareholder tends to think along the lines of, “hey, this CEO is smart and talented and I don’t want to let her get away, because even if things aren’t so great right now, we need her for the long haul. Better make sure she’s paid enough!” And anyway, this is all a sociological issue, not an economic one. Money paid to CEOs—like all money paid to anyone and not stashed in a mattress—quickly recirculates through spending and lending.
|By Niki Kitsantonis, The New York Times, 04/29/2015|
MarketMinder's View: We’ve heard this one before. In 2011, then-PM George Papandreou threatened to call a referendum on austerity measures. Creditors howled, he U-turned, everyone compromised, and Greece got its money. We aren’t saying that’s what happens this time, as this whole crazy saga is beyond impossible to handicap, but it goes to show that Greek politicians, like all politicians, are extraordinarily adept at saying one thing and doing another.
|By Zhao Yinan, China Daily, 04/29/2015|
MarketMinder's View: Tired of citizens going abroad to shop for foreign goods instead of buying them at home, officials are cutting tariffs on a broad swath of imports—including luxury and basic consumer goods, like cosmetics, clothing and, um, toilet seats. This is a positive for Chinese consumers and global multinationals, who are about to gain easier access to China’s bustling mainland economy.
|By Kyle Caldwell, The Telegraph, 04/29/2015|
MarketMinder's View: Using the “Sell in May and go away; don’t come back till St Leger Day” definition of the old adage, a UK brokerage firm measured whether selling on May 1 and returning in the second week of September would have added value from 1986 (when the UK deregulated financial services) through 2014. Their findings: “The FTSE All Share delivered positive returns in 19 out of the past 29 years. In other words investors would have made money 66pc of the time by staying invested over the summer months. Those that sold and reinvested in the second week of September would have missed out these gain, with the tactic only working 34pc of the time. Overall, Bestinvest said investors who follow the strategy will have made less money, returning 9.8pc on average each year, while those who stayed the course would have made 10.9pc a year.” Granted, this analysis covers only UK stocks, but the principle applies globally: Trading on seasonal adages is folly and fails far more often than not.
|By Chico Harlan, The Washington Post, 04/29/2015|
MarketMinder's View: Yep. Weather often plays a role in slower Q1 growth, but it isn’t the sole determinant. Those blaming weather alone for Q1 2014’s contraction missed the impact of the shifting Accordable Care Act enrollment deadlines and accompanying technical snafus, which resulted in folks paying much less for insurance and health care services—total health care spending fell -1.4%. This time around, the “blame the weather!” crowd is likely overlooking falling oilfield investment and the West Coast Ports labor dispute’s impact on trade and supply chain management. Those factors are transitory, too, not signs of a weakening economy.
|By Jack Ewing, The New York Times, 04/29/2015|
MarketMinder's View: Happy news, though we’d temper enthusiasm. While this says ECB quantitative easing is “having the desired effect of encouraging banks to lend more,” ECB policy has severely flattened eurozone yield curves, and some banks are already reporting a fall in lending profits as a result. Falling profitability usually discourages lending, so we are skeptical this resurgence has staying power.
|By Shuli Ren, Barron’s, 04/29/2015|
MarketMinder's View: Actually, this isn’t quantitative easing (QE). It’s more like the ECB’s long-term refinancing operations (LTRO), which they used in 2011 and 2012 to help banks crushed by troubled peripheral eurozone debt. Banks swapped the bonds for three-year loans, which they used as temporary cash buffers while they rebuilt capital for the long haul. QE is when central banks outright buy assets from banks using new electronic reserve credits, which banks are then supposed to lend off of. This kind of thing would be effective in a fractional reserve banking system only—that’s where banks are allowed to multiply reserves. China doesn’t have a traditional fractional reserve banking system. The central bank controls money supply via strict loan quotas, making expanded reserves less impactful. And anyway, it isn’t even expanding reserves indefinitely. Again, these are medium-term loans with a fixed maturity date. As such, the aim here appears to be debt management and bank aid, not outright monetary stimulus.
|By Jeremy Warner, The Telegraph, 04/29/2015|
MarketMinder's View: After three reads, we still can’t follow the headline’s line of logic from negative interest rates, which are quite affordable for the issuing governments, to a mounting likelihood of mass default, which implies governments can’t afford debt. Near as we can tell, this is actually just another iteration of widespread “bond bubble” fears, which hold that low and negative rates are evidence of irrationally high demand for bonds, and when this reverses, bond prices will crash. We still aren’t sure how this leads to mass default, though, because sovereigns would continue paying the rates attached to bonds at issuance. And on negative-yielding securities, the redemption value wouldn’t change—the “negative” just means investors buy bonds at a premium and receive face value when they mature. Then again, the headline is rather disconnected from the article itself, which spends much of its space exploring the fundamental forces weighing on sovereign yields—like ECB bond purchases and high bank demand due to the Basel III capital requirements, which are phasing in. To that list, we’d add that a chunk of global bond inventory is locked up on the Fed’s, BoE’s and BoJ’s balance sheets. And bond issuance has slowed in much of the Western World. This is a fundamental supply and demand imbalance, not evidence investors “have thrown caution to the wind.” Nor is it a sign of an “extend and pretend” mentality driving a debt bubble. Demand is actually growing fine globally.
|By Staff, Jiji Press, 04/28/2015|
MarketMinder's View: Here’s Exhibit A on why big free-trade agreements don’t happen that often: The more parties are involved, the harder it is to find consensus. This is the case with the Trans-Pacific Partnership (TPP). After years of talks, the 12 nations still disagree over extending drug patents and how to handle intellectual property-right violations. It seems uncertainty over whether the US Congress will approve a fast-track bill—and, specifically, uncertainty over what that law could include—is also muddying the waters. Congress is debating several amendments that reek of protectionism, which incentivizes the other nations against tipping their hand before the bill is final (lest Congress crack down on their pet peeves, requiring a renegotiated treaty).The plan for now? Another round of talks next month—lather, rinse, repeat. Completing a trade deal like the TPP would be a boon for the global economy by making trade across 40% of the world economy freer. But even if it never happens, it’s not a negative—just the absence of a positive. Stocks have done fine with no TPP and can keep doing so. For more, see our 4/23/2015 commentary, “Will Free Trade Ring the Pacific?”
|By Scott Hamilton, Bloomberg, 04/28/2015|
MarketMinder's View: We reckon the economic and political implications here are minimal. Politicians are talking a big game, but it’s one quarter—and most weakness stemmed from cutbacks in the North Sea oil industry and falling construction activity, which is subject to revision (most agree the ONS’s data collection methods for the first estimate tend not to accurately capture construction output). Plus, as the analysts quoted here note: “‘The economy is still a big issue for voters. … But, in our view, it is perceptions -- inflation perceptions, outlook for personal finances -- that matter more than ‘hard data’ in influencing party preferences.’” In our experience, people just don’t think about GDP in the ballot box. They think about their own wages, costs of living and employment prospects—along with a host of social and foreign policy issues. So we have a hard time seeing this be a swing factor for any party in an election that remains too close to call.
|By Staff, CNBC, 04/28/2015|
MarketMinder's View: Since this is not a one-word article that simply says, “nothing,” the thesis is flawed. It argues that since margin’s record high in March accompanied a monthly decline in the S&P 500, it means investors are less caught up in short-term volatility and focused instead on the potential for more gains (whereas if margin debt fell alongside stocks, that would supposedly imply investors are thinking less long-term). And since institutional and professional investors are the biggest margin users, this means the so-called “smart money” is getting optimistic, making optimism smart. To us, this all seems like reading way too much into one month’s worth of data. We agree folks are becoming more optimistic overall, and this is generally good for stocks (as sentiment continues improving, investors typically bid more for stocks), but margin doesn’t give much evidence for this. Margin is more useful as an indicator of a market peak—and even then, it’s the speed at which margin increases, not the level itself, that’s telling. For more, see our 3/13/2014 commentary, “Margins of Bearishness?”
|By Victoria McGrane and Ryan Tracy, The Wall Street Journal, 04/28/2015|
MarketMinder's View: “Under state regulation, U.S. insurers have operated through a network of state-based subsidiaries. Now, the Fed oversees each firm’s holding company, meaning it can impose an additional layer of requirements for risk management, capital, reporting and other matters.” But the state regulators would still have say-so, so this overall complicates the insurance regulatory landscape, probably increasing compliance costs. And it is premature to say whether additional Fed oversight is an improvement. For one, insurance is very far from the Fed’s wheelhouse, and since Dodd-Frank gave them oversight in 2010, they’ve had to hire a bunch of experts just to begin understanding how the industry operates (hint: Insurance firms don’t operate like banks). Now the focus turns to rulemaking, and no one knows what’s coming. The risk here is that they devise something akin to Europe’s Solvency II—which has some elements that vaguely recall mark-to-market accounting for less liquid assets—or something equally a solution in search of a problem. Ideally, whatever the Fed does, they will move glacially, incorporating industry feedback as they write and rewrite rules, and give the industry years to phase in any changes. That’s what the EU did, much to their benefit.
|By Matt Egan, CNN Money, 04/28/2015|
MarketMinder's View: Why? Because gridlock prevents Congress from “addressing” certain sociological issues, which evidently threatens America’s global standing. A) Whether that’s even a thing is a matter of opinion and entirely debatable. B) Either way, this is all just sociology. Stocks don’t much care about sociological issues. Though, we’d be remiss not to mention that gridlock is overall good, as passing sweeping legislation to address any big perceived issue, whether economic or sociological, could create winners, losers and unintended consequences. That’s why stocks tend not to like high legislative risk, instead preferring the calm of gridlock.
|By Craig Torres and A Catarina Saraiva, Bloomberg, 04/28/2015|
MarketMinder's View: This tries to do the impossible: Forecast the consensus decision of 10 biased, opinionated, whimsical human beings. Folks, you can’t predict how one individual will react to and interpret economic data, never mind 10 of them. This is why Fed decisions are by nature unpredictable. Plus, forecasting isn’t necessary. The effort implies one rate hike has a set market impact. Yet history shows this isn’t so—the first interest rate hike in a Fed tightening cycle hasn’t ended a bull market since MSCI World data begin in 1970. As for bond markets, most surveyed here expect long-term bond rates to rise when the Fed hikes, but usually, the first few rate hikes have minimal impact on long rates. There are also many other forces weighing on long rates right now, like the downward pressure from low rates globally, low supply and high demand from banks.
|By E.S. Browning, The Wall Street Journal, 04/27/2015|
MarketMinder's View: We found just one sensible point from this piece: A bear market doesn’t look likely in the near future. Otherwise, it’s full of misperceived reasons to be bullish and false fears, much of them self-contradictory. Like the notion that this bull market is really the bee’s knees because the economy is growing slowly, providing no inflation pressure to justify a rate hike. Then going on to argue that “The worrisome thing right now is that we haven’t been able to inflate the economy yet. Globally, there is still deflation out there.” Well, which is it, Jack? Is lowflation good or bad? But also, this argues the Fed’s low short-term interest rates have been a boon to stocks; US markets look “expensive;” and the bull market is getting old, making it more susceptible to volatility and smaller gains. Where is the evidence supporting any of this? Valuations provide a rough gauge of sentiment, but they don’t tell you where stocks are headed. Low interest rates, in isolation, are much less significant than the yield curve—the gap between short and long rates. Considering “easy” monetary policy actually flattened the yield curve, stocks have been rising in spite of, not thanks to, the Fed. A bull market’s age also doesn’t tell you what stocks are about to do, either. We mean, if it is so true that advancing age increases volatility and dampens returns, please explain the following years: 1954, 1955, 1980, 1997, 1998, 1999. All were hugely positive years further about as far into the bull as we are today.
|By Steve Tobak, Fox Business, 04/27/2015|
MarketMinder's View: No, we aren’t. Do you hear folks on Main Street pitching hot stocks? We don’t. Do you see junky, made-for-IPO firms hitting it big in the public markets? Do you see the Tech sector swelling to comprise 30% of the S&P? Several anecdotal cases and a handful of cherry-picked companies don’t provide compelling evidence of an inflating bubble. That some privately held companies are getting off-the-chart valuations and IPOs have been rising is a sign there may be pockets of overenthusiasm. But bubbles are widespread, and if you need to dig deep in private markets for evidence of froth, that’s likely a sign things aren’t very bubbly at all. And most of today’s IPOs look nothing like those of 1999 and 2000, when companies were going public despite offering little more than a promise. Folks, when we’re actually in a bubble, you’ll see fewer articles like this and more pieces like this—and most investors won’t even be aware of it. Finally, the argument America is overindebted (consumers and the government) at the end is statistically wrong. Debt levels aren’t relevant. Population goes up, more consumers to borrow. Also, GDP and tax revenue are higher. The government is currently spending less than 8% of tax revenue on debt service, less than half what it did in the 1980s and 1990s. Consumers? 9.9% of disposable income is spent on debt service—the second-lowest read since 1980, behind Q4 2012. Folks, don’t believe the bubble hype.
|By Matthew Dahlberg, The Christian Science Monitor, 04/27/2015|
MarketMinder's View: Now don’t get us wrong: Saving is an important part retirement planning. However, this popular (if cliché) advice overlooks the different complexities and situations retirees may face, which impact how much cash they’ll actually need. No, “the size and value of their nest egg the day before they retire” is not the most important indicator. You see, that money needs to last your life, so you better make darn sure it can reasonably cover your cash flow need over your time horizon. Rather than saving towards an arbitrary figure, we suggest planning for what your expenses are going to be—accounting for cost of living, inflation, potential support you’re providing and your own personal goals—and crafting a plan from there. It also overlooks the power of compound growth. Simply, as your account gets larger, it’s highly likely market return adds more to total value than what you are allowed to save (by IRS rule) in a tax-deferred account. So saving, yes, is crucial—mostly early. But as time passes, saving is eclipsed by allocation. But that is not neatly encapsulated in snarky two-word investment advice. Oh, and “Save More!” For more, see our 4/22/2015 commentary, “Retirees Will Need Some Income.”
|By Lu Wang, Bloomberg, 04/27/2015|
MarketMinder's View: While there are refreshing aspects of this article—like the notation the bull’s annualized return of 21% is average by historical standards—overall we felt it wasn’t terribly sensible. Projecting where earnings or stocks “should” be based on past data is a common investor fallacy—the past doesn’t predict the future, and there is no a correctly valued market or a way to “underperform” earlier bull markets. There is no “right” magnitude, speed or length for bull markets, as averages do not ever predict—they result. That said, that pundits are arguing markets should be higher than current levels does indicate folks are more optimistic than they used to be. Rising sentiment, along with a growing global economy and gridlocked governments in developed countries, suggests the global bull—with a big contribution from the US—should continue romping along for the foreseeable future.
|By Marcus Bensasson and Nikos Chrysoloras, Bloomberg, 04/27/2015|
MarketMinder's View: In your latest Greek update, two polls taken over the weekend show most Greeks want their government to strike a compromise and remain with the common currency. Colorful Finance Minister Yanis Varoufakis, popular among the people but not his EU colleagues, was also replaced as the primary negotiator with Greece’s eurozone creditors. As interesting as this news may be, the twists and turns throughout this Greek tragi-comedy have become commonplace. Whether Greece finds itself again stumbling to default, compromises and kicks the can down the road yet again, or even finds itself on the outside of the euro looking in, markets have long since moved on. There are no signs of contagion in the eurozone and Greek GDP is smaller than Detroit, Michigan. If you are keeping score, Detroit went bankrupt in 2013 and stocks rose 30% that year. For more, see our 4/9/2015 commentary, “A Greece-y State of Affairs.”
|By Tara Siegel Bernard, The New York Times, 04/27/2015|
MarketMinder's View: This is arguably even less important than what the rule says, which itself is overrated by virtually every party involved in the debate. FACT: Rules do not govern behavior. There are more than 6.9 million people cooling out in America’s prisons who are a sad testimonial to that. Why, oh why, should we be convinced that whoever writes a uniform Fiduciary Standard—be it SEC or DoL—it will fundamentally alter the industry? Registered Investment Advisers today, already held to a strict standard, don’t all have the same resources, abilities and values, and those things are much more meaningful than a regulatory minimum. Now, if the DoL rule goes through, we would argue it is a net negative in the sense that it isn’t a Fiduciary Standard by any traditional sense of the term and could confuse more investors rather than fewer. For more, see our 4/16/2015 commentary, “Be-Labor-ing the Fiduciary Standard.”
