|By Andrew Coen, Financial Planning, 06/30/2014|
MarketMinder's View: The bottom line. Look, we don’t doubt some brokers with a CFP designation have strong values and provide fine advice. But this piece makes it pretty clear the rise of holistic financial planning in the brokerage world was and is a revenue grab. Trading revenues are in decline as investors gravitate toward cheaper platforms, and the major full-service brokerage firms needed a differentiator. They say it’s for the clients, but the incentives and revenue boasting illustrated here betray their true intent.
|By Richard Barley, The Wall Street Journal, 06/30/2014|
MarketMinder's View: Forgive us for pointing out the obvious here, but that corporations have been able to borrow money cheaply via capital markets at a time when banks aren’t lending hand over fist is a positive—companies are getting financing to invest and grow. Divining any other takeaway from narrow corporate bond spreads is simply searching for meaning in bouncy bonds. It assumes a level of spreads today that would be considered average by historical standards is somehow extra risky. That becomes all the more bizarre when you consider just how healthy corporate balance sheets are today, with nearly $2 trillion in cash.
|By Dan Hyde, The Telegraph, 06/30/2014|
MarketMinder's View: This highlights three key problems with robo-advisers: They often rely on faulty inputs, like risk-tolerance surveys, they interpret said surveys with industry mythology, and the algorithms aren’t foolproof. How can you get an investment strategy based on your long-term goals if you don’t work with a human being who knows you enough to help you identify your specific investment objectives? And has demonstrated the expertise necessary to help you actually reach those goals? Cheap computer gimmicks can’t do that—they’re a sloppy cover-up for firms with limited resources. For more, see Elisabeth Dellinger’s 6/2/2014 column, “Robots, Marie Antoinette and You.”
|By Park Si-soo, The Korea Times, 06/30/2014|
MarketMinder's View: Why are Korea’s credit raters getting nailed for inaccurate and non-transparent ratings? “The regulator said the agencies were found to have ‘sold’ favorable grades and delayed unfavorable ratings on corporate clients in return for their business.” As in the US, the issuer-pays model introduced conflicts of interests and made official ratings about as useful as a whale’s hip bone.
|By Viktoria Dendrinou, The Wall Street Journal, 06/30/2014|
MarketMinder's View: Well, of course central bankers are going to take credit for the good (rising stocks) and shun responsibility for the “bad” (weak growth). They have to find some way to rationalize their importance, after all. It wouldn’t serve them at all to say monetary policy has held back the global economy for five-plus years, restraining lending through a flat yield curve, but markets have risen anyway because publicly traded firms are strong enough to shrug off that massive headwind. As for the “outlook” portion of this, we don’t buy all that “greater financial fragility” mumbo jumbo—we’ve always had and will always have economic and market cycles. One day, this cycle will turn, but a look at the world’s actual strength suggests that day isn’t in the foreseeable future.
|By Boris Johnson, The Telegraph, 06/30/2014|
MarketMinder's View: Why has the UK not produced even one cubic foot of shale gas commercially? Reasons abound, but here’s a biggie: “No landowner, large or small, has any automatic commercial interest in the discovery of shale gas beneath their property. No wonder the shires are in revolt against fracking. It is no surprise that everyone is a Numby when they are told that whatever is under their back yard is not theirs, but belongs to the Queen!” Incentives matter. Put mineral rights in the hands of the people, not the state, and the motivation for development becomes obvious. For more, see our column on Investor’s Business Daily, “Will the Shale Revolution Go Global?”
|By Trish Regan, USA Today, 06/30/2014|
MarketMinder's View: Yes, they do—but if you overthink and misinterpret recent economic data the way this piece does, it’s hard to see. Like, it says durable goods’ 1% drop in May means “consumers aren’t spending on big ticket items,” ignoring that the drop was driven by a fall in defense spending. Look more broadly, and you see a different, better picture. Like all-time-high-and-rising corporate earnings. A global economy that grew in Q1 despite the US’s contraction. Rising LEI trends in the US and major geographic areas. As for the Fed, stocks have long since realized monetary policy is only getting in the way of growth.
|By Paul J. Lim, Time.com, 06/27/2014|
MarketMinder's View: The bind in question is the need to maintain credibility as inflation approaches the Fed’s target even as considerable “slack” remains in the economy (whatever that means), apparently putting the Fed at the crossroads of its dual mandate. Pundits can’t stop chattering about the next potential move, nor can Fed head Janet Yellen stop twittering on about whatever (bogus) indicators she’s looking at. “But here’s a novel idea: Why doesn’t the Fed simply pipe down about what it thinks it’s likely to do moving forward, and just do what it thinks is right? Quietly.”
|By Matthew Holehouse and Dan Hyde, The Telegraph, 06/27/2014|
MarketMinder's View: Or so he says. Considering how many times the BOE Governor has changed his mind on interest rates—earning the reputation as the UK’s “unreliable boyfriend”—it seems a fair assumption he’ll flip flop again. And again. Maybe even again. Which is fine! Investors shouldn’t try to game central banks anyway. He’s doing you a favor by being so hard to pin down.
|By Mike Bryan, Atlanta Fed Macroblog, 06/27/2014|
MarketMinder's View: While this is a bit on the academic side, it makes a great point: Inflation and cost of living are two different things. The CPI, PCE and other inflation measures official and unofficial aren’t meant to match any one person’s actual living expenses—they’re broad baskets of goods and services across society. That means the Fed’s inflation tinkering isn’t meant to keep cost of living under control—it’s to foster stable, predictable money supply growth.
|By William D. Cohan, The New York Times, 06/27/2014|
MarketMinder's View: Well, most of that question mark—and this article—is made irrelevant by the simple fact the Fed doesn’t use fair-value or mark-to-market accounting. So swings in the value of its bond holdings don’t impair its balance sheet. Nor should they! You can’t judge the success or failure of Fed policy by unrealized gain and loss. Money supply growth is more appropriate. To that end, the only real question is how the Fed ultimately shrinks its balance sheet, and this isn’t something you can game today. FOMC members have intimated they’ll go gradual, just letting assets slowly mature, which seems sensible enough. But they might never unwind things fully. Not when regulations require banks to hold far more capital—we might just live in an era of permanently higher reserves.
|By Editors, Bloomberg, 06/27/2014|
MarketMinder's View: Count us among the deniers of the need for “macroprudential policy,” aka central banks’ proactive bubble pricking. When has a central bank ever spotted a bubble at the right time? What if Alan Greenspan tried to let the air out when he first spied “irrational exuberance” in December 1996, over three years before the peak? In our view, we’d all be better off if central banks got back to basics and did less, not more.
|By Paul Sullivan, The New York Times, 06/27/2014|
MarketMinder's View: So-called smart beta ETFs—where stocks are picked and weighted according to anything from book value to volatility (say what?) and everything in between—smack of heat chasing. And industry mythology. And active investing trying to masquerade as passive (which isn’t even real). And a gimmick. And a mutual fund industry cash grab. You get the drift.
|By Katie Allen, The Guardian, 06/27/2014|
MarketMinder's View: And business investment, which was revised up to 10.6% y/y! The UK recovery isn’t a mirage of consumer credit. It’s real, with private firms firing on all cylinders.
|By Julia Mengewein and Rachel Morrison, Bloomberg, 06/27/2014|
MarketMinder's View: Evidently, state-driven green energy efforts get you a glut of coal-fired power and a bunch of unprofitable utilities. For those who seek traditionally high-yielding utilities as a replacement for presently low yielding bonds, a word of advice: Without profits, dividends aren’t easy to come by.
|By Alexandra Scaggs, The Wall Street Journal, 06/27/2014|
MarketMinder's View: Wait. If the money going out of US stock mutual funds was about one-tenth the size of the money going into US stock ETFs, how, exactly, are mom and pop running screaming for the exit? Seems more like a change in product preference than a change in sentiment. And either way, fund flows don’t drive returns in an auction marketplace.
|By Staff, Jiji Press, 06/27/2014|
MarketMinder's View: Gee, whaddaya know. A sales tax hike made prices go up. Use the BOJ’s suggested calculations to strip out the tax, though, and core inflation (ex-food and energy) slowed in May. Seems like Japan has squeezed about all it can squeeze from the weak yen, and with Shinzo Abe’s latest reform package looking a bit weak, anyone expecting dynamite results in Japan likely ends up disappointed.
|By Anne Seith, Der Spiegel, 06/27/2014|
MarketMinder's View: We’d suggest not getting caught up in the euphoria surrounding a substance that was only recently legalized in only two states. Hazy visions of dot-com-sized valuations for marijuana companies are far, far from reality (and, we’d point out, most dot-coms ultimately went to pot). Maybe, one day in the far future, it becomes an, um, high-growth industry. But not now. Not when any bank doing business with a pot shop is violating federal law. As investment opportunities go, this one seems to us about as substantial as a puff of smoke.
|By Martin Crutsinger, Associated Press, 06/26/2014|
MarketMinder's View: It’s easy to get bogged down in the occasional lackluster month or two (or three) of any one narrow economic indicator—but searching for meaning in bouncy data just isn’t useful. Investors don’t need to overthink this stuff. Looking at broader, forward-looking indicators like the Leading Economic Index (LEI) will tell you which direction the economy likely goes. Right now, LEI is high and rising, which suggests growth will continue.
|By Ana Nicolaci Da Costa and Huw Jones, Reuters, 06/26/2014|
MarketMinder's View: We struggle to see how allowing only 15% of new mortgages to exceed 4.5 times the borrower’s income changes anything in the UK housing market. Not when only around 11% of new mortgages are that lofty. The percentage in London is more like 20%, so maybe you see a teensy bit of pressure there, but the national average is what matters. Plenty of wiggle room there. Seems to us this attempt to deflate the UK’s nonexistent housing bubble is just window dressing.
|By Ben Levisohn, Barron’s, 06/26/2014|
MarketMinder's View: Shocker: A chart comparing an antiquated price-weighted index with itself over arbitrary, mismatched timeframes—with deliberately skewed scaling—utterly failed to predict future broad market returns. If plain old past performance doesn’t predict future returns, then past performance that has been beaten with a sledgehammer, stretched by a medieval torture device and then massaged into submission certainly doesn’t predict anything. (Though, as a public service announcement, the spooky chart actually compared the Dow to 1929, not the S&P 500.)
|By Gina Chon and Camilla Hall, Financial Times, 06/26/2014|
MarketMinder's View: Daniel Tarullo, the Fed’s regulator-in-chief, seems to be continuing his press tour to promote his vision of the Fed’s stress tests as the ultimate arbiter of a bank’s stability, solvency and compliance with global capital standards. Which is … the Fed’s prerogative, we guess. It doesn’t really change anything. The tests already were (and will likely remain) shadowy, complex, arbitrary exercises that don’t tell you anything about what actually will happen in a crisis but allow the Fed to look like it’s doing something to help save the world. Or something. For more, see our 06/05/2014 commentary, “Stress Test (This Is Not a Book Review).”
