|By William Pesek, Bloomberg, 05/29/2015|
MarketMinder's View: So this assumes that Thursday's -6.5% drop in the Shanghai index is just the first step off a cliff, as China's market "bubble" bursts. Look, we get it. Chinese stocks have gone up a ton in the last year, leading many to suggest the run is overdone. But if, as noted here, margin requirements have been tightened all year—and they have been—why be so sure this sharp drop is the difference maker that proves China's a "bubble?" Yeah, China's growth is slowing. But that isn't a reason stock returns should falter, just as its booming growth in earlier years didn’t cause a massive China stock boom. Maybe, just maybe, that slow growth is topping long-in-the-tooth hard-landing fears that have weighed on Chinese stocks for years?
|By Francine McKenna, MarketWatch, 05/29/2015|
MarketMinder's View: The Enron-era audit requirements referred to here are parts of the onerous Sarbanes-Oxley Act of 2002, which sought to ban accounting fraud by requiring executive certification of balance sheet accuracy, with criminal penalties if inaccuracies were found. Well intended? Sure, but it massively increased compliance and audit costs at the same time, which is probably not the most productive use of capital in our economy and is a drag for public companies. But what’s more, here the Chamber of Commerce notes requirements and standards have expanded and morphed since 2002, to include coverage of “internal controls” like oversight of the JPMorgan internal trading strategy run by the “London Whale.” These expansions, the Chamber claims, aren’t legislated and haven’t even been subjected to the typical rulemaking process. While these costs are likely only an incremental increase, if the Chamber is correct, this exemplifies how regulators can creep beyond their mandated bounds. This is a story worth watching, if only to see whether this government creep can withstand scrutiny and public challenge.
|By Liam Pleven, The Wall Street Journal, 05/29/2015|
MarketMinder's View: Well, thing is, there is much, much more you need to identify other than just the fees and specific fund choices made in a target-date fund. The glide path, how it gradually shifts from stocks to bonds, when and what types it chooses, are far more important. Those asset allocation decisions are highly likely to render fee rates near irrelevant by contrast, and if you don’t know what they are you are risking your whole retirement, not a few basis points of return. Target-date funds operate on the misperception retirees should own far fewer stocks and may wind up generating less return than you need in the long run.
|By Lauren Tara LaCapra, Reuters, 05/29/2015|
MarketMinder's View: Well, he’s wrong in the sense that if you file Chapter 11 (Lehman did!), you are bankrupt. Because that is also called, “Filing for bankruptcy.” But he is right in the sense that Lehman was solvent (assets exceeded liabilities) on the day the Fed elected to let them fail. And yes, that wording is entirely intentional, because (as the Fed’s meeting transcripts make clear) they denied backing a bid for Lehman, sealing its doom. This, despite the fact the Fed brokered a deal with JPMorgan to save Lehman’s twin, Bear Stearns, from a near-identical predicament six months earlier. And this is the byproduct of accounting rule FAS 157, a well-intended rule that caused banks to take greatly exaggerated paper losses.
|By C.W., The Economist, 05/29/2015|
MarketMinder's View: This makes vastly too much out of the above-mentioned US GDP report, though it does conclude semi-correctly that, “America, it seems, will avoid recession.” We say semi-correctly because two consecutive quarters of negative growth isn’t how the US determines recession dating, and there aren’t forward-looking takeaways from GDP. But you also don’t need that, because The Conference Board’s Leading Economic Index is high and rising, and that hasn’t coincided with a recession’s start since 1959. But, imports rising by 6% do not “suck demand from the economy.” They reduce GDP, but GDP isn’t demand or the economy. It’s an oddly calculated government statistic created nearly 85 years ago with baked in biases, like protectionism. Rising imports in realityland signal healthy demand.
|By Nelson D. Schwartz, The New York Times, 05/29/2015|
MarketMinder's View: This overstates the importance of Q1 2015 US GDP’s second revision, which swings headline growth from a previously reported 0.2% seasonally adjusted annual rate of expansion to a -0.7% dip. This report does not suggest “the economy got off to an even weaker start this year than first thought,” nor should one suggest it “underscores the American economy’s seeming inability to generate much momentum.” The one-off factors this so quickly dismisses—a poor seasonal adjustment the Bureau of Economic Analysis has already said will be revised (possibly substantially changing Q1 readings over the past three decades) likely influences it. And the biggest factor—trade, which detracted -1.9 percentage points from growth—was hit by a West Coast port labor stoppage that is over now. More recent and forward-looking data like The Conference Board’s Leading Economic Index, which is in a solid uptrend, do not suggest problems are deeper.
|By Callie Bost and Jeanna Smialek, Bloomberg, 05/29/2015|
MarketMinder's View: This is basically a collection of three anecdotes from inexperienced traders—not buy- or sell-side investors, traders—who haven't experienced a rate hike. With all due respect to the folks mentioned, this basically operates on the notion that it's different this time because traders are young. Which is both ageist and foolish at the same time. Most investors with considerable wealth are not 30. Most money managers are not 30. Traders are a short-term breed doing short-term things, for the most part, and they do not dictate how stocks react to news. If these newbies want to sell based on something that has no history of catastrophically derailing bull markets, our advice is to buy their shares and teach ‘em a life lesson.
|By Szu Ping Chan, The Telegraph, 05/28/2015|
MarketMinder's View: So when you read that the trade deficit whacked growth, the wise first move is always to look at both halves of it, because the trade deficit doesn’t really mean anything. It counts imports as negative, but rising imports means rising domestic demand, generally a sign of a healthy economy. In the UK’s case, exports fell -0.9% q/q in Q1, which isn’t so grand—but UK exports have struggled most of this expansion, tied largely to the eurozone’s slow crawl. Imports, however, rose 2.3% q/q, which is smokin’ hot. This is actually one of the more bullish “slow” GDP reports we’ve seen in a while, with business investment bouncing back and consumer spending growing at a fine clip—and a broadly dour reaction, implying sentiment is still skeptical, which stocks like. Also, this is backward-looking. We’re at May 28, looking at what happened from January 1 through March 31. Stocks are forward-looking, and it is fair to assume they have moved on. We suggest looking forward, too, at things like the Conference Board’s Leading Economic Index for the UK, which remains on an upswing.
|By Chao Deng, The Wall Street Journal, 05/28/2015|
MarketMinder's View: While reading a lot into any one day’s movement isn’t a recipe for uncovering much useful information, it is worth noting the -6.5% down move on the Shanghai exchange came on the heels of yet another restriction of margin lending. The exact same thing happened two times earlier this year, in January and April. Yet after a short-term reaction, Chinese stocks’ rise resumed. It’s likely a plus that China’s regulators occasionally throw cold water on a hot rally.
|By Laurie Itkin, Daily Finance, 05/28/2015|
MarketMinder's View: There is some wisdom in this article. The story of an adviser who sold their 40-something, income-earning client a high-fee, low-returning indexed annuity in an IRA is a cautionary tale. Don’t take your broker or adviser’s recommendation on their unsupported word alone. Demand the reasoning and supporting data. If they’re selling a product, read the prospectus, and discover all the fees and restrictions. Reading an equity-indexed annuity would reveal they are indexed in name only—performance caps and participation rates prevent annuitants from receiving all of the underlying index’s returns. Consulting your tax advisor would also probably reveal that an annuity’s tax shell is redundant in an IRA. But that’s about where the good takeaways end. Mutual fund fees alone don’t determine their quality—they impact performance but are not the sole determinant. And, more importantly, the fiduciary standard does not guarantee any financial professional will put your best interests first. Neither the existing rules nor the Department of Labor’s proposed standard for retirement account advisers ban the sale of high-fee products for their clients, revenue sharing agreements with mutual fund companies or proprietary products—advisers need only justify it when they do and disclose all conflicts of interest. It will always be up to investors to ask the right questions and determine for themselves if they are receiving the best advice for them.
|By Jonathan Clements, The Wall Street Journal, 05/28/2015|
MarketMinder's View: No. They don’t. They aren’t even remotely the same thing. Dividend stocks are stocks, subject to all the volatility and return characteristics that go with that. If bonds are appropriate in your situation (which may or may not be the case, cash flow needs or no), replacing them with non-bonds eschews the benefits of non-correlated asset classes. Ultimately, this operates on a false choice, too: Either invest in interest-generating bonds or dividend-paying stocks to generate cash flows in retirement. Ignoring what we believe is a more durable, lasting approach: investing for total return—dividends and capital appreciation. This approach lets you choose from the world (diversification!) and puts harvesting cash flow—yes, occasionally by selling securities—completely in your control. For much more on this, see our recent commentary, “How to (Actually) Shield Your Retirement From the Threat of Low Yields.”
|By Peter Rudegeair and Ryan Tracy, The Wall Street Journal, 05/28/2015|
MarketMinder's View: There are interesting nuggets galore here! We start with the obvious takeaway: Swift business loan growth means businesses are getting financing for all the wonderful growth-oriented endeavors that help drive our economy forward. Commercial lending’s strength relative to mortgage lending also speaks to how banks have dealt with both the flatter yield curve during quantitative easing and the lingering effects of the financial crisis on their balance sheets. While working through foreclosure backlogs, instead of taking a high-risk-low-return flyer on low-quality homebuyers, they opted for the more favorable conditions in business credit markets. These latest data continue a trend that has persisted for much of this expansion, with long-term rates too low (and the yield curve spread too slim) for banks to justify loosening mortgage lending standards. But, a couple things here make us hesitant. One, while 8.5% y/y business loan growth sounds swift, it is actually the slowest in a year, and the Fed’s weekly data show it has continued decelerating in Q2, which implies some of the pop from the temporarily wider yield curve might be fading. That fading also shows up in the continued decline in net interest margins, which could reduce banks’ willingness to lend. We aren’t calling the end or anything—the yield curve steepened again over the last few weeks, and all other signs indicate banks are keen to lend—but we’d be remiss if we left no stone unturned.
|By Staff, Reuters, 05/28/2015|
MarketMinder's View: For one, we’re confused by this claim: “A Greek exit from the euro would not mark a return to the debt crisis of 2012, but it would create risks of contagion and change the nature of the monetary union, which was supposed to be permanent, a senior Moody's rating analyst said on Thursday.” Ummm. The debt crisis was all about the nature of the monetary union—the potential it splintered. Not debt itself, which largely hasn’t changed since. But even here the thesis seems off target and doesn’t take note of markets. Low sovereign rates across the eurozone—especially for the countries that experienced debt crises several years back—are currently signaling Greece’s problems are not other eurozone members’ problems. So are stocks. So are the costs to insure against default (CDS rates). So while it is possible a “Grexit” could start contagion spreading throughout the union, there is little to no actual evidence that is likely to happen. Credit ratings agencies have a tendency to be late to the party as it pertains to their primary function—rating credit—and it seems they haven’t awakened to the disconnect between Greek markets and the rest of the eurozone yet.
|By Simon Constable , The Street, 05/28/2015|
MarketMinder's View: Sorry folks, but this is news you can’t use—or at least shouldn’t. While this research study concluded “sin stocks”—companies selling things like tobacco, alcohol and weapons—performed in line with “socially responsible investments” but with less volatility, that does not make them superior or the conclusions even valid. The study looked at a 12 year period, from July 1995 through July 2007. That’s like the lifespan of a gnat compared to the history of capital markets. Also, lower return variability makes sense when you consider these stocks are concentrated in Consumer Staples (with a handful in Discretionary and even Energy, since these folks consider nuclear power naughty). Consumer Staples stocks are less economically sensitive. But concentrating in them alone—or in three sectors—is hardly a winning strategy. Everything has its day in the sun as well as the rain. That includes value stocks, which aren’t inherently superior, despite the implications otherwise. Besides, “sin” vs. “socially responsible” stocks is a false either/or. This is all just ivory tower gimmickry. Stocks are stocks. Different categories are not more or less risky.
|By Edward Hadas, The New York Times, 05/28/2015|
MarketMinder's View: Near as we can tell, there are two reasons Lehman Brothers really lives on: Some of its assets and liabilities are still being resolved, and mass media continues misinterpreting the events of 2008. While we guess we can see why folks might want to blame every perceived economic negative on one easy culprit, the fact is Lehman’s bankruptcy has naught to do with America’s growth rate, business investment, rate of infrastructure investment and “rising inequality.” Leman Brothers went kablooey for two reasons. First, FAS 157—a well-intentioned but misguided accounting rule that forced banks to mark nearly $2 trillion in illiquid, thinly traded assets to fire-sale prices—destroyed the value of Lehman’s collateral, cutting it off from short-term funding markets. Second, when it couldn’t get cash to cover daily operational needs because of this—even though it had $28 billion in equity capital and its assets exceeded total liabilities—the Fed and Treasury mandated its bankruptcy by refusing to replicate the deal they brokered when Bear Stearns was in the exact same situation. If you don’t believe us, check the Fed’s transcripts. That all destroyed confidence in the Fed’s ability and willingness to do their job (lender of last resort) in the next crisis, but it means next to nothing for credit markets and the economy today. Particularly since FAS 157 no longer applies to held-to-maturity assets. Central banks did create headwinds during this expansion, but that has more to do with their deliberate flattening of the yield curve.
|By Carl Richards, The New York Times, 05/27/2015|
MarketMinder's View: Indeed, if you have a short-term need for your money—like plans to buy a house, pay for someone’s college or travel the world in luxury within the next five or so years, it probably isn’t wise to invest whatever you’ve earmarked for that endeavor in anything subject to volatility. The prospect of earning a return might be tantalizing, but short-term declines are always a risk. Plowing that money into stocks raises the possibility not all of it will be there when you need it. Always remember your time horizon and the tradeoff between risk and return. That’s especially important now, as greed grows hotter in a maturing bull market.
|By Greg Ip, The Wall Street Journal, 05/27/2015|
MarketMinder's View: Part of us wants to award half a point for not going all “eek look out recession!” over a potential GDP contraction, but we just can’t do it. Not when that otherwise-rational perspective is couched in a bunch of baloney about aging populations and low productivity dragging on growth in the developed world, making the odd contraction or three normal simply because slow growth can easily become no or negative growth. This broad theory is as wrong today as it was when Alvin Hansen coined the term “secular stagnation” in 1938. The demographic component doesn’t make it any better, because demographics are not a cyclical economic driver. Heck, nothing written here even technically applies to the US, considering working-age population and the labor force are at all-time highs (give or take some monthly volatility). Nor is America even technically aging, considering Millennials outnumber Baby Boomers. And again none of this even matters for economics or markets anyway. Population growth didn’t drive one single expansion in the 20th century.
|By Fion Li, Bloomberg, 05/27/2015|
MarketMinder's View: And it’s up to a 2.07% share of global payments! Wheeeee! So jolly good on them, but China has a way to go before the yuan is internationalized enough to be a reserve asset, as discussed thoroughly here. More widespread yuan usage is a global positive, as freely convertible currencies tend to enable trade, which markets like. Nothing here causes the US to lose out, either. Countries receive no benefit from their currency being used in international trade—no brokerage fees. Nor does being a reserve asset grant special privileges or curry favor on capital markets.