|By Gerard Baker and Jacob M. Schlesinger, The Wall Street Journal, 04/27/2015|
MarketMinder's View: Here is an interesting and in-depth look at Japanese Prime Minister Shinzo Abe’s lifelong ambition: restoring Japan’s military might and rewriting the constitution’s anti-war clause. Whatever your view of a more vigorous Japan on the foreign policy / geopolitical stage, changes like this are unpopular (as the discussion of Abe’s bifurcated approval rating herein shows) and require significant political capital. Also unpopular: structural economic reforms included in Abenomics, which are key to reviving Japans’ moribund economy. In our view, there likely isn’t enough to do both of these simultaneously and, given his background, it’s likely Abe prioritizes constitutional reforms. This, in our view, is why you have seen little meaningful structural reform of Japan’s economy.
|By Andrew Critchlow, The Telegraph, 04/24/2015|
MarketMinder's View: Even if all the geopolitical stuff here played out exactly as described (not at all guaranteed, though this also isn’t our forte—we’ll save this hypothesizing and strategerizing for the relevant professionals), it is quite likely not a gigantic economic negative for Britain, America or any other Western nation. Should oil spike to $100 (also not guaranteed—this underestimates US production potential), guess what, we had $100-ish oil for years during this bull market. If going back to an earlier, fine-for-all status quo is the biggest economic threat the West faces, things must be pretty darned good overall.
|By Matthew Boesler, Bloomberg, 04/24/2015|
MarketMinder's View: So Q1 US GDP won’t be released until next week, and already folks are ratcheting down estimates for Q2 GDP. Why? Well, March’s core capital goods orders (capital goods orders excluding aircraft and defense) fell -4.6% y/y, the 7th straight drop when measured on a monthly basis. However, manufacturing is a fairly small slice of overall US output relative to services, and the decline seems heavily influenced by oil—machinery orders, which include oil and gas field equipment, tumbled more than 12% y/y. Anyway, this gauge is historically quite volatile and has shown similar weakness during overall expansionary periods before, like in 2012 and 1998. That being said, if economists want to ratchet down their estimates, we say, “Be our guest!” because that just makes it easier for reality to positively surprise them.
|By Justin Wolfers, The New York Times, 04/24/2015|
MarketMinder's View: So here is an interesting preview of next week’s US Q1 GDP report that investigates the question: Why has first-quarter US GDP been the weakest quarter not only in this expansion, but dating back to the 1980s? The answer may be simple: Government math. The seasonal adjustment for GDP isn’t appropriately accounting for wintertime consumption patterns. “If it’s done right, there should be no systematic difference between economic numbers for the first quarter and any other quarter. The problem here is that the seasonally adjusted G.D.P. growth numbers still show a seasonal pattern, in which the first quarter has been weaker than other quarters.” All in all, this is another reason you cannot presume GDP is perfectly equivalent to “the economy.”
|By Josh Zumbrun and Carolyn Cui, The Wall Street Journal, 04/24/2015|
MarketMinder's View: So let us see if we have this right: Low-low commodity prices, low interest rates and inflation and low wage pressures are a policy maker problem threatening growth? They sound to us like: a) the opposite of what folks usually fear b) a boon for business and industry, and c) a sign of the times sentiment-wise.
|By N. Gregory Mankiw, The New York Times, 04/24/2015|
MarketMinder's View: This is an excellent article, not so much on the Trans-Pacific Partnership itself, but more on the issue of why nearly all economists agree international trade is good, while politicians and the public don’t. Here is a salient snippet: “The first is an anti-foreign bias. People tend to view their own country in competition with other nations and underestimate the benefits of dealing with foreigners. Yet economics teaches that international trade is not like war but can be win-win. The second is an anti-market bias. People tend to underestimate the benefits of the market mechanism as a guide to allocating resources. Yet history has taught repeatedly that the alternative — a planned economy — works poorly. The third is a make-work bias. People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries.”
|By Ian Wishart, Corina Ruhe and Karl Stagno Navarra, Bloomberg, 04/24/2015|
MarketMinder's View: Here is your obligatory peek at the latest from Greece. Greece’s leadership attempted to do an end run around the eurozone finance ministers’ rejection of Greece’s list of economic reforms, seeking a deal at the leadership level. It didn’t happen. Today was supposedly a deadline for this to get approval, but no one seems very concerned about Greece not meeting that deadline. The FinMins, for their trouble, seem more interested telling Greek leaders everything they don’t like about them. This, a day after Greek FinMin Yanis Varoufakis said a deal was getting close. Anyway, it’s a lot of noise and dramatics that would make a wonderful CNBC soap opera (We’ll be waiting for our royalty check!), but it isn’t all that meaningful for investors one way or the other. There are few if any signs Greece’s woes are spreading across the eurozone, and Greece is just too small to sway stocks for long.
|By Neil Irwin, The New York Times, 04/24/2015|
MarketMinder's View: This article is just plain riddled with fallacies about the impact of a stronger dollar and falling oil and gas prices. The strong dollar, for example, is only a modest headwind on export growth—that US Exports fell in January and February is largely attributable to the widely known (and now settled) West Coast Ports labor dispute (by nearly every economist, not just us). Retail sales are only a small subset of consumer spending and don’t include broad services, a huge slice of the US economy. But also, this decries saving, though in our fractional reserve banking system, saving underpins lending too. Ultimately though, the sentiment this expresses is quite detached from this reality: The factors cited here are not economic negatives or bad for businesses—both contribute to lowering businesses’ costs markedly. This kind of disconnect, friends, is bullish.
|By Lucy Hornby and Henry Sanderson, Financial Times, 04/23/2015|
MarketMinder's View: Bye-bye restrictions on rare earths exports! Yay! That should make the global marketplace much more efficient, and it makes life easier on computer hardware manufacturers outside China. Though, we wouldn’t be too optimistic: “But while international trade officials may cheer the end of the tariffs on rare earths such as tungsten and molybdenum, the end to tariffs on aluminium products could lead to new trade frictions.” Like allegations that China is “dumping” cheap products in the US, undercutting producers here, and distorting competition. We wouldn’t be shocked if protectionist rhetoric flared over this.
|By Peter Spence, The Telegraph, 04/23/2015|
MarketMinder's View: We’ve long been confused by all the handwringing over France’s sad-looking manufacturing and services purchasing managers’ indexes (PMI). France’s PMIs have long been pretty wildly detached from the country’s actual economic results. PMIs were mostly in contraction from late 2013 on, yet France kept growing most of the time. And its Leading Economic Index (LEI) kept rising, suggesting LEI is a better indicator for France than PMIs. France’s LEI has risen in five of the last seven months.
|By Ambrose Evans-Pritchard, The Telegraph, 04/23/2015|
MarketMinder's View: Parts seem over the top, like the discussion of OPEC/US price wars (we’ve seen no evidence this is actually a thing) and Middle Eastern conflict. But otherwise, this is an insightful look at the world’s oil supply and demand landscape. US oil firm reps shared all sorts of goodies at this week’s IHS CERAWeek energy conference. Like this one: “IHS said an astonishing thing is happening as frackers keep discovering cleverer ways to extract oil, and switch tactically to better wells. Costs may plummet by 45pc this year, and by 60pc to 70pc before the end of 2016. ‘Break-even prices are going down across the board,’ said the group's Raoul LeBlanc.” And this one: "‘We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days,’ said Scott Sheffield, head of Pioneer Natural Resources.” The more efficient shale production becomes, the further extraction costs fall, and the less incentives firms have to drastically cut output. Meanwhile, falling fuel subsidies across the developing world probably keep demand there more in line with market fundamentals, removing an artificial boost. Those are two reasons prices probably won’t soar any time soon.
|By Editorial Staff, Financial Times, 04/23/2015|
MarketMinder's View: This is all just sociology. While the US’s Export/Import bank certainly benefits individual companies, it isn’t a huge economic driver, and it doesn’t have much to do with America’s global economic clout—which, again, is a pure sociological issue. Ditto for the Asian Infrastructure Investment Bank, whose existence is not a shot across America’s bow, but a way for countries to get together and, you know, invest. It doesn’t give China clout (whatever that even means) any more than it strips it from America. Overall and average, more capital flowing globally and more investment in Africa and Asia—regardless of where the money comes from—is good for the world economy and trade.
|By Jason Zweig, The Wall Street Journal, 04/23/2015|
MarketMinder's View: In terms of pure behavioral advice, this is spot on. Getting caught up in euphoria and losing sight of fundamentals is the ticket to investing heartache. But the applications of that advice are a tad wide of the mark. Yes, some of the rhetoric accompanying the “sharing economy” sounds a wee bit dot-com-ish, and we’d urge investors to weigh profits, not platitudes about “new economies” and the like. But most of these companies are privately held, and most of the publicly traded Tech sector appears to be in fine shape, fundamentally, with solid earnings and revenues and strong demand growth.
|By Alessandro Speciale, Bloomberg, 04/23/2015|
MarketMinder's View: Wait. Last month, when PMIs rose, we were told it was all because of quantitative easing (QE). Even growth pickups from February have been attributed by media to QE, despite their predating the program's launch. But now, NOW, we must wait for the QE effect?
|By Chuck Jaffe, Marketwatch, 04/23/2015|
MarketMinder's View: We are pretty darned ambivalent about this one. We share its bullishness, and we agree these six reasons are indeed bad reasons. But much of the supporting logic misses the mark. So let’s go one by one and parse the good and bad. 1) Indeed, “it can’t go up forever” is probably wrong if you’re thinking ultra-long term, and there is no such thing as markets being due, overdue or underdue for a correction or longer, deeper bear market. But the spirit too strikes us as pretty buy-and-hold-for-all-time. In our view, there are times—bear markets—when it’s sensible for long-term growth investors to leave stocks, but only if you identify one before most of it has passed. 2) Hear, hear: “There is nothing that says bull and bear runs need to be balanced in any way.” (Though, the veiled suggestion that the next downturn will be “a long, nuclear winter” strikes us as odd, to say the least.) 3) We don’t think a Fed rate hike will kill the bull, either, but that’s because short-term rates alone aren’t stock market drivers, and no initial rate hike since 1970 has ended a bull. The explanation here also implies the move would have impacted stocks if it weren’t already priced in, which imagines a set relationship where none exists. 4) We don’t expect the government to muck up markets, either, but that’s because DC is wonderfully gridlocked. Not because the fiscal cliff, sequester and general budget bickering didn’t mess things up, and if those couldn’t, nothing can—those were all non-things from the start. Fact is, Congress could hurt stocks in a big way if they passed something radical. The chance of that happening now is simply slim. 5) No, the market isn’t overpriced. But there is also no such thing as a too-high valuation. Plus, keeping dry powder and taking profits to put to work after a dip aren’t viable long-term strategies—there is a high opportunity cost. Heck, this bit contradicts point 6), which quite rationally states how waiting for a better buying opportunity is money lost if that better buying opportunity never comes.
|By Lynn Doan and Dan Murtaugh, Bloomberg, 04/23/2015|
MarketMinder's View: One more reason crude oil prices probably won’t skyrocket soon: There are currently 4,731 drilled shale oil wells that have not yet been hydraulically fractured and therefore aren’t pumping, keeping an estimated 332,000 barrels per day off the market but available at short notice. With prices low, firms lack incentive to press “go” today. But should prices inch up and pumping become more profitable, producers can turn on spigots. This will likely keep oil prices low over the foreseeable future, making it difficult for most oil firms—whose profits depend on higher prices—to massively increase earnings. Chalk this up as another reason bottom-fishing for Energy stocks is probably still premature.
|By Mark Gilbert, Bloomberg, 04/22/2015|
MarketMinder's View: So our beef here isn’t so much with Mr. Gross’s prediction that German bund yields are as unsupportable as the British pound was in September 1992—everyone is entitled to their opinion (though we think the supply of and demand for German debt will make it hard for German yields to soar any time soon, and most bund demand isn’t artificial). Our issue is more with the scenario envisioned here, which claims German yields alone would rise first, then everyone else’s would jump amid “a tsunami of repricing across trillions of dollars of government debt around the world.” Thing is, we’re talking about German 10-year yields at 1.7%, where they were for much of 2013, which was a pretty darned good year. Plus! All similarly liquid markets discount widely known information near-simultaneously. And it isn’t like a central bank is artificially propping up the value of German bonds the way the BoE was propping the pound in 1992. Again, supply and demand. German bond supply has fallen since 2013, as the government ran surpluses. But demand is high, because capital requirements make banks really, really, really want to own stable bonds. Yes, the ECB has added some demand through quantitative easing (QE), but that is incremental compared to the demand from banks and savers. Stopping QE probably won’t cause German yields to soar, just as the end of QE in the US and UK didn’t make yields skyrocket. US yields did rise after Ben Bernanke first telegraphed QE “tapering” in May 2013, but growth accelerated, the world did not implode, and then they fell again. So to the extent you do get higher yields in Germany eventually, you likely get a slower drift that happens simultaneously with slower drifts in other countries, which is just not very Armageddony. That’s just how markets work, folks.
|By Matt Levine, Bloomberg, 04/22/2015|
MarketMinder's View: We offer this to you, dear readers, as an entertaining, easy-to-read, even-handed look at the US government’s case against a British gent whose alleged trading actions allegedly contributed to alleged volatility that allegedly contributed to the May 6, 2010 Flash Crash (innocent until proven guilty, we aren’t lawyers or experts, we don’t have a dog in this fight, etc.). If you’re curious on the ins and outs and points for and against the feds’ case, this one’s for you.
|By Kosaku Narioka, The Wall Street Journal, 04/22/2015|
MarketMinder's View: Potato chips, not computer chips, but anyway. Far be it from us to fully pooh-pooh the positives mentioned here, like rising profits at some consumer firms and the recent measures to improve corporate governance, but expectations for Japanese stocks still seem way too high. Byzantine labor markets still make it hard for companies to raise wages and stay profitable. The flat yield curve is still hampering lending. Trade barriers are still high. A tangled web of cross-shareholdings still limits how conglomerates can respond to corporate governance incentives. The weak yen is still inflating import costs even with oil prices down, and Japanese manufacturers import a heckuva lot of raw materials and high-tech components. Nuclear power plants are still idled. There are many, many, many obstacles in Japan’s way, and hopeful investors don’t seem to realize this. That’s likely a recipe for sadder stock returns, on balance, over the foreseeable future. Also, that 20,000 magic number refers to the Nikkei 225 denominated in yen. Returns in USD, though high this year, are less eye-popping.
|By John Tamny, RealClearMarkets, 04/22/2015|
MarketMinder's View: Jordan Spieth is the professional golfer who rewrote the Augusta National record book as he won this year’s Masters, a feat that earned him a cool $1.8 million and probably raised income inequality—which many argue is an economic scourge that must be solved through higher taxation and redistribution. This delightful read shows why that isn’t necessary to spread the wealth at all! “Assuming what seems observably untrue, that Spieth is a wasteful, prodigal spender, wealth redistributors should seemingly rejoice such a scenario. Spieth could quickly spend the portion of the winnings he keeps on private jets, hotels, cars, and booze, and per the alleged Keynesian multiplier, expand the economy through aggressive consumption. Even better, the money wouldn't have to sit in Washington in wait of politicians to vote on its final destination.” And if he saves it instead? “There’s no such thing as idle wealth. Applied to Spieth, unless he intends to stuff his Masters winnings under a mattress, the $1.8 million he earned will quickly migrate to the hands of many people not named Jordan Spieth, and who are not nearly as rich as he is. … If Spieth chooses to put his Masters windfall in the bank, his deposit will soon enough represent loans to individuals who need money to buy a car, to pay the college tuition of a son or daughter, who need a home loan, or who perhaps need credit in order to start a small business.”