|By Matt Levine, Bloomberg, 06/26/2014|
MarketMinder's View: Bank prop trading is a really just a bogeyman, as there is little actual evidence it had anything to do with 2008 or is a major source of systemic risk. But the point raised here that we find sensible is the fact loopholes are carved into the Volcker Rule based on a series of assumptions, like trading in Treasurys is riskless. Which is entirely illogical.
|By Staff, The Economist, 06/26/2014|
MarketMinder's View: Well, the reason CAPE doesn’t work outside the US is that CAPE doesn’t work. Period. That’s true whether you’re forecasting one or 10 years out (which is always and everywhere a fruitless task). The structurally adjusted cyclically adjusted PE ratio (SACAPE?) isn’t any more predictive than CAPE or PEs in general. None tell you whether stocks are fairly, over- or under-valued—that’s all a matter of opinion, based on your outlook and perception of publicly traded firms’ future probability.
|By Staff, Bloomberg, 06/26/2014|
MarketMinder's View: Forget the big first-day gains—that’s all just noise. What matters here is that China has once again restarted its IPO market after a false start earlier this year (which followed a multi-year shutdown). This could be a sign China is getting its capital markets in order—a long-term positive for a country trying to emerge as a global market force—but it’s not yet clear whether officials have solved the issues with inefficiency and transparency they identified in February. This could very well remain a trial-and-error process for some time.
|By Neil Irwin, The New York Times, 06/25/2014|
MarketMinder's View: It’s true Q1 2014 GDP growth was revised down from -1.0% to a -2.9% seasonally adjusted annual rate, but it’s really just statistical noise driven by bad weather, wobbly health-care spending—itself heavily influenced by the one-off external factor of the Affordable Care Act enrollment—and GDP’s overall quirky treatment of items like inventories and net exports. We’d suggest taking this negative quarter in stride, and instead look to the bevy of data suggesting the economy perked in spring and Leading Economic Indicators showing growth is likely to resume.
|By Paul Merriman, MarketWatch, 06/25/2014|
MarketMinder's View: Before reading this and joining in the “hey-na, hey-na, small cap is best!” refrain, we’d suggest there are a fair few problems with this notion. No category of stock, bond or other investment is inherently superior from a risk or return standpoint. Stocks are stocks, and stocks move in cycles (not necessarily calendar years). Early in cycles, small cap and value stocks tend to perform best by a big margin. But big cap stocks actually outperform small more frequently. This isn’t to argue bigger is permanently better. Nothing is. It is to say, small cap’s superiority is mythology.
|By Donald J. Boudreaux, Café Hayek, 06/25/2014|
MarketMinder's View: This less-than-five minute video is an insightful, entertaining look at the explosion of wealth and improvement in general life that has occurred since the Industrial Revolution. We highly recommend this, particularly for those newly interested in economics.
|By Michael A. Gayed, MarketWatch, 06/25/2014|
MarketMinder's View: We’ll spoil the surprise: This isn’t a forecast of some mega-bull market on steroids. Rather, it is a look at what the index level of the S&P 500 would be if you used total returns (price return plus reinvested dividends) and began with estimates at 1928. Now, dividend data from that era is sketchy at best, so specifics are debatable. But the point of this article—and it is a sound one—is total return counts most. Picking price return or dividends alone is an incomplete view of an investment.
|By Timothy W. Martin, The Wall Street Journal, 06/25/2014|
MarketMinder's View: Far be it from us to defend the puffery that passes for credit ratings, but we’d humbly suggest ramping up the oversight of raters via a Dodd-Frank-created committee within the SEC misses the mark and is a solution only those inside the Beltway would come up with. After all, if you eliminate regulations requiring some pensions and banks to rely on the opinions of “Nationally Recognized Statistical Rating Organizations” as a mark of safety and the conflicted issuer-pays model, their puffery would become equivalent to sell-side equity analysts’ buy/sell/hold puffery. And it’s free!
|By Wendy Koch, USA Today, 06/25/2014|
MarketMinder's View: While some headlines suggested this move marks a loosening of the four-decade-old US oil export ban, the reality is different. Energy firms have long been permitted to export oil products providing the chemical structure was sufficiently altered. For example, gasoline—refined oil—can be exported from the US. In this case, the government has ruled that two firms producing oil from condensate, a process that requires the base substance to be distilled, can ship their product abroad. The government simply noted that distillation is a sufficient substance change to allow export. For more on the potential impact of US oil exports, see our 06/19/2014 article, “Crude Reality.”
|By Matt Levine, Bloomberg, 06/25/2014|
MarketMinder's View: Tuesday, the SEC announced it will demand certain exchanges widen bid-ask spreads in US-listed small-cap stocks in an effort to test the theory that having more specialists make markets can make for more orderly markets, one of their primary historical functions. Wider bid-ask spreads are part and parcel to specialists’ profitability, so widening spreads theoretically incents more specialists. However, as noted here, the theory may prove outdated, as there are few specialists operating today and spreads in small-cap firms are frequently wider than the mandated $0.05 anyway.
|By Aaron Task, Yahoo! Finance, 06/25/2014|
MarketMinder's View: The claim stocks haven’t seen a cyclically adjusted price-to-earnings ratio (CAPE) this high since 2000 or 2007 is cherry picked, considering the data show it first reached this level in about 1996 and ran up for four more years. In the last cycle, CAPE bounced around the present level from 2003 to 2007—basically the whole bull. If you figure this is predictive, how about looking at all the iterations of similar levels and not a conveniently selected one? No valuation is predictive alone (of broad market direction or sector/style outperformance). But CAPE is arguably more flawed, considering it smoothes 10-years of earnings data. Profits earned in George W. Bush’s first term aren’t likely to help you forecast stock returns in Obama’s second. For more, see our 05/20/2014 commentary, “P/Es: Still Not Predictive After All These Years.”
|By Sarah Portlock and Jonathan House, The Wall Street Journal, 06/25/2014|
MarketMinder's View: The headline month-over-month drop isn’t the real story here, as it was nearly entirely driven by a 31.4% drop in military orders, which suffered from very difficult comps to April, when orders surged 38.2%. Orders for non-defense capital goods, a sub-component many analysts follow as an indication of business investment, rose 0.7% in May.
|By Takashi Mochizuki, The Wall Street Journal, 06/24/2014|
MarketMinder's View: Take three on Abe’s “third arrow” doesn’t seem much more beneficial than takes one and two. While folks seem to cheer slightly more detailed proposals to cut corporate taxes, improve corporate governance, boost corporate Japan’s earning power and broaden the labor force, these plans are still woefully short on specifics and have fuzzy, long implementation targets. Abe is talking a big game, but we aren’t wildly optimistic actions will follow: “Japan often falls short of following through with its lofty goals.”
|By Staff, Reuters, 06/24/2014|
MarketMinder's View: This time last year, most were sure the “tapering” of quantitative easing bond purchases would drive mortgage rates up and abort the housing recovery. Yet here we are, with mortgage rates indeed higher—and new single-family home sales up 16.9% y/y in May. Not only is housing coming out of its recent soft patch, but it’s in far better shape than most anticipated or appreciate today.
|By Szu Ping Chan, The Telegraph, 06/24/2014|
MarketMinder's View: While we wouldn’t quite go so far as to say Mark Carney and the Bank of England are acting like an “unreliable boyfriend,” it does seem fair for politicians from both major UK parties to point out his apparent flip-flopping over the timing of a rate hike. Last year he suggested markets expect a hike no sooner than 2016. Earlier this month, he suggested it would come much sooner. Now it seems he’s waffling on his waffling. In our view, this illustrates why it’s fruitless to rely on central bankers’ words—they’re not set in stone.
|By Staff, Xinhua, 06/24/2014|
MarketMinder's View: As part of a pilot program, Guangdong had its first bond auction—and at first glance, it seems a successful step toward a more market-driven economy. Consider: Even after officials demonstrated earlier this year that they aren’t afraid of defaults (read: no automatic bailouts), demand was robust (1.85x coverage) and yields comparable with China’s sovereign debt. If markets were truly worried about huge problems in China’s local debt markets, this probably wouldn’t be the case.
|By Matt Levine, Bloomberg View, 06/24/2014|
MarketMinder's View: Wondering what yesterday’s Supreme Court decision on securities class action lawsuits means? Wonder no more! This is a clear, concise rundown of the implications (and some of the apparent gaps in the Justices’ reasoning).
|By Gregory Zuckerman, The Wall Street Journal, 06/24/2014|
MarketMinder's View: Just because something outperforms in one environment (in this case, private equity and other “alternative” investments during 2008) doesn’t mean it is superior for all time. As this shows, investing based on the recent past can lead to missed opportunities. As the old saw (and disclaimer) goes, past performance doesn’t dictate future returns.
|By Brett Arends, The Wall Street Journal, 06/23/2014|
MarketMinder's View: We have a slight quibble with this advice: The notion is an entirely backwards way to invest. You don’t start out investing in stocks by deciding whether stocks are high or low today—after all, the likelihood you pinpoint call a top or bottom is next to zero. Rather, start by identifying your goals and figure out what return you need to reach them. If your asset allocation—the mix of stocks, bonds, cash or other securities—is unlikely to provide that return, you better have a great reason why. And stocks being at an all-time high isn’t good enough because all-time highs tell you nothing about where stocks go from here.
|By Matt Levine, Bloomberg, 06/23/2014|
MarketMinder's View: While we aren’t suggesting new regulation is needed targeting bond markets, it is worth noting how much more small-investor-friendly the stock market is than bonds. Bond pricing is opaque, some bonds are quite illiquid and there is often no transparency for an investor to make an educated decision. Funny thing is many folks don’t know all this and think bonds are easy to self-manage.
|By Staff, Reuters, 06/23/2014|
MarketMinder's View: The saga between Argentina and its holdout creditors continues as Argentina’s economy minister (who just last week said Argentina would look for ways to swap its debt to avoid paying creditors) announced it will ask the judge to issue a stay order on the ruling so it can work out a deal with creditors and still make its bond payment next week. How exactly this story turns out remains to be seen, but if Argentina defaults—which we think the most likely outcome—the impact seems to be quite limited. Argentina is not exactly a bastion of creditworthiness, so it wouldn’t be a big shock if they defaulted again. Also, Argentina has not issued new debt at market since the 2001 default that led to this court case anyway.