|By Ben Marlow, The Telegraph, 05/27/2015|
MarketMinder's View: Like most broad legislative agendas in competitive, developed countries, the UK government’s self-imposed to-do list (written by PM David Cameron and his cabinet, “Queen’s Speech” being the symbolic moniker) amounts to a lot of tweaking that would create winners and losers (there are also some big things, like extending devolution in the constituent countries and the EU referendum, but those aren’t so much the focus here—see this commentary for more on them). It also probably won’t become reality in its present form considering how divided the Conservative Party is—there is a lot of gridlock underneath that 12-seat majority. So whether you think these pledges are the bee’s knees or whatever the opposite of that colloquialism would be, we wouldn’t get too excited either way. The market impact of all this tax and regulatory tweaking, good or bad, is likely quite small.
|By Mehreen Khan, The Telegraph, 05/27/2015|
MarketMinder's View: Ok, but Greek officials also said “technical” reps on both sides were drafting an agreement, and eurozone officials said “uh no they aren’t.” (Not a direct quote, though how fun would it be if bureaucrats talked like that?) The outcome here remains impossible to handicap, but the risk of contagion remains next to nil.
|By Joshua Brown, Fortune, 05/27/2015|
MarketMinder's View: Yes, but not for the reasoning here, which claims foreign stocks are the biggest winners and a blend of global stocks and bonds is your best survival kit. As if this is something you need to survive. Short-term interest rates are one of many variables influencing capital markets. On their own they are minor input. The yield curve, of which short-term rates represent one end, matters more, and it is presently steep enough that short rates somewhere north of zero won’t zap credit markets. That’s what really matters, folks (along with the fact sentiment toward rate hikes is so doggone low—false fears are bullish). As for assessing historical market returns surrounding rate hikes, we think the focus on broad averages obscures too much. If you look at rate hikes one-by-one, it is clear there is just no relationship between the first rate hike in a tightening cycle and how stocks perform. That’s true for US and world stocks.
|By William A. Galston, The Wall Street Journal, 05/27/2015|
MarketMinder's View: We are darned ambivalent about this one. On the one hand, it quite rationally absolves NAFTA of blame for most manufacturing job losses since it passed—productivity and automation had a far bigger impact. But that’s also true when you consider China’s rise in the last 15 years, something this article credits offhand with causing problems here without giving the same due consideration to how efficiency gains played a role. Instead, it relies on anecdotal evidence to make the claim there is something wrong with the manufacturing sector because new firms aren’t taking over old factories and warehouses in a couple of small towns. Our hearts are with anyone looking for work in Decaturville, TN and Galesburg, IL (the towns highlighted here), but two towns don’t a national trend make—and as this article even notes, manufacturing (and service!) opportunities are plentiful elsewhere in the country. So anyway, we half-heartedly recommend this as a sociological defense of free trade, which stocks like, but we wouldn’t base an assessment of US industry’s prospects on its evidence alone.
|By Noah Smith, Bloomberg, 05/27/2015|
MarketMinder's View: Set aside the sociological aspects, and this is a good explanation of why it’s next to impossible to say, definitively, whether any economic policy is inherently good for growth or bad for jobs. There is never a counterfactual (a clear, trackable, measurable control group), leaving it a matter of guesswork and opinion whether things would have been “better” without any change. So in that regard, from an academic perspective, the big minimum wage hikes in Los Angeles, San Francisco and Seattle could be an interesting case study in performing a true, controlled economic trial—except that there are too many variables muddying the waters. One being the suburbs, which won’t have the same higher minimum wage if they aren’t within the city limits, yet are easily within commuting range of city dwellers, therefore muddying city-level employment statistics. San Francisco’s minimum wage won’t impact a high school kid who lives in the Sunset but works after school in Daly City. Also, LA’s new wage phases in gradually through 2020, and we imagine minimum wages elsewhere will change over those five years, interfering with the integrity of the controlled experiment. So yah, we agree, it would be nice to have more evidence either way in the “do higher minimum wages impact jobs” debate, but it’s hard to see anything totally definitive emerging here. More anecdotal evidence? Of course. But probably nothing irrefutable.
|By Paul Gordon and Alessandro Speciale, Bloomberg, 05/27/2015|
MarketMinder's View: There is a missing word in the title: Third. As in, "Can the World Deal with a Third Greek Default." And considering the global expansion survived the prior two, there is little reason to believe it can't "deal" now. Heck, back in 2011 and 2012 Greek fears were at least influencing markets elsewhere in Europe. Today there is nary a ripple in bond, stock or credit default swap markets. Outside of Greece, that is, because Greek markets are going nutso, probably pricing in some sort of credit event. No one else seems to be, and that’s telling, folks.
|By Vanessa Piao, The New York Times, 05/27/2015|
MarketMinder's View: At issue is the ownership of centuries-old pits used to ferment grain and make baijiu, a traditional (and crazy-strong) Chinese spirit. The family who owned them since the Ming dynasty leased them to a state-run distiller in the early 1950s. The government stopped paying on the lease in 2009, arguing they had become state property when the lease was signed, despite documents confirming the family’s ownership in 1984. So the family filed suit, claiming their property was wrongfully seized. Their first attempt was tossed. The second, filed after judicial reforms took effect, is pending hearing with the highest court. The verdict, whichever way it goes, will have key implications for property rights in the world’s second-largest economy, potentially reverberating nationwide.
|By Takuya Ono and Hiraku Iwasaki, The Yomiuri Shimbun, 05/27/2015|
MarketMinder's View: High hopes for something that isn’t a net benefit for Japan’s economy? If you’re looking for signs of too-rosy sentiment, look no further than Japan.
|By Peter Spence, The Telegraph, 05/27/2015|
MarketMinder's View: This is an interesting visual counterpoint to the widely held belief the UK’s expansion is “unbalanced” and benefits only Londoners. The rise in disposable household income is actually pretty geographically diverse, with much of the London area lagging. The City of London, home to the financial sector, is fourth from the bottom. Northern Scotland and central Wales are near the top of the leaderboard. That isn’t to say all is hunky-dory nationwide, but it does speak to the breadth of UK growth.
|By Allan Sloan, The Washington Post, 05/27/2015|
MarketMinder's View: Here is a story about one of the less-discussed risks unitholders of master limited partnerships (MLP) face. If you’re a shareholder of a publicly traded company, the board has a fiduciary duty to you, so they legally can’t do something like make a sweet deal for themselves and stick you with the tax bill. (Rules don’t govern behavior and values, so they might try it anyway, but legally, it is no-no time.) If you’re an MLP unitholder, they can, and they have at times, as this article recounts. We aren’t anti-MLP or anything, but it’s important to know all the pros and cons of any investment you consider. For more on MLPs, see our 11/26/2013 commentary, “MLPs and Your Portfolio.”
|By Eduardo Porter, The New York Times, 05/27/2015|
MarketMinder's View: This is one of the more frightening passages we’ve seen all year: “Had the government received an equity share in Tesla in exchange for taxpayers’ financial support, for example, it might have paid for the government’s failed investment in Solyndra. Had it gotten even a minute stake in Google — whose search algorithm was financed by the National Science Foundation — or in GPS, rocket development, touch-screen technology or the many drugs that flowed from its investment in basic science, the government might have a stable, richer pot to finance the next generation of scientific discovery.” That is the sort of utopian vision you might find in the collected twenty-first century works of Marx and Engels, if such a thing existed. The internal contradiction in the first quoted sentence should show you why it is a fairy tale. Politicians aren’t so very good at picking winners in technology. Not their field, you know? And the recent experiences of French companies tell you all you need to know about what happens when governments have a stake in publicly traded firms. Moreover, this is a solution in search of a problem. We don’t have a research or business investment shortfall in America. R&D spending is at all-time highs both absolutely and as a share of GDP. Companies are taking risk and innovating. The entire venture capital sector is built on supporting failures on the outside chance one bet strikes the bigtime.
|By William Mauldin and Siobhan Hughes, The Wall Street Journal, 05/26/2015|
MarketMinder's View: And they did so without tacking on some proposed amendments that could have killed the Trans-Pacific Partnership (TPP), like tough rules for the oft-accused-but-never-proven-or-quantified alleged sin of currency manipulation, the abolition of the Investor-State Dispute Settlement System, and a ban on extending trade benefits to nations that turn a blind eye to human trafficking (setting aside all sociological and human rights opinions on this last one—we’re looking at this from a market/economic perspective only, as we do with all legislation). If an identical bill passes the House, that would make TPP ratification easier, a positive, though it doesn’t guarantee TPP actually happens. Getting 12 nations to agree on anything that meaningfully reduces trade barriers is a tall order.
|By Fion Li, Bloomberg, 05/26/2015|
MarketMinder's View: This is all just symbolic, considering there is no way to quantify whether any currency is over-, under- or fairly valued. Heck, we aren’t sure what any of that even means. But we are fairly certain you can’t know what the yuan’s true value to the world is at any time unless it is freely traded, and it is not freely traded now. So yah, symbolic. Perhaps it does grease the wheels for the yuan to be included in the IMF’s special drawing rights (SDR) basket, seen as a precursor to gaining reserve currency status, but that is also symbolic. Countries don’t gain special privileges when their bonds sit in other nations’ foreign exchange reserves. Nor will the IMF’s blessing cause the yuan to shoot up the reserve currency leaderboard overnight. Bond supply is low, and as our former Fed head Ben Bernanke just noted, capital markets are still kinda closed.
|By Kate Davidson, The Wall Street Journal, 05/26/2015|
MarketMinder's View: So headline durable goods orders fell -0.5% m/m—but as mentioned here, under the hood, the report was better than expected and not at all indicative of a weakening economy. For one, the headline decline was due to a drop in aircraft orders, which swing wildly. Excluding aircraft, orders rose. So did core capital goods orders—considered a loose proxy for business investment (though they aren’t perfectly predictive by any stretch). Consider this another sign the expansion is a lot more, um, durable than most give it credit for these days.
|By Matthew J. Belvedere, CNBC, 05/26/2015|
MarketMinder's View: … Fundamentals don’t support valuations at some point—this video argues they don’t, claiming stocks have run up on share buybacks and easy money alone. This claim has been around for years, and we can’t find any evidence that supports it. But we can find a wealth of favorable fundamentals, like a growing global economy, rising corporate earnings and benign politics. Could markets be volatile once the Fed begins tightening? Sure. They could pull back or even correct (short, sharp, sentiment-driven drop of -10% to -20%). Or they could be the good kind of volatile, soaring as hike-disaster fears prove false. It’s all too short-term and sentiment-dependent to predict with certainty either way, just like all short-term volatility. As for the pace of tightening, this correctly argues it’s more important than the first hike, but it ignores what matters most: how rising short-term rates impact the yield curve. The spread between short- and long-term rates has widened lately, giving the Fed more breathing room—an error is possible, but you can’t predict that in advance.
|By John Shmuel, Financial Post, 05/26/2015|
MarketMinder's View: Indeed, oil and metals’ recent rally probably isn’t the start of a lengthy rebound, but not for all of the reasons mentioned here. It gets a point for citing rising supply, but it loses three for implying global economic growth is a) weak and b) a bigger driver. If that were true, oil would have a high positive correlation with stocks and world GDP. It doesn’t. User demand for oil and most other commodities is also rising, just not as quickly as supply. Whether or not investors got too far ahead of themselves over the last month, the upside potential appears limited for now.
|By Jenny Cosgrove, CNBC, 05/26/2015|
MarketMinder's View: Here is the latest round of finger-pointing in the long-running soap opera that is Greece—and for a more complete view of Greece’s stance, we suggest you read the jolly Finance Minister’s Project Syndicate post, which enumerates his beef with creditors. Will they compromise? Will Greece make that June 5 IMF payment? Will they it default for the third time? Will they kick the can once more? Tune in next time! Oh and whatever the answer, stocks have long been aware of pretty much every potential outcome, and markets are saying the risk of contagion is minimal.
|By Staff, Xinhua, 05/26/2015|
MarketMinder's View: Lower tariffs on luxury (and even some basic) imported consumer goods should be a boon for Chinese consumers and developed-world producers alike, making goods cheaper and raising demand. It should also help China attract more commerce on its shores, giving residents less incentive to engage in shopping tourism or send proxies abroad to buy new cosmetics, clothes, shoes and baubles. This won’t restore double-digit growth or anything, but it is a positive nonetheless.
|By Joshua M. Brown, The Reformed Broker, 05/26/2015|
MarketMinder's View: So whether it’s three and a half years or three years minus one week since the last correction ended is a matter of opinion—the S&P 500’s last correction exceeding 10% indeed ended on 11/25/2011, but the 2012 pullback bottomed at -9.8% on 6/1/2012, and world stocks had a -13.2% correction from 3/19/2012 – 6/2/2012. So we are inclined to give that one to the “correction” column, making it three years minus one week since the last one bottomed. But that’s all just quibbling over indexes, math and semantics—our takeaway is the same either way: Corrections and volatility are random. This seems to imply one is somehow due now because P/Es are the highest since 2010 and stocks haven’t had a -5% pullback this year. Newsflash: None of that matters. Nor are the potential correction “triggers” cited here anything of the sort. Stocks did great when 10-year US Treasury yields rose in 2013. They did great throughout the late 1990s alongside an even stronger dollar than today’s. And rate hikes have no set relationship with stocks. Our advice: Tune out myopic noise and think longer-term.
|By E.S. Browning, The Wall Street Journal, 05/26/2015|
MarketMinder's View: Why not? Because the cyclically adjusted P/E (CAPE) ratio is way above average, which some arbitrary math says means the S&P 500 will rise just 5% annually over the next decade. Some other arbitrary math predicts dividends will drive a larger share of S&P 500 total returns, limiting the price return to 2.7% annually. Got it? No? That’s ok—overthought arbitrary math is hard to follow. It also isn’t necessary to follow, because this article is 100% investment mythology. No one can predict 10-year returns, because doing so requires knowing the unknowable, future stock supply and all the many unimaginable things that will happen between now and then. CAPE can’t predict this either, because past price movement and earnings don’t predict the future. And as for all that dividend claptrap, high-dividend stocks have their day in the sun and the rain. Oh, and stocks aren’t “expensive” by more traditional valuation measures either. High-P/E markets have done fine and not fine throughout history. So have low-P/E markets. As a sentiment indicator, modestly above-average P/Es imply nascent optimism with no euphoria in sight (Exhibit A being this article).
|By Matthew Holehouse and Christopher Williams, The Telegraph, 05/26/2015|
MarketMinder's View: Well there they go again. We guess we should have known this issue wouldn’t go away considering how hot to trot they were over “harmonizing” EU corporate tax rates a few years ago, but we had our hopes. Alas. By harmonizing, of course, they really mean “synchronizing,” and synchronizing at a rate above Ireland’s 12.5% and probably above the UK’s 20%. In our experience, markets and the global economy are all better off when countries compete. Forcing other countries to handicap themselves just because others want to preserve higher tax rates is an odd solution in search of a problem. That said, it all seems unlikely to go anywhere considering the very entrenched opposition.