|By Staff, Reuters, 04/22/2015|
MarketMinder's View: Welp, this was as close to inevitable as the real world gets. Congress is working on a bill to grant President Obama authority to “fast track” the Trans-Pacific Partnership (TPP), US/EU Transatlantic Trade and Investment Partnership and other free-trade deals through Congress, submitting them for up-and-down votes only, no amendments. This is good in theory, as it raises the likelihood TPP becomes official (assuming negotiations are ultimately successful—a big IF). But some Senators plan to add amendments cracking down on “currency manipulation,” which would turn the unenforceable “hey don’t do it please, mmmkay?” in the current bill into toothy sanctions for supposed currency cheaters. That is basically adding protectionism to a free-trade bill and would probably discourage Japan and others from signing on, as Japan is often (wrongly) accused of currency manipulation due to quantitative easing and its mercantilist economic structure. The Senators involved telegraphed this move long ago, and the 12 other participating nations told the Treasury it was a nonstarter, so if this amendment passes, it probably jeopardizes TPP. That isn’t a huge deal, as multiparty trade deals are rarely likely to pass, and TPP faced numerous other obstacles, but it is a bit of a disappointment—a 13-nation free-trade deal could have been a WOW! for global markets. Stocks love free trade.
|By Peter Rudegeair, The Wall Street Journal, 04/22/2015|
MarketMinder's View: This story about community banks’ struggle to stay profitable illustrates a couple things. One, the yield curve spread matters—when the gap between long- and short-term rates is slim, banks profits shrink, and that makes lending difficult. Two, for all the talk about community banks being more traditional and therefore safer than the megabanks with their investment-banking, trading and wealth management, the “safest”* bank is the bank with growing profits, as consistently profitable banks tend not to fail. Banks struggling to profit are more prone to failure and therefore not so very safe. That, folks, is a big reason why we’ve long viewed efforts to end “too big to fail” and diversified banking as a solution in search of a problem. *We put “safest” in scare quotes because there is really no such thing as safety, ever, in the financial world. Even if you don’t invest or use banks. Someone could break into your house and steal the money stuffed in your mattress. Or disable all the booby traps you rig around where you buried your money three feet deep in your back yard.
|By Joshua Robinson and Catherine Bosley, Bloomberg, 04/22/2015|
MarketMinder's View: Ok maybe, but that’s a forecast, and economic data often beat expectations. (Disclosure: They miss and meet, too.) Even if this does turn out to be true, and Swiss GDP falls -0.1% in Q1 and -0.2% in Q2 before bouncing later this year, a very shallow recession in a country where exports comprise 72% of GDP should defang many worries over a strong dollar and pound. Exports are 13.3% of US GDP and 28.8% of UK GDP. But this also illustrates how quickly stocks can discount widely expected results. Swiss stocks corrected for two days while the Swiss National Bank broke the peg was fresh, and have surged since. All sufficiently liquid markets are roughly equally forward looking. Any questions?
|By Tommy Stubbington and Josie Cox, The Wall Street Journal, 04/22/2015|
MarketMinder's View: Sign of complacency, or evidence the risk of contagion is next to nil? This isn’t something you can prove either way, but our opinion lies in the “no contagion” camp. It seems hard to argue investors are complacent when headlines have spent five years warning of the financial doompocalypse that could ensue if Greece leaves the euro and give daily updates on the likelihood of said “Grexit.” Plus, investors appear to have realized Greece is Greece, while Spain and Italy aren’t. They are Spain and Italy, and all have made hard choices, cut deficits and passed some reforms along the lines of those at which Greek leaders are presently thumbing their collective noses. So it seems quite rational that investors buying Spanish and Italian bonds this week would say this: “If Greece developed badly, we’d be absolutely of the same mind-set. There’s no comparison to draw between the periphery and Greece.” (Aside from the fact all three produce and export olive oil, and yes, we know, we are way too literal.)
|By Larry Elliott, The Guardian, 04/22/2015|
MarketMinder's View: Well, we’d just read them as a summary of some things some central bankers said when they got together a couple weeks ago. Those things resulted from the economic data available then and how the central bankers felt that day. None of that means anything looking forward, because the next time these central bankers get together, they will have new data and maybe different feelings and who knows what they’ll say about all that! Never mind what they’ll do!
|By John Authers, Financial Times, 04/22/2015|
MarketMinder's View: Yep, many investors trade often and at the wrong times, and DALBAR’s Quantitative Analysis of Investor Behavior demonstrates this—it shows how fund in/outflows spike when volatility does, and it pegs the average mutual fund holding period at 3.4 years over the past two decades, which isn’t sufficiently long to reap the benefits of investing in stocks over time. But we rather doubt the industry can solve this by limiting the supply of funds available. Investors don’t make badly timed trades because they are distracted by a dizzying array of shiny objects. They do it because humans are emotional and hard-wired to trade on fear and greed. We’re all equally prone to that whether we have one fund to choose from or thousands. The real ticket to battling those instincts, in our view, is to find an adviser who can dispense the tough-love advice you need when your emotions threaten to trump reason.
|By Bradley Olson, Bloomberg, 04/22/2015|
MarketMinder's View: Yes, at some point, oil production will fall, supporting higher prices. But that tends to happen gradually. People are conditioned to believe in oil “shocks” (and higher prices) thanks to the 1970s and mid-2000s, but long stretches of lower prices are far more common. Plus, new supply is easier and cheaper to extract than ever, thanks to evolving technology. And while firms are delaying high-cost new projects, many are also still trying to squeeze revenues from existing wells to recoup the high upfront costs. Conditions just don’t appear to be in place for prices to soar any time soon. Actually, this inadvertently shows why supply changes tend to happen so gradually by highlighting the 5-10 year lead time between initial investment in some of these new wells and when the first barrel of oil is produced.
|By Kristen Scholer, The Wall Street Journal, 04/21/2015|
MarketMinder's View: Why? Because “stalled earnings growth, high valuations and slow economic activity have put a lid on gains.” Same old backward-looking-and-not-predictive issues we discussed , and . As for the notion stocks need a “clear catalyst” to rise, . Stocks’ natural tendency when the economic and political backdrop favors earnings growth is to rise. They don’t need a push. That people broadly think they do is a good sign sentiment is lagging reality, which is bullish.
|By Neil Gough, The New York Times, 04/21/2015|
MarketMinder's View: Private companies have “defaulted,” which we put in air quotes because investors in onshore issues were eventually made whole by the government. But state-run firms haven’t defaulted on domestic investors. They’ve always enjoyed an implicit government guarantee. So the default of state-owned solar power equipment maker Baoding Tinwei Group, though small (they are missing a $14 million interest payment, not a principal repayment), is noteworthy and will be an interesting case study, however it plays out. In theory, it should be a positive sign of ongoing reform and maturity in Chinese capital markets, but these are untested waters, and the government may yet feel compelled to intervene in the name of peace and harmony: “‘Ultimately the question is one of market discipline,’ said Charles Chung, the head of Asian credit strategy at Credit Suisse in Hong Kong. ‘In a free capitalist market, this is gained by default experience, but in China, this has yet to come in a meaningful way to the bond market.’” This episode strikes us as a litmus test for China’s commitment to reform: If they let this play out, it should be a positive sign indeed.
|By Staff, Reuters, 04/21/2015|
MarketMinder's View: Re-insurance is when an insurance company transfers some of its risk to other insurance companies, reducing the chance it will have to pay out a big claim—a normal risk mitigation practice in the insurance world. Naturally, different countries have different regulatory requirements for re-insurers. The US has collateral requirements. From next January, EU firms will have to comply with Solvency II, a huge yarnball of restrictions and capital requirements (similar to Basel III, but for insurance firms). EU firms doing business in the US will have to comply with both regimes, adding costs and limiting their flexibility, putting them at a disadvantage. So the EU is asking the US to bend and accept Solvency II standards as sufficient, which would improve competition globally. That would likely be a net benefit for Financials (though we are dubious about Solvency II overall), but the chances seem slim given insurance is regulated by state governments. Then again, as this notes, the fact EU regulators are considering slapping Solvency II rules on US re-insurers doing business over there may give US regulators an incentive to figure something out. Either way, this could set the precedent not just for cross-border insurance regulation, but for financial regulation overall—and the US and EU’s efforts to free transatlantic trade in services.
|By David Keohane and James Crabtree, Financial Times, 04/21/2015|
MarketMinder's View: We highlight this not for India’s central bank chief’s harsh words for Indian banks, who aren’t transmitting recent stimulus measures to customers, but for the mechanics of what’s going on. The Reserve Bank of India cut rates twice this year in an effort to boost lending—but banks aren’t lending. The reason is impossible to pinpoint, but analysts have a good working theory: Indian banks are funded primarily through deposits (78% of total liabilities in India’s commercial banks), not interbank lending, so rate cuts don’t immediately impact their funding costs. That makes it much more difficult to lend at lower rates—it would pinch profits, limiting incentives to lend enthusiastically. This situation is a largely overlooked counterpoint to the broad global push to limit banks’ wholesale funding and push them more toward deposits. Regulators globally (wrongly, in our view) perceive deposits as less run-prone than interbank loans, and Basel III capital standards penalize wholesale funding. If regulators get their wish, however, it could become far more difficult to conduct monetary policy.
|By Staff, Reuters, 04/21/2015|
MarketMinder's View: When politicians speak out about alleged global market risks overseas, it is a fair assumption that they are speaking as, well, politicians, not economic analysts. A little jawboning from the US Administration over Greece is nothing new (and likely politically motivated), and the latest iteration doesn’t mean a Greek euro exit is actually now a huge global risk that markets haven’t discounted. As the article notes, Greece’s “financial woes have not had a major impact on other peripheral euro zone members like Portugal, Spain or Italy, which have seen their borrowing costs fall substantially since peaking three years ago. And world stocks are near all-time highs.”(See our charts here for more.) Those factoids, along with the drop in peripheral eurozone bond insurance costs—and the fact this saga has swirled for five-plus years, through two Greek defaults in 2012—are strong signals markets have already dealt with every possible Greek outcome and then moved on. If the risk of contagion were high, it would cost a lot more to ensure Spanish, Italian and Portuguese bonds.
|By Joe Carroll, Bradley Olson and Dawn Kopecki, Bloomberg, 04/21/2015|
MarketMinder's View: And they, along with the sponsoring legislators, quite rationally stress that ending the ban is good for consumers. Popular perception holds that allowing crude exports will cause US oil prices to rise, matching the global benchmark, but this ignores the fact that added US supply would probably bring down the global average. Plus, as the article explains, US consumers don’t really benefit from discounted crude prices here: The law bans crude oil exports, not gasoline exports, so refiners take cheap crude, refine it, and ship it abroad for a healthy profit, reducing domestic gas supply. Ending crude exports would remove this incentive, likely boosting domestic gasoline supplies. As alluded to here (and mentioned more directly in an imbedded link here), gas prices are determined by the supply and demand of refined gasoline—not crude oil. Also, most US refiners are equipped to process heavy crude, not the light, sweet crude that comes from shale, so allowing exports would help the market function much more efficient overall.
|By Mehreen Khan, The Telegraph, 04/21/2015|
MarketMinder's View: Yup. Total eurozone government debt-to-GDP has reached its highest level since the currency union started in 1999. But! All these figures are gross public debt. Net debt, which excludes debt owned by the issuing country’s government, is a better measure for evaluating the actual burden (money you owe yourself cancels, so it doesn’t make sense to include). That figure will be much lower. UK net debt, for example, is around 79% of GDP, vs. the 89% gross debt-to-GDP listed here. French net public debt is 86% of GDP—this lists gross French debt at 95% of GDP. Plus, total debt isn’t what matters—debt servicing costs determine whether debt is affordable or not. Right now, countries not named Greece are having no trouble servicing debt, and falling yields since 2012 have allowed them to refinance maturing debt at lower interest rates. Most eurozone countries’ interest rates today are historically low (some are even negative, where borrowers basically “pay” to lend the governments money). And while deflation can make debt payments more burdensome over time, the eurozone isn’t in Japan-style deflation (and nominal GDP is rising). It’s merely enjoying the fruit of lower oil prices.
|By Carolyn Cui, The Wall Street Journal, 04/20/2015|
MarketMinder's View: So according to this take, rising corporate defaults—exacerbated by a strengthening dollar and a looming Fed interest rate hike—are the newest threat emerging from Emerging Markets (EM). But we’ve seen this movie before: Last year, the Fed “tapering” quantitative easing (QE) was supposed to wreck EMs. And January was bouncy in Turkey, Ukraine and Argentina! Yet that passed and the taper continued, which supports our contention that volatility was due more to domestic issues in a handful of well-known basket cases rather than Fed monetary policy. Today is largely the same song, different verse. Consider the examples cited here: Brazil, the Ukraine and Russia. Energy-sector headwinds and corruption scandals have slammed Brazil, war ravages Ukraine, and Russia faces all three. Attributing all this to a potential fed funds target rate hike is to overlook virtually every major development in those countries in the last 12 months. Oh, and as to China: One Chinese property developer defaulting on a bond payment recently doesn’t mean a rash of defaults will follow—especially when China has been willing to (quietly) lend a helping hand.
|By Robert Milburn, Barron’s, 04/20/2015|
MarketMinder's View: Here is some sensible advice about the problems of being concentrated in any one stock: “…roughly 40% of the publicly traded companies (13,000 firms in the Russell 3,000 between 1980 and 2014) had suffered a ‘catastrophic loss’ in value, defined as a 70% decline or more from its peak value which never recovered more than 10% of that original value.” Owning a position exceeding 5% of your liquid net worth is, to us, too concentrated—and that is whether you founded the company, worked there for your career or just admired from afar. As much as you may know about a company and/or its industry, you can never know everything that may sway a stock—which can be an internal or external factor. Ultimately, humility is crucial in investing, and having a well-diversified portfolio humbly hedges those risks.
|By Mohammed A. El-Erian, Bloomberg, 04/20/2015|
MarketMinder's View: While we appreciate the effort to go to 11, these “need to know” factoids aren’t meaningful or even new for global investors. To review: 1) Default isn’t unfamiliar to Greece—just because it’s the IMF doesn’t make it unique; 2) A lack of confidence in a shaky Greek financial sector isn’t breaking news; 3) Greece struggling to find lending? Isn’t that pretty much where we’ve been on-and-off since 2010?; 4-7) Ditto for Greece and its creditors bickering about reforms and funding; 8) A Greek contagion is very unlikely according to markets; 9-11) We, too, are very skeptical there will be “visionary policy making on both sides”—heck, these are all just politicians we’re talking about—but to be clear, stocks and the eurozone economy don’t really need a magical solution for Greece. Greece does, but it is tiny.
|By Andrew Critchlow, The Telegraph, 04/20/2015|
MarketMinder's View: Most of the predictions here are either speculative or just rather detached from reality. Consider: Those hedge funds that increased their net-long position in oil contracts are not as bullish as they were in June 2014, according to the chart included—that was right before the floor fell out from under oil. Why be so sure they are right this time? But also, yes, shale drilling activity is down, but production is up and could be ramped up rapidly if prices bounce. While factors like one listed here—unrest in the Middle East—can add to already volatile commodity markets, in our view, it’s flat wrong to suggest the market is tighter than data show—again, if prices rise, it’s likely US shale producers snap into action fast. Finally, small Energy firms are issuing stock to replace high-rate bank loans and junk debt, diluting shareowners’ stakes. In our view, headwinds in the Energy sector remain, and now is not the time to go bottom-fishing for oil stocks.
|By Staff, Bloomberg News, 04/20/2015|
MarketMinder's View: The People’s Bank of China’s (PBOC’s) one percentage point (to 18.5%) cut to its reserve-ratio requirement (RRR) will free up about 1.2 trillion yuan ($200 billion) for banks to lend. And, interestingly, this follows the primary securities regulator dialing back margin availability last week. Taken together, it seems China wants to give the impression (at least) that it is willing to goose the economy, but wants that credit channeled to the economy, not stocks. Ultimately, it’s likely just another batch of mini-stimulus--like infrastructure spending or targeted tax cuts to specific industries—to keep its slowing growth up at an “acceptable” level.