MarketMinder's View: The eurozone’s composite Purchasing Managers’ Index (PMI) fell to 52.8 in June, down from May’s 53.5 and causing many to worry the recovery is already starting to lose steam—particularly since France contracted further to 47.8 from May’s 49.6. These fears are nothing new, yet the eurozone recovery continues. And with 18 constituent countries, growth isn’t going to be uniform—and all data vary from month to month—they won’t grow at the same pace. Moreover, PMIs don’t have to be gangbusters for eurozone stocks to do well looking forward. What matters more is that reality continues to outpace expectations. Consider: France saw contracting PMIs earlier in the year all while GDP grew.
|By The Wall Street Journal, 06/23/2014|
MarketMinder's View: The US Supreme Court ruled today in Halliburton v. Erica P. John Fund, a case that was highly watched within the industry as it pertains to securities class action lawsuits. At issue: the Fraud on the Market provision, which allowed plaintiffs to join a class action suit based on the notion any and all buyer were disadvantaged by fraud, since efficient markets price in even erroneous information near instantly. The Court’s ruling will allow Fraud on the Market to stand, though companies will be permitted to challenge the entry of individuals into the class group prior to its certification—sort of a middle of the road decision.
|By The Wall Street Journal, 06/23/2014|
MarketMinder's View: Here is the heart of the issue for investors: “With bold ‘Japan is back’ rhetoric, Mr. Abe has promised an ambitious rebound route. ‘I am willing to act like a drill bit’ for deregulation, he declared early this year to the World Economic Forum in Davos. ‘No vested interests will remain immune from my drill.’” Yet Abe has drilled through exactly no meaningful resistance from vested interests to date, something we believe necessary for Japanese stocks to materially outperform for long. Abe has set expectations that will be difficult for reality to meet, much less exceed.
MarketMinder's View: China’s initial HSBC manufacturing Purchasing Managers’ Index (PMI) moved back into expansion in June, beating estimates and jumping to 50.8 from May’s 49.4—positive news. But it seems to us the positivity here overlooks the reality on the ground. China has been growing at a 7%+ clip over the last two years. The HSBC PMI represents only a small subset of China’s economy, as it only includes private SMEs. The broader official PMI, which captures huge, state-run firms, has been mostly expansionary throughout. And what’s more, PMIs can often be in so-called contractionary territory and the economy still grows. PMIs show the frequency of rising output/activity, but they don’t log the magnitude.
|By Simon Kennedy, Bloomberg, 06/20/2014|
MarketMinder's View: So now the almighty Fed can offset an assumed $9.8 trillion negative impact in 2013 alone—alone!—from regional conflicts: "For now, she says, monetary stimulus helps explain the disconnect between increased conflict and minimal market impact—she calls it the 'palliative effect of cheap money.'" We are like 85% sure this isn't a joke. Assuming it's serious, the trouble here is essentially threefold: The assumed cost has no counterfactual and disregards decades of regional conflicts that didn't overturn growth; that the Fed's actions carry sufficient weight to override anything and everything; and that negatives can be ignored thanks to the Fed. What if the estimate is just flat wrong and the interpretation erroneous?
|By Matt Levine, Bloomberg View, 06/20/2014|
MarketMinder's View: There is no way to know what Argentina will do—not when they flippantly flip-flop on whether to make nice or throw their hedgie creditors for a loop. But as this piece shows, Argentina has few incentives to do anything other than starve them out. Sure, most courses there end in technical default, but markets seem to have accepted this—they see Argentina has the intent and money to pay everyone else, and the legal rejiggering required to do this doesn’t meaningfully impact the ultimate outcome (bondholders who didn’t sue Argentina get money).
|By Richard Barley, The Wall Street Journal, 06/20/2014|
MarketMinder's View: So wait. Because stocks are up a lot and the economy is just sort of plodding along (ish), stocks can’t go up any more? Because there are no “cheap assets” left? Uh, we don’t think so. “Cheap” is in the eye of the beholder. What about all-time-high-and-rising earnings and revenues? What about the steeper yield curve? What about the pickup in bank lending? Publicly traded firms are doing great and poised to keep doing great. That’s what you buy when you buy a stock. Not GDP, employee wages or whatever arbitrary stat someone tells you is a sign of doom.
|By Camilla Turner, The Telegraph, 06/20/2014|
MarketMinder's View: The UK’s stubborn deficit is a political issue, not an economic one. With gilt yields still near generational lows, it seems pretty clear markets aren’t questioning the UK’s creditworthiness. Getting the deficit down is simply a political nice-to-have. A self-imposed goal for the coalition government.
|By Saabira Chaudhuri, The Wall Street Journal, 06/20/2014|
MarketMinder's View: Whether or not these banks pay the government their overdue dividends, it doesn’t really matter for investors or taxpayers. The millions of dollars outstanding pales in comparison to the more than $20 billion profit the Treasury has earned so far on the Capital Purchase Program segment of TARP. We won’t insult you by calling it a “taxpayer profit”—it’s not like they’re sending out refunds or cutting taxes as a result. It just shows the program isn’t the sinkhole many anticipated, whether or not a handful of banks can’t make good on their agreement with the feds.
|By Floyd Norris, The New York Times, 06/20/2014|
MarketMinder's View: Well, maybe—but it’s premature to say the Supreme Court’s decision on Argentina makes it super easy for creditors to prevent countries from restructuring debt to get their finances under control. Just because the hedge fund holdouts won doesn’t mean they’ll get their money. Maybe Argentina says, “or what?” It’s not like they can throw Cristina Fernandez in debtor’s prison. They’ve already tried seizing assets (didn’t work). Seems to us potential holdouts might just see holding out is a huge, expensive hassle that isn’t worth it and just go along with a restructuring. This whole legal debate is interesting from an academic standpoint, but it’s largely noise.
|By Scott Wenger, Financial Planning, 06/20/2014|
MarketMinder's View: For $1,950, you too can become an Accredited Investment Fiduciary® and add the letters AIF to the end of your name to tell all potential investors you took a class that allows you to claim you’re a fiduciary and lead them to believe you’ll always put them first and do what’s best. As industry shell games go, this is a big one. Whether it’s an actual rule or an arbitrary toothless self-imposed designation, the fiduciary standard doesn’t guarantee perfect behavior or the best advice. Values, expertise and resources matter so much more. For more, see Todd Bliman’s 11/14/2013 column, “The Compass.”
|By Richard Dyson, The Telegraph, 06/20/2014|
MarketMinder's View: Yes yes, let’s all take the fixed income we own for reasons tied to our long-term goals and cash flow needs, dump it, and buy commercial real estate funds for their alleged 12% yield. Great idea, swapping something with high liquidity and relatively low volatility for something less liquid and far more narrow. Here’s the simple truth: Long-term goals and needs, not short-term yield-chasing, should drive big asset allocation decisions like this.
|By Staff, Bloomberg, 06/20/2014|
MarketMinder's View: It seems a fair assumption China will have to deal with more and more potential defaults as trust loans, wealth management products and other shadow financing tools mature—with the sheer amount outstanding, it’s just natural, regardless of the health of China’s property markets. How officials deal with this will be a true test of their resolve to continue pushing China’s economy toward a more market-oriented system. Accepting default is part of that. But will they let it happen, or will they feel compelled to step in for the sake of growth and political harmony?
|By Staff, Reuters, 06/20/2014|
MarketMinder's View: This is all lovely and well-intended, but it isn’t entirely necessary. The Growth and Stability Pact in the Maastricht Treaty is, shall we say, not strict. Countries violate the deficit limit all the time, with minimal consequences (finger-wagging, pocket-change fines, etc.). Eurozone nations already have the flexibility they need—in practice, if not the letter of the law—to support their economies with fiscal stimulus as needed. No need for drawn-out negotiations and treaty changes getting dragged out in years of bureaucratic morass. (Then again, this is the EU and we can think of worse things for politicians to actually accomplish.)
|By Staff, The Telegraph, 06/20/2014|
MarketMinder's View: Sure, France isn’t the most competitive nation on earth, and this article highlights some of its issues—and the UK’s advantage. But for investors, basing decisions on structural factors like these—and perceptions of leaders as pro- or anti-business—can be costly. Cyclical factors matter, too. And the fact is, despite France’s drawbacks, French stocks have outperformed the world since François Hollande took office.
|By Michelle Jamrisko, Bloomberg, 06/19/2014|
MarketMinder's View: As the Fed and IMF revised their forecasts for US economic growth downward because of a Q1 pullback, the Leading Economic Index (LEI) rose 0.5% in May. With a “broad based” increase—with big contributions from the yield curve and credit availability—these forward-looking indicators suggest US economic expansion continues this year, a fundamental reason for the bull to keep on running.
|By Staff, The Economist , 06/19/2014|
MarketMinder's View: For those concerned about how the US’ exports compare to the rest of the world, this piece clears up some of misperceptions surrounding the statistic. One is scale—in absolute terms, the US trails only China in exporting prowess. Another is the fact America is so darned huge, with varied resources and industry. Smaller countries have huge exports because they’re one link in a key supply chain. The US has entire supply chains. Plus: “If a world-class American firm wants to sell to a market with $16 trillion in GDP it doesn’t have to export.”
|By Daniel Yergin and Kurt Barrow, The Wall Street Journal, 06/19/2014|
MarketMinder's View: “While it may seem paradoxical, exporting US crude will increase, not reduce, domestic oil supplies and lower, not raise, domestic gasoline prices.” How? As pointed out in this piece, the US currently lacks sufficient refining capacity to convert the “new crude” oil recovered by fracking, and it would take years to develop it. Lifting the export ban would both encourage more oil production at home and make the global marketplace more efficient, helping crude supply get to the appropriate refineries faster, boosting overall supply.
|By Mike Felton, The Telegraph, 06/19/2014|
MarketMinder's View: Yes, stocks have climbed through recent geopolitical risks and economic wobbles—but not because quantitative easing (QE) is a “get out of jail free card.” Nor is it buoying markets or “pumping massive amounts of money into the financial system.” The only thing QE pumped is bank balance sheets and central bank reserves! QE flattened the yield curve, so that party “punch bowl” was laced with economic sedatives, not stimulants. Seems to us stocks are just pricing in a pretty darned bright future for firms globally.
|By Joseph Sternberg, The Wall Street Journal, 06/19/2014|
MarketMinder's View: While this takes a rather optimistic view of Japanese Prime Minister Shinzo Abe’s potential to push economic reforms through Japan’s huge political bureaucracy, it does make an interesting point: Abe “is using a bold and popular, if undetailed, reform program to quell bureaucratic dissent. Creating a widespread expectation of change to come has forced bureaucrats to follow along to a greater extent than usual.” You can see this to some extent in preliminary agreements to pursue corporate tax cuts—a longtime third rail. At the same time, that’s a rare example. We’d suggest keeping expectations in check.
|By Ylan Q. Mui, The Washington Post, 06/19/2014|
MarketMinder's View: Actually, the Fed lowered two forecasts. They knocked their 2014 guesstimate from almost 3% to between 2.1% and 2.3% because of Q1’s contraction—no shocker there. But they also cut the estimate of long-term US “potential” growth to 2.1% annually. Which we’d suggest taking with a big grain of salt. One, history shows the Fed’s forecasting track record is rather shoddy and their expectations based on the recent past—never a reliable gauge of the future. Two, there is no way Fed officials can know what will happen over the next several years to impact the US’s actual growth. That’s what ultimately matters. “Potential” growth is for academics.
