|By Christian Berthelsen and Lynn Cook, The Wall Street Journal, 07/31/2014|
MarketMinder's View: The first tanker carrying US-produced ultra-light oil, or condensate, has officially set sail for South Korea after the US Commerce Department recently ruled condensate, which has to be distilled for stability, is refined enough to escape the Federal Government’s ban on crude exports. In our view, boosting exports would be positive for the US and the global economy. But condensate exports are unlikely to prove a game changer unless the crude ban is formally removed. For more, see our 6/27/2014 story, “A Slightly Refined, But Still Crude Export Ban.”
|By Mohamed A. El-Erian, Bloomberg View, 07/31/2014|
MarketMinder's View: “Argentina, as a nation, is the biggest loser. It will have a much harder time borrowing money on international markets, and will pay more to do so.” Actually, this is perhaps the most feckless sovereign default of all time. For one, it’s totally a technicality that doesn’t say much about Argentina’s finances. But also, Argentina has not been able to issue debt on international capital markets since the 2001 default. Can this default make borrowing money much harder than being totally unable to do so? We think not, but hey, maybe we’re missing something.
|By Sridhar Natarajan and Adam Janofsky, Bloomberg, 07/31/2014|
MarketMinder's View: In our view, it’s possible an unintended consequence of new money fund regulations permitting institutional share prices to float and permitting funds to block redemptions is firms having a tougher time issuing commercial paper. But considering individual investors’ money funds have always floated, the situation doesn’t seem like such a drastic change. As for blocking redemption, funds will have a choice to make, which will give investors a choice to make. Overall, though, it’s difficult to envision demand cratering for relatively less volatile, highly liquid funds that pay more than cash. Plus, companies have spent the past five-plus years adapting to a commercial paper market. This all just seems quite overstated. For more, see our 7/24/2014 commentary, “The SEC Does Some Things to Money Market Funds.”
|By Greg Robb, MarketWatch, 07/31/2014|
MarketMinder's View: Even national PMIs are already narrow, volatile economic surveys that tally the breadth of growth, but not the magnitude. That this is a regional index makes it that much less telling about broader US economic health. Besides, in July, the 10.0 point drop put the reading at a still expansionary 52.6. That wasn’t the case in October 2008, when the gauge fell nearly twice as much—over 19.2 points to a very contractionary 37.8 read while a financial panic was going on. To us, a more apt comparison for today than 2008 is May 2005, when the gauge fell 11.7 points to a still expansionary 53.6. Only to bounce around in expansionary territory for three more years. Finally, July readings suggest the Empire State, Philly, Kansas City, Richmond and Milwaukee regional manufacturing indexes all rose in July.
|By Jonathan House, The Wall Street Journal, 07/31/2014|
MarketMinder's View: There is one takeaway and one takeaway only from this news: Workers had a great Q2. That’s it! It doesn’t mean wages shoot up more from here, no matter what meaning folks try to find in unemployment numbers, business cost trends and productivity. And it doesn’t mean anything for inflation, which is still always and everywhere a monetary phenomenon, not a labor market one. And it doesn’t mean “stagnant” wages will stop “restraining consumer spending”—mostly because wages haven’t been stagnant and consumer spending is at all-time highs and rising.
|By Bob Pisani, CNBC, 07/31/2014|
MarketMinder's View: Well, maybe these events account for today’s volatility and maybe not. It is usually impossible to identify the specific cause for a volatile day (and a futile, fruitless exercise). But what we can say is this: the five things cited here are very unlikely to affect stocks materially looking forward. 1) Ukraine rhetoric? If bombs, missiles and tanks shooting things in a regional conflict don’t much affect stocks—and haven’t this year—why would words? 2) One firm’s profit estimate being rounded down by roughly $180 million might affect its share price, but probably not the entire $50 trillion global equity market. Small scaling problem there. 3) Perhaps Portugal drove jitters today, but this corporate governance issue is not a systemic one and isn’t likely to become one. 4) 10-year yields did not “spike”—they traded in a seven basis point range (between 2.54% - 2.61%) all day and closed 1 basis point different than a day earlier. 5) Most Emerging Markets countries don’t have such bizarre leadership issues and little access to global credit markets as Argentina.