|By Jeff Cox, CNBC, 05/22/2015|
MarketMinder's View: Comparing total debt outstanding to GDP is a ridiculous exercise for a number of reasons. Here are a few: 1) Debt is a liability to a borrower, but an asset to the lender (think: bonds). Hence, you’d have to net out all the debt that cancels here to have a true comparison. 2) Debt is a level, a quantity of something that accumulates. GDP is a flow of economic activity. Comparing the two is done in some economic circles for a) scaling and b) because the flow of economic activity impacts the tax base, which is used to repay government and municipal debt. But you cannot scale all debt against GDP alone. You would need to scale it against the assets of the entire nation, public and private. But even if you want to compare it to the flow of economic activity, it’s a fallacy to limit that to GDP and not include corporate revenues, personal incomes and investment income. All those are flows too. Suffice it to say, this is utterly useless for investors and such a comparison would likely make virtually any country look like it’s in hock up to its eyeballs.
|By Anjani Trivedi, The Wall Street Journal, 05/22/2015|
MarketMinder's View: This is an interesting article from a number of perspectives, but two major ones jump out at us. One, that the Chinese authorities are allowing more and more foreign investors into their very restricted bond market is a tangible and non-wishy-washy sign China’s reforms targeting a more open economy are, in fact, progressing. And two, “Overseas fund managers now hold 713 billion yuan ($115 billion) of domestic Chinese bonds, up 78% since December 2013, according to central-bank data. That is more than the 601 billion yuan held in onshore stocks.” Folks, this should assuage fears China is about to boot the dollar as the world’s primary reserve currency. With only $115 billion of bonds owned by foreigners (who, again, are very restricted from buying more), supply is nowhere near sufficient to satisfy central bank demand for currency reserves, which is in the tens of trillions of dollars in total. While we don’t believe greater adoption of the yuan globally is a bad thing at all—including adding it as a reserve asset—this is yet more evidence a material shift isn’t coming soon.
|By Ben Levisohn, Barron's, 05/22/2015|
MarketMinder's View: Surveys like the one cited here are an imperfect indicator of how folks feel right at this moment about stocks. They do not predict where stocks go from here. Because folks’ feelings are so heavily influenced by recent market movement, sentiment survey extremes may be a contrarian indicator, but that’s about it, and we’d hardly suggest using them as your sole gauge of euphoria.
|By Emily Glazer, The Wall Street Journal, 05/22/2015|
MarketMinder's View: Weelllllllllllll, we aren’t so sure this is that great of a plan. You see, Japan has had a little post-office bank known as Japan Post for many generations. It is the world’s largest financial firm. It also isn’t exactly the world’s best-run bank. It benefits from being a wing of Japan’s government in the sense it has a backstop. But it suffers from the same, because it has largely become a repository for Japanese government bonds. Oh and this is a solution seeking a problem. For an interesting look at why, check out this piece from the UK’s Telegraph.
|By John Lyons and Paulo Trevisiani, The Wall Street Journal, 05/22/2015|
MarketMinder's View: All right Brazilian party people, what time is it? Time to set ideology and politics aside to get the useful information out of this article, which has a heavy dose of political wrangling. Brazilian President Dilma Rousseff’s growing unpopularity tied to corruption scandals doesn’t help, but this really highlights the degree to which a commodity-driven economy gets pinched when oil and materials prices head south. Also, price controls, which she instituted a couple of years back, are economic no-no time. That isn’t a partisan critique, just taking on a poor notion. All in all, this does a really good job documenting some of Brazil’s current economic issues and why diving into stocks in the oil-rich Emerging Market right now isn’t the best plan.
|By Daisy Maxey, The Wall Street Journal, 05/22/2015|
MarketMinder's View: Annually, market-cap weighted indexes like the Russell series add and delete members based on changes in their market capitalization. Since many institutions and managers restrain themselves to buying based on benchmark-index membership, some folks presume it is uber-bullish for a stock or country to be added and bearish for them to be removed. Yet this is an oversimplification of something that has little actual impact. The fact is, folks, that they literally announce who is in and who is out. Also, as noted here, the criteria are widely known. If there is a kick from index membership, it is likely to be so fleeting and small that it isn’t worth noting for a longer-term investor.
|By Jonathan Clements, The Wall Street Journal, 05/21/2015|
MarketMinder's View: When it comes to investing, overcoming behavioral errors is paramount, and these “seven lies” exemplify two of the biggest, overconfidence and regret shunning—giving yourself way too much credit for anything that goes right and blaming others for anything that goes wrong. Understanding these tendencies, learning how to spot them in yourself and training yourself to battle them will help you make better investing decisions over time and increase your chances of success.
|By Luke Kawa, Bloomberg, 05/21/2015|
MarketMinder's View: This drastically and confusingly underrates The Conference Board’s US Leading Economic Index (LEI) in favor of focusing on how six backward-looking reflections compare to expectations. None of this suggests fundamental economic weakness. Also, if the LEI is so widely known, why didn’t the report exactly match estimates? Folks, since 1959, we’ve never had a recession start while LEI is rising. You cannot say the same of the Kansas City Fed’s Manufacturing Activity Index or existing home sales. Sorry. Heck, the KC Fed gauge cited here only has 15 years of history and several false reads in that time.
|By Neil Irwin, The New York Times, 05/21/2015|
MarketMinder's View: Well, what to make of it is that markets are volatile. Always have been, always will be. Even bond markets, which are no more rational or irrational than stock markets, despite the claims otherwise in this article. This is all just way too much searching for meaning in bouncy yields, which are actually largely flat year to date. Do yourself a favor and don’t overthink it. For more, see our 5/11/2015 commentary, “Pundits Search for Meaning in Bumpy Bond Yields.”
|By John Tamny, Real Clear Markets , 05/21/2015|
MarketMinder's View: "Not only does free trade enhance the value of every paycheck we bank, but the savings made possible by trade are a form of capital for the commercial ideas that power us into the future. Naysayers will argue that free trade destroys jobs, but then so does all economic progress. This is a happy development. If jobs are or were the sole purpose of economic activity, then the logical next step beyond closing our borders to foreign goods would be to abolish the car, the tractor, the ATM machine and the internet. All four were massive job destroyers, but as evidenced by the fact that we're not in breadlines as a result of their proliferation, economic advances that destroy jobs don't erase work; rather they reorient investment to new forms of commerce that simply change the nature of our work. This is good. Indeed, not much more than 100 years ago most Americans worked on farms. Thank goodness for the economic progress that free trade speeds up. How skillful and productive would most of us be with the backhoe?"
|By Ivana Kottasova, CNNMoney, 05/21/2015|
MarketMinder's View: Not literally killed. Just metaphorically, as their buy-when-there-is-blood-in-the-streets approach to investing in Greece is not working out very well so far. Greek stocks are down more than -20% and bond yields have spiked over the last year. Look, we’re all for going against the crowd and buying what’s unpopular, but sometimes things are unpopular for good reason. With no meaningful domestic growth drivers and a messy political situation, Greece seems unpopular for good reason. Is it possible that Greece eventually pulls through and its stocks do well? Sure, but how many other, better opportunities might you miss in the meantime? Markets usually move on what’s likeliest over the next 12-18 months (30 max), and over that foreseeable future, Greece looks quite likely to remain a basketcase.
|By Staff, Bloomberg, 05/21/2015|
MarketMinder's View: While this correctly concludes that no, Puerto Rico isn’t a threat to markets and the economy, it also vastly overrates the threat and potential implications of a Greek default. Both of these are basically false fears, and in that way, yes, Puerto Rico is America’s Greece. But you can’t easily make a portmanteau like Grexit or Grexident or Graccident or Drachmail out of anything Puerto Rico-related, so PR isn’t very Greece-like in that sense either.
|By Michael Santoli, Yahoo! Finance, 05/21/2015|
MarketMinder's View: We have no idea what “style points” mean in this context, but we are fairly certain they don’t matter for, stocks. (Architecture, furniture and fashion, yes.) We are quite certain none of the specific things mentioned here are telling. The latest market highs are not somehow dubious because certain categories are trailing. Small caps’ lagging doesn’t mean investors lack risk appetite, because small cap stocks aren’t riskier than other stocks—stocks are stocks. Transportation stocks are not a leading indicator for other stocks—stocks are stocks. That both categories have lagged of late simply means investors prefer other areas of the market. This is normal. It is also a sign of narrowing market breadth—typical of maturing bull markets. Maturing bull markets are also when small cap usually underperforms. Nothing here is unusual, folks.
|By Jonnelle Marte, The Washington Post, 05/20/2015|
MarketMinder's View: Not overconfident as in “I am the best investor ever and can’t go wrong ever so I should get leveraged to the hilt and throw it all on one penny stock.” But at least confident enough to believe your retirement savings can grow if you invest them in stocks, rather than sit timidly in cash or fixed income because you don’t trust stock investing skills. That’s a fair point, though we’d argue confidence in markets—and their historical ability to bounce high after tumultuous periods—is more important. Fear paralyzes more than ignorance. Though, we’re all for improving financial literacy, as understanding even basic investment lingo like “actively managed mutual fund,” “basis point” and “vesting period” can help you defend against all the hucksters who prey on innocent folks with flashy tactics and too-good-to-be-true promises.
|By Richard Katz, The Wall Street Journal, 05/20/2015|
MarketMinder's View: As this shows, claims currency manipulation in China has robbed America of millions of manufacturing jobs amount mostly to hot air. We aren’t saying no US jobs have moved to the Middle Kingdom. Factories there make goods America stopped producing decades ago. But that says more about development here and there than currencies. Here: “It is true that after long being flat at around 17 million, the number of factory jobs in America started a steady decline around 2001, the same time China entered the World Trade Organization. This is the alleged “turning point” cited by commentators such as Robert Scott of the Economic Policy Institute. But this is like saying the sun rose after the rooster crowed. U.S. factory jobs plunged even when the yuan soared vis-à-vis the dollar. There is simply no correlation between the long-term trend in factory jobs and movements in China’s currency. The real cause of the lost jobs is improved efficiency. U.S. factory jobs have declined by 30% since 2000 even though manufacturing output rose 20%. Back in 2000 it took almost 11 workers to produce a $1 million worth of manufacturing output per year (as measured in constant 2009 dollars); now it takes just six workers. If 11 workers were still needed, then the U.S. would now employ 21 million manufacturing workers instead of 12 million.” And as for the trade deficit, that’s a nonstarter. Imports aren’t the root of all evil, and import tallies aren’t even all that accurate: “About 1% of the value of an iPhone comes from the assembly work in China. Most of the real fabrication work is done elsewhere, as in the cases of Japanese or Korean LCD screens or computer chips. Yet U.S. trade statistics count the entire value of the iPhone as an import from China.” If you really want to understand global trade, visit the OECD’s Trade in Value Added database, which shows how much country A contributes to goods made in country B.
|By Mehreen Khan, The Telegraph, 05/20/2015|
MarketMinder's View: Well that’s nice of them. Easing collateral requirements should allow Greek banks to tap emergency liquidity for a little bit longer, buying Greece a bit more time to negotiate with creditors. We wouldn’t read much into what the rumor mill says about those negotiations—or into what loudmouth politicians say on either side. Greek pols championing “deliberate default” and the end of austerity are trying to stir up support on the homefront. They aren’t the ones actually negotiating with the rest of the eurozone. Cooler heads often prevail behind closed doors. Even if they don’t this time, and Greece gets the boot, the risk of contagion here is minimal.
|By Eamonn Fingleton, The Guardian, 05/20/2015|
MarketMinder's View: As far as markets are concerned, this is all sociological—whether the UK has a manufacturing- or service-based economy isn’t important to stocks. Markets care about profits and growth, regardless of where it comes from. But to people, this is all huge—there is no arguing the UK’s commercial landscape hasn’t changed astronomically over the past 60 years. Industry in much of Northern England, Scotland and Wales is unrecognizable, and many towns once dependent on mines and collieries have never recovered. But it’s a fallacy to pin this on a “pipedream” of post-industrialism or any one politician or party—just as it’s a fallacy to say those who seek the revitalization of heavy industry in the UK want to revert to the 1950s. Britain could do a lot with high-tech manufacturing, and we’d be among the first to say the country would probably get an innovation boost from more technology being developed and produced on the isles—just as Silicon Valley gets a boost from the sheer volume and high concentration of tech being developed there. The constant collision of new ideas that happens where tech is concentrated fosters innovation. But some historical understanding here is important. In the mid-20th century, most of the UK’s manufacturing and mining industries were heavily subsidized or owned by the state, which distorted competition, while they simultaneously dealt with wage and price controls. When those controls led to runaway inflation and the pound soared as the BoE jacked up rates to tame prices, heavy industry became increasingly unable to compete globally. That left the UK government with a choice: Privatize firms and rip the Band-Aid off, or prop them up at taxpayers’ expense without guaranteed success. They chose the former, and at a macro level, it is hard to argue with the results. But at a micro level, looking at empty towns and displaced workers who couldn’t retrain? Hey, we get it. We aren’t heartless—markets are, though, and the broadest lesson here, for investors, is that sometimes you have to tune out the human impact of certain economic policies and developments and focus on what markets look at. If you don’t, you could miss opportunities. Invest with your head, not your heart (or your biases).
|By Eduardo Porter, The New York Times, 05/20/2015|
MarketMinder's View: Actually, this argument lies on a weak foundation: faulty data! Like this: “Investment in research and development has flatlined over the last several years as a share of the economy, stabilizing at about 2.9 percent of the nation’s gross domestic product in 2012, according to the National Science Foundation.” Yah, but, if the broad economy is growing, and R&D’s share is stable, then guess what, R&D is growing too! And also! While we don’t know where the National Science Foundation gathered their data, the Commerce Department’s data show US R&D spending’s share of GDP rising from 0.20% in 1929 to an all-time high of 1.8% in Q1. Even during this expansion, R&D spending has grown way faster than the economy. And faster than it did during the alleged military-industrial complex’s mid-20th century heyday (when it really did flatline as a share of the economy, hovering around 1% for nearly two decades). No disrespect to XEROX Parc or the other research giants of the 1950s-1970s, but firms today are doing it fine, thankyouverymuch. No, they aren’t publishing their findings in academic journals, but that’s a petty ivory tower concern. Research is still research even if it isn’t blessed by academigods, printed on acid-free paper, bound in leather, and stored in the sixth-floor stacks of a university research library. Nobel winners, published academic studies and whatnot are not really evidence firms aren’t investing in R&D. They are arbitrary measures of ivory-towerness that have shown little relationship to economic growth.
|By Staff, The Yomiuri Shimbun, 05/20/2015|
MarketMinder's View: Japan had an alright Q1, which is no doubt nice for them after last year’s recession, but we aren’t about to call their lost decade(s) over. Two percentage points of that 2.4% annualized growth came from inventory builds as companies restocked (following inventory declines in Q3 and Q4 2014). While this isn’t an inherent sign of weakness, it does suggest drawdowns later this year could detract from growth, leaving consumption, investment and trade to pick up the slack. Those components weren’t horribly weak—private capex grew for the first time since Q1 2014—but they didn’t soar either, and structural barriers to robust growth persist. Reform remains the swing factor for Japanese stocks, in our view, and despite a few recent small political victories for PM Shinzo Abe, progress overall remains slow as molasses. It remains to be seen whether he can fulfill investors’ very high hopes for sweeping change.