|By Mohamd A. El-Erian, Project Syndicate, 06/19/2014|
MarketMinder's View: As this piece nicely captures, economic reform is hard. Its benefits are great, but they come at a lag, so they’re often a tough sell—particularly with the politicians who benefit from the status quo. So Mexico is something of a rare case: A country executing an ambitious reform agenda. And it’s a test case: Will politicians stay patient and see it through? If so, and if the benefits are obvious for all to see, Mexico could provide a shining example for other reform candidates (ahem, Japan).
|By Michael J. Casey, The Wall Street Journal, 06/18/2014|
MarketMinder's View: Comparing the ISIS invasion of largely non-oil-producing parts of Iraq with the 1970s Arab oil embargo is a ridiculous stretch. Last we checked (and admittedly, we haven’t been outside in a couple hours now), there weren’t long lines of cars seeking a fill-up of very limited supplies of fuel. Further, the early 1990s recession was tied to the Savings & Loan crisis, and Saddam Hussein didn’t exactly invade Penn Square Bank. Fact: Regional conflict and turmoil rarely impact global markets. So it isn’t exactly surprising troubles in an already troubled place haven’t much troubled investors.
|By Ken Parks and Nicole Hong, The Wall Street Journal, 06/18/2014|
MarketMinder's View: In the wake of Monday’s US Supreme Court ruling requiring Argentina to pay creditors who refused the bond exchange the country implemented after defaulting in 2001, some feared Argentina would have to default on the entirety of their debt. But it seems Argentina is considering a … ummm … more creative (?) move: Swapping the debt out of American law into Argentinian and then not paying the 2001 holdouts. There isn’t much direct market impact from this long-fought over issue, but this maneuver would be unprecedented. However, it is unclear how they’d do this, as US law would punish those aiding and abetting the move. This may just be a negotiating tactic as well, seeking to force the holdouts to accept a deal.
|By Mark J. Perry, AEIdeas, 06/18/2014|
MarketMinder's View: A slew of interesting factoids in this post, which highlights the power of North Dakota’s shale oil boom. “April was another banner month in ‘Saudi Dakota,’ with average daily oil production surpassing one million bpd for the first time and setting a new all-time monthly record for the state’s average daily oil output. Within a few months, the Bakken oil fields in the western part of the state will join an elite group of only ten oil fields in the world to ever surpass the million-barrel milestone for peak daily crude oil production.”
|By John Hechinger, Bloomberg, 06/18/2014|
MarketMinder's View: Rolling over retirement assets isn’t the bad part of all this, it’s the (alleged) low-quality advice delivered based on the wacky conflicts of interest in retail brokerage and the selected products. That’s the best part of this story. IRAs, contrary to the article’s assertion, do not “often charge higher fees than those associated with 401(k) plans.” IRAs themselves are generally mostly fee-free. The products your broker pitches carry fees, which vary. (Also true of 401(k)s.) IRAs are also much more flexible than 401(k) plans. However, that flexibility can be for good or ill, and it is incumbent upon the client to do their due diligence and understand what’s at work. For more, see Todd Bliman’s 4/28/2014 column, “Free to Fail.”
|By Josh Zumbrun, The Wall Street Journal, 06/18/2014|
MarketMinder's View: It’s true rising US and Canadian output have reduced US reliance on OPEC and Middle Eastern oil in recent years—which does mitigate the risk of a 1970s-style oil/gas shortage. However, that doesn’t necessarily mean prices wouldn’t rise if a major disruption occurred. Oil is a fully globalized market, subject to demand from many places without rapidly increasing output. That said, recent developments in Iraq are unlikely to provide all that much of a shock.
|By Maiko Takahashi, Takashi Hirokawa and Isabel Reynolds, Bloomberg, 06/18/2014|
MarketMinder's View: It seems the Japanese parliament will rekindle debate on a proposal seeking to allow major casinos to enter the country, with a goal of increasing tourism and foreign investment—part of Japanese Prime Minister Shinzo Abe's "Third Arrow" of structural economic reforms. However, the slow going on this is emblematic of these reforms overall: This is among the least contentious measures, yet Abe hasn't been able to accomplish it after a year and a half. If Abe struggles this much getting poker and roulette approved, what is the likelihood he can take on strongly entrenched interests in agriculture and labor?
|By Kyle Caldwell, The Telegraph, 06/18/2014|
MarketMinder's View: While we agree with the Warren Buffett quote cited (“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.”), it’s a comment about major inflection points in the market. In between those major inflection points, there are dozens of examples of times when retail investors buy in and see sustained positivity after. Are they great at timing? Heck no. But it seems to us recent inflows into British equities are really more a marker of modest optimism than euphoria. Also, the level of equity ownership (£239 billion versus the record £247.3 billion) is utterly meaningless as it doesn’t strip out share price movement.
|By Robert Schmidt, Bloomberg, 06/18/2014|
MarketMinder's View: This is one of those overly romanticized stories in which a heroic regulator sets out alone to protect the little guy from big-money predators, but struggles against the tide. However, it's all a red herring. The fiduciary standard wouldn't prevent brokers from recommending high-fee products—those subject to it today can recommend variable annuities, after all. Moreover, the fiduciary standard is not a prophylactic guarding against fraud, incompetence or any other major problem. Yes, they would have to disclose conflicts of interest, and that's a plus. But the inconvenient reality is values, resources and expertise determine behavior. Not rules.
|By Matthew Dalton, The Wall Street Journal, 06/17/2014|
MarketMinder's View: Are the last four quarters of eurozone growth an actual recovery or merely a pause before another leg down? That’s what the EU equivalent of NBER is debating, and it seems they want more evidence before they retroactively declare an end to the recession. That’s all fairly normal and backward looking. For investors, this serves as a timely reminder stocks move ahead of the economy—and stocks don’t really care whether think tanks think twice about last year’s economic results. What matters more is what happens from here, and the overall rising Leading Economic Indexes in eurozone nations and the currency area overall suggest growth should continue.
|By Rahul Karunakar, Reuters, 06/17/2014|
MarketMinder's View: So say 21 of the 38 economists surveyed, citing headwinds like tougher capital requirements. Seems on point too, considering banks are deleveraging to prepare for the upcoming stress tests. But this also shows why this isn’t a huge risk for eurozone or world stocks: It’s pretty darned well-known and thus lacks material surprise power.
|By Anjli Raval and Neil Hume, Financial Times, 06/17/2014|
MarketMinder's View: Specifically, the IEA warns recent developments in Iraq (potential civil war), Libya (more fighting), Iran (more sanctions) and Nigeria (theft) could disrupt the agency’s long-term outlook for energy supply, which all seems a bit hasty and arbitrary. We don’t see how this forecast is any more valid than the last one, which predicted Iraq would account for 60% of global oil supply growth between now and 2019 (besides, they still expect output to grow, even in these distressed areas). Any number of things could change between now and then. For more about near-term potential supply issues, see our 6/16/2014 cover story, “All Eyes Are on Iraq.”
|By Peter Eavis, The New York Times, 06/17/2014|
MarketMinder's View: This is an interesting discussion of the implications of the US Supreme Court’s ruling that Argentina must repay bond investors who didn’t accept the terms of an old debt restructuring. Some theorize this sets a precedent making it more difficult for defaulting sovereigns to write off debt, but Argentina’s bonds didn’t have collective action clauses, which are written into most sovereign bonds now. Most European bonds also tend to be governed under English law. So—and this is a bizarre thing to call positive—it seems a stretch to say struggling nations won’t be able to default in the future because of this ruling.
|By Matthew Yglesias, Vox, 06/17/2014|
MarketMinder's View: This argument rests on a major fallacy—that quantitative easing (QE) is a boost for the economy. QE actually hampered growth by decreasing the spread between short- and long-term rates (banks’ potential operating profit), giving banks little incentive to lend—ultimately, depriving the economy of its fuel. The end of QE, not its continuation, would better address issues like still-low inflation and still-high unemployment (which aren’t leading economic indicators, by the way).
|By Michael P. Regan, Bloomberg, 06/17/2014|
MarketMinder's View: Well, maybe, but if so, it’s just coincidence and emotions. Oil prices are reacting to fears of a supply disruption in Iraq, but so far, output doesn’t appear to be at risk (and OPEC has enough spare capacity to pick up the slack if Iraqi output plummets). Stocks might react to the Iraqi conflict in the short term, but history shows regional conflicts—even Middle Eastern conflicts that disrupt oil output some—don’t end bull markets.
|By Ylan Q. Mui, The Washington Post, 06/17/2014|
MarketMinder's View: Breaking news: 12 people with different backgrounds and economic philosophies happen to disagree on when the Fed should stop rolling over maturing assets on its balance sheet and allow its quantitative easing program to start shrinking. Yes, these 12 people happen to be the FOMC, but no matter. Even if they did all agree today, there is no guarantee their decision would be wise. That’s ultimately what matters, and it isn’t something you can game today. Investors, as always, will have to weigh the merits of every Fed decision after it’s announced.
|By Matt Krantz, USA Today, 06/17/2014|
MarketMinder's View: Have you ever bought, held or sold because you believed the recent past would repeat looking forward? Held on to or doubled down on a dog because cutting your losses would have meant admitting defeat? Sold out because a correction was too painful to bear, then missed the bounce back? If so, you aren’t alone—these and other behavioral errors, as described here, have dogged investors since the dawn of markets. Understanding them can help you guard against them and have more success over time.
|By Staff, EU Business, 06/16/2014|
MarketMinder's View: Thus far, Russia has stated it will not shut off gas supplies to the EU (which gets about 15% of its gas supply from Russia via Ukrainian pipelines), but it is putting Ukraine on a pay-as-you-go system until its back bills are met. The likelihood this goes further than that and cuts gas off to the EU is low—there is too much at stake for Russia, which derives nearly 90% of government revenue from its Energy industry—to risk backlash.
|By E.S. Browning, The Wall Street Journal, 06/16/2014|
MarketMinder's View: Typically, markets do run up into a bubble in very late stage bull markets. But it seems a little ridiculous to us to root for a consolidation (assuming you’re not short) to forestall the risk stocks rise and make people all greedy. Should this bull market go the way they typically do, that greed will come in time. That some fear a rise before it happens seems a sign investors are still skeptical about what’s really underpinning current market growth.
|By Stephen Foley, Financial Times, 06/16/2014|
MarketMinder's View: The operating fallacy here is that it’s important to forecast Fed hikes, because they are meaningful for stocks. But the reality is quite different: There is no history of initial rate hikes being uniformly negative for stocks, returns are overwhelmingly positive 6, 12 and 18 months after the initial hike of a tightening cycle. So it’s futile. But also impossible: Using data points Janet Yellen alluded to in the past assumes past Fed head thinking predicts Fed head behavior. Fed heads are not serially correlated, nor do they unilaterally decide monetary policy. It’s a committee of people who may interpret facts differently based on the situation.