|By Staff, The Yomiuri Shimbun, 07/31/2014|
MarketMinder's View: Here is a rarity worth appreciating: Actual plans for Japanese structural reforms. Details and Abenomics’ Third Arrow’s broad goals are normally like oil and water. Now, for the details themselves, cutting the corporate tax rate from Japan’s relatively high level is a plus for Japanese firms. However, it remains to be seen what, if any, measures will be taken to recoup the “lost revenue” some suggest will follow, on the order of 1 trillion yen. Under discussion? Raising other taxes on businesses. Which … is … a … bit … odd, no?
|By Neil Irwin, The New York Times, 07/30/2014|
MarketMinder's View: Well, there are caveats, for sure. But there usually are in any series as broad and wonky as GDP. The article notes 1.66 percentage points of growth came from inventories—which are open to interpretation as to what they say about Q2 growth—but doesn’t note that bare shelves subtracted 1.16 percentage points in Q1, largely caused by ice-jammed shipping routes. The article also doesn’t quantify the assumed boost from health care—just 0.08 percentage point (that’s it!)—which likely gets revised up when full data are in. Finally, it totally avoids the issue of an 11.7% import surge subtracting 1.85 percentage points from headline growth. GDP’s math tallies imports as a negative, but they actually show strong demand at home—which, you know, isn’t bad. We’d suggest this is just confirmation Q1 was a one-off and not something worse.
|By Matthew Lynn, The Telegraph, 07/30/2014|
MarketMinder's View: This pretty much sums it up: “The oil and gas fields generate a heck of a lot of money. Except the trouble is, you are not going to get any of it. Most of it will go to the Government and the exploration companies – and practically nothing will go to you. One reason the industry has developed so fast in the US is that under American law the oil and gas is owned by the people under whose land it is discovered. If a developer finds it under your property, you make a fortune. In this country, you only own the first few feet, which isn’t any use – the shale gas is a lot deeper than that.”
|By David Enrich, Gabriele Steinhauser and Matthew Dalton, The Wall Street Journal, 07/30/2014|
MarketMinder's View: The US and EU officially released details of their expanded sanctions on Russia tied to the ongoing Ukraine conflict. And, here again, the sanctions lack teeth and are more noteworthy, arguably, for what they omit than what they hit. As shown here, major Russian banks can’t issue long-term debt in either EU or US capital markets, but the banks targeted have relatively little debt due in the next nine months. Also, the US sanctions on banks miss Russia’s largest bank, which is majority state-owned, no less. Other measures taken include a ban on future arms sales and some energy technology.
|By Anatole Kaletsky, Reuters, 07/30/2014|
MarketMinder's View: If you are concerned that the Shiller Cyclically Adjusted Price-to-Earnings Ratio (CAPE) shows stocks are overvalued, we prescribe this excellent article. The CAPE’s theory is faulty, “… Arbitrary 10-year averaging takes no account of the length and depth of business cycles and makes no allowance for accounting write-offs. The Shiller price-earnings ratio will continue to be upwardly biased until 2019 because of the longest recession in U.S. history and the biggest-ever corporate write-offs then suffered by U.S. banks.” And isn’t accurate in practice: “But leaving aside the theoretical arguments, what about the practical usefulness of the Shiller ratio as an investment tool? Recent evidence is conclusive: For the past 25 years, the Shiller ratio’s signals have been almost uniformly wrong. Since 1989, the S&P 500 has multiplied eightfold, while total returns, including dividends, have increased the value of an average equity investment 12 fold.”
|By Sarah Max, The New York Times, 07/30/2014|
MarketMinder's View: Well, “fair” is always in the eye of the beholder, but we feel compelled to point out the author’s last name—Max—is also the mechanism the government put in place to keep plans from skewing overly to highly paid workers. There is an annual contribution maximum (in 2014 that’s $17,500), and employers can’t match when you can’t contribute. As designed, the mechanism also encourages employees to contribute more to plans. Rewarding employees for saving less is just a very confused message to send workers.