|By Katie Morley, The Telegraph, 04/20/2015|
MarketMinder's View: While this story is particularly relevant for British retirees who are now free to choose new options for their retirement funds, it has lessons for all investors who work with or are looking for financial advisers. We would only suggest that you expand this logic beyond the delineation provided here (regulated versus unregulated investments) to include any adviser who takes custody of your assets, can’t explain their strategy simply and offers too-good-to-be-true high and positive returns with no downside risk. See our 8/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For,” for more.
|By Gretchen Morgenson, The New York Times, 04/20/2015|
MarketMinder's View: Look, we’re all for clearer regulation—complex and vague rules can create uncertainty. But the proposals here seem off base, in our view. They assume banks with smaller proprietary trading departments, less than $3 billion notional value in hedging-only derivatives positions, and a 10% capital ratio are somehow “safer” and thus don’t need to be subject to certain regulations. Yet that conclusion misses the elephant in the room: Small banks fail at a much higher clip than big banks do. Did in the crisis. Did before the crisis. Have since the crisis. Megabanks JPMorgan Chase, Wells Fargo and Bank of America were all major acquirers of troubled institutions in 2008. We’re not saying big banks are inherently any better than smaller ones—both are fine. But arguing small banks rarely fail and thus shouldn’t be burdened with regulations that were the result of big banks’ (supposed) actions in 2008 misconstrues both history and reality and misses a broader point: The size of the institution didn’t cause 2008. FAS 157 and the haphazard actions of the US government took out big banks and small ones alike.
|By Chao Deng, The Wall Street Journal, 04/17/2015|
MarketMinder's View: While we guess you could theoretically call limiting margin, enabling short sales and warning against selling property to invest in stocks a big “red flag,” in this case, you could also interpret them as signs Chinese officials are trying to encourage more mature capital markets. The short sale thing isn’t new—they started drafting this years ago, in an effort to attract more foreign investors. Limiting speculation might also make foreign investors view Chinese markets as less rickety. And the property piece could easily be aimed at trying to salve a multiyear slowdown in property markets. In other words, none of today’s developments mean China is in a bubble about to pop. It has had a strong run lately, but there is fundamental support—better-than-expected economic growth and slow-but-steady economic reform. Also, even if Chinese stocks do eventually encounter tough sledding, Chinese markets don’t correlate strongly with the world’s. There are too many contained local variables. Big upswings and big plunges over the last 15 years haven’t tugged world stocks hard in either direction.
|By Jason Zweig, The Wall Street Journal, 04/17/2015|
MarketMinder's View: While a couple of the conclusions go juuuust a bit too far, this is an overall great look at how overconfidence—a dangerous behavioral error—builds and why it’s so hazardous. The more an investor gets right in investing, whether or not rightness has anything to do with analytical skill, the more they believe in their own superiority and forget they could be wrong. That leads to excessive risk-taking, willful blindness and, often extremely poor returns. “Think of the folks who bought Internet stocks in 1999 and doubled or tripled their money in no time. Plenty of them were convinced, by early 2000, that nothing else was worth owning. Within 12 to 18 months, Many of them had lost 90% or more. No wonder the economist and investment strategist Peter Bernstein, who died in 2009, was fond of saying, ‘the riskiest moment is when you’re right.’”
|By Nikos Chrysoloras and James Hertling, Bloomberg, 04/17/2015|
MarketMinder's View: This article runs through a range of five imaginative, hypothetical outcomes for Greece ranging from can kick to Grexit, and we give them one point for creativity. But there is no perspective offered or scale, so it is really a thought experiment in what's possible with no broad view of probable outcomes. Minus one point. And all the overwrought language ("catastrophic divorce"; "financial purgatory"; "economic afterlife") obscure the fact there next to signs of contagion or any reason to believe Greek woes are actually as contagious as Scenario C argues. The Russia/warm water port stuff at the end is wild, sociological speculation. In sum, we award this article no points, and actually think it owes us a few.
|By Robin Wigglesworth, Financial Times, 04/17/2015|
MarketMinder's View: This is all just a bunch of textbook theory and long-term-forecast malarkey—there is no such thing as a “natural” interest rate, and demographics are not cyclical market drivers. Markets are efficient, pricing in all widely known information quickly. Demographic trends play out slowly, over decades, and they are quite easy to see coming years in advance. We’d suggest erasing from your brain the concept of normal, natural, equilibrium, or whatever word someone might use to describe some fairytale interest-rate paradigm, and simply considering supply and demand factors over the foreseeable future. Do that, and you’ll likely find bond yields are low because bond supply is constrained (falling deficits in much of the world), while demand is high thanks to central bank purchases and tougher bank capital rules, which incentivize hoarding highly rated sovereign bonds. None of those factors appears likely to change materially in the next year or two.
|By Liam Pleven, The Wall Street Journal, 04/17/2015|
MarketMinder's View: We wanted to like this one, because we love a good behavioral finance piece, but it falls short. The first behavioral error highlighted—investors’ tendency to sell stocks that are either up or down big, suggesting past performance and not forward-looking fundamentals drove their decisions—is something everyone should read every time they log in to their brokerage account. The second and third—investors’ tendency to buy funds managed by American-sounding people and run by financial firms with soaring stock prices—strike us as trivial evidence of bias, probably less helpful. But overshadowing everything is this assertion that passive funds “help protect investors from mental mistakes by putting important decisions on autopilot.” Friends, they do no such thing. They put stock-picking on autopilot. They do not make you any less prone to trading on past performance, panicking, getting greedy and trading at the wrong time. The true emotionless passive investor is as mythical as Nessie. (And by that, we mean they don’t exist, though there are unconfirmed sightings of a steely Scot who bought Vanguard’s first-ever index fund in 1975 and hasn’t so much as looked at an account statement since.)
|By Matt Levine, Bloomberg, 04/17/2015|
MarketMinder's View: No, of course not, that’s silly, come on! Which this tongue-in-cheek, devil’s-advocate-playing “defense” of a proposal to restrict mutual funds’ holdings to one or two companies per industry cheerily admits. (Note, the “defense” is actually a subtle debunking.) The logic behind this modest proposal, which you can read here, holds that mutual funds are a modern-day equivalent of trusts (as in those big competition-limiting behemoths banned by the Sherman Act in 1890), and by owning huge chunks of several companies in each industry, they weaken corporate governance by reducing boards’ incentives to compete for shareholder love. The evidence for this is a paper that made the earthshattering discovery that the US’s biggest airline firms, which are nearly half-owned by mutual funds, don’t compete so very well—equating correlation with causation leads the researchers to believe concentrated ownership gives these firms an incentive to charge customers sky-high (pun intended) prices instead of cutting fares to actually compete. The logical counterpoint to this, of course, is “hello, it’s the airline industry, basically a triopoly whose members sometimes go bankrupt, of course market forces there are distorted.” This Bloomberg piece, in pretending to defend, guts the “ban big funds” theory in a different way: Diversified individual investors would technically have the same incentives as those big fund managers owning equal amounts of all three major airline firms, so what are you going to do, ban diversification? And where is the evidence anything theorized in the study is even remotely a problem across 99.99999999999999999% of Corporate America? “I have a lot more at stake financially in my retirement accounts than I do in my occasional airline flights, and even if you believe [their] proposal would cut airline prices by 5 percent it seems dangerous to extrapolate that to other industries.”
|By Mehreen Khan, The Telegraph, 04/17/2015|
MarketMinder's View: Maybe, though the primary reason eurozone CPI rose this month is because the weaker euro jacked up energy costs—that’s a pure currency conversion phenomenon and could very well be temporary. Not that we think the eurozone risks some big deflationary spiral, of course—the idea of a spiral is largely myth, and eurozone money supply is accelerating. We just think the nature of the enthusiasm here is overall a little odd.
|By Staff, Reuters, 04/17/2015|
MarketMinder's View: By “oks,” they mean Congressional leaders agreed on the language of a forthcoming bill seeking to let the White House “fast track” trade negotiations by limiting Congress’s vote on any deal to a straight yes/no, with no amendments (Congress would get to help the White House’s trade negotiators set objectives, so they’d still get a say). This would make it much easier for any finalized deal to pass Congress and take effect, and it appears to have a decent shot of passing—gridlock doesn’t prevent everything. That’s theoretically a positive for trade, and stocks like trade, but it doesn’t mean any deals get done. The Trans-Pacific Partnership, for instance, must still be agreed on by all 12 players, each with their own unique interests, wont-dos and must-haves. There are still several stumbling blocks, so nothing here is a done deal. It just got a wee bit easier.
|By Don Clark, The Wall Street Journal, 04/17/2015|
MarketMinder's View: Pessimistic headline aside, this is a super-cool look at the history and amazing progress of Moore’s Law—Intel founder Gordon Moore’s now-axiomatic theory that the number of transistors on an integrated circuit would roughly double annually. His prediction has held true since he published it in 1965, and it has enabled exponential, astronomical gains in computing power and efficiency. It explains why your smartphone now does far more than your desktop computer did 20 years ago. Moore’s Law has also borne fruit in stock markets globally, both in technology companies and the countless firms using technology to their advantage. It probably will slow at some point in the future, and perhaps we’re seeing the early seeds of that now, with the higher development costs described toward the end of this piece, but the sheer potential isn’t winding down—nor will it in the foreseeable future. In the far future, which is outside markets’ typical time horizon, any number of revolutionary forces unimaginable today could take it place. And in the meantime, don’t underestimate tech’s other strong forces, like Koomey’s Law (the battery-power equivalent of Moore’s Law), Kryder’s Law (the computer memory equivalent) and the Shannon-Hartley Theorem (which holds similar for communication speed). These forces are colliding in amazing, powerful ways.
|By Justin Fox, Bloomberg, 04/16/2015|
MarketMinder's View: This delightfully, um, pops the myth that every run-up in prices or supply is a bubble. Bubbles are events of mass psychology, driven by irrational hope and belief in a new paradigm where downside risk doesn’t exist. Like the tech bubble, with its “new economy” that was supposed to be all boom, no bust. Cupcake and shoe fads are not bubbles. (Also, last we checked, people weren’t hoarding cupcakes with an aim to re-sell for a profit weeks or months later, because cupcakes are perishable, and that would be one smelly, useless stockpile.) The existence of potential downside is not a bubble—it is just risk. Though, we’d add that stocks currently show no signs of bubbliness. For one, the bubble in bubble fears keeps sentiment in check—as we’re fond of saying, bubble fears are self-deflating. Moreover, stocks aren’t detached from fundamentals. They’re rising as earnings and global growth beat expectations. That’s called a bull market.
|By Ambrose Evans-Pritchard, The Telegraph, 04/16/2015|
MarketMinder's View: We read this four times, and we still can’t tell if it’s bullish or bearish. Surging broad money supply? Rising lending? Booms in America and Germany? (Technically, the article calls them “boomlets,” which we find oddly wonderful.) Rational observations that expansions don’t just fall out of the sky, so don’t overthink those slower US indicators in Q1? Sign us up! Then again, there is all that stuff about rising rates causing a bond-market bloodbath globally. Un-sign us. Yes, interest rates are low, and yes, at some point they will rise, but that point needn’t come immediately or all at once. Bond markets are efficient, just like stocks, and have a way of discounting widespread fears and widely known information. If everyone expects long-term rates to skyrocket, markets price those opinions in and then probably do something else. Like, maybe, drift up glacially and not very far.
|By Megan McArdle, Bloomberg, 04/16/2015|
MarketMinder's View: OK party people, what time is it? Time to set aside your partisan biases and candidate opinions and consider politics from an objective, market-oriented perspective! We’ve seen a fair amount of “what a Hillary Clinton Presidency would mean for businesses/markets/the economy” speculating, as if her nomination is a lock. However, as this piece reasons, she isn’t even certain to get the nomination. Our study of political history, as explained here, finds Clinton doesn’t fit the mold of a typical Democratic nominee. If you ignore the possibility that another candidate could emerge—or the possibility that anyone other than Ms. Clinton could win the White House—you could be at a disadvantage when trying to handicap the 2016 election’s impact on markets.
|By Christian Borda and Stanley Druckenmiller, The Wall Street Journal, 04/16/2015|
MarketMinder's View: So we agree with the larger premise here, which argues a rate hike won’t kill the US economy. History and economic theory back that up—the first rate hike almost certainly won’t invert the yield curve. But the reasoning here is pretty wide of the mark. One, low short-term rates haven’t created a bubble in stocks or other higher-yielding assets. Returns are actually pretty well in line with fundamentals. Two, 1937 is a false comparison. Not just because the economy today is far better, as the article rightly notes, but because a fed-funds rate hike now is not at all analogous to the Fed’s doubling reserve requirements to 33.3% back then. That was an astronomical shock to the monetary system, and it forced banks—which had been holding excess reserves for liquidity purposes—to raise tons of cash. A rate hike or two today wouldn’t do that. They might flatten the yield curve a wee bit, but that’s basically all. Short-term funding is already on the tight side, since the discount rate exceeds the fed-funds rate. There is no liquidity floodgate to close.
|By Paul Mozur and Jane Perlez, The New York Times, 04/16/2015|
MarketMinder's View: Those rules would have required “companies that sell computer equipment to Chinese banks to turn over intellectual property and submit source code, amid other demands,” all in the name of national security and preventing potential espionage. That would have effectively barred major US tech firms from selling hardware to Chinese banks, a big protectionist barrier. The suspension doesn’t fully solve this, but it grants a temporary reprieve, and it opens the door for watered-down rules, perhaps eventually reducing protectionist risk on this front.
|By Matt Levine, Bloomberg, 04/16/2015|
MarketMinder's View: While this goes a bit far afield in suggesting the Department of Labor’s proposed fiduciary standard for investment professionals advising on retirement accounts will push investors into index funds, the opening is a great summary of how the new rules will work. The department’s biggest bugaboo, it seems, is revenue-sharing between broker-dealers and mutual fund companies—essentially trail commissions the B-Ds receive for putting their clients in these funds (they get a slice of the fund company’s fees). Labor, rightly, sees a conflict of interest here—but they haven’t banned the practice, instead opting to boost disclosure and essentially hit everyone involved with more paperwork. “The adviser [must promise] to act in the client’s best interest, adopt policies ‘designed to mitigate conflicts of interest,’ and ‘clearly and prominently disclose any conflicts of interest, like hidden fees often buried behind in the fine print or backdoor payments, that might prevent the adviser from providing advice in the client’s best interest,’ including by referring ‘the customer to a webpage disclosing the compensation arrangements entered into by the adviser.’ But you’d expect that if the Labor Department was worried about common practices that create conflicts of interest, it would ban those practices. Instead it will just dress them up more.”
|By Matthew Yglesias, Vox, 04/16/2015|
MarketMinder's View: Because Japan’s national pension fund is shifting away from Japanese government bonds, while China is putting less emphasis on exports and therefore has less of a need to stockpile Treasurys to keep the renminbi down. But those are just fun factoids. What we especially like here is the thorough debunking of the long-running fears that China has leverage over the US by being America’s largest foreign creditor and foreign countries are “propping up” our debt. Foreign bondholders don’t own America any more than domestic investors and the Fed do. “Nobody can ‘threaten’ the United States by refusing to buy our federal government's debt. The debt is there because people want to buy it. If nobody wanted it, there would be a logistical challenge in switching from debt finance to money finance — either Congress or the Federal Reserve would have to promulgate a new policy — but economically speaking, life would go on as before.”
|By Mehreen Khan, The Telegraph, 04/16/2015|
MarketMinder's View: Here is the latest on Greece, and it is a doozy—a he-said-she-said circus of frightful rumors, warnings and accusations. Did Greece really ask the IMF for permission to skip payments? Will officials really expropriate state-run firms’ cash reserves to pay creditors and public-sector wages if they don’t agree on bailout funding next week? Are leaders bluffing when they claim Grexit beats kowtowing to austerity demands? Or is this all just more game theory? We don’t know, and nor does anyone else claiming to, unless they have bugged Yanis Varoufakis’ and Alexis Tsipras’ offices. What we do know, however, is that even if Greece does ultimately leave the euro, the surprise power and risk of contagion seem minimal. In 2011, when Grexit dread spiked, peripheral sovereign yields spiked too, as folks feared it would trigger a sudden and disorderly eurozone collapse and global contagion. But now, even as Greece gets more chaotic with yields again skyrocketing, other peripheral yields are down. After five years of Greek woes, markets seem to realize Greece leaving won’t bust up the euro or world.