|By Binyamin Appelbaum, The New York Times, 06/16/2014|
MarketMinder's View: Actually, we’d suggest looking at neither when it comes to measuring economic health. The labor market, whether you’re looking at folks who have jobs, folks who are actively looking but don’t have jobs or those who don’t have jobs and aren’t looking is a late-lagging economic indicator. (And even then, how exactly these numbers are calculated can be wonky.) What matters more for investors is where the economy goes from here. For that, look no further than the Leading Economic Index, which continues to rise, led by a widening yield spread.
|By Alexis Xydias, Bloomberg, 06/16/2014|
MarketMinder's View: Whether they are in the US or abroad, price-to-earnings ratios are not predictive of future returns. Much more analysis is needed than sheer reliance on perhaps the most widely known indicator of market direction. For more, see Todd Bliman’s column, “P/Es: Still Not Predictive After All These Years.”
|By Ben Leubsdorf, The Wall Street Journal, 06/16/2014|
MarketMinder's View: Utilities was the only sector to see a decrease in May, though that’s not terribly surprising given warmer average temps as spring takes hold. All in all, it’s just another sign growth continued in May.
|By Gretchen Morgenson, The New York Times, 06/16/2014|
MarketMinder's View: Whether or not you agree with the pensions’ cases that ratings agencies fraudulently inflated ratings for dodgy assets before 2008’s downturn, it’s clear their ratings weren’t exactly accurate as to the risk of an asset. Which isn’t very unusual for raters, in our view. More often than not, they’re late to the game—downgrading or upgrading credit ratings long after information becomes widely known (not to mention their pay-per-rating model introduces a significant conflict of interest, as highlighted here). That institutions still place significant value on raters’ views—particularly those who are pursuing legal action against said agencies—seems an odd choice to us.
|By Susan Dynarski, The New York Times, 06/13/2014|
MarketMinder's View: No, they aren’t. There might be $1.26 trillion in outstanding student debt, but it’s not like that whole amount is at risk of repayment. The median amount owed—about $12,000—resembles a car loan, not a mortgage. Mortgage defaults also tend to lead to property seizures, foreclosures and realized losses for banks. Student loans, which are exempt from bankruptcy, aren’t nearly such deadweight. And considering the economy has grown fine as student lending has expanded—and recipients tend to be college grads, who tend to hold more and higher paying jobs—the risks seem way overstated here. This is a political issue, not an economic one. For more, see our latest column on Equities.com, “About That Student Loan Time Bomb.”
|By Park Si-soo, The Korea Times, 06/13/2014|
MarketMinder's View: Expect more anecdotal reports of foreign firms hurt by the conflict in Iraq: The country has received some significant foreign investment projects in recent years, and the fighting puts these at risk. Some firms might take minor revenue or earnings hits as a result. But even so, the conflict seems unlikely to ripple globally—Iraq’s economic footprint and interconnectedness are just too small, and regional conflict (including the two official Iraq Wars) has historically had little impact on global stocks over the mid to longer term.
|By Tara Seigel Bernard, The New York Times, 06/13/2014|
MarketMinder's View: An update on the latest haggling over applying the fiduciary standard to both the brokerage industry and those advising on retirement plans—suffice it to say, there is no swift resolution in sight. But that doesn’t necessarily put investors at a disadvantage. As we’ve seen time and time again when advisers are convicted of fraud, the stricter rules don’t prevent bad behavior. Even with an industry-wide fiduciary standard, investors will need to do thorough due diligence on their advisers’ values, firm structure, resources, investment philosophy and all the rest. For more, see Elisabeth Dellinger’s 4/17/2014 commentary, “Values Rule.”
|By Jason Douglas, The Wall Street Journal, 06/13/2014|
MarketMinder's View: Wait. Isn’t this the same Mark Carney who mere months ago said markets were pricing in a hike too soon and tried to push expectations to 2016? Folks, THIS is why we don’t believe a word that comes out of central bankers’ mouths.
|By Tyler Cowen, The New York Times, 06/13/2014|
MarketMinder's View: War. What is it good for? Apparently economic growth. Who knew. Look, we get that many of the 20th century’s groundbreaking technologies came from the so-called military-industrial complex. But this assumes those wouldn’t have happened without military backing. Maybe, but there isn’t a counterfactual, so there is no way to know. This also ignores all the recent developments, like astronomical gains in computing power, memory, battery life and communication speed. These technologies still collide in ways we can’t imagine to drive innovation, advancement and growth. It’s just that flash memory and external hard drives aren’t nearly as sexy as nuclear power or the space program.
|By Katy Burne, The Wall Street Journal, 06/13/2014|
MarketMinder's View: So-called covenant-lite loans are on the rebound, with issuance back near pre-crisis levels. To some, this raises concerns of another 2008, but coincidence isn’t causality. Less restricted corporate lending didn’t cause the financial crisis. And in this environment, it’s a sign credit is becoming more and more available as the yield curve steepens—a positive for the US economy. We’d also point out much of this lending involves firms refinancing debt at lower rates. Another positive for corporate balance sheets.
|By Jeff Kearns and Kathleen Hunter, Bloomberg, 06/13/2014|
MarketMinder's View: Ladies and gents, meet your new Fed members. And don’t bother looking for clues to their future decision making in past papers, speeches, comments or overheard gossip. Or media speculation. It’s all just noise. Central bankers have a long, long, long track record of defying popular expectations once they’re in the hot seat.
|By Jill Treanor and Hilary Osborne, The Guardian, 06/13/2014|
MarketMinder's View: The “why” here seems simple enough to us: The UK holds general elections next May, and the Coalition needs to shore up support. What better way than to address one of Brits’ biggest fears? Chancellor George Osborne even said, when announcing the plans, he doesn’t see any need for the bank to act now—or any signs recent home price gains are unwarranted. And as this piece points out, it’s not like the Bank of England was clamoring for the new power. Looks to us like politicians just wanted to be seen doing something.
|By Mark Magnier, The Wall Street Journal, 06/13/2014|
MarketMinder's View: After three-plus years of a slowdown, it seems fair to assume no one is shocked China’s monthly economic reports were a mixed bag in May. Rising industrial production and retail sales—coupled with continued housing weakness—seems about right for a country trying to boost growth with targeted fiscal and monetary stimulus while reining in bank lending. All things markets have long been aware of.
|By Dan Hyde, The Telegraph, 06/13/2014|
MarketMinder's View: This “failure” went down about as seamlessly as possible, with investors made whole, but the next time a peer-to-peer lender fails, it might not be this rosy. Return doesn’t come without risk, and anything promising 18% returns has a lot of risk. For investors, it’s vital to understand these risks, the likelihood of returns anywhere near the advertised number, and whether that’s an acceptable tradeoff. What’s the firm’s business model? How is that return generated? What sort of uncontrollable variables does it rest on?
|By Staff, Jiji Press, 06/13/2014|
MarketMinder's View: Encouraging: The Agreement. Discouraging: This quote. “‘We aim to cut the effective corporate tax rate to below 30 percent over several years, starting in the next fiscal year,’ Prime Minister Shinzo Abe told reporters.” Tax cuts are tax cuts, but if the phase-in is as long as the gradual 18-year phase-in for agricultural tariff reductions, this won’t much help corporate Japan in the near future. Success will also depend on the ultimate rate—still to be determined—and how the rest of the tax code shifts to accommodate the change (which Abe is already vowing to do). In short, this doesn’t make us want to rush headlong into Japanese stocks: Reforms still seem highly unlikely to meet investors’ still lofty expectations.
|By Louise Armitstead, The Telegraph, 06/12/2014|
MarketMinder's View: The rules include establishing stricter oversight of over-the-counter forex, bond and commodity markets, similar to the measures aimed at making Libor more transparent last year. Overall, it’s well-intended and should make markets more transparent, similar to the provisions of Dodd-Frank making derivatives markets in the US more transparent. Though, details remain forthcoming, and the potential for unintended consequences remains.
|By Daniel Kruger, Bloomberg, 06/12/2014|
MarketMinder's View: In our view, this gives altogether too much credit to one politician for both market movement and Washington (dis)harmony. Congress has dithered (and eventually compromised) on the debt ceiling since well before Eric Cantor was born. As for budget bickering, we haven’t had a budget in years, and stocks have done fine. Sure, heated rhetoric could affect sentiment, which may contribute to market volatility—but then again, almost anything could move markets in the short term.
|By John D. McKinnon, The Wall Street Journal, 06/12/2014|
MarketMinder's View: In election years, temporary tax breaks become campaign bargaining chips and opportunities for pandering. One side argues making them permanent will benefit small business, the backbone of the American economy. The other side says these cuts hurt middle class families and necessary social programs. Eventually the furor calms and temporary breaks get extended. And through it all, businesses keep on producing, consumers keep on buying and the economy keeps on growing—and markets move on. For more, see our 05/12/2014 commentary, “The Looming R&D Cliff…”
|By Staff, The Economist, 06/12/2014|
MarketMinder's View: It seems a stretch to say the ECB will be propping up the eurozone periphery for years. While the small-business lending programs announced last week probably won’t do much, this is more tied to continued deleveraging and other supply constraints than a rash of over-indebted businesses. This piece fails to account for the possibility of credit markets improving after stress tests are done. For more, see our 06/06/2014 commentary, “Super Mario Strikes Again?”
|By Ambrose Evans-Pritchard, The Telegraph, 06/12/2014|
MarketMinder's View: This is emblematic of investors’ overall too-high expectations of Shinzo Abe’s ability to boost Japan’s economy. Yah, the national pension fund might buy more stocks, but the $100 billion in question is a pittance (and offset by the $100 billion worth of sellers—two sides to every transaction). Considering Japan Post is state-run, it’s tough to imagine it flipping its holdings from bonds to stocks—it’s the government’s favorite self-financing arm. And as long as Abe fails to address the economy’s structural issues, we probably won’t see dramatically rising fortunes in the Land of the Rising Sun.
|By Barry Eichengreen, The Guardian, 06/12/2014|
MarketMinder's View: Actually, the world would probably benefit most if central banks stick with tradition: serving as lender of last resort and fostering stable, predictable money supply growth. Telling them to go bubble-hunting with regulatory policy as their weapon assumes that central bankers are all-knowing oracles that can conjure the exact remedy for every economic ailment. History has shown, however, central bankers aren’t terribly good at interpreting the present, never mind seeing the future, and their actions could make a bad situation worse. For more, see Elisabeth Dellinger’s on Investor’s Business Daily, “Hunting Bubbles With Janet Yellen.”
|By Editorial Board, The Wall Street Journal, 06/12/2014|
MarketMinder's View: The ideas presented by India’s new government sound promising: simplify the tax code, cut down on government bloat and corruption, improve the country’s infrastructure and spur foreign investment. They also aren’t new. These issues have plagued India for decades, and previous governments with similarly ambitious agendas have failed to tackle them. We’re skeptical it’s any different this time. For more, see our 05/19/2014 commentary, “A New Leader for India.”