|By Steven Davidoff Solomon, The New York Times, 05/20/2015|
MarketMinder's View: Here is a great piece on efforts by France (and some US companies) to prevent hostile takeovers, plant closures and other allegedly short-termist actions. France’s solution, courtesy of last year’s Florange Law, is to reward long-term investors with double voting power, which is all well and good except that the French government holds major stakes in several of France’s major corporate giants, and the government has systematically bought up shares in certain companies to assume they don’t have enough votes to opt out of the Florange Law. Meanwhile, on our shores, several companies have gone public with a two-speed share class system, concentrating voting rights among the founders and other key interests. We have no doubt this is all very well-intentioned—France wants to protect its workers, founders here want to protect their corporate babies—but the potential for inefficiency and shenaniganery abounds. “People who speak of ‘shareholder democracy’ may not be happy with the trend away from one share, one vote, but does giving shareholders more votes improve anything? If the French plan is adopted, long-term holders like institutional investors may win. Yet the average actively managed mutual fund turns over its portfolio every year, meaning many such investors will not benefit. Shareholder activists may lose, though they may not. Instead, they would have to cater to a different set of shareholders. This may be index funds, which do hold on to shares and would have more power. The mixed results extend to management. Presumably, a high-vote structure will discourage hostile takeovers by giving management protection, but it will also make management subservient to a smaller group of existing shareholders. And so, the increased voting power may not be a good thing. It may give an advantage to more passive shareholders and those that may have special interests. … In other words, while it may seem like the cure for short-termism, high-vote shares may instead do something else, giving power to a small group of shareholders with odd interests. And whether they exercise that power vengefully or selfishly is an unknown. C’est la vie.”
|By Ambrose Evans-Pritchard, The Telegraph, 05/20/2015|
MarketMinder's View: Ok, but so what? Even if Portugal’s equivalent of Syriza leads the government after this autumn’s election, Portugal isn’t Greece. It isn’t back in recession. It isn’t still trying to negotiate emergency bailout funding. It isn’t effectively locked out of capital markets. Its debt insurance costs haven’t soared to the high heavens. Its banks aren’t hemorrhaging deposits or securing ECB liquidity with only their own lousy commercial paper as collateral. Portugal is standing on its own two feet. If a profligate regime takes over, maybe that’ll bad for Portugal’s economy, or maybe it will be fine. Any predictions at this point are opinions only, driven by bias, not fact. But if they start violating the eurozone’s debt and deficit limits, our guess is officials will deal with them the same way they deal with France, Italy and every other country that has ever violated their arbitrary, toothless limits—a lot of finger-pointing, verbose letters and empty threats to collect fines.
|By Yannis Behrakis, Reuters, 05/20/2015|
MarketMinder's View: This is fascinating, but as a public service announcement, no photo gallery like this will ever give you an accurate depiction of how any country, state or city’s economy is doing. We could make photo essays like this of pretty much every major city in America, including boomtowns like the San Francisco Bay Area. Investors would gain nothing from them.
|By Ewen Cameron Watt, Financial Times, 05/20/2015|
MarketMinder's View: While the term “safe asset” makes us tired, as truly safe assets are nonexistent (everything has risk!), this is an otherwise great look at what is driving bond prices these days: supply and demand! Central banks have hoovered up supply, and new bank (Basel III) and European insurance (Solvency II) regulations have forced firms to beef up their holdings. Bond yields aren’t historically low because investors are behaving irrationally, piling into a “momentum-driven trade that will end suddenly.” These are natural forces of supply and demand. Our only other quibble is with the ending, which theorizes that the reversal could be sharp when quantitative easing (QE) ends. We guess that’s possible, but considering the end of QE in the US and UK hasn’t seen either nation’s central bank’s balance sheet shrink, it seems everyone has learned from Japan’s mistake in the mid-2000s, when the BoJ cut its balance sheet way down after ending QE. That didn’t go well for them. More likely, QE nations just let the bonds on their balance sheets mature gradually, which is probably a 10-year process. 10-year processes usually don’t move markets. And again, central bank supply-hogging is just one factor. Bank and insurance demand won’t change unless Basel III and Solvency II become looser—possible, technically, but improbable in the foreseeable future and impossible to handicap in the long term.
|By Andrew Ackerman, The Wall Street Journal, 05/20/2015|
MarketMinder's View: Regulators long ago decided the solution to the invented problem of “too big to fail” is paperwork, so it’s no shock their way to address this in the mutual fund industry is—ta-da—paperwork! Step one, announced today, is requiring big firms to disclose more information about their funds’ holdings, including derivatives contracts. Steps two and three, supposedly coming down the pike this year, entail requiring funds to “better manage liquidity risks,” which smacks of holding limits, and subjecting big funds to stress tests. That all sounds about as beneficial for the mutual fund industry as it was to the banking industry—a lot of headaches. For funds, it all seems a bit odd considering their role in the financial system. Unlike banks, their businesses aren’t built on leverage, and a run on a mutual fund does not hit the financial system the same way a run on a bank does. But the political winds blow where they blow, and we guess if politicians were going to do something, this so far seems preferable to more sweeping intervention, like forcing funds to shrink or break up, which would probably disadvantage investors.
|By Jamie Chisholm, Financial Times, 05/20/2015|
MarketMinder's View: If commodity prices were such a marvelous leading indicator, why did the Commerce Department chuck them from the Leading Economic Index eons ago? Yah, that’s what we thought. Is wood used in US homebuilding? Yes. Does residential real estate predict or drive US consumer spending and overall growth? No. Is steel rebar used in Chinese apartment towers and skyscrapers? Yes. Does Chinese construction drive growth? Ok yah, more there than it does here. But is demand the only driver of steel prices? No, supply matters a ton (pun intended), and supply has soared in recent years. A supply glut has weighed on metals prices across the board since late 2010/early 2011, coincidentally, right when Chinese steel rebar prices rolled over. In addition, lumber prices have been down for more than two years. Meanwhile, the global economy has grown. Seems to us this article is reading way the heck too much into a well-known global trend (and one that is not a sign of economic trouble outside of commodity-dependent nations).
|By Jon Hilsenrath, The Wall Street Journal, 05/20/2015|
MarketMinder's View: There is a big part of us that wants the Fed to hike in June just to show everyone how utterly unreliable forward guidance is. We reckon you, dear reader, are probably tired of seeing us caution that whatever central bankers say and foresee is subject to change, and you can’t predict how 10 humans (we think) with varying biases and opinions will interpret the latest economic data (which isn’t predictable either). It would be so convenient if they just showed this instead. It might not be so great from a Fed credibility standpoint, and we guess that’s like bad and all, but we do like convenience.
|By Mitch Goldberg, CNBC, 05/19/2015|
MarketMinder's View: So the theory here is stock prices in typically high dividend-paying sectors have been inflated to very expensive valuations by the global low interest rate environment, because investors have sold low-yielding bonds and cash-like investments in favor of these stocks. It goes on to forecast trouble for Consumer Staples, Utilities and Telecom as a result, meaning you should sell out of these stocks and hold cash instead. However, if this were true, there should be some evidence it is so. Yet net inflows into bonds are higher than inflows into stocks in this bull. Price-to-earnings ratios—a signal of sentiment—should be inflated for the three sectors cited. While Consumer Staples’ 12-month forward P/Es are above average, the other two are below, and none are at euphoric levels. Moreover, if this theory that so many folks are stampeding into high-yielding stocks is so true, why have the MSCI World High Dividend Yield and MSCI USA High Dividend Yield Indexes trailed their non-high-yield counterparts since 2012 began? Finally, this also overstates the impact of a rate hike, which historically aren’t bearish. Now, let’s be clear: There is a time to reduce equity exposure, but it’s when you see a fundamental negative risk others don’t. Not when you fear a narrative data just don’t support.
|By Scott Hamilton, Bloomberg, 05/19/2015|
MarketMinder's View: Yep, the UK just posted its first negative year-over-year CPI read, following the US and eurozone into deflationary territory. However, like in the US and eurozone, falling food and energy prices were the big contributors. Excluding those two, prices rose. What’s more, this is a function of big price drops last year in those two categories—month-over-month, CPI rose 0.2%. While deflation isn’t the bogeyman many presume, it’s also likely to prove fleeting barring another big drop in oil prices. As for what this means for a potential rate hike, we don’t think it is possible to intuit much of anything about monetary policy from these data, considering they are subject to the potentially biased interpretations of the BoE’s Monetary Policy Committee. And, ultimately, it is rather futile to try, as initial rate hikes in the UK (as in the US) have no history of derailing bull markets and expansions.
|By Neil Irwin, The New York Times, 05/19/2015|
MarketMinder's View: Well, this is a near-perfect illustration of still-present banker bashing, showing sentiment is not euphoric by any stretch. Here, high-paying finance jobs in an industry that has sharply rebounded from the financial crisis are a bad thing not a good thing because the Financials sector is presumed to be a leech on the actual economy. Look, it may be a bit uncouth to say this these days, but banks are good. Without banks, capital doesn’t get allocated. Without capital markets, banks would struggle to fund themselves or businesses downstream. The evidence a strong Financials sector is a drag on the economy at large is limited at best. Is the industry free of all wrongdoing? Heck no. But no industry is. (P.S.: We are guessing those who understand the crisis was caused by the unintended consequences of an accounting policy and the government’s schizophrenic attempts to deal with the fallout would see this entirely differently.)
|By Jon Hilsenrath, The Wall Street Journal, 05/19/2015|
MarketMinder's View: Actually, this is more like the phrase of last month. Or last quarter, because the debate is all about whether Q1 US GDP data were skewed by a flaw in the Bureau of Economic Analysis’ seasonal adjustment that accounts for winter weather distortions. For econonerds (like us), it’s an interesting statistical debate, but for investors it isn’t of much consequence: Q1, weaker or stronger, is over. Stocks look forward, not back. However, contrary to the assertions cited here, there is plenty of evidence suggesting the economy is rebounding after a Q1 slowdown, like the robustly growing Services industry and surging imports, for two.
|By Cullen Roche, Cullen Roche, Pragmatic Capitalism, 05/19/2015|
MarketMinder's View: Here is an excellent piece highlighting the limitations of Tobin’s Q ratio as a timing tool: “The Q ratio has been well above its historical average for most of the last 25 years. If you sold stocks when the ratio was above its historical average you’ve missed out on some huge gains. If you BOUGHT the S&P 500 in January 1996 when the ratio passed 1 you would have never lost a dime over the ensuing 7 years including the tech bubble.” Folks, no matter how you slice ‘em, valuations aren’t predictive.
|By Staff, Reuters, 05/19/2015|
MarketMinder's View: As Trans-Pacific Partnership (TPP) talks progress, they continue to highlight examples of why deals like the TPP often aren’t completed—like the fact not all parties can agree on major provisions. Many US policy makers continue to insist on including language that would penalize trade partners determined to be “manipulating currencies” to make their exports more competitive. Now they are pursuing a vague agreement “in the context of” a trade deal, which has yet to be defined. Also yet to be defined are “overvalued” or “undervalued” currencies, which no one has determined a means of calculating, because fair value isn’t really a thing. This disagreement risks the deal if it gains steam, one reason we are skeptical the TPP gets done any time soon, particularly when there is a little US election next year. Few would-be presidents or other politicians wish to expose their flanks to attacks claiming they favored a deal permitting “currency cheating.” Mind you, we’re all for the TPP, we just aren’t holding our breath. For more, see our 4/23/2015 “Will Free Trade Ring the Pacific?”
|By Tyler Cowen, The New York Times, 05/18/2015|
MarketMinder's View: It’s hard to take any of this at face value considering it proffers two options for the current state of the economy: “cyclical downturn” and something even worse. Last we checked, the US was still growing, which is a cyclical upturn, and the high-and-rising Leading Economic Index suggests growth should continue. We also aren’t sure what “normal” is, considering no two expansions are exactly alike, averages aren’t predictive, and the only evidence that this one isn’t “normal” is a smattering of sociological anecdotes. Plus, the predictions here are all very long-term and extrapolate the recent past—always a mistake. For example, while wage growth isn’t booming (though we wouldn’t call it weak, either), plenty can change between now and some far-future “later.” Stocks usually don’t look beyond the next 30 months or so and focus most on the next 12-18 months—and they don’t move on sociological factors. The likely economic reality in that window looks far better than suggested here.
|By Simon Kennedy, Bloomberg, 05/18/2015|
MarketMinder's View: About half of this article’s problems vanish if you swap “bull market” for every mention of “bubble,” because the text foolishly equates the two. They aren’t synonymous. Bubbles sometimes form at the tail end of bull market, but not always. Today’s stock market doesn’t look anything like a bubble, considering the global economy and earnings are growing overall, leading economic indicators are on the rise, expectations are on the low side and valuations are just slightly above average, nowhere near levels that would imply runaway sentiment. But even if you make that handy linguistic change, this still errs in assuming rate hikes ever have a direct market impact—saying trouble begins on hike number three isn’t any more correct than saying it begins when the Fed first acts. Short rates alone don’t determine how loose or tight credit markets are. That (and how happy stocks are) depends much more on the yield curve spread—the gap between short- and long-term rates. Trouble usually doesn’t begin until the Fed hikes short-term rates above long rates, inverting the yield curve—and even that isn’t an immediate trouble-trigger. On average, since 1970, the yield curve has inverted 13.8 months after the first rate hike in a tightening cycle, and bull markets have continued for another year-plus after that.
|By E.S. Browning, The Wall Street Journal, 05/18/2015|
MarketMinder's View: Here is the central misperception: “Stocks do best in a world of low interest rates and share prices and steady earnings gains. With interest rates rising and stocks expensive, the market depends more than usual now on earnings.” Well, if that’s so true, how do you explain stocks’ tendency to rise swiftly from bear market lows, when valuations are usually quite high and earnings still falling? Or the fact P/E multiples usually expand as bull markets mature? When P/Es expand, that means stocks are growing faster than earnings, which we tend to think implies the opposite of dependence on earnings growth. This is all just one heaping load of wrong. Stocks don’t move one-to-one with earnings. They move most on the gap between expectations and reality, and expectations are so low that even a small earnings decline would be a positive surprise.
|By Swaha Pattanaik, Reuters, 05/18/2015|
MarketMinder's View: Folks, repeat after us: A “risk-free return” doesn’t exist. As finance theory dictates, if you want growth, you must take risk, and if you take risk, you also must accept the risk of loss. Securities like bonds tend to experience less short-term volatility compared to equities, but that doesn’t mean they can’t experience volatility or loss—even in the most stable fixed income securities, like German bunds or US Treasurys. Investing always comes with the risk of loss. What bond markets are doing today isn’t some unprecedented new era. It’s just bond markets being bond markets. For more, see our 2/12/2015 commentary, “Safe Haven Found! It’s in the Fiction Aisle.”
|By Chuck Jaffe, MarketWatch, 05/18/2015|
MarketMinder's View: What folks should really do is nothing, because as this shows, “sell in May and go away” is nothing more than an old wives’ tale. Try hard enough, and you can find “segments and indexes that justify it,” but even then: “No one can really say why it works. At best, that makes the theory little more than a coincidence; at worst, it’s horse-puckey.” Markets don’t move on seasonal adages, so we suggest not making portfolio decisions based on them. Nor, however, do we encourage anyone to trade in or out of stocks for comfort or to avoid feeling nervous. Trading on emotion is usually as problem-prone as trading on calendar pages.