|By Staff, The Economist, 04/16/2015|
MarketMinder's View: Do stricter capital and other regulatory requirements incentivize banks to own fewer bonds? Probably. Does that crimp their market-making capabilities? Perhaps. But fears of a widespread liquidity crisis seem wide of the mark, in our view. As this piece even notes, new players are already entering the arena, finding opportunities in market-making, and investors are changing how they trade in a way that actually increases liquidity. This is what happens when fears and potential issues are so widely discussed—markets get time to adapt and discount them before they actually become problems. Given how widely this liquidity bugaboo has circulated over the past couple years, we have a hard time envisioning it having any surprise power whenever bond markets eventually encounter trouble. This all strikes us as Y2K for bond markets.
|By Carl Richards, The New York Times, 04/15/2015|
MarketMinder's View: Yet so many investors do play fast and loose with portfolio tactics, always in search of the next hot trick to goose returns and make them set for life—yet without any consideration of their long-term goals, investment time horizon or understanding of the risk/return tradeoff of different assets and strategies. That is a recipe for chasing your tail and, probably, not getting the returns you need over time. Identifying your goals is step one—investing without doing so is like aiming without a target. You’ll miss every time. So give this a read, and start by asking yourself the four questions at the end.
|By Simon Denyer, The Washington Post, 04/15/2015|
MarketMinder's View: Not tough times as in hard landing. Rather, as in growth slowed to 7% and probably slows a tad more over the years ahead as China continues rebalancing away from manufacturing and exports, which will be tough on the sectors the state has decided it no longer wants as primary growth drivers (but good for chosen winners, like the service sector). Property markets’ slowdown will probably add some more doldrums. These issues are widely known and have been for years now. For global markets, what matters more is that China’s growth rates are still high by any other country’s standard, and the world’s second-largest economy adds a ton to global demand as output and incomes keep growing swiftly.
|By Mark Gilbert, Bloomberg, 04/15/2015|
MarketMinder's View: So Greece needs a few billion by next Friday in order to repay loans due to the IMF and other creditors, otherwise it defaults, and yowza. Because unlike the 2012 defaults, which hit private investors, this one would hit the IMF, and according to this piece, reneging on them is something proper states just don’t do. And that reputational damage would cement Greece as a failed state, leaving them no place with the proper countries in the euro. And we guess this theory enters the realm of possibility, but in a way only Sherlock Holmes or Spock would consider viable (when you eliminate the impossible, whatever remains, however improbable …). One of the benefits of getting bailout money from the IMF is that they are big and bureaucratic. Assuming they don’t compromise and this actually isn’t all one big negotiating ploy, if Greece misses its next IMF payment, it won’t even officially be in arrears for 30 days, since that is how long the missed payment takes to circulate to the top. (Bureaucratically, that is, we are pretty sure Christine Lagarde will see it on TV or in the papers.) And then a lot of letter-writing ensues, giving Greece more time to cobble together whatever it needs. So we take all this critical week for the euro stuff with a grain of salt. Yah, there is a deadline, but deadlines in this saga are lines in the sand that get drawn and redrawn repeatedly. This looks more like a critical slow leak that is playing out over a very long time. Oh, and wherever it ends, even if that involves Greece leaving the euro, will that really shock anyone? After five years of this? We think not.
|By Ambrose Evans-Pritchard, The Telegraph, 04/15/2015|
MarketMinder's View: Them and an army of pundits. Their latest report claims bond liquidity is down thanks to regulations discouraging banks from making markets, leverage is up thanks to rising margin use and a proliferation of covenant-light corporate loans, and a rise in interest rates will thus make the financial system fall like a house of cards. Thing is, most of those corporate loans don’t have floating rates. They’re fixed at low levels and thus affordable. Firms have the earnings and cash flow to support them, overall and on average. And while this draws parallels between today and 2008, those loans weren’t responsible for the carnage. To the extent they stumbled and banks had an incentive to sell their stakes in securitized debt including them, it was because mark-to-market accounting’s misapplication to illiquid assets made holding on to them wreak havoc on balance sheets. Banks now can hold that stuff to maturity and value it accordingly, making volatility less likely to impact capital levels and their behavior. Without mark-to-market accounting, the conditions likely aren’t there for a vicious circle of firesales and writedowns.
|By Kristen Scholer, The Wall Street Journal, 04/15/2015|
MarketMinder's View: While we’re bullish and thus appreciate the optimism here, thinking so short term rarely does any good. Recent past performance, stocks’ historical tendency to do well late in April and an oil price forecast based on technical indicators (not actual supply and demand) aren’t solid reasons for any decisions. Think longer term, looking several months to a year or more out, weigh what’s likely, and then square that with popular expectations. When we do this, we see most folks expecting a ho-hum year, slower growth and rate-hike trauma. The high and rising Leading Economic Index and simple fact short-term rates aren’t market drivers tell us those expectations are probably too dour. That, not April trivia, is a reason to be bullish.
|By Ron A. Rhoades, Financial Planning, 04/15/2015|
MarketMinder's View: Wondering how the Department of Labor’s proposed fiduciary standard for all investment professionals advising on retirement accounts will impact you? Here is a thorough, objective explanation of what the new rules will and won’t do and evaluation of a few pros and cons. We’d only add that regardless of whether rules require brokers to act in your best interests, rules don’t guarantee behavior, and conflicts of interest are a constant. Rule or no, investors should always investigate how their adviser or broker attempts to mitigate these conflicts, how their values influence behavior, and what resources they use to get clients the advice they truly believe is best for them.
|By Sarah Portlock, The Wall Street Journal, 04/15/2015|
MarketMinder's View: Thank you kindly! While everything here is anecdotal and provides next to zero clues on how much the US grew in Q1, it illustrates some things likely to influence growth one way or the other. Like the Northeast’s terrible weather, which squashed retail and restaurant revenues. And the San Francisco Bay Area’s ongoing tech boom, which is driving residential construction, engineering and architectural activity sky-high. For those wondering about oil prices, note this: “While oil drilling has been curtailed, contacts in the Cleveland area said the number of drilling rigs across the district declined 25% since mid-December, but production remains at high levels. One industry executive reported that ‘even with the current low prices for oil and natural gas, there is still a lot of industry optimism surrounding the Marcellus and Utica shales.’” So don’t expect prices to jump any time soon. Oh, and watch out for a potential turkey shortage this Thanksgiving—there is a nasty turkey flu outbreak in Minnesota. Poor gobblers.
|By Eric Morath, The Wall Street Journal, 04/15/2015|
MarketMinder's View: Industrial production (IP) fell -0.6% m/m in March, capping its first negative quarter (-0.3% q/q) of this expansion, and that tells you nothing about what happens next. IP took four quarterly dips in the 1980s without signaling recession or a bear market. It dipped twice in the 2002-2007 bull—both were blips. It is totally normal for output to reaccelerate, just as it has after this expansion’s flat reading in Q2 2011 and several slow patches. Economic data are bouncy! Also, most of March’s read was tied to mining (oil, which was totally expected) and utilities (which fell as weather warmed in March, also totally expected). Manufacturing output rose. Oh, and about three quarters of the US economy is service-based.
|By Katy Burne, The Wall Street Journal, 04/15/2015|
MarketMinder's View: In their latest attempt to do the impossible and de-risk the financial system, regulators are taking another whack at banks’ short-term wholesale funding, which they see as more run-prone than deposits. (Their evidence is Lehman Brothers, which went bankrupt because it couldn’t get cash to cover immediate obligations, even though its assets exceeded liabilities.) Basel III regulations already penalize banks for relying on wholesale funding, but US and UK officials want to go one step further, stripping certain privileges from creditors, including the right to terminate contracts early if the borrowing firm wobbles—similar to the changes applied to swaps contracts last year. Officials believe this will buy them more time to determine how to resolve failing huge banks, and by “more time” we mean a day or two. It would basically pause a bank run, probably not prevent one. Banks seem ok with all this, just like they were mostly ok with the swaps stuff, though we have to wonder if this has the unintended effect of reducing liquidity (or making funding more expensive) when markets seize, as short-term lending will become riskier. That could create a self-fulfilling prophecy. Though, that isn’t likely to cause a crisis, just perhaps exacerbate one already underway.
|By Anjli Raval, Financial Times, 04/15/2015|
MarketMinder's View: The latest figures show global demand rose 1.3 million barrels per day in Q1, not too shabby—but global production grew 3.5 million barrels per day in March alone (both figures y/y). OPEC production surged, and US output rose, too. While the IEA expects US production growth to slow as capital expenditure falls, with most wells still pumping, the supply landscape probably won’t change markedly any time soon.
|By Paul Krugman, The New York Times, 04/15/2015|
MarketMinder's View: Here is an insightful, easy-to-read take on the latest debate among bigtime economists: whether linear macroeconomic models including few variables can accurately reflect and explain the messy real world. We’re rather sympathetic to both sides here, because while theory and the real world often don’t intersect, sometimes they do—and the more variables you introduce into a model, the more arbitrary and ham-fisted it can end up. As the Professor explains: “When you first start playing around with multiple-equilibrium models — in my generation that generally happened in grad school — there’s a period of enthusiasm. Crazy things can happen! Anything can happen! I can write down a model in which X leads to Z instead of Y! Also, you can call spirits from the vasty deep. But will they come when you do call? The point is that it’s quite easy, if you’re moderately good at pushing symbols around, to write down models where nonlinearity leads to funny stuff. But showing that this bears any relationship to things that happen in the real world is a lot harder, so nonlinear modeling all too easily turns into a game with no rules — tennis without a net. And in my case, at least, I ended up with the guiding principle that models with funny stuff should be invoked only when clearly necessary; you should always try for a more humdrum explanation.” Indeed! While we aren’t slaves to the problem-solving principle of Occam’s Razor, the simplest explanation is often the best place to start. (Though, our “simple” explanation of 2008’s causes is different than the one noted here, as our studies lead us to conclude trouble in property markets wouldn’t have snowballed into full-fledged financial panic if banks weren’t forced to mark illiquid mortgage-related assets to market and constantly rejigger capital as prices fell—and if the Fed and Treasury hadn’t handled the resulting bank failures so haphazardly.)
|By Jennifer Kaplan, Bloomberg, 04/14/2015|
MarketMinder's View: This highlights where sentiment stands today: Optimism is spreading, but folks aren’t irrationally gung-ho, suggesting this bull market is in its second half but likely has room to run. But that’s about all we’d take from it—there is no correlation between this index and future stock movement. While some note swift-rising sentiment can coincide with market peaks, we agree with this guy: “‘If you look back, you could probably cherry pick it and say this happens before collapses, but this thing really picked up in ’95, you didn’t want to sell in ’95, you didn’t want to sell in ’03,’ [analyst] Michael Feroli said.”
|By Alex Rosenberg, CNBC, 04/14/2015|
MarketMinder's View: “This sector” is Energy. But in our view, this is likely a case of investors’ putting too much faith in oil prices’ recent rise (WTI is up 20% since March 17). Folks, oil bounced in February, only to tank again in March—commodity markets are volatile, too. Nothing has fundamentally changed to support sustained higher oil prices. Production is still booming, making supply likely to continue outpacing demand. Producers usually take time to respond to price movement, and we haven’t seen evidence of a shift here yet, likely keeping oil prices low and pinching Energy firms’ profits. Plus, when sectors get hammered as hard as Energy, turnarounds don’t usually start until sentiment burns out. For now, bottom-fishing is too popular and folks are too enthusiastic about Energy’s near-term potential.
|By Lucia Mutikani, Reuters, 04/14/2015|
MarketMinder's View: Far be it from us to pooh-pooh good news, but this is an awful lot of hoopla for one monthly number. For one, by touting retail sales’ first rise “since November,” it overlooks the skew of falling oil prices during that window—excluding gas stations, sales rose in two of the last four months. Retail sales also excludes spending on services, which is where most households spend a majority of their money, so nothing here predicts total consumer spending. So while we guess this is indeed evidence the US economy is moving on from that weather-related winter slow patch, let’s not overstate the importance.
|By Alen Mattich, The Wall Street Journal, 04/14/2015|
MarketMinder's View: Why? Because even though Mario Draghi is taking a sort of “quantitative easing is working!” victory lap as retail sales, purchasing managers’ indexes and loan growth accelerate, inflation is way under target and unemployment is at 11.5%. There is also some other claptrap about the weaker euro and keeping the Fed from hiking interest rates, but it is bizarre and self-contradictory, so we’ll just back slowly away. Anyway, unless you are in Draghi’s head and are drinking buddies with every ECB board member and eurozone central bank President, you cannot know whether eurozone QE will end early. The eurozone would benefit if that were to happen, as yield curves would have one less thing flattening them, but it’s impossible to handicap today. Particularly since broad economic improvement predates QE by a mile, so we have no evidence of its actual impact yet. For more on the program, see our 1/23/2015 commentary, “The ECB Will Buy Some Bonds.”
|By Robin Wigglesworth, The Financial Times, 04/14/2015|
MarketMinder's View: No, not May 6, 2010’s minutes-long double-digit swan dive—the 10-year Treasury yield’s minutes-long 33-basis point dip on October 15, 2014. Pundits speculated then that low liquidity drove the blip, and bond liquidity jitters have only escalated since then, making this the latest iteration of a widely known fear (albeit with a layer of computerized trading phobia tacked on). Yes, regulatory changes have discouraged banks from making markets in fixed income, but liquidity abhors a vacuum. Other outfits have already stepped in to provide liquidity and will likely continue doing so as long as there is a market for their services. As for how this will impact markets in times of stress, we have to wonder how something so widely discussed can have any surprise power. Markets are pretty efficient at dealing with this stuff.
|By Andrew Ackerman, The Wall Street Journal, 04/14/2015|
MarketMinder's View: Welp, here we go, the Department of Labor (DOL) has released its proposed rules requiring all investment professionals advising on retirement accounts to put clients’ interests “before their own profits.” Which sounds lovely, but we are skeptical it changes anything or improves the landscape for investors. The DOL’s efforts center on commissions brokerage houses receive from mutual fund houses for selling those funds to individuals, assuming these are all higher-cost, inferior and therefore not good for investors—the agency’s (thinly supported) opinion, not a provable fact. These products wouldn’t be banned, but disclosure requirements would change, making this a watered-down version of the UK’s recent Retail Distribution Review regulatory change. That didn’t hollow out the UK’s investment advice industry, resulting in masses of underserved investors, and we are skeptical it would do so here. Nor will it likely improve the quality of advice, and it doesn’t eliminate conflicts of interest. So the onus remains on investors to discover whether and how an adviser seeks to mitigate conflicts of interest and put clients first. For more, see 3/18/2015 commentary, “A Winning Standard.”
|By Kerin Hope and Tony Barber, Financial Times , 04/14/2015|
MarketMinder's View: And they want the world to know, which smacks of Game Theory gone awry. Will this goad eurozone creditors into compromising at April 24’s meeting? If not, will we learn Greece was just bluffing? Or will they make good (bad?) on threats to leave the IMF high and dry? At this point, anything is possible. But considering Greece is small, its troubles are widely known, the private sector’s exposure is small and markets rose through both Greek defaults in 2012. In other words, it would not be “an unprecedented shock.”