|By Jeremy Warner, The Telegraph, 06/12/2014|
MarketMinder's View: We’ll skip past the obvious question—does a “boomless boom” make a sound?—and cut to the chase. Yes, it’s perhaps a touch weird that productivity has stayed low throughout the UK’s developed-world-leading recovery, but we doubt it’s a sign said recovery is a house of cards built by the BoE. In our view, it probably has more to do with the fact QE held down investment by flattening the yield curve and, by extension, squashing corporate financing. With QE done and banks becoming more willing to lend, businesses should be able to invest more in efficiency-boosting equipment. Productivity should follow.
|By Steven Russolillo, The Wall Street Journal, 06/11/2014|
MarketMinder's View: It’s interesting trivia that we haven’t seen a 1% or greater daily move in 37 days, well above average. But the notion that this means we definitively will in the near future is just lazy mean reversion-based forecasting. And it says more about sentiment than reality that folks presume a downside move is more likely based on the lack of recently wide swinging returns. Past performance and volatility (or the lack thereof) are not predictive in any way, shape or form.
|By Ian Katz, Bloomberg, 06/11/2014|
MarketMinder's View: Through the first eight months of fiscal year 2014, the Federal budget deficit is down 30% year-over-year from 2013 to the lowest level since 2008—and 2013’s deficit was down more than 60% from 2010’s peak. If you still fear those trillion-dollar deficits and that the country will soon spend itself into oblivion, you should take note of just how much the story has changed in four years.
|By Ben Rooney, CNN Money, 06/11/2014|
MarketMinder's View: We’ll save you the trouble of reading this one. The six are: A too fast Fed; a too slow Fed; Ukraine(!); troubles in Emerging Markets; Chinese hard landing; and the rise of China (economically and geopolitically—it doesn’t totally contradict the preceding worry). All this reads like a list of commonly held fears that have been swirling in some cases (China hard landing) for years. When a bear market eventually arrives—and one will come at some point, the business cycle is still a cycle—it is highly unlikely to be due to any of these widely telegraphed, front-page news factors. Surprises tend to move markets most.
|By Caroline Valetkevitch, Reuters, 06/11/2014|
MarketMinder's View: Yep, year-to-date Utilities is the best performing sector. But we’d suggest this says a lot more about the twists and turns in a non-bouncy 2014 than it does a lasting trend. Further, “beta”—the degree of movement in a stock’s price versus an index—isn’t a permanent attribute. It is just a description of movement over a certain time period, pure and simple. What was low beta can easily become high. Finally, if this is all because investors are “scared,” then why did small-cap, economically sensitive firms dominate when fear was arguably near its apex in 2009?
|By Jonathan Soble, Financial Times, 06/11/2014|
MarketMinder's View: OK, so we partly picked this one because we enjoyed the titular word play. But beyond that, it’s an interesting look at Abe’s reform promises, what he has actually accomplished (not much) and what hasn’t been achieved (a lot). To us, expectations still seem lofty for Japanese reforms’ market impact, exemplified here by the analyst quoted giving Abenomics a “B-minus” he expects to upgrade to a “B-plus.” That, and the consensus view now of Abe as an underpromiser and overdeliver, do not illustrate super-low expectations.
|By Allister Heath, The Telegraph, 06/11/2014|
MarketMinder's View: A great illustration of a market economy’s inherent dynamism, frequently brought by technological advances, which come with fears of job-market destruction included (for free!). But as the author notes: “The lump of labour fallacy is the oldest myth in economics. There is no fixed stock of jobs; in a dynamic economy, millions of new ones are created every year to replace the equally large numbers that are lost. The luddites are as wrong today as they were two centuries ago.”
|By Matthias Rieker, The Wall Street Journal, 06/11/2014|
MarketMinder's View: How can you protect yourself from (alleged) rats like Mr. Valente? Consider: “Mr. Valente promised outsized returns for his clients’ investments, assured their principal was guaranteed and sent them fake monthly reports, according to the SEC’s compliant…” “In 20 years, he racked up 17 customer disputes according to public records [Broker Check].” That alone triggers three of the red flags in Lance Lehman’s recent column, “Five Due Diligence Must-Dos.”
|By Jennifer Ryan, Bloomberg, 06/11/2014|
MarketMinder's View: While the interest rate speculation in this article strikes us as carrying little to no value, as the BoE is not a gameable market force, the data (payrolls at record highs, biggest quarterly rise since 1971—the inception of the series) are interesting in the sense they show the High (Main) Street impact of the UK’s developed world leading economic growth rates over the last year or so. Always remember, stocks move first, the economy second and jobs third.
|By Yoon Ja-young, The Korea Times, 06/11/2014|
MarketMinder's View: This seems like a relatively sensible step away from misdirected reforms limiting large Korean conglomerates, which raised prices and reduced competition in those spaces. However, the Korean economy would benefit from other, more sensibly crafted chaebol reforms, which this measure seems to step away from. The measures designating foreign firms with assets exceeding 500 billion won a conglomerate smack of protectionism.
|By Matt Levine, Bloomberg, 06/10/2014|
MarketMinder's View: To this brilliant debunking of the widespread thesis that ultra-low VIX = complacency = markets crash soon, we’d just add one thing: Not only does nothing about the VIX tell you volatility will “mean-revert soon and horribly,” but markets don’t mean-revert at all! It’s a mathematical fairy tale. Markets don’t follow laws—true whether it’s the law of averages, the law of gravity, or the law of conservation of momentum.
|By Ryan Tracy, The Wall Street Journal, 06/10/2014|
MarketMinder's View: While the Fed hasn’t announced a specific policy change yet, Tarullo—essentially the FOMC’s regulatory czar—suggested banks might soon face stricter collateral requirements for short-term funding. The aim here is to prevent a repeat of Lehman’s bankruptcy, which was triggered by a run on short-term funding, but it’s based on a fallacy: That commercial paper, overnight lending and the like are inherently flightier than deposits and, therefore, inferior. Nothing in the potential plans makes the US banking system more insulated from a crisis.
|By Megan McArdle, Bloomberg, 06/10/2014|
MarketMinder's View: While the $1.2 trillion in outstanding student loans is big—driving fears it’s a ticking timebomb—scale is important: “While you may have heard the horrifying statistics about how the average borrower has almost $30,000 in student loan debt, the median borrower has more like $12,000. That number gets dragged upward by a small number of students with huge loans—many of them professional school graduates like me.” In our view, that’s just more evidence this is a sociopolitical issue, not an economic one.
|By Liz Hoffman, The Wall Street Journal, 06/10/2014|
MarketMinder's View: Last month, the Delaware Supreme Court ruled firms could amend their bylaws to require anyone who sues them and loses to pay all their legal costs. Now, the Delaware legislature is set to vote on a bill effectively overturning that decision. The outcome here—along with a pending, related Supreme Court Case (Halliburton vs. Erica P. John Fund)—could dramatically impact the frequency of corporate class action lawsuits.
|By Russell Lynch, The Independent, 06/10/2014|
MarketMinder's View: To clarify, the growth rate is what hit a three-year high in April at +0.4% m/m (+4.4% y/y). Many have deemed this evidence the government’s efforts to rebalance the economy away from consumer spending are paying off, but this is a bridge too far, in our view (and an unnecessary aim, though that’s a story for another day). Industry just got whacked hard during the recession, and now it’s bouncing back, making this news simply more data pointing to the UK’s ongoing recovery.
|By Wallace Witkowski, MarketWatch, 06/10/2014|
MarketMinder's View: There is no such thing as an “overdue” correction. Or an underdue one. Or a due one. Corrections don’t happen at regular intervals, they don’t have to revert to some historical average frequency, and the likelihood doesn’t get higher or lower as time passes. They’re random and unpredictable, just like the emotions that drive them.
|By Lucia Mutikani, Reuters, 06/10/2014|
MarketMinder's View: Of the three data points highlighted here, only inventories have any forward-looking implications for the US economy. The +1.1% m/m rise in US wholesale inventories suggests firms continue to expect high demand—they aren’t getting lean and mean to brace for a slowdown.
|By Staff, Xinhua, 06/10/2014|
MarketMinder's View: After announcing targeted reserve requirement ratio (RRR) cuts last week, officials followed up with details Monday. The central bank will cut the RRR by 0.5 percentage point for banks lending to agricultural and small firms, certain nonbank lenders and auto financers. While these tweaks won’t restore China’s double-digit growth rates, they should help capital flow where it’s most needed.
|By Mohamed A. El-Erian, Bloomberg, 06/09/2014|
MarketMinder's View: While we agree the VIX has little (ahem, zero) predictive power for future volatility and that current levels shouldn’t be a signal to increase long positions in the stock market (they aren’t a signal for anything), this article mostly gives VIX too much credit. If the VIX isn’t predictive of stocks’ direction, why would it be a good time to load up on options that are tied to … ummm … stocks? We’ve had Fed quantitative easing and low rates since 2008. We’ve seen some uber-volatile times and some placid ones since. How then can we infer that low volatility is Fed-driven and not “self-reinforcing market forces” (whatever that means)? And finally, what does that mean? Markets are never “self-reinforcing.” The past is irrelevant to future directionality.
|By Min Zeng, The Wall Street Journal, 06/09/2014|
MarketMinder's View: Last year at this time, some folks feared the Fed slowing its bond purchases would send rates much higher making US debt significantly less affordable. But a funny thing happened on the way to that theory coming to fruition: After initially rising just over 1% to still-affordable levels in 2013’s last seven months, rates have fallen in 2014. And on top of cheap financing costs, the government’s tax take is up nicely. All in all, it’s just another reason US debt fears are very untimely.
|By Ben Steverman, Bloomberg, 06/09/2014|
MarketMinder's View: This misperceives the likely impact of an expanded fiduciary standard, weak or stringent. Whether or not this is meaningful doesn’t depend on rules, but rather values, resources and expertise. The village idiot held to a fiduciary standard isn’t going to provide better advice than the village idiot held to the suitability standard. They’re still the village idiot, after all. Putting clients first is a concept we treasure, we’d just argue that blindly believing a rule can generate that outcome is the height of naivety.
|By Bruce Einhorn, Businessweek, 06/09/2014|
MarketMinder's View: Maybe this thesis proves correct and Japan rebounds from the potential impact of the sales tax hike quickly. However, literally nothing in this article is evidence of that potential outcome—it is all backward-looking information. The upward revision in Q1 may actually increase the hole Japan has to dig out from, as it could easily imply more activity was pulled forward into Q1 from later points in the year than was previously thought. Oh, and Japan’s LEI has been falling for all of 2014 to date.