|By David Fagleman, The Guardian, 07/30/2014|
MarketMinder's View: So this is a lot like the idea you can have a rule that guides any and all behavior, a la US regulators’ push for a uniform fiduciary standard for financial professionals. But the world doesn’t conform to such niceties: Rules do not instill values, install intelligence or institute a client-focused structure. That stuff all comes from within. Moreover, it isn’t like medicine’s use of the Hippocratic Oath ensures there is no malpractice, or else many American lawyers would be out of work. Finally, you can also say things like, “Banks perform crucial functions that are vital to our everyday lives” about just about anything. For example: “
Banks Sewage treatment plants perform crucial functions that are vital to our everyday lives, providing savings water and retirement waste disposal options, enabling us to become homeowners live and prepare for our have a future. Their purpose goes beyond macro-economic infrastructure concerns and extends to the long-term prosperity lives of customers. Advocating for more virtue in banking sewage treatment is a call for the re-introduction of an economic and social purpose to banking waste disposal that is vital if we are to get the banking sewage treatment sector we deserve.”
|By Ambrose Evans-Pritchard, The Telegraph, 07/30/2014|
MarketMinder's View: But buying foreign bonds to build up foreign exchange reserves isn’t quantitative easing! Yes, both practices bid prices up and yields down, but this is where the similarities end. Reserve building doesn’t increase the quantity of money. (Neither does QE, in practice, but in theory that’s the purpose.) If, as predicted here, foreign countries do cut back on bond buying for foreign exchange reserves, it might mean higher long-term interest rates, but this isn’t monetary tightening. If banks capitalize on a steeper yield curve by lending more, and increasing the quantity of money, it’s loosening!
|By Christopher Condon, Bloomberg, 07/30/2014|
MarketMinder's View: The trouble with this article isn’t anything former Fed head Alan Greenspan said—this is not a repetition of his three-plus-year early “irrational exuberance” call made in 1996. The problem is that the reporting leads you to believe he made a call, which he didn’t. Here is what he said: “The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know.” Which sounds more like a case of acrophobia, common among investors today. Now, a correction may or may not come—short, sharp, sentiment-driven dips of 10% or more are unpredictable. But bear markets usually start with widespread euphoria, and widespread acrophobia is at odds with that.
|By Quentin Fottrell, MarketWatch, 07/30/2014|
MarketMinder's View: Well, the person we elect to the oval office doesn’t actually preside over the private-sector-led US economy, so none of these guys could fight or win a “battle” against unemployment. Growth begets jobs, and the economy moves in cycles. Take Clinton, for example: The boom occurring while he was in office that drove unemployment to 4% was tied to Tech and the Internet, which Clinton neither invented nor commercialized. (Nor did anyone else in his administration.) He also didn’t cause the tech bubble that he “handed” to George W. Bush, who seems to get low scores here despite having unemployment of around 4% in 2006-2007. Always remember: The US economy—and jobs and stocks—aren’t slaves to the folks in office. Presidents are only one of many inputs.
|By James Titcomb, The Telegraph, 07/30/2014|
MarketMinder's View: This is supposedly needed because either: a) a 3-5 year clawback period was clearly insufficient or b) bankers were complaining that their salaries were not big enough before. Here is a hint: If bankers see professional risk rise (jail time), they will demand more reward. That’s not greed, just rational man theory.
|By Jon Hilsenrath, The Wall Street Journal, 07/30/2014|
MarketMinder's View: The part of this worth noting is the Fed again slowed its quantitative easing bond purchases from $35 billion monthly to $25 billion. The Fed’s tapering has, in our view, contributed to sunnier broad economic conditions lately, as the widening yield spread boosts the profitability of bank lending. It is no surprise to us lending is up sharply since 2014 began and the taper kicked in. Aside from that, Fed forecasts and rate hike speculation are noise.
|By Mark Gilbert, Bloomberg, 07/30/2014|
MarketMinder's View: Here’s an alternative explanation: Maybe Europe just isn’t spiraling into deflation? Disinflation and a monthly deflationary read don’t mean recession and rapidly falling prices approach. Deflation tends to follow recession, not lead it. Finally, here is a sign of an odd thesis: Positive and better-than-expected GDP is bad because it means the ECB is less likely to take radical (read: unnecessary and likely counterproductive) action on a slight dip in prices. Look at it this way: While there is little evidence deflation is a leading indicator, there is a mountain of evidence wrongheaded monetary policy is. We’d prefer avoiding the latter more than the former. (By the way, Spain’s actual leading economic indicators point to growth ahead.)