|By Nikos Chrysoloras and Vassilis Karamanis, Bloomberg, 05/18/2015|
MarketMinder's View: In the latest update from Greece, Greek banks will max out on emergency central bank assistance in three weeks—though the ceiling could hit sooner or later depending on whether the ECB adjusts collateral requirements (and depending on whether depositors continue fleeing at the same rate, slow down or speed up). So the stopwatch is ticking down again, and with that comes all the requisite hype, handwringing and unconfirmed rumors—this time of the European Commission chief’s direct involvement in negotiations. Round, round and round they go, and where they’ll stop no one can know. Either way, markets have been trading on euro collapse fears for years now, and whatever results from this saga will carry minimal surprise power.
|By Ben S. Bernanke, The Brookings Institution, 05/15/2015|
MarketMinder's View: The discussion here of the potential implications of a recent bill that would astronomically increase the interest rates charged to troubled banks is spot on, and raises an often-overlooked point about the reason the Fed exists. Hint: It isn’t to keep inflation at 2% and maximize employment. “The lender-of-last resort concept is centuries old. Walter Bagehot, the English economist, discussed the lender-of-last resort policies of the Bank of England in his famous 1873 tract Lombard Street. Bagehot famously advised that, in a panic, the central bank should lend freely, at a penalty rate, against good collateral. By providing liquidity—for example, to banks facing runs by their depositors—the central bank can help end a panic and limit the economic damage. Indeed, the Federal Reserve was founded in 1913 in large part to serve as a lender of last resort and thereby reduce the incidence of banking panics in the United States.” Now then, we would quibble with the application of these lessons to 2008, in which the Fed and Treasury acted haphazardly and stoked panic, but the theory is spot on and for that we award points.
|By Ben Steverman, Bloomberg, 05/15/2015|
MarketMinder's View: Here is the good news: “The good news is that company stock is shrinking as a share of 401(k)s, so a bankruptcy or an industry downturn will hit many fewer American workers with that double whammy. Company stock holdings made up 11 percent of 401(k)s at the end of last year, data provided by Aon Hewitt show. That’s less than half their concentration in 2005 and down from more than 30 percent in the 1990s.” But, to us, the bad news is plans still have 11% of their balances invested in company stock. In our view, this number should be closer to zero. If you have a 401(k) or other plan that grants you shares of employer stock, we suggest you diversify that position as soon as company policy permits, regardless of your outlook for the company, our outlook for the company or Warren Buffett’s outlook for the company. Owning employer stock in a retirement account is a no-no. Period.
|By Greg Ip, The Wall Street Journal, 05/15/2015|
MarketMinder's View: Here is an excellent article making the uncommon point that few consider the actual costs of increased financial regulation in terms of lost credit, jobs, direct compliance costs and more. “The costs of financial regulation go beyond what banks and their shareholders must pay for more compliance personnel. By making credit more expensive and restricting its supply, new regulations can ding growth, especially at times like the recent past when the Federal Reserve can’t compensate by lowering interest rates, which are already near zero. One hint of these costs comes from a study by the Federal Reserve Bank of Richmond that found just four new banks started up between 2011 and 2013, compared with a yearly average of 100 from 2002 to 2008.”
|By David Rosenberg, The Financial Post, 05/15/2015|
MarketMinder's View: Wednesday, US retail sales posted a flat monthly headline read and only 0.1% m/m growth excluding auto sales, missing expectations of 0.5% m/m growth and triggering a tsunami of headlines fretting over the supposedly weak rebound from Q1’s US slowdown. This article, however, provides vastly underreported perspective: Namely, that consumer spending on services is surging, which isn’t captured in the retail sales report. Here is a snippet, but we suggest reading the whole thing: “Here’s the rub: the above-mentioned services that are not part of retail sales represent one-quarter of all consumer spending in the aggregate and they are rising at nearly a 6.5-per-cent annual rate — or double the overall trend in consumer spending, not to mention nine times the pace of headline retail sales.”
|By Niall McGee and David Berman, The Globe and Mail, 05/15/2015|
MarketMinder's View: Canada’s Finance Minister claims the Volcker Rule’s trading limits on banks buying foreign sovereign debt violates the free-flowing capital aspects of the North American Free Trade Agreement (NAFTA). And hey, maybe he’s right, but his predecessor made precisely the same claim to no avail, echoing the concerns of many foreign officials when Volcker was first debated. (Although the watered-down version Congress enacted isn’t as objectionable to them.) We are a little skeptical this goes anywhere anytime soon, but it’s an interesting debate and this is the best coverage we’ve found of it.
|By Edward Robinson, Bloomberg, 05/15/2015|
MarketMinder's View: Total peer-to-peer lending (P2P), as noted herein, is valued at $77 billion. That’s not $770 billion or $7 trillion. Most of the rest of the numbers are in the millions. While we would not turn you down if you wanted to give us $200 million out of the goodness of your heart, $200 million in economic or loan activity going poof is not a fundamental threat to markets. So even if P2P is a bubble ready to burst right now, the negative market implications are basically zero. It takes a negative shock in the multi-trillions—or about 50 times the size of P2P’s total value—to quash a bull market. Also, securitization—depicted here as a threat—was not the root of 2008’s financial panic. How FAS 157 (the mark-to-market accounting rule) required banks to account for illiquid securitized assets was. Banks wrote down over $2 trillion worth of securitized assets back then, writedowns that largely have proven excessive since then. That is a key distinction because held-to-maturity assets are not required to be marked to market any longer.
|By Andrey Ostroukh, The Wall Street Journal , 05/15/2015|
MarketMinder's View: Here is another hugely unsurprising outcome of falling oil prices: Russia’s economy contracted -1.9% y/y in Q1, and most economists aren’t expecting a big rebound. The Russian budget being nearly 50% funded by the Energy sector, a 50% whack to oil prices was always going to sting a little bit.
|By Ben Leubsdorf, The Wall Street Journal, 05/15/2015|
MarketMinder's View: Just as you shouldn’t judge a book by its cover, you shouldn’t judge this article by its title. Yes, many economists expect contraction when Q1 US GDP is revised later this month, and it might happen. But that says much more about GDP’s skew than it does actual economic conditions on the ground. “The key reason not to worry too much: The contraction reflected a drop in net exports related to the resolution of a labor dispute at West Coast ports, the firm said.” But, hey, if you read our site regularly (as you absolutely should!), you knew that over a week ago.
|By Lucia Mutikani, Reuters, 05/15/2015|
MarketMinder's View: Yes, headline industrial production did fall for the fifth straight month (by -0.3% m/m), but the drop seems to be due to energy, which is a) widely known and b) not a sign of broad economic weakness. Here is a picture. Non-energy industry output was basically flat and has trended sideways in recent months. Which isn’t great, but the services industry has been leading the expansion for some time now, so this isn’t shocking.
|By Charles Lane, The Washington Post, 05/14/2015|
MarketMinder's View: Ok party people, what time is it? Time to set aside your partisan biases and, if you would, ignore every part of this article that deals with individual politicians. We beg you do so, because the first two-thirds or so of this article is a dynamite look at why the Trans-Pacific Partnership (TPP) would not be the job killer for the US some contend. The theory behind the “job destroyer” argument is that free trade between the US and countries with cheap labor countries will hollow out American-made goods with a flood of cheap imports, destroying US manufacturing jobs. While we won’t argue trade has zero impact on jobs here, this theory ignores some key facts. 1) Most of the trade covered by TPP would be between the US and four countries with higher wages. 2) The US already has free trade with Mexico, Peru, Singapore and Chile, and those relationships are mutually beneficial. 3) TPP would open trade with heavily protected Vietnam and Malaysia, improving US access to those markets. 4) It would also improve US access to Japan, which is huge. It’s hard to see this as anything other than a net positive for all involved, which is why it would be such a WOW for global markets if it came to fruition.
|By Patrick Gillespie, CNN Money, 05/14/2015|
MarketMinder's View: The titanic problem being should the US economy fall into recession, there are no lifeboats available to save the passengers from the fate that awaits them, because the Fed can’t cut rates and the feds can’t crank up spending. Except neither of those things is true, because Europe long ago disproved the existence of the “zero lower bound,” and the US and UK actually have plenty of room (arbitrary budget targets aside) to goose spending and run a higher deficit if needed. Plus, the four recession triggers hypothesized here, which we guess we should call icebergs to keep with the metaphor, are the same old false fears pundits have warned of for years. Rising wages? They’re a symptom of an improving economy, and they haven’t led to bear markets historically. Companies tend to raise wages only when they can afford it. China? Yah, a recession there could make the global economy go “bonkers,” but there is zero evidence this is at all likely. More likely, they keep growing somewhere near that 7% target, which contributes a ton to global GDP. Fed hiking too soon? Show us the evidence this economy, in which loan growth is zipping and output and consumption are at all-time highs, can’t handle rates north of zero. Underfunded pensions? Folks have been talking about this one for about 20 years. Companies, governments and public agencies have mostly been able to deal with immediate problems as they arose. And when they couldn’t deal (Detroit), bankruptcy didn’t cause economic havoc.
|By Lawrence Delevigne, CNBC, 05/14/2015|
MarketMinder's View: By that, our former-former Fed head means, get ready for more bond market volatility when the Fed hikes rates. And, anything is possible, but history shows the first few hikes in a tightening cycle typically have minimal impact on long-term rates. In 2004, for example, when Greenspan started a tightening cycle that included rate hikes at 17 straight meetings, most of the movement in long rates came in the final six months. (He also inverted the yield curve by the end.) Moreover, that so-called “taper tantrum” that began after Greenspan’s successor, Ben Bernanke, first telegraphed quantitative easing’s forthcoming end in May 2013, amounted to a roughly 100 basis point rise in long-term yields—which steepened the yield curve, which stocks and the global economy actually liked. Bonds didn’t like it so much, but yields settled and they did alright. Oh, and markets are pretty good at pricing in widely discussed items, and “Fed rate hike” has topped investor concerns for at least 18 months now.
|By Caroline Valetkevitch, Reuters, 05/14/2015|
MarketMinder's View: Well, what this headline should really say is, “On average, the 255 S&P 500 companies that bother providing guidance for future capex want investors to think they’ll spend less this year, and half of their fuzzily projected decrease comes from Energy.” Companies often ratchet down expectations, citing uncertainty over this or that, only to surprise in the end. Even if capex does fall, it’s way too much of a stretch to extrapolate that to falling business investment, GDP or stock prices. Stocks have risen through periods of falling capex before, and widely discussed issues like this tend to have little power. Also, capex isn’t a casualty of stock buybacks and dividends. Buybacks, capex and cash on corporate balance sheets have risen throughout this expansion. There is no either/or here, and companies finance most of this activity with debt. Using those big cash reserves as collateral lets them finance growth while saving for a rainy day.
|By Matthew C. Kline, FT Alphaville, 05/14/2015|
MarketMinder's View: This isn’t so much a “cost of the bubble” considering the US economy and stocks weren’t in a bubble when the bear market and recession began in 2007, but it is fair to say the recession’s timing and big swings probably did distort the algorithms the BEA uses to seasonally adjust economic data—we can’t know for sure, but it would explain why Q1 is more anomalous these days than before 2010 (though other economists note Q1 has been a modest outlier from the rest of the year since the 1980s). This is one reason (along with the West Coast Ports labor dispute) we’d urge investors to take Q1’s dreary GDP reading with many grains of salt. As for the retail sales comparison in the article’s second half, while we aren’t too jazzed over how much these data were manipulated to look more positive (they took the year-over-year change in total rolling 12-month sales in five categories), it does nonetheless provide an interesting counterpoint to widespread fears over yesterday’s humdrum April retail sales report.
|By Eric Pianin, The Fiscal Times, 05/14/2015|
MarketMinder's View: Ladies and gents, welcome to the government shutdown showdown freak-o-rama, 2015 edition. It will be noisy. It will probably be annoying. Politicians on both sides of the aisle will use life-and-death rhetoric and scary phrases, like “spending crisis.” They will say that September 30 deadline totally matters. Sorry, but if government shutdowns didn’t kill the US economy in 2013 or 1995 (or the many times before), we fail to see how it’s different this time, whether or not they meet their self-imposed arbitrary deadline. As for the highway funding issue, we get it, no money for highways would probably mean bad potholes—we learned that one from Sim City 2000. But politicians have a long history of using eye-catching issues like this as leverage in larger debates, then compromising at the last minute—or just after the last minute, and passing something retroactively. Really, if they take a few extra days or weeks on this one, a giant sinkhole probably won’t swallow I-80. Also, can we just stop calling it a “cliff” every time funding or tax breaks for one group/industry are about to expire? The metaphor is beyond tired and confusing.
|By Thomas L. Friedman, The New York Times, 05/13/2015|
MarketMinder's View: Here’s a fun interview with Mr. Moore himself, the man who predicted the exponential rise in computing power and efficiency since the early 1960s. And here’s a fun snippet putting that rise in context: “In introducing the evening, Intel’s C.E.O., Brian Krzanich summarized where Moore’s Law has taken us. If you took Intel’s first generation microchip, the 1971 4004, and the latest chip Intel has on the market today, the fifth-generation Core i5 processor, he said, you can see the power of Moore’s Law at work: Intel’s latest chip offers 3,500 times more performance, is 90,000 times more energy efficient and about 60,000 times lower cost. To put that another way, Krzanich said Intel engineers did a rough calculation of what would happen had a 1971 Volkswagen Beetle improved at the same rate as microchips did under Moore’s Law: ‘Here are the numbers: [Today] you would be able to go with that car 300,000 miles per hour. You would get two million miles per gallon of gas, and all that for the mere cost of 4 cents! Now, you’d still be stuck on the [Highway] 101 getting here tonight, but, boy, in every opening you’d be going 300,000 miles an hour!’” For more on what this all means for investors, see our recent commentary.
|By Matthew Yglesias, Vox, 05/13/2015|
MarketMinder's View: While this is entirely sociological, it is a spot-on explanation of why median household income is a poor way to measure how well-off anyone in society is. Because the statistic doesn’t account for household size, age or the source of income, it reveals next to nothing: “The median household income in the United States is about $52,000. So go ahead and picture a median-income household. What did you picture? Did you picture a 25-year-old with a decent job who's maybe worried about student loans but is basically doing okay? Or did you picture a married pair of 45-year-olds who are both full-time workers stuck in kinda crappy jobs? Or did you picture a married couple with one full-time worker and one stay-at-home mom? Or a 65-year-old retiree whose $2.5 million stock portfolio yields him $52,000 a year in dividend income? These people are all in very different situations. But household income says they are all the same. In fact, it says they are all typical households earning the US median household income.”
|By Jim Leaviss, The Telegraph, 05/13/2015|
MarketMinder's View: Wait, why stop at abolishing paper money, coins and private banking and forcing everyone to park their money in a state-run bank, where officials can monitor every transaction and change policy to encourage or discourage spending for whatever arbitrary reason they feel like? Why not force everyone to dress in identical suits matching whatever the supreme leader fancies, nationalize all services and means of production, put everyone on the state’s payroll, redistribute from each, according to their abilities, to each, according to their needs, and call it a day? Maybe organize a two-minute hate every day to rally the party faithful? Put a two-way telescreen in every home? Make an example of Emmanuel Goldstein to keep everyone in line? Create a hologram of Richard Burton to torture the rebels into submission? Then again, we’re pretty darned sure you can’t end boom and bust even in the most harrowing of communist fairy tales. As for the modest proposal in this article, if price controls and rationing couldn’t end boom, bust and runaway inflation in the 1970s, why would giving the government theoretical power to limit household spending work any better? Folks, communism didn’t work when governments owned the means of production, and we doubt them managing the means of consumption would have very different results.