|By Andrew Pavia, Financial Planning, 06/09/2014|
MarketMinder's View: We believe fee-only (which is different than fee-based, as fee-based advisers may still earn some commissions) is better for clients, but not for the reasons cited here—which are largely reasons it benefits advisers. As an investor, the key to a fee schedule is to figure out how it might affect the adviser’s behavior. Performance based? Shoot for high performance. Commission-based? Trade. Fee for service? Slap on services, need or so. Fees based on asset type? Recommend higher fee types. In our view, flat, transparent fees based solely on account size align interests best. And that is why investors and advisers should seek it out.
|By Frank Jack Daniel, Reuters, 06/09/2014|
MarketMinder's View: While these proposals could be beneficial for India, as mentioned here, we’ve heard them before. Whether or not India’s new PM Narendra Modi has the political capital—and whether he’s willing to spend it to push reforms through—remains to be seen. But even if he is able and willing, roadblocks tied to India’s decentralized government remain. For more, see our 5/19/2014 commentary “A New Leader for India.”
|By Liam Halligan, The Telegraph, 06/09/2014|
MarketMinder's View: We wonder if this is meant to be high-brow satire? If so, we didn’t get it. Claiming that the US’s weather-induced blip in Q1 is horribly worrisome and that the Fed is propping the economy and markets up when evidence shows their policies have counterproductively weighed on lending is a bit off, in our view. Folks, it’s 2014. The economy has grown for five years. Stocks have been rising for the same. We’d suggest that false rallies just wouldn’t last this long.
|By Howard Gold, MarketWatch, 06/06/2014|
MarketMinder's View: That individual and institutional investors had only 37.7% of their investable assets in stocks in 2012 is an utterly meaningless observation. One, it’s a year and a half old—backward-looking. Two, even if it were current, it tells you nothing about investor behavior or what will happen, whether in terms of fund flows (which aren’t a market driver anyway) or market returns. It’s also largely a function of past price movement in all asset classes and the dynamite growth of US capital markets.
|By Nafeez Ahmed, The Guardian, 06/06/2014|
MarketMinder's View: This entire article—which claims peak oil is back—rests on a half-sentence from one report taken completely out of context. This article portrays it as fact that US shale oil output drops off in 10 or so years. The actual report is clear this is a hypothetical estimate based on planned slowdowns in investment. Not actual dwindling supply. Maybe investment goes up instead! Or maybe the world moves on from oil and production naturally goes down! There is no way to know now, no telling what will change over the next decade.
|By Justin Lahart, The Wall Street Journal, 06/06/2014|
MarketMinder's View: The notion Fed members are a bunch of kids playing with matches while financial markets are “gathering up kindling” is just wrong. Fed rate policy didn’t cause the panic in 2008, and there isn’t any evidence low rates are driving “excessive risk taking” today. Neither stocks, Treasurys nor corporate bonds appear wildly detached from reality. None of this guarantees the Fed’s next move is wise—it’s the Fed, you know—but all the speculating and fear-mongering here seem misplaced. A “slow expanding economy with little inflation”? Historically a great backdrop for more growth and more bull market. For more, see Elisabeth Dellinger’s article on Investor’s Business Daily, “Goldilocks and the Three Bears.”
|By Jon C. Ogg and Thomas C. Frohlich, 24/7 Wall St., 06/06/2014|
MarketMinder's View: There is no such thing as a safe stock. Ever! All stocks are subject to short-term volatility and the risk of going under. Dividends? Companies can cut them at any time. High-dividend payers can fail, like Northern Rock and Wachovia in 2008. For more, see Todd Bliman’s column, “When Does Focusing on Dividends Actually Pay Dividends?”
|By Matt O’Brien, The Washington Post, 06/06/2014|
MarketMinder's View: The arguments here are largely sociological and completely backward-looking—not drivers for forward-looking stocks. As the expansion continues, so should hiring. Stocks likely digest that eventual reality long before it shows up in the numbers.
|By Staff, Bloomberg , 06/06/2014|
MarketMinder's View: More targeted stimulus in the Middle Kingdom, where officials are trying to boost credit to small and medium businesses—their preferred economic engine. Whether they succeed in addressing the structural issues otherwise stymieing small-business lending remains to be seen, but for now, this is yet more evidence officials are doing what they can to keep China growing at a decent clip. Contrary to all those hard-landing fears.
|By Editorial Staff, The Guardian, 06/06/2014|
MarketMinder's View: Was the ECB’s rate cut a way of “paying heed to the rage that a continent has just expressed at the ballot box?” Perhaps, but if so, then the central bank is a might out of touch. A quick look at the headlines from continental Europe shows folks are pretty peeved—many see the negative deposit rate as a tax on savers, the ECB squeezing their livelihoods. Seems a bizarre way to score political points. More likely, the ECB did what it believed best to boost lending and overall growth by steepening the yield curve a wee bit. Whether it works, though, only time will tell.
|By Chris Dieterich, The Wall Street Journal, 06/06/2014|
MarketMinder's View: None of this tells you anything about where stocks go next. Volatility doesn’t predict volatility. Or returns. Up or down. That’s true whether you want to invest in stocks or, um, volatility itself (which we still can’t quite believe is a thing, but we guess is a sign of capital markets innovation).
|By Scott Grannis, Calafia Beach Pundit, 06/06/2014|
MarketMinder's View: Record-high household net worth is backward-looking but nifty all the same. It’s also a testament to the largely unappreciated strength of this expansion and bull market.
|By Jeremy Warner, The Telegraph, 06/06/2014|
MarketMinder's View: Let’s be clear: The ECB isn’t battling “twin afflictions of deflation and economic depression.” Greece might qualify for the latter, but overall and average, the eurozone is growing and money supply expanding. Just slowly. As for broader, global monetary policy trends, low rates haven’t pushed the world to the outer limits (pun intended) of sanity. Stock prices have plenty of fundamental support, and there is zero evidence stocks and bonds must move in opposite directions. Each asset class has its own unique drivers. They can and have moved similarly at times.
|By Chester Dawson, The Wall Street Journal, 06/06/2014|
MarketMinder's View: More trans-ocean Canadian oil exports would be good for Canada and the world. Canadian firms have long relied on US demand, but the shale boom has changed matters. Some see this as a negative, believing it would cause oil prices to rise in the US, but there isn’t any evidence this is the case—not with domestic supply booming and Canadian imports just one variable in the overall equation.
|By Staff, The Economist, 06/05/2014|
MarketMinder's View: Why consult experts for stock advice when picks by a blind-folded monkey can be just as—if not more—effective? Because successful long-term investing is much more than stock selection. Studies have shown that asset allocation—your portfolio’s breakdown of stocks, fixed income and/or other securities—contributes much more to overall portfolio return than the specific stocks you choose. With all due respect to the monkey, it won’t be able to determine an asset allocation commensurate with reaching your long-term financial goals. Nor will that primate give you the appropriate counsel when market volatility stirs up irrational investor emotion. It’d probably just grunt.
|By Stefan Riecher and Jeff Black, Bloomberg, 06/05/2014|
MarketMinder's View: After much debate over what the European Central Bank would do to combat (misperceived) deflation fears, ECB President Mario Draghi announced a number of “unconventional measures,” including (but not limited to) taking the deposit rate negative and launching a targeted refinancing operation that seeks to boost lending. In our view, these measures alone likely won’t accomplish the ECB’s goal to boost lending. For one, eurozone banks aren’t holding huge excess reserves at the ECB for a negative deposit rate to stimulate. Two, there is the major issue of the eurozone stress tests outstanding, and this doesn’t eliminate that. Why would banks lend, risk failing the test and potentially get labeled insolvent by the ECB’s standards?
|By Richard Evans, The Telegraph, 06/05/2014|
MarketMinder's View: No style, size, country, sector or category is best for all time. Similarly, no style, size, country, sector or category is permanently inferior or “riskier.” Leadership constantly rotates and industries change. Shutting out certain sectors—or multiple sectors—leads to a lack of diversity … risk. Following this philosophy would severely increase long-term portfolio risk: “Most companies can be excluded from consideration simply from a description of what they do or the sector they occupy, as most are cyclical, require leverage to get adequate returns, sell to other businesses, make capital goods or durable items, or some combination of these factors." That leaves basically Consumer Staples.
|By Dionne Searcy, The New York Times, 06/05/2014|
MarketMinder's View: Here is an overall sensible take on the state of the US economy following the impact of Q1’s inclement weather. In summation: the economy has been growing. While the “polar vortex” did impact a swath of industries, the data suggest it only delayed or pushed back, not stopped, some economic activity. While backward-looking reports don’t guarantee growth in the future, they are evidence that fears of stymied economic growth were overwrought.
|By Michael P. Regan, Bloomberg, 06/05/2014|
MarketMinder's View: The meme that bond markets are “smarter” than the stock market is a bit puzzling, considering both markets are forward-looking and tend to price in the impact of known information. History has shown bond markets don’t possess any special insight about the future that stocks miss. Another commonality bonds and stocks share that can’t be easily explained: volatility, which is what bond markets seem to be going through right now.
|By Scott Patterson, The Wall Street Journal, 06/05/2014|
MarketMinder's View: The trading network in the US isn’t perfect, but it’s far better than many appreciate and regulation may not be a valid solution. For one, not all high-frequency trading (HFT) is bad and in need of regulating. On the contrary, much of it benefits the average investor by providing additional market liquidity and making markets. Additionally, some argue HFT wouldn’t exist were it not for the unintended consequences of trading regulations like Reg NMS and National Best Bid and Offer. Regulation is not necessarily a solution here.
|By Ambrose Evans-Pritchard, The Telegraph, 06/05/2014|
MarketMinder's View: We’ve long held quantitative easing (QE) has exacerbated, not countered, disinflation and possibly deflation. There is no evidence or counterfactual proving this thesis true: “The evidence in Britain and America is that QE has had a potent effect, preventing double-dip recessions as fiscal austerity began to bite, in stark contrast to Europe.” However, there is ample evidence a flat yield curve discourages loan growth by reducing bank lending’s profitability. The US had a flat yield curve and the slowest loan growth in any US expansion on record. We doubt that’s coincidental. Suggesting the ECB needs to commit to a strong QE effort or none at all, as posited here, misperceives QE’s effectiveness.
|By Michelle Jamrisko, Bloomberg, 06/04/2014|
MarketMinder's View: While exports falling -0.2% m/m in April’s US trade report isn’t stellar news, imports’ jumping +1.2% m/m to a new record more than offsets and shows healthy domestic demand. In a global economy, even goods we import often contain intermediary goods we produced and previously exported. GDP figures may account for trade deficits as a negative, but that says more about GDP’s quirkiness than the economic effect. Trade gaps are just plain irrelevant.
|By Staff, EUbusiness, 06/04/2014|
MarketMinder's View: Despite the debt crisis, a growing euroskeptic movement in European Parliament and many wagging an accusatory finger at the common currency, it is telling that Lithuania seeks to become the 19th member of the eurozone. Closer integration to the euro offers Lithuania much more economically than sticking on its own—namely 18 free-trade partners, shoe-in trade agreements with other nations, a stable currency and fewer pressures from Eastern neighbors. (*Ahem.* Russia.) The euro has its share of issues, too, but the good still greatly outweighs the bad.