|By Matt Phillips, Quartz, 04/13/2015|
MarketMinder's View: Ok, let’s see if we have this thesis right: Major central banks have created too much money, Emerging Markets have stored up too many reserves, but growth is too slow and the private sector isn’t investing, so in order to restore the balance between savings and investment, governments globally must follow China’s lead and invest worldwide? We would try to summarize the evidence as well, but it is so riddled with factual errors that we can’t go point-by-point in this short space. Overall, though, we see no evidence any of this is true. While central banks have created mountains of reserves, most are sitting on bank balance sheets—they aren’t circulating, as banks haven’t lent eagerly. The global economy grew plenty while developing nations hoarded reserves. While stock buybacks are up, as noted in this article, so is capex—it’s at all-time highs. Firms can do both. This whole notion of a savings glut—or whatever you want to call it if you don’t like Ben Bernanke’s name for it—doesn’t seem to be a thing as far as we can tell. To the extent money is moving more slowly globally, it has more to do with flatter yield curves, which stem more from central bank intervention (quantitative easing) and slow-growing bond supply than “secular stagnation.”
|By Alex Frangos, The Wall Street Journal , 04/13/2015|
MarketMinder's View: On the surface, China’s latest trade numbers don’t look pretty—exports fell 15% y/y in March while imports dropped 13% y/y—prompting the common “Chinese growth slump” refrain. This piece sensibly breaks that down: “All things being equal, most of the drop in imports in the first quarter can be attributed to lower prices for just two lines: oil and iron ore. By value, China’s first-quarter imports of these two were down $63 billion from a year earlier. But in volume terms, China imported more of both—albeit at a slower growth rate than in the go-go past.” [boldface ours] Domestic demand seems just fine, important for a country transitioning from an export-driven economy to a consumer-based one.
|By Michael Casey, The Wall Street Journal , 04/13/2015|
MarketMinder's View: Errr…if the flatter yield curve didn’t much concern the Fed in 2011, 2012 or early 2013, why would they suddenly start caring today? Particularly when they deliberately flattened the curve by buying long-term bonds through quantitative easing? Also, the yield curve isn’t the “differential between two-year and 10-year US government debt. It starts with overnight rates. Anyway, we do award this piece a point for highlighting the yield curve’s importance and influence on loan growth, as most ignore this these days. But it errs in assuming flatter yield curves predict recessions. They do discourage loan growth, but they don’t cease it—just slow it. Inverted yield curves, when shorter-term rates exceed long-term rates, are the real poison. The yield curve is not inverted today, nor should it invert after only one rate hike. Usually, the curve inverts when the Fed tightens too aggressively over many months (or more). The trajectory of rate hikes is what matters.
|By Mehreen Khan, The Telegraph, 04/13/2015|
MarketMinder's View: Well sure, “resurgent inflation and wage increases” could lead to a “swift rise in German bund yields,” which would hurt bond prices. But we see precious little indication that is poised to happen any time soon, if at all. Gradually, as the eurozone recovery continues? Plausible. But with German bond supply falling thanks to the budget surplus, bank demand high thanks to regulatory capital requirements, the Bundesbank buying about €12 billion in bunds monthly for quantitative easing, headline CPI negative, core CPI low and steady and loan growth only just recovering, there doesn’t appear to be much reason for German yields to skyrocket any time soon. That said, we wouldn’t treat any asset—whether it’s a stock, bond, or something else—as “safe.” No asset class is risk-free or acts like a true “safe haven” for your investment.
|By Matt Egan, CNN Money, 04/13/2015|
MarketMinder's View: We agree with the title: We expect the bull to keep on running through 2015. However, projections for a 3% rise from here through year-end seem juuuuuuuuuuuuust a bit too dour, considering leading economic indicators are on a tear, defying slowdown fears, most companies are plenty profitable, political drivers are strong and P/E multiples actually have lots of room to expand before appearing euphoric. The evidence for slow stocks offered here amounts to the same old false fears about the dollar, earnings, oil, weather and rate hikes—all very widely known, widely misinterpreted issues. While volatility or a correction could strike at any time, between solid fundamentals and too-dour sentiment, conditions look ripe for a big year.
|By Editorial Board, The New York Times, 04/13/2015|
MarketMinder's View: Why unsafe and unsound? Because, according to FDIC Vice Chair (and former Kansas City Fed President) Thomas Hoenig, if they used international accounting rules instead of US rules (and Basel III rules) on derivatives contracts, the eight largest banks’ average tier 1 capital would fall from 12.9% to 4.9%. We are told this accounting better reflects the real world, as “in the financial crisis American taxpayers were forced to hand banks tens of billions of dollars to make good on derivative bets gone bad.” An embedded weblink directs the reader to a story about AIG’s bailout so we guess that’s the evidence for that statement. Only AIG was an insurance firm, people, not a bank. Banks were AIG’s counterparties, and many received government assistance, but that had much more to do with the nearly $2 trillion in exaggerated, unnecessary writedowns wrought by the mark-to-market accounting rule’s application to illiquid assets. That isn’t a factor today. Actual derivative losses paled in comparison to those writedowns, by the way.
|By Ambrose Evans-Pritchard, The Telegraph, 04/10/2015|
MarketMinder's View: It seems foreign demand for UK government bonds is dropping a bit, and many believe election uncertainty is why. No party is expected to win a majority next month, and many fear the resulting gridlock of a minority or coalition government will stall UK markets and create uncertainty. Perhaps bond markets are pricing that in, and perhaps UK stocks are also discounting those fears, considering the MSCI UK Index is trailing the world year to date. That’s about all we’d dare gleaning from this article, and it’s actually good news—it doesn’t mean the UK is hemorrhaging capital, contrary to the assertion here. It means expectations are good and low, creating lots of room for gridlock’s overwhelmingly positive reality to be a big happy surprise. Gridlock doesn’t create uncertainty, and in Britain, it won’t prevent anything major—the UK doesn’t need “fiscal consolidation,” considering debt is quite affordable as tax revenues grow faster than interest payments. Instead, it should help prevent radical change folks fear from both major parties, including “Brexit” and price controls. That reduces uncertainty and probably attracts foreign capital.
|By Staff, Reuters, 04/10/2015|
MarketMinder's View: Thank you, kind sir, for pointing out what should be obvious to all but isn’t: One Fed rate hike does not a tightening cycle make. We can see why the misperception lingers, considering the Fed’s last one-off hike happened in March 1997—and the last “first” rate rise, in 2004, kicked off 17 consecutive hikes. But that isn’t how it must work. Says Richmond Fed President Jeff Lacker: “If we were to raise rates, then subsequently reduce them to zero, it might be unexpected, but presumably we’re setting rates where we ought to be. I don’t see it as problematic to reduce rates having raised them once.” So while we don’t think a rate hike is anything to fear, perhaps this sets others’ jitters at ease—they can undo it if they determine they jumped the gun. Also, for bond investors, this is another reason we’d caution against expecting a steady increase in rates in the near future—the path isn’t carved in stone.
MarketMinder's View: Maybe. Maybe not. Straight-line long-term forecasting based on prevailing growth trends won’t tell you anything. Economies don’t grow in straight lines—sometimes they grow, sometimes they contract, and they don’t revert to the mean. Past growth doesn’t predict the future. China could surge, as projected, or officials could mess up financial reform somewhere down the line and grind growth to a halt. Japan could get its act together, finish all those often-discussed-but-never-seen structural reforms, and become a dynamo again. The eurozone could bust out in a big way. And so on down the line. Not that any of these are probable! But they’re possibilities not accounted for here, illustrating why you can’t game probabilities so far out. 2030 is 15 years away, and much can change between now and then to render these forecasts incorrect.
|By Charles Stein, Bloomberg, 04/10/2015|
MarketMinder's View: This look at the lack of celebrity fund managers today is an interesting snapshot of sentiment. Stock-picking, like stocks themselves, is unloved. Heroes of old are out of the limelight, even though some have done quite well recently. In their place are the bond fund kings, with their famous projections of “new normal” slow growth (and the like) receiving reverence worldwide. Stock investing is often an optimist’s game, and even six-plus years after the last bear market ended, society just isn’t ready to fete the (rationally) raving optimists. At most euphoric market peaks, you get a wave of investor and CEO heroes, like the old lions fondly recalled here. We aren’t there yet.
|By Staff, CNBC, 04/10/2015|
MarketMinder's View: Well, not worst—the US is at least up, unlike Greece. But yes, it’s trailing most of the developed world, which highlights why investing globally is wise. But this article sort of twists that advice into something dangerous, encouraging readers to chase heat in Europe and Japan, assuming what’s hot will stay hot—and the US will stay lackluster. Trading on past performance—piling into what’s winning and leaving the laggards—is rarely a winning move, especially if you can’t identify strong, fundamental reasons why recent trends should continue. Yes, we do happen to be bullish on Europe, but more because despite this year’s solid run, sentiment remains too dour. We aren’t so hot on Japan, where hopes are too lofty. And we expect US stocks to surprise the doubters. The Leading Economic Index signals more growth ahead; gridlock reigns in Congress, reducing legislative risk; and low expectations for US stock returns (as highlighted here) mean reality has an easy hurdle to clear to surprise positively.
|By Allister Heath, The Telegraph, 04/10/2015|
MarketMinder's View: While the interpretation of the strong pound and rising UK trade and current account deficits as big negatives is rather off target (in our view), we happily overlook that because this makes some otherwise smashing points. Like the fact Britain’s service sector is a marvelous growth engine, not to be shunned, and an underappreciated export generator. And like the fact imports are not the root of all evil: “Some discussions of trade quickly veer into the mercantilistic, glorifying exports and demonizing imports. That is nonsense: There is nothing wrong with imports and buying goods and services from overseas suppliers that we prefer to our home-grown variety, because they are either better or cheaper.”
|By Szu Ping Chan, The Telegraph, 04/09/2015|
MarketMinder's View: Straitjacket? That’s a tad overwrought. It’s more that the stronger sterling creates winners and losers. Exports become relatively more expensive abroad, and overseas revenues lose value when converted to ye olde British pound. But imports get cheaper, and most UK manufacturers import components and raw materials, so the cost improvements at least partly offset the revenue hits. This is why the pound isn’t a trade swing factor. If it were, imports would always jump when the pound is strong and exports would always shrink. And when sterling weakened, exports would always jump and imports fizzle. But that isn’t the case. Both tend to rise and fall along with economic growth. Also, note, UK exports have been lackluster throughout this expansion, which has seen a weak and strong pound.
|By Charisse Jones, USA Today, 04/09/2015|
MarketMinder's View: We are quite ambivalent about this one. On the one hand, surveys like this aren’t terribly accurate. People could be under- or over-stating their stock investments, particularly if they don’t pay much mind to how their 401(k) is invested. Polls like this also don’t often reflect the broad population to a T. So we are skeptical that broad stock market participation is anywhere near as low as estimated. But, that said, the second half makes some great points. Like this one: Bankrate analyst Claes Bell “said it’s understandable that some people fixate on the stock market’s volatility, particularly since the spotlight tends to focus on stocks’ dramatic drops and downturns. ‘You don’t see a lot of headlines saying 20,000 people were able to retire today in relative comfort because they were investing in the market over the long term,’ he says. But for most people, avoiding the stock market entirely is a mistake.” Think long-term, keep your goals in mind, and don’t get swayed by short-term gyrations or past volatility.
|By Ted Knutson, Financial Advisor Magazine, 04/09/2015|
MarketMinder's View: Why? Because they’re often disclosed in places most investors don’t look, like disclosures on trade confirmations. Folks, it’s exceedingly difficult to gauge whether you’re receiving good value for what you pay if you don’t know what you’re paying. Plus, knowing how and how much your broker is paid can help you determine whether their incentives are aligned with yours. Aligned incentives don’t guarantee they’re putting your needs first, but commissions carry unavoidable conflicts of interest, and knowing whether and how your broker attempts to mitigate them is vital. So while we’re all for improved transparency and disclosure, don’t wait for FINRA to act—read the fine print, get the facts, and do a thorough cost/benefit analysis.
|By Wes Goodman, Bloomberg, 04/09/2015|
MarketMinder's View: Yep, seems about right—those putting money on a big jump in long-term rates after the Fed hikes (whenever that may be) will probably be disappointed. Bond markets, like stocks, are forward-looking and efficient, and investors have been trading on those very widely discussed rumors and expectations of rate hikes for months. Yet long-term yields aren’t jumping. The market controls long-term rates, not the Fed (well not now that quantitative easing is done, at any rate), and with inflation low and interest rates elsewhere at rock-bottom, investors don’t need much of a premium to own US Treasurys. (Also, really, a movie version of The Big Short? We saw what they did with Moneyball, and we were not big fans.)
|By Josh Halliday and Terry Macalister, The Guardian, 04/09/2015|
MarketMinder's View: The discovery of huge oil reserves near London is cool, but not useful for investors. What is useful? How people reacted to the news! Namely, the share price of the discovering firm surged over 200% on the news. Even though getting most of the oil would require fracking, which doesn’t appear to be in the cards. And even though oil prices are way down, creating less of an incentive to develop the field in the new future. We’d chalk this up as more evidence folks are still out over their skis when it comes to oil, vastly overestimating the potential for strong profits over the foreseeable future. That’s a sign sentiment hasn’t burnt out yet, likely making Energy stock bargain-hunting way premature.
|By Don Clark, The Wall Street Journal, 04/09/2015|
MarketMinder's View: This is the latest development in an under-the-radar trade spat between the US and China. Under the guise of national security, both are blocking technology firms from doing business—either denying contracts to foreign firms or preventing domestic firms from doing certain things overseas. For now, it is very limited, confined to small corners of the tech world, limiting its scope. But if it were to escalate into full-blown trade restrictions, it could ripple globally, disrupting supply chains and trade overall. The freer trade is, the better for stocks. Markets would hate a return to the world’s protectionist past. Again, for now, this is a small, isolated risk, but we’re keeping an eye out.
|By Kasia Klimasinska, Bloomberg, 04/09/2015|
MarketMinder's View: By “change,” they mean long-term interest rates will rise, jacking up US debt interest payments—which are projected to nearly quadruple in 10 years. Or so says the Congressional Budget Office (CBO) in their latest 10-year forecast, a publication with a well-documented history of often comical inaccuracy, as we’ve discussed here, here, and here. While the CBO is right at times, that’s more luck than science. Their forecasts are always based on straight-line math, extrapolating the recent past or historical averages years into the future. Thing is, real-life doesn’t follow straight-line math and historical averages. Any number of factors unknowable today could influence economic growth, interest rates, tax revenues, debt issuance and government spending. Maybe economic growth beats their forecasts, boosting tax revenues! Maybe interest rates don’t mean-revert, just as they didn’t mean-revert after the CBO’s 2002 forecast projected 6% 10-year yields for a decade! Maybe future governments will spend differently! Long-term forecasts can’t account for any of that. There are simply way too many unknowns over the next eight years to accurately determine now what the US budget will look like in 2023.
|By Simon Kennedy, Bloomberg, 04/09/2015|
MarketMinder's View: Wait, let’s see if we have this right: Low oil prices are stimulus, but they can’t totally stimulate unless central banks cut rates, too? Uuuuuhhhhhhhhhhhhhhhh, that’s not how it works. Oil prices are the cost of oil. Short-term interest rates are the cost of money. Those are two independent variables, and they impact different things. Cheap oil helps anyone buying the stuff and hurts anyone selling it, creating winners and losers. Cheap money is cheap money. Low long-term rates and flatter yield curves make that cheap money less apt to multiply than if yield curves were steeper, which means broad money supply grows a tad more slowly. That is what it is. It doesn’t mean people and energy-consuming businesses can’t benefit from cheaper energy. Besides, oil isn’t actually massive economic stimulus. Again, it creates winners and losers! And the winners don’t always spend their savings. Sometimes they save or pay down debt. Seems to us we’re seeing that in the data now, and pundits just aren’t connecting the dots. Nothing here is abnormal.
|By Jeff Benjamin, InvestmentNews, 04/09/2015|
MarketMinder's View: According to ETF fund flows, investors bought some European stocks over the last few months, a factoid this article is making a big darn deal of, despite the fact there is no way to use ETF flows to determine sentiment (lacks history to compare to) or what’s causing the move. Hey, it’s possible some did so presuming quantitative easing (QE) will boost the eurozone economy or markets, but it’s equally possible many others were simply following returns. To us, both those rationales are misguided. As we’ve written, QE is not the economic stimulant many believe—it flattens yield curves, discouraging bank lending—and buying because of past returns is a classic behavioral error. Look, we’re bullish on Europe too! But mostly because folks just overlook seven straight quarters of GDP growth, acceleration in recent months and more.