|By Phillip Inman, The Guardian, 05/13/2015|
MarketMinder's View: This argues the eurozone accelerated only because of quantitative easing (QE) and sub-zero interest rates. We’ll parry with a question: What if the bloc instead grew despite those two factors? Because last we saw, loan and money supply growth were looking better before Mario Draghi telegraphed QE last year, yield curves have flattened bigtime since then, and 100-plus years of data show flat yield curves drag on growth. Seems to us cyclical factors are overcoming monetary headwinds, not the other way around.
|By Lucia Mutikani, Reuters, 05/13/2015|
MarketMinder's View: This is all a bit too dour and speculative. This is one month’s worth of a data set that excludes the biggest chunk of consumer spending, the service sector. If spending on physical goods held steady while folks simultaneously spent more on service and entertainment—which is entirely possible, though we won’t know until the report comes out later this month—how bad can things really be?
|By John Gapper, Financial Times, 05/13/2015|
MarketMinder's View: But nor is it a financial asset (in the strictest terms) or a wise investment, as this shows nicely, and same goes for all painted, drawn and sculpted works. We love art. Collect it if you want! But don’t stake your financial future on an opaque, illiquid, subjective market.
|By Giles Turner, The Wall Street Journal, 05/13/2015|
MarketMinder's View: Not to be flip, but this shows confusion, not overconfidence. “On average, they expect a return of 12%. Yet the investors on average are looking to allocate only 20% of their investment portfolios to higher-risk assets such as stocks. About 45% will be allocated to low-risk investments such as cash, and 35% to medium-risk assets such as bonds, despite yields being at historic lows, the company found.” How can you expect double-digit returns if you’re 80% in cash and bonds during a rip-roaring equity bull market?
|By John Authers, Financial Times, 05/13/2015|
MarketMinder's View: “For the uninitiated, smart beta is the catch-all term for rules-driven quantitative strategies that take major indices and reweight them so as to create a better chance of beating the market in the long term — if all goes well. They cost more than a standard passive (or ‘beta’) fund, but not much more, and the hope is that they can beat the benchmark by a little more than the difference in fees. Typical strategies include weighting towards value (cheap) stocks, or stocks with momentum, or stocks with high dividends or low volatility.” And now some are trying to get extra-smart by weighting according to more than one factor. This all strikes us as quite unhelpful: It assumes certain categories are inherently superior, ignoring that all have their times of leading and lagging. That problem doesn’t go away if you combined several factors—you’re just basing a fund on several misperceptions instead of one. As for the supposedly superior long-term performance, back-tested returns aren’t real or pure. They’re usually steered by assumptions and biases. We think investors are better off judging real, verified results.
|By Dai Tian, China Daily, 05/13/2015|
MarketMinder's View: Allowing banks to use municipal bonds as collateral at the central bank should improve liquidity, boost demand for muni bonds and further China’s broader efforts to make local debt more transparent and manageable. This isn’t a huge gamechanger or anything, but it should be an incremental positive.
|By Moming Zhou, Bloomberg, 05/13/2015|
MarketMinder's View: That missing ingredient is a change in supply and demand fundamentals, which are about on par with where they were while oil was sliding: Supply is rising faster than demand. While we’d take all the long-term-forecasty stuff here with a grain of salt, it is an overall good look at why oil prices likely won’t jump back where they were a year ago any time soon. Relatedly, US shale producers are already talking about ramping up output if prices inch a wee bit higher.
|By Staff, EUbusiness, 05/13/2015|
MarketMinder's View: This is entirely political, considering the UK isn’t in the eurozone, isn’t subject to the fiscal compact, and faces zero actual consequences for breeching these quite arbitrary deficit limits. The continued breech also says nothing about the UK’s fiscal health or economic prowess. A deficit at 5.2% of GDP is neither inherently bad nor good—just a thing. Considering it was financed at historically low interest rates, it shouldn’t make Britain’s debt any less affordable. This is all just a sideshow.
|By Andrew Ross Sorkin, The New York Times, 05/12/2015|
MarketMinder's View: No, they aren’t actually unicorns. They’re private companies folks are calling “unicorns,” to describe how rare and beautiful non-publicly traded firms like Uber and Airbnb are. (Yes, this analogy is odd because Uber and Airbnb are real, while unicorns are not. But we didn’t make it up and are not endorsing the use of it by any stretch.) Anyway, the concern here is mutual funds are investing in these “unicorns” in 401k and other retirement account funds, which is a dodgy idea! After all, most investors are not buying funds of stocks thinking they’re diving into private equity. In addition, there are some questions, as this piece points out: How do these funds value “unicorns”? What happens if the fund manager seeks to exit, or changes and the new manager favors non-horned horses? But ultimately, this article is probably making too big a deal out of this, considering the holdings are a miniscule slice of these funds’ holdings. We believe this is mostly a, “Hey investor! Understand what you own!” argument at this point. For more, see our 3/26/2015 commentary, “Funds Behaving Badly.”
|By Victoria McGrane, The Wall Street Journal, 05/12/2015|
MarketMinder's View: So the debate here is whether or not the reforms enacted since 2008 have solved “Too Big to Fail,” the notion that big banks’ failure had to be averted through haphazard bailouts back then or the financial system would have melted down. Which all presumes TBTF was a real threat to begin with, when the actual systemic threat was FAS 157 requiring trillions in writedowns and those haphazard government actions. Always seemed to us TBTF was never real, and was more of an excuse to explain away incongruous, schizophrenic regulator behavior.
|By Victoria McGrane, The Wall Street Journal, 05/12/2015|
MarketMinder's View: Senate Banking Committee Chairman Richard Shelby (R-AL) unveiled his long-awaited bill to defang Dodd-Frank and strengthen Congress’s oversight of the Fed Tuesday, and this article has a pithy rundown of the Fed-related aspects. To sum it all: more. More people writing more Congressional reports, more transparency in how the Fed determines policy, requiring the Fed board to vote on most enforcement actions against banks, reducing the transcript publication delay from five years to three, extending voting powers on the interest rate paid on excess reserves to all FOMC members, commissioning studies on the Fed’s structure and accountability, and making the NY Fed Presidency a Federal (with Senate confirmation) appointment. Some of this is benign, some of it would boost transparency, some could create issues downstream, and all of it would create winners and losers. But it also seems highly unlikely to become law in its present form. A watered-down version might pass Congress, but that doesn’t mean the President signs it. Whether you love or hate all these proposals, the likelihood any of this impacts stocks seems low for now.
|By Peter Spence, The Telegraph, 05/12/2015|
MarketMinder's View: Bond volatility, like stock volatility, is normal. While bonds’ expected short-term volatility is below stocks, that doesn’t mean they never swing wildly. This isn’t the first time, and barring the end of the world, it won’t be the last time. For all the talk about low liquidity causing bigger price swings now, we’ve seen equally big swings at many points in history, when liquidity was supposedly higher. So overall, we doubt this volatility is “a sign of worse to come”—volatility doesn’t predict more volatility, and wobbles can end as suddenly as they begin. So stay cool and don’t take what’s happening now as a sign to sell out of bonds if they’re part of your long-term strategy. With bond supply still tight and demand high, there is plenty of downward pressure on yields to counteract rising inflation expectations. For more, see today’s commentary, “Pundits Search for Meaning in Bumpy Bond Yields” and our 5/5/2015 commentary, “The Mysterious Evaporating Bond Liquidity?”
|By Jill Treanor, The Telegraph, 05/12/2015|
MarketMinder's View: File under: News of the obvious. Look, we do find it refreshing that these researchers have tried to take the aura of “safety” from all the stricter post-2008 bank capital requirements. Having bigger buffers helps, but there is no such thing as a fail-proof bank. Banks are in the business of taking risk. And, as this notes, if capital is held in the form of sovereign debt, it’s only as good as the sovereign’s creditworthiness. But really, folks, there is no such thing as safety in financial markets, and you cannot derisk the banking system. Banks were prone to failure before 2008 and will always remain so.
|By Julie Verhage, Bloomberg, 05/12/2015|
MarketMinder's View: We’ll hold all the “long, strange trip” references and instead point out that this article operates on several fallacious assumptions: 1) there is a “normal” in economics and markets, 2) we aren’t at it and 3) the Fed has been helping the economy get closer to it with its supposedly easy money. And heck, there isn’t anything about this expansion relative to the last 50 years suggesting the US economy can’t take a rate hike. After all, rates are at 0 – 0.25%. We sincerely doubt an economy with record-high GDP and consumer spending, surging US corporate profitability and a rising Leading Economic Index can’t handle rates higher than zero. (P.S., Milton Friedman debunked the notion that rates, inflation and employment are all joined at the hip when Jerry and boys were just getting started.)
|By Staff, EUbusiness, 05/12/2015|
MarketMinder's View: Here is the latest on Greece: Officials found enough cash between the couch cushions to make its €750 million payment to the IMF. Hooray! But some of the funds are from a separate IMF-related coffer. Huh? Repaying the IMF with the IMF’s money? When we tell you Greece talks are getting bizarre, we mean really bizarre. But rest easy, signs of contagion are still absent and Greece, even with all its bizarritude, is too small to derail this bull.
|By Allan S. Roth, The Wall Street Journal, 05/12/2015|
MarketMinder's View: Yes it can, and for two main reasons. One, economic forecasts are often wrong—as this highlights, if you’d made big portfolio changes anticipating higher interest rates last year, you’d be out in the cold. Two, even if they’re right, they can lead to unwise decisions. “If an economic forecast turns out to be prescient, why doesn’t that necessarily produce good investment returns? Because we often confuse knowledge with unique knowledge. In other words, that knowledge is already priced into the market and, perhaps, even overpriced as many investors react based on this very common knowledge.”
|By Heather Long, CNN Money, 05/11/2015|
MarketMinder's View: Nothing in this article actually tells you what it will take for stocks to go higher. However, it does share a bunch of false fears, misperceptions and odd analogies that roughly indicate where sentiment is—optimistic, but not irrationally so. Valuations slightly above their long-term average aren’t a signal the bull market is “tired.” Bull markets simply do not die of age. Other things yes, age no. And it doesn’t mean the “easy money” has been made—“easy money” market doesn’t exist, in our view. What’s more, this statement fundamentally miscasts how markets operate: “While the first-quarter earnings season is turning out better than expected, that's largely because there were such gloomy expectations heading into it.” Ummmm. Markets move most on the gap between fundamentals and sentiment, not fundamentals alone. Ultimately, rearranging your allocation just because of fears—fears of an initial Fed rate hike (which hasn’t proven to be a negative for stocks) or just plain higher volatility—is likely an error. Unless you see a bear market forming (and we don’t, if you want our take), making significant changes to your portfolio’s asset allocation could come with a big opportunity cost.
|By Joshua M. Brown, The Reformed Broker, 05/11/2015|
MarketMinder's View: Here is some very sensible advice: Volatility and risk aren’t the same thing. Now, volatility is one type of risk investors face, but it isn’t the only one—there are the risks of permanent loss and lost opportunity. The biggest risk you face is not the degree to which stocks swing, but rather, the risk you don’t reach your longer-term goals—like running out of money in retirement. As this piece notes, “The modus operandi of a lot of Street denizens is to present something as a problem for you so that they can sell you the solution. By putting the fear of volatility in front of you as though it’s a serious long-term risk, the door is then opened for all manner of high-cost, horrifically ineffective products or strategies.” For more, see our 11/24/2014 commentary, “Risky Business.”
|By Sam Mamudi and Saijel Kishan, Bloomberg, 05/11/2015|
MarketMinder's View: This crucial piece of information is “short interest”—how many shares of a stock have been lent to investors to sell on the expectation of a decline. A high number suggests many folks expect the stock to fall, which some take as a warning sign and some a contrarian buy signal as the negativity is too widely known. The issue here is that while official short interest tallies are released two weeks after the fact, some larger investors either track the data themselves in real-time or pay for it from research firms—theoretically giving them an edge. Now, from a high level, we see merit in both arguments: Releasing real-time data promotes transparency and discourages abusive short selling. However, it would likely have unintended consequences—an SEC study found that it could encourage copycat or front-running strategies. But at a higher level, we are skeptical this tactic is as crucial as claimed. For one, short interest isn’t perfect—just because some investors think a stock’s price may fall doesn’t make it so. And, hey, just having the info will not tell you whether the shorts or contrarians are right. But also, myopically focusing on what’s happening to a single stock in the short term may prompt an emotional, reactive portfolio decision—a common investor mistake.
|By Anne Applebaum, The Washington Post, 05/11/2015|
MarketMinder's View: Well this seems awfully speculative. Even after the Scottish National Party’s (SNP) sweep in Scotland and Prime Minister David Cameron’s promised referendum on EU membership, rumors of Britain’s demise seem greatly exaggerated. Regarding a potential EU exit, Cameron first has to renegotiate Britain’s relationship with the rest of the EU, and Britain will vote on the resulting deal—it’s impossible to predict how that deal will play out right now. While Scotland did overwhelmingly vote for the Scottish National Party, exit polls show this was more related to an anti-austerity, pro-government spending economic plan than independence. Yes, more devolution likely comes, giving Scotland more powers of the purse and economic liberty (and perhaps the same for England and Wales). But all these factors will be slow going and are unlikely to sway markets for the foreseeable future. Besides, it is not like Cameron’s six-seat majority is an unassailable mandate for extreme moves. For investors, we suggest not fretting about the prospects of radical change wreaking havoc in Britain—even with Conservatives’ slight majority.
|By Gabriele Steinhauser and Matthew Dalton, The Wall Street Journal, 05/11/2015|
MarketMinder's View: Here is your daily update on Greek theatrics: In a 180 from their stance in 2011, it seems some senior eurozone leaders are amenable to the notion of Greece holding a national referendum on the austerity measures the troika requires to extend funds. It remains to be seen if this happens and how Greeks vote if it did (although the poll included here suggests there is a 17-percentage point margin between those who favor austerity and euro versus those who reject both). This volte-face is the latest in the frequently chaotic discussions. But, chaotic as they are, Greece does not appear to be a material threat to markets. For more, see our 5/8/2015 commentary, “Why Greece Isn’t the Bull Market’s Achilles Heel—in Pictures!”
|By Lingling Wei, The Wall Street Journal, 05/11/2015|
MarketMinder's View: Given the recent spate of weaker economic data, the People’s Bank of China’s interest rate cut from 5.35% to 5.1% is the latest unsurprising mini-stimulus the government has announced to add some slight support to growth recently. And, coupled with a few interesting op-eds in the state-controlled media, it appears they are continuing their efforts to dissuade investors from chucking this growth-goosing credit into financial markets so that it reaches the rest of the economy. But we’d advise against getting caught up in the overly dour tone here—this is still the world’s second-biggest economy advancing at a roughly 7% y/y clip, and the government is still engineering this slow down to a great extent. Nothing new.