|By Carol E. Lee, The Wall Street Journal, 07/29/2014|
MarketMinder's View: The EU and US are expanding sanctions on Russia, to hit Russian state-run banks’ ability to access EU capital markets (similar to existing US provisions), curtail future weapons trade and limit export of oil exploration technologies. Though these sanctions are a bit harsher, they still aren’t hugely punitive and are unlikely to materially affect markets or the global economy.
|By Michalis Persianis, The Wall Street Journal, 07/29/2014|
MarketMinder's View: In March 2013, Cyprus turned to the EU, IMF and ECB (troika) for a bailout. The troika, however, responded with a new plan: Large, uninsured depositors would be bailed in—deposits above €100,000 would be exchanged for an equity stake in these banks, converting the depositors (typically considered highly secured creditors of a bank) into owners—a popular move at the time, considering anti-bailout sentiment in Northern Europe and the fact Russian oligarchs were among Cypriot banks’ biggest customers. The depositors took losses then, and they appear likely to take big losses again now, as Bank of Cyprus dilutes equity owners to try to clear the ECB’s stress tests. This doubling down on bail-ins comes after the EU announced the measure will be part of standard bank resolution looking forward, which all sends very odd signals to savers and could lead to bank runs down the line if other firms become imperiled. As this article notes, investors are different than depositors—“…They just want their money back.” For more, see Elisabeth Dellinger’s 03/26/2013 column, “What Cyprus Tells Us About Banking Regulations.”
|By Brian Bremner and Simon Kennedy, Bloomberg, 07/29/2014|
MarketMinder's View: Claiming that the “open monetary spigots at the US Federal Reserve, European Central Bank and Bank of Japan” are the reason why recent geopolitical turmoil in Ukraine, Gaza, Thailand and another chapter in the near incessant squabbling between China and its neighbors overlooks history. The simple fact is regional conflict normally does not affect stocks, as it usually isn’t significant enough to impact global growth, profits or revenues. For examples, see the Korean Conflict, Gulf Wars I and II, Afghanistan, The Vietnam War, virtually all of Israel’s history and more. If these events didn’t change market direction materially, why would the present?
|By Katie Holliday, CNBC, 07/29/2014|
MarketMinder's View: Wait—it’s a bubble in bubble talk? Claims of “froth” are bubbling up all over? Here’s the thing: If everyone thinks you’re in a bubble, you probably aren’t, because a bubble requires euphoria to blind investors to risk, buoying asset prices higher than they should be. Hence, bubble talk is unlikely to ever be a “self-fulfilling prophesy.” Bubble fears are actually self-deflating. The time to fear a bubble is when the tally of headlines claiming there is one is near zero. For more, see our 7/29/2014 commentary, “What a Real Bubble Looks Like.”
|By Yoon Ja-Young, The Korea Times, 07/29/2014|
MarketMinder's View: There is good news, bad news and a bizarre theory underlying both at work here. Starting with the good news: Korea’s government plans to slash the dividend tax rate—a real plus for shareholders. The bad news? The government reportedly plans to tax companies’ “excessive internal cash reserves”—no word on what that means, though the tax is rumored to vary by industry—by anywhere from 3-15% annually. The bizarre theory behind all this is Korean politicians’ belief the economy needs spurring and inequality is hampering growth. So they view this as a means to force businesses to boost investment, salaries and dividends to avoid this tax and get money off their balance sheets. However, we are skeptical this impact would follow with no unintended consequences. In our view, you likely get a wee bit of misdirected investment, some corporations leaving Korea or otherwise creatively avoiding the tax.