|By Timothy Coulter, Bloomberg, 04/08/2015|
MarketMinder's View: Maybe? But also maybe not. It’s true that you usually see consolidations when an industry gets hammered as hard as oil has been—the strong snap up the weak. But there is no law saying this happens at the exact bottom. We probably will see plenty more mergers, but prices could fall plenty in the meantime. Our advice? Let the oil giants do the bottom-fishing. Now isn’t the time to speculate on potential acquisition targets. Too many candidates, too many variables, too hard to handicap, and too big a “what if I’m wrong?” factor.
|By Landon Thomas, Jr., The New York Times, 04/08/2015|
MarketMinder's View: Well, Greek banks are nothing if not resourceful: Bleeding deposits and strapped for cash, they’ve been issuing high-yield commercial paper and using it as collateral to get central bank cash—first from the ECB, then, after they were cut off, the Bank of Greece (which gets its funds from the ECB). Some, including Finance Minister Yanis Varoufakis, call this a “hidden bailout,” and we kinda see the point. These bonds are government-guaranteed, so Greece would be on the hook if any of the banks failed—and €50 billion has been issued over the past year, so this isn’t chump change. But, this is all widely known. Is anyone shocked Greece’s banking system is a house of cards? Anyone? Bueller? Maybe this does inch Greece closer to euro exit if a bank fails, but markets have spent the last five-plus years pricing in that possibility. Whatever the outcome here, there is no evidence anything that happens in Greece is contagious.
|By David Weigel, Bloomberg, 04/08/2015|
MarketMinder's View: Probably nothing. Set aside your political beliefs and biases for a moment, please, and let’s all look at this objectively. Whether you think auditing or ending the Fed is the ticket to American prosperity or the path to perdition, this is all an incredible longshot. The president is one person. He doesn’t have fiat power when it comes to the Fed. Congress calls the shots, and the current “Audit the Fed” bill sponsored by Senator Paul (R-KY) doesn’t appear to have a snowball’s chance of passing the Republican Congress. Might that change if Senator Paul becomes President Paul and has a strong Congressional majority? Maybe, but that’s too far out to handicap today, when all of two GOP candidates have formally declared (and when Senator Paul is routinely polling middle of the pack). Anything can happen, but markets move on probabilities, not possibilities, so it is far too early to panic or celebrate over any possibility related to the Federal Reserve and the Junior Senator from Kentucky. (We guess we’d be remiss not to add that much of the Fed bugaboo is grounded on flawed math, a misunderstanding of the Fed’s function, and an unawareness of the risks of politicizing monetary policy—see Elisabeth Dellinger’s commentary, “Congressmen Attempt to Invite Monetary Error, Fail,” for more.)
|By Sam Fleming, Financial Times, 04/08/2015|
MarketMinder's View: Gee, considering several Fed people have come out for and against rate hikes in recent hikes, of course March’s meeting minutes would show differing opinions. Also, that’s normal! It’s pretty rare for a group of humans with different beliefs and biases to interpret information identically. Nothing here is shocking or terribly useful for investors. The Fed’s next move remains as unpredictable as ever.
|By Peter Spence, The Telegraph, 04/08/2015|
MarketMinder's View: Yah, well, others warn markets are spooked by the prospect of a Conservative government and referendum on EU membership. Or a Conservative/UK Independence Party coalition and a potentially aggressive bye-bye EU push. All these fears get baked into markets during the campaign, doing investors a favor by lowering expectations. When a minority government or fractured coalition emerges—as remains likely—the resulting gridlock brings relief. That’s bullish. And if Labour and the Scottish Nationalists do form a government? Politicians moderate, and no party is inherently good or bad for stocks. UK stocks have done fine under past Labour governments. They’ve done fine under Conservative governments, too. And they’ve had sour spells on both parties’ watch. Whatever the election’s outcome, reality probably beats low-and-falling expectations.
|By Rob Copeland, The Wall Street Journal, 04/08/2015|
MarketMinder's View: Yep, and here’s a handy user’s guide. We wouldn’t go so far as to say these newfangled “liquid alternative” funds, which smell like hedge funds but trade like mutual funds, are uniquely vulnerable to a vicious cycle of redemptions and falling net asset value—that issue is largely myth (see the next story for more). But it does seem fair to say they offer things that sound very nice in theory but might not work out in the real world, particularly when markets get stressed. There is no such thing as riskless return, and ditching a diverse fixed income portfolio for something advertising bond-like stability with higher yields—and given a splashy name like “opportunistic credit”—might run counter to your goals. Do your due diligence, know what you’re buying, and don’t get blinded by pizzazz. For more, see our 3/26/2015 commentary, “Funds Behaving Badly.”
|By Greg Ip, The Wall Street Journal, 04/08/2015|
MarketMinder's View: So on the one hand, this is one of the more even-handed looks at shadow banking we’ve seen in recent months. That sector of finance often gets a bad rap, but as this shows, it actually does a lot of good in the world, filling in to provide credit to people and businesses when regulations won’t let banks perform their traditional financing duties. But it goes a bit far in the second half, accepting as fact the IMF’s (and others’) report citing higher risk of market crashes and contagion from ETFs and managed mutual funds. Yes, some funds have helped supply credit by buying high-yield corporate and sovereign debt (largely from Emerging Markets) and leveraged loans, and yes, these securities are probably more volatile than your average Treasury bond. But volatility isn’t exacerbated by the fact funds own these. If funds didn’t, individual and institutional investors would own them directly, making the same buy/sell decisions they would with fund shares, and thus driving the same ups and downs. Markets are efficient like that—plus, there is a seller for every buyer. One man’s toxic asset is another man’s opportunity. Also, this vastly overestimates the scope. Consider mutual funds’ holdings leveraged loans: At about $277 billion in the US and eurozone, they’re around 3% of the market.
|By Elaine Moore and Robin Wigglesworth, Financial Times, 04/08/2015|
MarketMinder's View: This is just cool. Not only did Mexico just successfully issue a €1.5 billion 100-year bond in euroland, but it found robust demand at 4.2%. Some call that a sign of widespread desire for higher-yielding euro-denominated assets. We call it a sign of rising confidence in a country most saw as one step away from banana republic a few years ago. It’s also a sign fears Emerging Markets can’t get foreign capital when the dollar strengthens are misplaced. Money will always flow where investors see opportunities, no matter what any big currency does. So while this is anecdotal, it is evidence that long-feared Emerging Markets implosion ain’t happening.
|By James Titcomb, The Telegraph, 04/08/2015|
MarketMinder's View: This argues banks are potentially undermining financial stability by lending more enthusiastically to borrowers with smaller down payments and less eagerly to borrowers with more cash to splash. We guess that’s one potential interpretation, if you’re of the belief that housing is indeed a huge risk to the UK’s financial system, but we don’t buy it. Residential real estate is a sliver of UK GDP, and housing didn’t cause 2008. We’d interpret this news differently: With interest rate spreads relatively wider today than during quantitative easing’s heyday, and most Basel III-related capital-raising complete, the risk/reward tradeoff of lending to a wider swath of borrowers is in banks’ favor. Profits are higher the more risk you take, and banks have less of a need to hoard cash and pad balance sheets. This is all good for banks’ net interest margins and the broader economy—more lending to more people means more money changing hands.
|By Nicole Friedman, The Wall Street Journal, 04/08/2015|
MarketMinder's View: Because most US wells produce light sweet crude, while many US refineries are equipped to process heavy crude only. And demand for gasoline is high, so they’re importing the heavy stuff to meet it. This is just an interesting factoid, though, not a sign Energy firms are about to become way more profitable—despite the reference to high gasoline profit margins. Some of the big, vertically integrated firms, which have better-weathered low oil prices thus far, might be able to use this to their advantage, but we wouldn’t go bottom-fishing throughout the sector. Sentiment there remains overall too optimistic.
|By Jennifer Kaplan, Bloomberg, 04/08/2015|
MarketMinder's View: Seems about right. Analysts’ earnings expectations aren’t blueprints. They’re the bar earnings must clear to give stocks a happy surprise, and lower expectations give reality a greater likelihood of beating. Plus, they do us all a favor, allowing markets to pre-price the likelihood of falling earnings, which will be largely due to oil prices if they actually happen. That’s overall good for stocks, sparing them from unpleasant shocks and setting up plenty of positive surprises as other sectors announce strong results.
|By Howard Gold, MarketWatch, 04/07/2015|
MarketMinder's View: Now, first, the author claims the four headwinds will cause a “correction,” which we define as a short, sharp, sentiment-driven move of greater than -10% that come and go fast. We’ve had five in this bull market alone, they are normal in bull markets, and they can’t be forecast with any reliability. So we figure the article here is simply defining correction as we would bear market. But at long last, here are the four headwinds of the apocalypse: A Fed rate hike; the strong dollar; a projected decline in earnings; and the debt ceiling. So in other words, all widely known stuff, all wrongly perceived. History shows Fed initial rate hikes aren’t toxic to bull markets. The dollar was stronger in the mid-to-late 1990s—US large cap multinationals outperformed. The earnings decline is a) a forecast, b) basically all related to Energy and c) lowers the expectations bar for reality to clear. Finally, the debt ceiling? Really? What about 2011? The two in 2012? 2013’s government shutdown and debt ceiling fight. Squabbling over the debt ceiling is a long-standing American political tradition. We’ve addressed all of these here, here, here and here, respectively. We humbly suggest history shows none of these are so insurmountable.
|By Rebecca Burn-Callander, The Telegraph, 04/07/2015|
MarketMinder's View: Yes, an accounting or financial modeling error could lead to a firm failing, but let’s get real here: There is always the possibility of human error in literally everything you do, and there is literally no way to hedge this risk and no need. After all, what is the probability a spreadsheet error causes a panic? It has never happened before, as the example cited here time and again is Enron, which was a) a criminal matter and b) did not take cause a recession, it was revealed by one. In our view, if you are stretching this far to find fears, things must actually be pretty good indeed. Our advice is to make life easy on yourself. Don’t fret things that are impossible to handicap, unlikely to have a material impact and cannot be hedged against.
|By Abigail Brooks, CNN Money, 04/07/2015|
MarketMinder's View: This video posits that over the past “couple of years” bad economic news has been good for stocks, because it means that “the Federal Reserve will continue to pump cheap money in the markets.” Yet for this to be true, shouldn’t the economy be worse off than it was a “couple years ago”? However you elect to define a “couple” that statement is false. The economy is bigger, consumers are healthier, businesses’ profits and revenues (outside Energy) are up, and hiring—a late-lagging indicator—is even up. This is all just the fallacy of ascribing too much importance to central banks’ actions and not looking at the real economy. Besides, the Fed tapered quantitative easing bond buying in 2014, which if you believe this theory should have been bad. It wasn’t, so why would one put so much weight in the view a rate hike would be awful this time? (Yes, it goes on to argue that this time that may not hold, showing you skepticism is still alive, but that is equally misperceived for the same reason—it doesn’t give fundamentals enough credit.) The real answer to the titular question is: It depends on how they compare to expectations.
|By Matthew Winkler, Bloomberg, 04/07/2015|
MarketMinder's View: So the theory here is Greece's outlook is better than Brazil's largely because "Greece has the benefit of stability guaranteed by its membership in the EU, Brazil has no such economic foundation." Well, Greece had that same benefit for the past five years, in which its economy shed nearly a third of its GDP, while Brazil grew. Look, we are sympathetic to the notion that Brazil's outlook isn’t great, but that doesn't mean anything about Greece's outlook. Overall, this is just a faulty, flawed, ridiculously inaccurate, false either/or that operates on omission and factual error. Here are three examples:
1. Yes, Greek bonds widely outperformed Brazilian since May 2012, but that's because they grew off a low base. Greece defaulted that March.
2. Greece’s two 2012 defaults also disprove the statement that, "A default would force Greece to leave the euro...."
3. Why would higher Greek forward 12-month price-to-earnings ratios signify stocks in Greece are doing "reasonably well"? They could argue earnings have been crushed.
There are more.
|By Staff, Reuters, 04/07/2015|
MarketMinder's View: “Global business activity accelerated at its fastest pace in six months in March, prompting firms to increase headcount at the sharpest rate since the middle of last year, a survey showed on Tuesday… JPMorgan's Global All-Industry Output Index, produced with Markit, jumped to 54.8 in March from February's 53.9. It has been above the 50 mark that divides growth from contraction since October 2012.”
|By Kenneth Rogoff, The Guardian, 04/07/2015|
MarketMinder's View: We offer this article to you for one and only one reason: This is a sober look at what the Asian Infrastructure Investment Bank (AIIB) is. Many other articles seemingly think this is somehow a huge negative for the US or an effort to remove the dollar from its perch as the world’s primary global reserve currency and profess that doom will result if it happens, but the AIIB is more analogous to the World Bank than anything to do with reserves. That would be the International Monetary Fund and it is different. Overall, the whole dollar-won’t-be-world’s-reserve-currency fear is false for a host of reasons, but it just strikes us that the AIIB isn’t the evidence some extremist articles warn it is.
|By Staff, The Associated Press, 04/07/2015|
MarketMinder's View: When you compare Q1 2014’s Russian import and export data to Q1 2015’s—the first before and the latter after the Ruble cratered, international sanctions were imposed and import restrictions were slapped on many goods, you should expect the comparison will show a big drop. And voila! Russian imports fell a lot. This, like most aspects of Russia’s present economic woes, isn’t sneaking up on anyone.
|By Deepa Babington and Renee Maltezou, Reuters, 04/06/2015|
MarketMinder's View: This week in Greece, cabinet members are making conflicting statements, the coalition is wobbling, and the government has four days to repay nearly €500 million in IMF loans. Will they make it? Will the fractured coalition crumble? Will Prime Minister Alexis Tsipras ask Russia for money when he hangs out with Vladimir Putin on Wednesday? This circus is impossible to handicap. Given all participants’ long-running penchant for can-kicking and compromise, that remains entirely possible, though however this ends, markets have long since moved on from Greece. After five years and two defaults, the risk of contagion in any scenario is ultra-low.
|By Matt O’Brien, The Washington Post, 04/06/2015|
MarketMinder's View: To answer the headline’s question, no one can know for several more months. Overall though, what our take on the employment report is the same today as when it was booming: A late-lagging, noisy economic indicator won’t tell you anything about upcoming growth prospects. Also, this piece has some bizarre framing issues. It claims 69,000 jobs were “lost” after a revision to January and February’s figures in the March release. Sounds bad! But in the January 2015 employment situation report, revised November and December figures showed employment gains were 147,000 higher than previously reported. So were those past jobs magically “created” three months later? Folks, just like any other economic indicator, unemployment has its uses and limitations, and we suggest not getting carried away whether it’s smashing or slumping.
|By Heather Long, CNNMoney, 04/06/2015|
MarketMinder's View: Overall a mixed bag. Among the good snippets: reminding us all corrections are a normal part of bull markets, reported economic data and the strong dollar are probably baked into stocks by now, and the US economy accelerated after last year’s winter dip. But other bits aren’t much use. Like, just because April has been a good month historically shouldn’t be your rationale for remaining invested in markets—turning the calendar page doesn’t flip a stocks-rise switch. Also, trying to predict negative volatility in anticipation of a Fed rate hike is a futile exercise on two fronts: Volatility is by nature unpredictable, as is any Fed move ever, despite all the claims otherwise. Overall though, while this week or any week could be ugly, the bull market doesn’t look like it’s in danger of ending any time soon.
|By Lu Wang, Bloomberg, 04/06/2015|
MarketMinder's View: The argument here is entirely sociological—stocks have no set relationship with wage growth. Whether they should be closer is a matter of opinion and not an economic issue. Nor is high wage growth necessary for stocks to rise from here. Also, while wage growth certainly isn’t booming, it’s not nearly as tepid as the media commonly portrays—especially depending on the gauge you use. We guess this article does get a point for highlighting how investors shunning stocks since the last bear have paid a dear opportunity cost, but that’s about all the discerning investor will get from it.