|By Tara Siegel Bernard, The New York Times, 05/11/2015|
MarketMinder's View: The 4% rule (and its ilk) are really just rules of thumb, and they aren’t necessarily applicable to every individual’s situation. We’d suggest a deeper dive into your income and expenses is the better starting point. It will help you figure out where you need to be to retire, what areas should be inflation-adjusted and where your budget has flexibility. Planning for anticipated expenditures can give you a better sense of what your portfolio needs to provide and put you in a better position to deal with any surprises life may throw your way. For more, see our 4/22/2015 commentary, “Retirees Will Need Some Income.”
|By George Parker, Financial Times, 05/08/2015|
MarketMinder's View: An excellent recounting of the fact the election of John Major in 1992, which gave the Conservatives a slightly bigger edge than they now enjoy after winning a slim majority in yesterday’s general election, did not bring a hyperactive legislature. The Conservatives’ win yesterday may give them an edge, but it isn’t carte blanche to push whatever legislation they want. Stocks should be fine with the result, in Britain and beyond.
|By Viktoria Dendrinou, The Wall Street Journal, 05/08/2015|
MarketMinder's View: Here is your daily Greece update, and it does not seem a deal is particularly close. Greek Finance Minister Yanis Varoufakis presented his colleagues with a 36-page “blueprint” for Greek economic reform that begins by asking them to “visualize” a Greek recovery and designs a bad bank to isolate bad loans with no discussion of where said bad bank will get funding. One unnamed official said, “‘There is hardly any connection between his blueprint and the ongoing negotiations,’ the EU official said. ‘It seems like a fine program for a country that does not have any financing problems, but just wants to catch up and be a nice tourist destination.’” That is your update. Now please read this for a slew of charts showing you why this isn’t a major concern for investors.
|By Victoria Stilwell, Bloomberg, 05/08/2015|
MarketMinder's View: The job market Job growth reaccelerated in April, with payrolls rising by 223,000 after March’s slower-than-initially thought 85,000. The unemployment rate fell to 5.4% and the U6 rate—a measure including discouraged workers (those who say they want work but aren’t looking because they don’t think there are jobs) and underemployed people—fell to 10.8%. While that latter might seem high, please note that it has only existed since 1994 and it was at 10.0% in February 1996, about five years after a very mild recession ended. Here is a picture. The forward-looking conclusions from this report are basically nil, though, including the relationship many draw between employment and the Fed, which constitutes this article’s second half. But as the article notes, the Fed recently reclassified “full employment” as a range between 5 and 5.2% unemployment, down from 5.5%. That friends, shows you their data dependency is entirely fungible.
|By Jason Zweig, The Wall Street Journal, 05/08/2015|
MarketMinder's View: We completely agree a stock market competition based on trying to outperform every other investor in class over a short-term period using leverage and concentrated positions teaches the wrong lessons, but it is worse than just that. These games teach folks to eschew asset allocation and focus on individual stock picking, the least impactful part of investing. Yes, this is just a game. But it’s a game that all too often reflects actual behavioral errors in practice that can impact real money in the real world.
|By Nils Pratley, The Guardian, 05/08/2015|
MarketMinder's View: The Conservative Party surprised pollsters worldwide last night, winning a majority in Britain’s House of Commons as the Scottish National Party swept Scotland, opposition Labour lost seats throughout the Northeast and even in Wales, former coalition partner the Liberal Democrats were all but swept away, and several bigtime pols were voted out. Yet the Conservatives’ majority is razor thin, and the backbenchers lack unity on several key issues, so gridlock likely persists—as it did under John Major, who had a few more seats in the mid-1990s than Cameron does now but still relied on support from Northern Ireland’s unionist parties to pass key bills. As for the major issues on Cameron’s plate—the pledged referendum on EU membership and greater autonomy for Wales and Scotland (and, potentially, devolved powers for England)—it’s far too early to speculate, but both issues likely play out glacially, with lots of chatter and horse-trading. Fears of “Brexit” are swirling, but the vote won’t happen immediately. First Cameron must renegotiate Britain’s relationship with the rest of the EU, which might require treaty amendments—a painstaking bureaucratic process. The new deal is what the people will vote on, and it is impossible to handicap what that will look like. Though, we’d note leaving the EU isn’t overwhelmingly popular in Britain, and repatriating some regulatory authority from Brussels might be enough to satisfy the euroskeptics. Anyway, while markets will be watching this over time, in the nearer term, they should enjoy the UK’s continued gridlock and solid economic fundamentals.
|By Mark Schoeff, Jr., InvestmentNews, 05/07/2015|
MarketMinder's View: According to a new survey, around 80% of investors believe the investment professional they work with is acting in their best interests—whether that individual is a registered investment adviser subject to a fiduciary standard or a broker, who isn’t. This is telling in two ways. One, it suggests investors don’t pay much attention to which regulatory standard their broker/adviser follows. Two, it suggests folks may not be digging deep enough to identify conflicts of interest, which are rife in this industry. We agree the Department of Labor’s proposed fiduciary standard for investment professionals advising on retirement accounts probably won’t clarify any of this, and it just might cause more confusion. It will boost disclosure paperwork, which is often written in legalese. We’d also add that rules don’t govern behavior, and the fiduciary standard doesn’t prevent the sale of high-cost yucky products like variable annuities. In our view, investors are best served by doing thorough due diligence to discover whether their broker or adviser values putting clients first and what steps they take to mitigate known conflicts of interest—and by conducting a cost benefit analysis that measures overall expenses and what service they’re getting in return.
|By Michael Santoli, Yahoo Finance, 05/07/2015|
MarketMinder's View: This argues an about face in German bonds over the last week is the “crucial tell” for all other markets globally because German bunds are the “safest of all,” making them the risk-free reference rate off which all other assets are priced. And sorry, but we just don’t see it, and not just because default risk isn’t quantifiable and no asset is truly “safe.” You see, all similarly liquid markets discount information simultaneously. German bond markets don’t have some secret information stock and US Treasury markets lack. You can’t use movement in one market to predict another. Moreover, stocks don’t have a set relationship with interest rates in any country.
|By Jeffrey Frankel, Project Syndicate, 05/07/2015|
MarketMinder's View: Setting aside this piece’s political and sociological aspects, it is a fairly good look at how free trade benefits all participants—and can, despite widespread belief otherwise, improve labor markets: “The late 1990s offer a good illustration of how trade theory works in the real world. The volume of trade increased rapidly, owing partly to NAFTA in 1994 and the establishment in 1995 of the World Trade Organization as the successor to the General Agreement on Tariffs and Trade. For the US during this period, imports grew more rapidly than exports. But the widening of the trade deficit had no negative effect on output and employment. Real (inflation-adjusted) GDP growth averaged 4.3% during 1996-2000, productivity increased by 2.5% per year, and workers received their share of those gains as real compensation per hour rose at a 2.2% annual pace. The unemployment rate fell below 4% – as low as it goes – by the end of 2000. A stronger trade balance in the late 1990s would not have added to output growth or job creation, which were running at full throttle. Further increases in net export demand would have been met only by attracting workers away from the production of something else. That is why the gains from trade took the form of bidding up real wages, rather than further increasing the number of jobs.“
|By Evan Kelly, Oilprice.com, via USA Today, 05/07/2015|
MarketMinder's View: The purported sign is a strengthening eurozone economy, which, everything else being equal, would spur global energy demand, contributing to higher prices. The thing is, everything else isn’t equal. Global oil supply continues to outstrip demand growth, and this has contributed more toward the sharp decline in the price of oil over the last year than a weak eurozone economy. Still, oil could possibly head higher over the near term as markets are inherently volatile, but a longer term trend of materially rising crude oil doesn’t seem likely with production still elevated.
|By Josh Mitchell, The Wall Street Journal, 05/07/2015|
MarketMinder's View: Here are five comments about those five things to watch. 1) This claims tomorrow’s jobs report will shine light on whether Q1’s 0.2% GDP growth was an anomaly or the start of a weakening trend. Problem is, employment data are backward-looking and don’t predict future economic trends. April’s job numbers will reflect the economic environment of the past few months. 2) Actually, “stagnant” wages aren’t such a mystery, even given falling unemployment. When firms are competing for an increasingly small pool of available workers, they focus on real wages, not nominal. It’s no coincidence wage growth slowed as falling oil prices started dragging down inflation. A chart of real wage growth would look quite different—and more favorable—than the nominal wage growth chart shown here. 3) The “part-time plight” is also backward-looking. And it’s a sociological issue, not an economic one—rather like the “McJobs” bugaboo from the 1980s, which turned out to be a load of hot air. 4) Those arguing the falling labor force participation rate means folks have “fallen out of the labor market” miss something huge: The total labor force is hovering near all-time highs. The participation rate is simply down because of population growth. 5) Construction and manufacturing hiring will be as backward-looking for those industries as total job growth is for the economy overall.
|By Szu Ping Chan, The Telegraph, 05/07/2015|
MarketMinder's View: As Greece’s fiscal predicament continues to teeter, policymakers in Greece and the rest of the eurozone are seeking ways to avoid a disorderly Greek default. An ECB board member has suggested Greece could pay public sector workers with IOUs or an alternate currency if they lack cash to pay creditors and civil servants. And we guess that’s clever enough, though the social cost could be huge. We highlight this more as a sign of where the stalemate is right now: Credible observers appear to increasingly believe Greece will face some sort of credit event, whether orderly or not. While the likelihood of either scenario (and a Greek euro exit) is impossible to handicap given the situation’s utter bizzaritude, whatever happens, the risk of contagion appears low. Sovereign debt yields across eurozone, even in Ireland, Portugal, Italy and Spain, are historically low. Their debt insurance costs have barely budged during Greece’s latest theatrics—Greece’s costs soared. This is a good sign markets have realized the eurozone is well equipped to handle a Greek exit.
|By Heather Long, CNN Money, 05/07/2015|
MarketMinder's View: There are some sensible parts here, like the quite correct assertions that business cycles do not die of old age, stock valuations do not appear stretched and the current bull market likely has more room to run. But some of the data and reasoning miss the mark. For one, there wasn’t a bull market from 1987 to 2000—there was a bear in 1990. Also, a 20% drop could be a mere correction, not a bear market, depending on the length and circumstances of the decline. World stocks fell 20.5% in 1998’s correction. Our biggest beef, however, is with the argument that Fed rate hikes and US or EU involvement in a military conflict are the biggest risks to stocks now. The sole evidence for the Fed argument is 1980, which sort of ignores the fact America’s yield curve was already inverted when Paul Volcker started hiking rates to battle double-digit inflation. Inflation today is tame as kittens, and the yield curve spread is around 200 bps wide. Unless the Fed goes bonkers, the risks here are minimal, and while anything is possible, Chair Janet Yellen’s actions thus far demonstrate her preference to move only when she has consensus—and consensus moves slowly. Regarding geopolitical risks, regional conflicts, as unsettling as they may be, have never ended a bull market. Even if major powers got involved. It takes huge global conflict, like World War II, to wallop a bull market. Otherwise the economic impact is too small.
|By Dave Michaels, Bloomberg, 05/07/2015|
MarketMinder's View: This seems like a solution in search of a problem, but it’ll be interesting to see how the experiment to boost microcap stock liquidity by widening ticks (the increment in which prices move) plays out. In our assessment of history, smaller ticks have benefited investors by narrowing bid/ask spreads. But the theory that market-makers will have more incentive to provide liquidity if ticks—and therefore spreads and potential profits—are wider makes sense, too. Again though, we do question whether making trading more expensive for investors provides a net benefit in this case.
|By Richard Barley, The Wall Street Journal, 05/06/2015|
MarketMinder's View: While this is kind of a mixed bag overall, we’re fans of this tasty nugget toward the end: “While the speed of the selloff is alarming, the reversal might also be a welcome return to reality. European government bond markets had begun to take on a flavor of the absurd with increasing amounts of debt trading at negative yields and investors proving surprisingly willing to accept that development. But that meant an increasing focus on chasing capital gains, which relied on a steady inflow of buyers to support prices. Meanwhile, key principles like the time value of money were being abandoned.” (Though we’d replace “new buyers” with demand, as the number of buyers and demand are not synonymous.) Nothing is risk-free, folks. Buying and holding a five- or six-year bond with a negative yield would pay off only if the eurozone entered a long bout of deep deflation. Otherwise, even if investors never sold those bonds for a loss, they would still pay a steep opportunity cost: Missed returns in other assets. That’s a high price to pay for the illusion of “safety,” which frankly doesn’t exist in financial markets.
|By Paul Kane, The Washington Post, 05/06/2015|
MarketMinder's View: Nah. Bully to them for passing a budget for the first time since 2010 yesterday, but that was pretty much a given considering Congress is no longer split (also for the first time since 2010). There is a difference between low-hanging fruit and major change, and there is also the issue of the President’s pen. “Of those 62 bills approved by the House, eight were signed into law. That’s not much different than the seven signed into law in the first 100 days of 2011 when Democrats controlled the Senate and Republicans ran the House. One of those laws, the Medicare reimbursement plan was significant because it included some changes to the program as well as an extension of a popular children insurance program. The rest were largely ceremonial or extensions of existing laws.” Meanwhile lawmakers have already scrapped plans to push big bills, like comprehensive tax reform. Gridlock is alive and well, folks, and that’s bullish—stocks usually dislike high legislative risk.
|By Staff, EUbusiness, 05/06/2015|
MarketMinder's View: In today’s installment of Greece’s debt soap opera, Greek Finance Minister Yanis Varoufakis is pointing fingers at the EU and IMF for holding up bailout funding. Evidently, according to the erstwhile econ professor, the two bodies disagree over whether Greece should get debt relief, which is a really nice name for a pre-arranged orderly partial debt default. Greece had two of those in 2012. The IMF evidently supports a third, the EU doesn’t, and no one involved seems to think a deal is likely in the near future. Is Varoufakis correct? Or is Greece’s government trying to deflect eyeballs from their lack of credible reforms? Tune in for the next episode of “As the Greece Turns.” (Or, if you prefer, “All My Bailouts,” “Days of Our Defaults,” or “General Fiscal Hospital.”)
|By Jeff Kearns and Jeanna Smialek, Bloomberg, 05/06/2015|
MarketMinder's View: Look, our Fed is run by some pretty darned bright people. But market forecasting isn’t their strong suit. Chair Janet Yellen and her fellow Fed Governors are economists (and lawyers) by trade, not investors. (Professional investors and widely recognized experts in stock markets, that is—we imagine they all own a few stocks or funds.) Economists live in the world of models, theory and textbook rules, where prices revert to means and all else is equal. In the messy real world of stocks, prices don’t revert to means, all else is never equal, and valuations aren’t predictive. They do indicate sentiment, but today’s valuations don’t suggest investors are euphoric. P/E ratios are only modestly above average and haven’t skyrocketed in recent months, suggesting investors are only starting to get optimistic. As for Treasury yields, while Yellen drew parallels between today and 10-year yields’ rise after Ben Bernanke telegraphed the end of quantitative easing in May 2013, we don’t think yields are likely to react similarly to a Fed rate hike. The first rate hike in a tightening cycle usually has a minimal impact on long-term rates, which have many drivers above and beyond short-term rates. With supply tight, inflation expectations benign and demand high, long-term Treasury yields have little reason to soar.