|By Linda Yueh, BBC, 06/04/2014|
MarketMinder's View: A few quibbles here. One, there is little evidence quantitative easing (QE) boosted inflation. Two, while central banks do target inflation, it’s worth noting inflation isn’t a leading economic indicator. But the money supply is, and it leads both inflation and economic growth. Finally, QE in these two countries seems an inappropriate solution: If China wanted higher inflation, they could simply ease up on lending constraints and goose firms to make new loans (they use quotas, since it’s not a market economy). The eurozone’s money supply is tight because banks are deleveraging ahead of ECB stress tests. QE would only further disincentivize lending, dinging the money supply more.
|By Jeanna Smialek, Bloomberg, 06/04/2014|
MarketMinder's View: The Institute for Supply Management’s US non-manufacturing index, which measures the majority of the economy—services, utilities, health care, construction, finance and agriculture—grew for the third consecutive month in May, completing a year in steady expansion. Growth was broad based: “Seventeen of the 18 industries surveyed showed improvement.” The forward-looking new orders component grew at the fastest clip since January 2011—implying growth likely continues moving forward. And that’s just one of many strong economic measures.
|By Jonathan Cable, Reuters, 06/04/2014|
MarketMinder's View: This illustrates eurozone sentiment well. Despite a three-year-high eurozone services PMI and still-growing manufacturing (53.5)—and, digging deeper, healthy German (55.6), Spanish (55.6) and Italian (52.7) composites—folks are more focused on downward revisions and what the ECB should do about low inflation. Economic reality in the eurozone isn’t super great, but it’s better than widely appreciated.
|By Scott Hamilton, Bloomberg, 06/04/2014|
MarketMinder's View: That the UK’s May services sector PMI (58.6) hit its 17th consecutive month of growth is a sign the UK is recovering strongly in a low-inflation environment—a sweet spot for economic growth and stocks. Global growth with low inflation is the polar opposite of stagflation—and that’s good.
|By Staff, Reuters, 06/04/2014|
MarketMinder's View: The new import duties really just close a hole in the old ones, which allowed Chinese firms to skirt tariffs via a stopover in an intermediary country. Either way it’s a drop in the global-trade bucket: The US makes up only 10% of Chinese solar exports, and solar is a dinky industry globally. (It might be less dinky if we ceased bizarrely protectionist policies that artificially inflate the prices of panels, but we digress.) What’s worth noting, though, is the US-China (and sometimes Europe) solar spat has been going on a while, occasionally threatening to spill into other industries and now, countries. Thus far, tensions haven’t escalated, but if they do, a US-China trade war would hurt globally.
|By Noémie Bisserbe and David Enrich, The Wall Street Journal, 06/03/2014|
MarketMinder's View: Will a rumored $10 billion fine whack the capital ratio of France’s biggest bank, forcing it to deleverage and exacerbating one of the region’s primary headwinds? Will this saga cause the ECB to adjust its stress tests to more heavily scrutinize whether the other 123 banks can handle big fines, potentially making it even harder to pass? Will tensions between the US and France over these potential punishments kill the US-EU free trade deal-in-progress? All are unknown, but all are possible outcomes. However, while these are risks, they likely aren’t sweeping enough to upend the many positive drivers supporting this bull market. They’re also pretty widely discussed.
|By Pat Regnier, Time, 06/03/2014|
MarketMinder's View: Low volatility and complacency didn’t cause the financial crisis—period. Stability didn’t breed instability. Calm didn’t encourage risky bets that were bound to blow up. This is all just reaching for causation in what is merely an interesting observation: The environment today, in a maturing bull market, is similar to the environment in 2007, before the misapplication of fair-value accounting truncated a healthy, fundamentally supported bull market that was only just starting to mature.
|By Ian Wishart, Bloomberg, 06/03/2014|
MarketMinder's View: Eurozone inflation slowed to 0.5% y/y in May, fueling speculation the ECB will act at its June 5 meeting. Maybe they do something, maybe they don’t—central bank decisions aren’t gameable. However, it’s unlikely the ECB can do anything to meaningfully boost lending while stress tests are ongoing. Negative central bank deposit rates likely just prompt banks to swap reserves for super-liquid assets. Quantitative easing likely flattens the yield curve and banks’ profit margins, further dinging lending and the money supply, as it did in the US and UK.
|By Martin Crutsinger, Associated Press, 06/03/2014|
MarketMinder's View: Rebound from what, we’re not sure—manufacturing has spent most of this expansion charging ahead. That said, the third monthly rise in new factory orders is yet more evidence the US economy continues growing, despite harsh winter weather hindering growth in Q1.
|By Staff, Bloomberg, 06/03/2014|
MarketMinder's View: Private Chinese manufacturing has struggled lately. Crackdowns on shadow financing—private firms’ life source—and supply gluts in steel and other materials have weighed on it a while. But May’s HSBC manufacturing PMI (which includes small, private firms), which rose from 48.1 in April to 49.4 in May, suggests the clouds are starting to clear somewhat. More importantly, other, larger areas of the economy are growing enough to offset this one narrow category.
|By Louise Armitstead, The Telegraph, 06/03/2014|
MarketMinder's View: Regulating Britain’s foreign exchange market seems well-intended and may help shore up much-needed confidence in UK banks after recent scandals. Nothing has been officially proposed yet, but thus far, the exercise seems in line with the UK government’s goals of increased transparency and better conduct. Still, as with all financial market reform, unintended consequences may lurk—it’ll depend on the fine print and any secondary clauses regulators add post-legislation.
|By Rebecca Clancy, The Telegraph, 06/03/2014|
MarketMinder's View: As the article points out, that Markit/CIPS’s UK construction PMI slowed to 60 for the first time in seven months hardly seems concerning. It’s still well above the 50 mark that signals expansion—that’s not exactly commentary on a softening property market. Much construction activity is still happening both commercially and residentially, adding to economic growth and overall home supply, for which demand is still very hot in some areas.
|By Leslie Shaffer, CNBC, 06/03/2014|
MarketMinder's View: Said differently, are Chinese leaders setting up a time bomb by delaying deleveraging in order to boost growth a bit now? We don’t see much evidence of this. While officials are urging some banks to lend more—and easing reserve requirement ratios for banks lending primarily to farmers and small businesses—overall credit growth continues slowing sharply, with larger banks still beholden to stricter standards. That said, the conclusion that China can handle below-target growth seems spot on—even at lower growth rates, China would still contribute handsomely to global demand growth.
|By Jason Zweig, The Wall Street Journal, 06/02/2014|
MarketMinder's View: There certainly is no free lunch in dividend funds, with that we agree fully. The notion that targeting high dividend yields as a retirement funding strategy and/or means to boost portfolio return is just a myth. Total return—price plus dividends—matters most. And as noted here, dividend-paying stocks have underperformed non-payers on a total return basis since 2011. However, this article has one major misperception in it: The notion that dividends and dividend stocks are safer. There is no validity to this, as demonstrated by the return of formerly high yielding banks and automakers in the Financial Crisis. When you buy high dividend stocks, you aren’t giving up upside in exchange for safety and income, you are buying a stock with the same risk and return characteristics as one that pays no dividend. Period.
|By Gregory Zuckerman, The Wall Street Journal, 06/02/2014|
MarketMinder's View: Worries are bullish. The more folks fret certain things might end the bull market, the further we are from the euphoria that typically comes before a bull market’s end. Moreover, all of the worries outlined here are either well known to investors, giving them little-to-no surprise power (i.e., a quantitative easing taper or China slowdown fears), or aren’t predictive of stocks’ future movement (stock valuations or investor confidence)— the chance they derail this bull are slim to nil, no matter what their arbitrarily picked worry level might be.
|By Jeff Cox, CNBC, 06/02/2014|
MarketMinder's View: Corrections—short, sharp, sentiment driven moves of 10% or more—can happen at any time for any reason, making them extremely hard to predict. Trying to tie them to any one thing in particular is a fool’s errand. Moreover, say you manage to time the beginning perfectly but miss the upswing when the correction ends. After trading costs (and potentially taxes), you’re likely worse off than had you stayed invested the entire time. For long-term investors, in our view, it’s best to stick to your long-term strategy unless you have a reason to believe you see a bear few others see.
|By Joseph Ciolli, Bloomberg, 06/02/2014|
MarketMinder's View: Well, even in the original report of US ISM May manufacturing, the sector again grew. It’s just that the erroneous use of April’s seasonal adjustment factor in May data caused the percentage of firms reporting growth to be understated. Perhaps the most noteworthy part of the correction: The new orders component was revised from a slowdown to a relatively significant acceleration.
|By Jennifer Rankin, The Guardian, 06/02/2014|
MarketMinder's View: Many incorrectly see asset-backed securities as the primary culprit for the financial crisis (in reality, it was mark-to-market accounting and the Fed’s inconsistent handling of events since Lehman Brothers fell). But five years later, it seems regulators are awakening to the notion these securities may be needed to increase individuals’ and businesses’ access to credit. Should the proposals by the BoE and ECB come to fruition, it would be a long-term positive development for markets. For more, see our 5/15/2014 commentary, “Detoxifying Mortgage-Backed Securities.”
|By Takaya Yamaguchi, Reuters, 06/02/2014|
MarketMinder's View: PM Shinzo Abe announced more plans for his third arrow. However, absent were many of the details regarding the structural reforms that will arguably help Japan the most, like discussion of opening doors to trade and liberalizing labor markets. Corporate governance reform might be fine, depending how it’s enacted, but much of the rest of this seems like a watered down political move with little actual economic impact. For more, see our 5/28/2014 commentary, “The Mythical Third Arrow.”
|By Jim Tankersley, The Washington Post, 06/02/2014|
MarketMinder's View: This largely seems to us more of the same inflation fear mongering that has been so heavy since quantitative easing (QE) began in 2008. Let’s be clear: The Fed isn’t “courting” inflation because it has strayed from the Taylor Rule. Why? Because the yield curve was flattened by QE bond buying depressing long rates. When the yield curve is wider, so are banks’ potential profit margins, making them more willing to lend, thus increasing the money supply. We won’t argue they’ll be perfect, but the Fed has plenty of tools to shrink its balance sheet and avoid hot inflation.
|By Catherine Bosley, Bloomberg, 06/02/2014|
MarketMinder's View: The final eurozone PMI remains in expansion but missed analysts’ estimates by a hair, falling to 52.2 vs. 52.5. Growth was broad based, though France contracted once again. But for those worried this means bad news for France, we’ve seen this movie before—late last year, French PMIs showed contraction while GDP later showed the country continued to grow, albeit slowly. This time, France’s Leading Economic Index rose once again in March, suggesting contracting PMIs are likely a statistical issue more than an economic one.