|By Anna White, The Telegraph, 04/06/2015|
MarketMinder's View: It might! Not in the form of a bear market, considering gridlock is almost assured and is usually bullish, but maybe in the form of volatility or even a correction. That said, patterns like the one alleged here, which claims UK stocks soar in the run up to an election but get choppy afterward, are typically widely known and thus not actionable. Volatility is unpredictable. You can’t time it. Whether or not UK stocks wobble before the election or during coalition negotiations, as they did in 2010, the gridlock associated with a coalition or minority government should prevent radical legislation—bullish for UK stocks. For more, see our 3/19/2015 commentary, “UK Politicians Want Some Votes.”
|By Peter Spence, The Telegraph, 04/06/2015|
MarketMinder's View: Wait, eurozone quantitative easing (QE) started less than a month ago, and folks are already grinding their teeth about the ECB pulling the plug too early and causing a “taper tantrum”? Hey, we get it, the ECB erred in hiking rates prematurely in 2008 and 2011, and central bank errors are a fact of life. But ending QE isn’t tightening. Nor is it deflationary. QE itself is tight and deflationary! It flattened yield curves in the US, UK and Japan. Eurozone yield curves flatten as markets priced in QE’s mounting likelihood there. Ending QE removes this pressure. We saw near-identical fears over US QE tapering in 2013 after former Fed head Ben Bernanke alluded to it in May—yet stocks surged and the US economy accelerated.
|By Charles Lane, The Washington Post, 04/02/2015|
MarketMinder's View: Not just the postal system’s—there is no evidence postal banking improves the banking industry, either, regardless of your opinion of payday lenders and check-cashing shops. It destroyed Japan’s financial sector. Elsewhere, it has distorted competition by offering savers preferred rates with implicit government guarantees. Yes, it theoretically would increase the number of bank branches in rural areas, but that could also be accomplished by, say, granting bank licenses to brick-and-mortal retailers who are already located there. Also! “Advocates tout prepaid debit cards and bill payment as potential postal bank products. Maybe, but they would have to beat American Express’s Serve cards, say, or PayNearMe, a smartphone-based, cashless payment system that people can use at FamilyDollar and 7-Eleven — and even to pay rent. Interestingly, a recent FDIC survey noted that ‘underbanked households were more likely to have access to smart phones . . . than the general population.’ Anyone really think the post office can keep up in this space?” Overall, postal banking just seems like a solution in search of a problem—one that creates winners and losers and distorts competition.
|By Greg Ip, The Wall Street Journal, 04/02/2015|
MarketMinder's View: The headline’s dilemma is a false choice based on a flawed assumption: the belief near-zero interest rates have and will continue inflating stock prices. Newsflash: Stocks have risen despite the Fed’s monetary maneuvers, not because of them. Short rates alone have nowhere near the influence suggested here. The yield curve—or the gap between short and long rates—is what matters, and Fed policy flattened it through quantitative easing. Stocks rose anyway. This argues they’re overvalued because the S&P 500’s P/E ratio is above the average since 1950, but P/Es don’t mean revert (and even if they did, rising earnings could reduce P/Es as easily as falling stock prices could). That average is made up of extremes, and P/Es often spend long stretches of bull markets above average. They also tend to rise as bull markets mature and investors are more willing to pay a premium for future earnings. Overall, nothing about stocks’ rise since 2009 implies detachment from reality. The world economy is growing. Political risk is low. Sentiment is guarded. Returns are in line with the S&P’s 21% average annualized return during bull markets. This is a normal, fundamentally supported bull market, folks. It won’t die if short-term rates rise a bit, because short-term rates aren’t fueling it.
|By Mehreen Khan, The Telegraph, 04/02/2015|
MarketMinder's View: Maybe they will. Or maybe they’ll find enough change in the sofa cushions to last two weeks. Or maybe they’ll just pay the IMF late, taking advantage of the 30-day window between missed payment and IMF action (which starts with a letter). Or maybe this is all talk aimed at goading the EU/ECB/IMF troika into ponying up. Or maybe they’ll compromise with creditors next week. There is no way to handicap this. We do know, however, that Greece’s economy is about €180 billion, which is a fraction of a fraction of global GDP. We also know Greece defaulted twice in 2012, and stocks did fine. And we know every possible outcome here has been widely discussed for ages, sapping surprise power. The chance something happens that could trigger prolonged market chaos globally is exceedingly slim.
|By Steve Goldstein, Marketwatch, 04/02/2015|
MarketMinder's View: Perhaps because leading economic indicators imply a recession is highly unlikely? And maybe because, as this article even notes, most Q1 readings still signal growth? Here are just some of the things growth-forecasting economists probably see: accelerating bank lending, a positively sloped yield curve, growing broad money supply, a rising Leading Economic Index, rising new business growth in manufacturing and services and a stock market—the ultimate leading indicator—near all-time highs. Yes, the Atlanta Fed’s “nowcast,” which claims to give a real-time GDP snapshot based on every economic release, is at zero. But we looked into that, and we fail to see how it can be accurate. It treats labor markets as a coincident indicator, when history overwhelmingly shows they lag big-time. It overweights manufacturing and appears to exclude major service-sector indicators like ISM’s non-manufacturing PMI. (Also, like GDP, it counts government spending as an automatic positive and imports as negative, even though government investment isn’t always a boost to households and businesses, and rising imports signal rising domestic demand.) What’s more, it also has a history of being wide of the mark. On October 2, 2014, Nowcast predicted the upcoming release of Q3 2014 GDP would show 3.1% growth. GDP rose 5.0%. On July 2, 2014, it projected 2.4% growth, but GDP actually rose 4.6%. It doesn’t always understate growth, but let’s just say it’s imprecise. Nothing here implies a recession is around the corner. Oh, and all the information included in the nowcast is widely known and backward-looking. We put no more stock in the predictive quality of this index than we do the backward-looking “GDP Based Recession Index” the same Atlanta Fed maintains, which presently shows about a 1.6% chance of recession. In that way, these indicators seem like the antithesis of the one-handed economist Harry Truman reportedly longed for.
|By Kristen Scholer, The Wall Street Journal, 04/02/2015|
MarketMinder's View: Not a leading indicator, whether you believe sentiment is broadly right or this is a contrarian sign. All it shows is a well-known phenomenon: Individual investors’ sentiment tends to shift quickly and often based on what just happened, what’s happening right now, and what they read. That helps you assess where broad sentiment is today relative to reality, but it doesn’t help you gauge where stocks go from here. Overall, we’ve found professional investors’ sentiment is more useful in that regard, as they tend to flip less often and stick with their forecasts for longer. On that note, surveys show the pros still expect a below-average 2015. Given how stocks usually price in consensus expectations, returns will probably end up different than this crowd expects. And given the strong political backdrop (legislative risk is low) and strong leading economic indicators globally, stocks have a strong foundation for solid returns.
|By James Kynge and Jonathan Wheatley, Financial Times, 04/02/2015|
MarketMinder's View: This is another iteration of the same Emerging Markets (EM) ghost story we’ve seen for two-plus years. Yes, now there is supposedly evidence of EM capital flight in the form of falling foreign exchange reserves, but the overlooks the elephant in the room: Russia deliberately spent down a huge chunk of its reserves to support the plunging ruble. Turkey has also sought to defend its currency, which was pressured by political instability. China has been known, over time, to dip into reserves to fund the occasional bailout, and it has finagled (read: officially sponsored and probably funded through the back door) a handful of rescues over the past 12 months. So saying the entire category must be bleeding based on one observation probably misses the mark. We aren’t arguing all EM countries are in perfect shape—commodity-dependent nations like Brazil will probably struggle. But the notion that EM is a huge, global ticking timebomb remains overwrought. It is merely a broad category with risks and opportunities, and on balance, it should continue contributing to global growth.
|By Thomas B. Edsall, The New York Times, 04/01/2015|
MarketMinder's View: Uh, no? The evidence for the “yes” argument amounts to a bunch of biased academic literature, data showing business closures outnumber new firms, and rhetoric about workers not moving around enough. We could write a similarly structured rebuttal quoting all the academics who would disagree, including Joseph Schumpeter, who argued business closures were necessary and often a force for good—the creative destruction that allows new businesses room to compete and grow. Like, would society really be better off if a bunch of obsolete businesses were still kicking around, sucking up resources? But there isn’t any point in spilling a couple thousand words in rebuttal when we can instead point out a simple fact: The data presented here exclude the many, many, many kitchen-table businesses selling through Etsy, eBay and the like. Many of those businesses are successful, earning good money, hiring humans and overall helping our economy go. As for the ranting about polarization and bad policy making business creation hard, most of that is a matter of opinion—we’re all for making it easy on entrepreneurs, but show us the evidence current policy actually hinders this to the degree estimated here.
|By Mehreen Khan, The Telegraph, 04/01/2015|
MarketMinder's View: Well, what the interior minister actually said was, “If no money is flowing on April 9, we will first determine the salaries and pensions paid here in Greece and then ask our partners abroad to achieve consensus that we will not pay €450 million to the IMF on time,” which sounds less like “we won’t pay and you’ll be sorry, Mister!” and more like “we’ll ask them if it’s ok with everyone if we send the check like a month late.” Though, far be it from us to try to divine a politician’s meaning. Overall, we’d chalk this up as just more of the same theatrics we’ve seen since Syriza formed the new government in January. Brinksmanship hasn’t prevented compromise yet, and this government has proven pretty talented at bending and breaking campaign pledges. And hey! Maybe Greek PM Alexis Tsipras’ upcoming trip to Russia, scheduled for the day before IMF D-day, will goad creditors into an early compromise! Or not. Either way, as this piece notes, IMF bureaucracy makes it so that a missed payment on April 9 won’t be a big deal for at least a month.
|By Staff, Agence France Presse, 04/01/2015|
MarketMinder's View: That radical plan involves abolishing fractional reserve banking—in which banks create most money through new loans—and giving the central bank sole power to create money. Out go bank loans, demand deposits (checking and savings accounts) and CDs. In come central bank “transaction accounts” that bear zero interest and “investment accounts” that do pay interest but carry pre-set lock-up periods and maturities. Central banks would create all money and either transfer it to the central government (which would spend it, cut taxes, pay “citizen dividends” or pay down debt) or allocate it to commercial banks to lend to businesses. This all seems fraught with problems. It would create winners and losers at the central bank’s and government’s behest. Capital would likely get allocated inefficiently. The velocity of money would probably plummet. Moreover, it’s a solution in search of a problem. Are fractional reserve banking systems subject to boom and bust? Sure. But they aren’t inherently bad, and fractional reserve banking isn’t why Icelandic banking boomed and busted last decade, despite what the proposal alleges. That had much more to do with central bank error! They cut the reserve requirement at the wrong time, then held it at 2% no matter what—used properly, the reserve requirement is a monetary policy tool used to sop up excess liquidity and manage money supply growth. Iceland left it unchecked, allowing banks to run amok. The central bank ignores this factoid and, in claiming powerlessness to control loan growth through higher policy rates, ignores the yield curve. Sorry, but deleting a monetary system that has fostered prosperity globally for over a century and replacing it with something only China and the ghost of Irving Fisher (no relation) could love is just not the solution to historical central bank errors.
|By William M. Isaac, The Wall Street Journal, 04/01/2015|
MarketMinder's View: Yep, if Fannie Mae and Freddie Mac aren’t allowed to retain earnings, it’s almost a foregone conclusion they’ll need more bailouts the next time housing goes south—retaining earnings is how financial institutions typically build capital reserves. Instead, Fannie and Freddie are forced to turn all theirs over to Uncle Sam. That’s not the original bailout agreement (incidentally, Fannie and Freddie have repaid about $40 billion more than they were lent by the Feds), but the Treasury unilaterally amended the contract in 2012, forcing both to pay the Treasury a 100% dividend. Now, we reckon public sympathy for these government sponsored enterprises is limited, but consider this: “For the government to come back four years later and unilaterally change the terms of its deal is troubling—and it will cause significant problems for regulators in getting the private sector to help in a future crisis.” Like the huge fines levied on JPMorganChase and Bank of America for the misdeeds of banks they bought (at government urging) during the crisis, the feds’ actions with Fannie & Freddie send a stern message: Don’t take risk, because the rules could change at any time.
|By John Authers, Financial Times, 04/01/2015|
MarketMinder's View: Well, first of all, there is no such thing as the “QE Rally,” as quantitative easing is not a rising tide that lifts all boats. It is a thing that flattens yield curves, does funky things to sentiment and has no positive economic impact as far as we can tell. Second of all, this is all based on the assumption value investing should be superior. But no one style is best for all time! Sometimes value leads, sometimes growth does. In the last several cycles, value has outperformed during bear markets and the initial bounce off the bottom. Growth tends to lead as bull markets wear on, and we are in a maturing bull market. This is not the time when deep value plays typically win.
|By James Dyson, The Telegraph, 04/01/2015|
MarketMinder's View: If you’re retiring today (or younger, obviously), probably a really long time! Decades! Here’s a handy primer on how and why. Estimating your life expectancy and time horizon accurately, with an understanding of lengthening life expectancies, can help reduce the chance of running out of money too soon.
|By Teresa Hunter, The Telegraph, 04/01/2015|
MarketMinder's View: In five days, UK retirees will no longer have to buy an annuity with their pension savings. Huzzah! But the new alternatives are complex, and the system has many question marks. So here is your handy, comprehensive, unbiased guide to the new landscape. May the Force be with you.
|By James Kynge and Jonathan Wheatley, Financial Times, 04/01/2015|
MarketMinder's View: This spins an observation—that Emerging Markets’ forex reserves fell in late 2014—into a theory that emerging nations will no longer be able to fuel developed-world growth by “recycling” trade surpluses into Western bond purchases. Which is all a bit overwrought. Even if the whole surplus recycling thing were a) real and b) slowing or stopping, it’s not like all Western growth is financed through government bonds. Actually, very little of it is! Then again, we aren’t convinced reserve accumulation was a huge force to begin with. It’s not like the West didn’t grow before reserves started piling up. The last decade of reserve-building was simply developing nations trying to prevent a repeat of the Asian Currency Crisis. Now they’re flush and ready and using reserves as intended, to support volatile currencies when deemed necessary (whether or not all moves are wise is beside the point). Maybe just trust this all to play out the way it’s supposed to?
|By Staff, Xinhua, 04/01/2015|
MarketMinder's View: Well, let’s not overstate things here. The official manufacturing PMI’s rebound from February’s 49.9 to 50.1 in March, coupled with the HSBC PMI’s drop from 50.7 to 49.6—and the official service sector PMI’s slowdown from 53.9 to 53.7—points to the status quo. This is largely how all these numbers have looked for the past few years of slower growth. Which is all just fine—it all signals China is still chugging along and contributing handily to global growth. It isn’t accelerating hugely and doesn’t need to.
|By Staff, Bloomberg, 04/01/2015|
MarketMinder's View: And guess what happened after May 2013? The US economy accelerated and stocks soared. ISM’s manufacturing gauge is always volatile month-to-month, and there aren’t new, material signs of weakness in the underlying components. Just the same strong-dollar scapegoating we’ve seen for months—overstated, in our view, and widely known. Also, our economy is predominantly service-based, and this reading still signaled growth. Make your life easy, and don’t overthink it.
|By Staff, EUbusiness, 04/01/2015|
MarketMinder's View: Well this is potentially interesting: The head of the EU’s new Single Supervisory Mechanism, which we call the super regulator (or, if you prefer, The Great Stabilitator), thinks maybe banks should have to limit their bond holdings to a certain percentage of total capital. This would probably do weird things to both bank balance sheets and bond markets, and while this seems well-intended, probably not all of those things are good. Look, banking is a business built on risk. You can’t remove risk from the financial system. There would be no system. Just a bunch of companies hoarding cash in vaults and not lending or making markets ever, and what would be the point of that? And if the goal is to make eurozone banks acknowledge “sovereign debt isn’t risk-free,” we are fairly certain they got the point when Greece defaulted twice in 2012.