|By James Quinn, The Telegraph, 05/06/2015|
MarketMinder's View: Well, yes, “whichever of the two largest parties proves to have the most seats once the votes have been counted, and the greatest chance of forming a government, UK plc will still be left with concerns.” Entirely logical, considering folks fear radical change from both main parties. Thing is, the election is exceedingly likely to yield more gridlock. Whether the Conservatives govern with the Liberal Democrats and other smaller parties or Labour governs with the Scottish National Party, fractious coalitions tend to have a hard time passing legislation. It usually gets watered down or scrapped entirely. The reality of low legislative risk should bring UK businesses and investors relief.
|By Lorcan Roche Kelly, Bloomberg, 05/06/2015|
MarketMinder's View: Voooooooooooooolatilityyyyyyyyyyyyyyyyyyy! Don’t overthink it. Also, the trend is never your friend, because there is no such thing as momentum in markets. They don’t follow laws of physics, and they aren’t materially serially correlated. Regardless of past performance, stocks could always rise or fall on any given day, week or month.
|By Staff, The Yomiuri Shimbun, 05/06/2015|
MarketMinder's View: This is all very speculative but interesting nonetheless: Apparently tired of encountering opposition to reform within his own Liberal Democratic Party and official coalition partner, New Komeito, Japanese Prime Minister Shinzo Abe is courting the opposition. The party in question, the Japan Innovation Party, supports things Abe has had trouble passing, like legalizing casinos. If he can cement an alliance and push through other long-stalled reform initiatives, that would be a big plus for Japan. At the same time, we aren’t holding our breath, considering the LDP bigwigs probably won’t appreciate a maverick PM doing an end run around them, and successful maneuvering on Abe’s part could trigger a party coup. We can’t handicap this one either way, but it’s worth keeping an eye on.
|By Andrew Oxlade, The Telegraph, 05/06/2015|
MarketMinder's View: And most of this article shows why you should take that with a big grain of salt. The sections in question are called “How forecasts have changed” and “How the predictions have been wrong.” Both are supported with some pretty stunning charts. We’d simply add that the BoE played a role in all this with its shifting guidance—its own projections bounced from 2016 to 2014 and back again as Governor Mark Carney repeatedly changed his criteria for hiking. The simple truth is rate hikes are unpredictable.
|By Jeffrey Sparshott, The Wall Street Journal, 05/05/2015|
MarketMinder's View: Because imports detract from growth, imports’ 7.7% surge in March could push Q1 US GDP growth from +0.2% into negative territory. But even if it does, it wouldn’t mean much for the bull market. GDP is backward-looking—and revisions even more so. But the very same thing happened last year, when Q1 GDP was revised from up to down to down more. Markets also get the fact that slow Q1 seems like a weather- and West Coast port labor stoppage-induced one-off, not a bigger trend. Data like today’s service sector PMI are already bouncing back. For more on the initial GDP estimate, see our 4/29/2015 commentary, “US Q1 GDP: A Widely Expected One-Off Slowdown.”
|By Alex Rosenberg, CNBC, 05/05/2015|
MarketMinder's View: Well, mutual fund flows can be a sentiment signal at extremes—big inflows suggest toppiness and big outflows buying opportunities. But there is no way to know what ETF fund flows mean, because the product has only existed for about 15 years and only gained widespread popularity recently—and there are only a few years of publicly available ETF fund flow data. And one may presume that they are more flip-floppy because the point to an ETF is market listing brings intraday liquidity. You can say all that with an exclamation point for leveraged ETFs. Checking the Investment Company Institute’s tally of retail fund flows shows modest inflows in April—not a stampede for the exit. Now, fund flows gauge sentiment, and ICI’s tally shows that sentiment has a mild case of heat chasing—after foreign markets led in Q1, domestic fund flows are negative and foreign positive. But none of this is big enough to draw a material conclusion from except, “Welp. Folks still get attracted by past returns,” but you already knew that.
|By Lucia Mutikani, Reuters, 05/05/2015|
MarketMinder's View: Total imports rose 7.7% m/m—even as petroleum imports hit a record low. Now, some are going to fret the potential impact on GDP terms, as rising imports detract from headline GDP. With the initial estimate of GDP showing 0.2% growth in Q1, some might fret the figure being revised to a negative read. But this is one reason why GDP is not a perfect reflection of the economy. Those rising imports signify improving domestic demand! Wheeeeee! Now, as mentioned here, some of this is pent-up demand from previous months as the West Coast ports labor dispute kept many goods from entering (and leaving) the country. But this just goes to show the recent declines in trade were almost entirely dispute-related and not due to a weakening US economy. In other words, we agree with the guy quoted here who said, “‘There is little reason to believe that the potential contraction in first-quarter GDP is the start of a serious downturn in the U.S. economy....’”
|By Anchalee Worrachate and Eshe Nelson, Bloomberg, 05/05/2015|
MarketMinder's View: Talks over Greece continue in bizarritude, with Greek FinMin Yanis Varoufakis admitting no real progress has been made, and even asserting he hasn’t been replaced in talks, contradicting news from last week. Some even claim they are at “an impasse.” But before you, too, start handwringing over the broader fallout, consider: The uptick today puts Italian, Spanish and Portuguese yields at 1.83%, 1.77% and 2.38%. Greek yields are at 10.93%. Point being: Greece sticks out like a sore thumb and its issues have shown little sign of contagion.
|By Scott Grannis, Calafia Beach Pundit, 05/05/2015|
MarketMinder's View: “If you had been asleep for the past 10 years and were shown these charts upon waking up, you would quickly conclude that the U.S. and Eurozone economies were in the middle (or maybe two-thirds the way through) a typical business cycle expansion.” Hear, hear! Though PMIs are narrow gauges, measuring only breadth of growth and not magnitude, a bevy of data from most of the world continues to suggest the global economy is in fine shape. While we aren’t advocating for a rate hike, we also agree the US is plenty strong enough to handle interest rates north of zero.
|By Michael Sincere, MarketWatch, 05/05/2015|
|By Tom Stevenson, The Telegraph, 05/05/2015|
MarketMinder's View: Oh we so very much wanted to like this article, but we fear it misses the mark in the end. We really like the discussion of why this election is likely to end up with a hung parliament, and we like the reminders that volatility is normal and uncertainty somewhat typical. However, the elephant in the room here is this: Gridlock, in developed nations, is bullish. That is the moderation referred to herein, but too timidly. But also, the 1974 example discussed here doesn’t really support the notion of political volatility, because it was a global bear that had more to do with price controls failing and the oil shock. And it is a stretch to presume UK investors should just ignore politics in their home country. Yes, UK multinationals generate most of their revenue abroad, but they are still subject to domestic regulatory regimes, accounting principles, monetary policy, tax and legal changes and more. Those matter, and they are specific from nation to nation.
|By Patrick Smith, The Fiscal Times, 05/05/2015|
MarketMinder's View: A really great synopsis of the issues confronting the 12-nation Trans-Pacific Partnership. In the US, intra- and interparty quibbles in Congress could block a bill giving President Obama fast-track authority to negotiate a trade bill that Congress can only approve or reject—not amend. That is likely a necessity in these sweeping negotiations. But as noted here, disagreements on trade details between member nations—particularly Japan and the US—could keep the TPP from happening even if Congress comes through with fast track. A free-trade deal covering 40% of world GDP would be a nice plus if it happened, but we aren’t holding our breath. For more, see our 4/23/2015 commentary, “Will Free Trade Ring the Pacific?”
|By Dan Strumpf, The Wall Street Journal, 05/04/2015|
MarketMinder's View: So much for all that Q1 earnings doom and gloom. With almost 75% of S&P 500 companies reporting, earnings growth is expected to be -0.4% y/y. By no means stellar, but given the known headwinds slamming Energy companies and the extremely dour expectations many analysts had (earnings growth was expected to be -4.6% y/y when Q1 ended), 71% of reporting companies have beaten expectations—right around the average from the past several years. Folks, this is a great example of how seeing markets differently can help you, as an investor, beat the crowd. Just because a chorus of mainstream pundits says something doesn’t make it so (and probably makes it less likely, as markets often do something different from the consensus).
|By Nouriel Roubini, Project Syndicate, 05/04/2015|
MarketMinder's View: We have a bunch of questions about this piece. First, we’re not sure how or when the US has “effectively joined the ‘currency war’.” A currency war (or competitive devaluation) is when a country deliberately tries to weaken its currency with the hope of making exports more attractive overseas. Yet the US stopped wielding the theoretical weapon of choice—quantitative easing (QE), which both Japan and the eurozone are using today—last year. So we’re confused about when the US declared it would be returning to the battlefield, to the extent there is even a battlefield. You see, we are not convinced currency wars are even real things—currency strength is relative, not absolute, so rather than a “race to the bottom,” it’s more a race to nowhere. Rather than try and concoct a global narrative connecting central banks’ monetary policies, we’d humbly suggest that each bank is responding to the domestic pressures its country is facing. For more, see our 2/11/2015 commentary, “One-Two-Three-Four, Who Declares a Currency War?”
|By Thomas F. McLarty III, The Washington Post, 05/04/2015|
MarketMinder's View: While we have some quibbles with the sociological points made here—particularly those related to China’s ascendance in Asia—this piece addresses some longstanding arguments against free trade. While many feared free trade with Mexico and Canada would be a one-way street, flooding the US with imports with little benefit for US producers (aka a “giant sucking sound,”), in reality, the North American Free Trade Agreement (NAFTA) has boosted total North American trade by 400%—more than $1.1 trillion per year—and Canada and Mexico are the US’ top two export markets. As for jobs: “Economists disagree. Assessing its overall economic impact, a report last month by the Congressional Research Service issued a split decision: ‘In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters.’ Trade related to NAFTA, despite significant growth, does remain a relatively small part of the total U.S. economy. Still, evidence suggests net job creation and more high-wage jobs created in the process. According to the U.S. Chamber of Commerce, around 14 million U.S. jobs depend on trade with Canada and Mexico, with nearly 5 million of those jobs due to the trade increase generated by NAFTA.” Now granted, getting a deal done with America’s two closest neighbors is easier than coming to terms with 11 other countries on both sides of the Pacific. But freer trade, whether it’s with Japan, Peru or Australia facilitates commerce and enriches both sides: a positive for the global economy.
|By Liam Pleven, The Wall Street Journal , 05/04/2015|
MarketMinder's View: So this article suggests the cyclically adjusted price-to-earnings ratio (CAPE) can help you sort “cheap” or “undervalued” countries from those that aren’t. Now, there are many flaws with the CAPE—using 10 years of past data to forecast the future is the big one, returns over the next 10 years are unknowable today, earnings from 2005 mean little for the future—but more broadly, using valuations alone to identify buying and selling opportunities is fallacious. For example, Greece’s current CAPE is 3.1—well below its historical average of 18.4. But given CAPE measures the past 10 years, readings are likely to stay low for a while given all the tumult the country continues enduring. With all that’s stacked against Greece, what’s really stopping its CAPE from falling further? Sure, it’s “cheaper” but that doesn’t make it a wise pick. For more, see our 3/11/2015 commentary, “When Cheap Doesn’t Mean Value.”
|By Szu Ping Chan, The Telegraph, 05/04/2015|
MarketMinder's View: OK, first of all, we have a very hard time fathoming how another contraction in a manufacturing survey for Greece is the “warning light” for Europe. Uh, what about what’s happening in Greece over the past five years, let alone the past five months? The country has been on the brink of its third default for months now, and it has already lost about a quarter of its GDP (and contracted again in Q1), so an April manufacturing survey that confirms it is “mired in contraction” is the least of its problems. As for France, its PMIs haven’t predicted GDP for over a year and a half now. The Leading Economic Index moves more in line with GDP and is still rising, suggesting France will keep growing in the near future, though that doesn’t mean it’s a smooth rise. Still, while France is by no means an economic juggernaut, even uneven growth likely exceeds dour expectations. That said, it is a bit telling that folks are cherry picking industry-specific numbers from a purchasing managers’ index (PMI) from the eurozone’s weakest economy in Greece and one that has struggled in France as examples of softness in the eurozone—particularly when the eurozone Manufacturing PMI overall hit 52.0, indicating broad expansion. If pundits are digging that deep to find weakness, things must be pretty ok in the euro-hood.
|By Staff, The Telegraph, 05/01/2015|
MarketMinder's View: This indicates sentiment and nothing more. It’s normal for pre-election jitters to make investors scatter—it happened in 2010, too. But this doesn’t mean the election is bearish for UK stocks. All plausible outcomes point to gridlock. Some fret a “constitutional crisis” if there still isn’t a government by the Queen’s Speech on May 27, but we’d point out that Belgian stocks performed roughly in line with the eurozone while that country went 19 months without a government from June 2010 through December 2011—deadlock isn’t bearish. Moreover, Belgium’s regional divides are much stronger than the political divisions between Scotland and the rest of the union. Overall, we think fears here are far too overdone. In a competitive developed nation like the UK, gridlock is positive for stocks, keeping legislative risk low.
|By Mark Gilbert, Bloomberg, 05/01/2015|
MarketMinder's View: In recent days, many have expressed fears the bond market lacks liquidity, creating major problems for firms in the event a crisis hits. But as noted here, recent moves suggest this is overstated: “Even if the large investment banks aren't making markets as actively as they used to, the lack of any symptoms of sclerosis as German securities tumbled -- the bund flash crash, if you will -- suggests the market is still sufficiently resilient to cope with a wave of selling. More transparency, not less, is the correct way to keep markets functioning efficiently.”
|By Alanna Petroff, CNNMoney, 05/01/2015|
MarketMinder's View: “The country's official statistics agency released data this week showing the Spanish economy is in the midst of a strong recovery, expanding by 2.6% in the first three months of the year compared to the same period in 2014.” More signs of strength from the eurozone, as Spain continues to grow at solid rates, buoyed by 2012’s labor market reforms, which helped businesses become more competitive, and a big tax cut that eased the austerity burden on all consumers. And its rising LEI suggests that will continue. Yes, unemployment in Spain is still a very elevated 24%, but even at those high levels, unemployment is a lagging indicator. It is also down big from years past, thanks to those afore-mentioned labor market reforms.
|By Paul Vigna, The Wall Street Journal, 05/01/2015|
MarketMinder's View: So the theory here is an unchanged-and-expansionary 51.5 reading in April’s US ISM Manufacturing purchasing managers index (PMI) hints that Q1’s slowdown may not precede a huge bounce in Q2. Which is a theory that has a few holes. 1) PMIs never measure the magnitude of growth, only the percentage of firms reporting growth (breadth). 2) It’s one month of three. 3) The forward-looking new orders gauge rose 1.7 percentage points, which is pretty big. 4) Should growth rebound to 2% GDP in Q2, that headline rate won’t tell you anything about stocks, like Q4 2014’s 2.2% growth didn’t. You have to look under the hood.
|By Staff, China Daily, 05/01/2015|
MarketMinder's View: Just a neat sign of some underappreciated strength in China’s economy: Helped along by financial reforms in recent years, start-ups have surpassed the state-run behemoths as Chinese graduates’ top job choices. That speaks to the ascendance of China’s private sector, likely a big growth engine in the years to come.