|By Editorial Staff, Bloomberg, 07/29/2014|
MarketMinder's View: While we’re never very optimistic multilateral trade deals get done, that Modi’s government—which swept into office amid high hopes of market-opening reform—is opposing removing these agricultural protections is just the latest point suggesting that reformer moniker isn’t earned yet. When you combine it with a budget that’s light on reforms and a finance minister who proclaimed the government’s policy direction was to avoid tough decisions, it seems Modi is far from “opening India up for business.” Yes, it takes time for any new leader to move the needle. However, promises are one thing. Actions are another—and that’s what investors should focus on in India.
|By Paul Krugman, The New York Times, 07/28/2014|
MarketMinder's View: This rather overstates the fiscal impact of inversion M&A deals (US firms buying smaller foreign firms so they can get a new tax address without jumping through costly IRS hoops). Companies that invert still pay taxes on profits booked here—they just avoid double taxation on overseas profits. The Treasury does lose some revenue, but not much—estimates are $20 billion in lost tax dollars over the next decade, or about 2% of the rise in tax revenue over the last 10 years (which ignores the probability they’d find other ways to pay less). Whether or not companies invert, they still have an incentive to invest here—it’s called growth. Inversions don’t put the US economy at risk. For more, see our 07/17/2014 commentary, “Economic Patriotism or Protectionism?”
|By Alexandra Scaggs, The Wall Street Journal, 07/28/2014|
MarketMinder's View: As this piece highlights, many “experts” predicted 2014 to be a pretty flat year for stocks. S&P 500 performance at the year’s halfway point has already exceeded those modest expectations, leading some to revise their forecasts and while others maintain the biggest gains for the year were already had—a sign of the still skeptical sentiment surrounding this bull. Professional forecasters did the same thing last year and were blinded by an over 32% rise in the S&P 500. This year, with corporate earnings and revenues up, a growing world, gridlocked governments and many doubters, we think stocks should deliver another nice surprise.
|By Nina Chestney, Reuters, 07/28/2014|
MarketMinder's View: While the UK should benefit over time from developing its vast shale resources, the bureaucratic process involved delays those benefits—potentially by a decade. Since markets tend to price in events over the next 12 to 18 months, we’d suggest not getting blinded by UK shale enthusiasm—this is a very long-term structural positive, not a near-term cyclical driver.
|By Staff, Xinhua, 07/28/2014|
MarketMinder's View: These three new private banks will target small firms, which have historically struggled to get bank loans, resorting to riskier avenues like loan sharks or peer-to-peer financing instead. While time will tell how successful this initiative is, it is another sign of China’s commitment to long-term financial reform and more broad-based growth.
|By Pedro Nicolaci Da Costa, The Wall Street Journal, 07/28/2014|
MarketMinder's View: Well, maybe, but in our view, all forward guidance is equally useless—for investors and central bankers. For central bankers, it backs them into a corner and raises the risk they lose credibility if/when they change their mind. For investors, it hoodwinks folks into believing central bank decisions are predictable. In our view, everyone was better off when Alan Greenspan communicated in noncommittal riddles.
|By Lu Wang, Bloomberg, 07/28/2014|
MarketMinder's View: As this piece points out, “buying the dips” is a pretty hot strategy early on in a bear market, as investors can’t fathom a deeper downturn. But there is a big difference between pouring money into a bear market and topping up during a bull. Today, it’s the latter. Not that we’d recommend such short-term tactics or waiting for the dips to buy. Always think long-term.
|By Neil Irwin, The New York Times, 07/25/2014|
MarketMinder's View: But it isn’t! This is all based on the assumption young folks who haven’t much participated in this bull market might never have another chance. But that’s not how markets work, and it has no grounding in history. We’ll likely have several bull—and bear—markets over the next few decades. We agree it matters when you invest, and investors shouldn’t assume straight-line returns over time, but folks also shouldn’t assume market cycles will stop or that “the remarkable rally in stocks is cannibalizing the market returns that otherwise would have occurred in the decades ahead.” Markets are pricing in the next year-plus. Who knows what wondrous things they’ll price in over the far future!
|By Ambrose Evans-Pritchard, The Telegraph, 07/25/2014|
MarketMinder's View: It’s still far from certain whether the EU will approve to sanctions that amount to more than an annoying poke. Not that we’re questioning the investigative reporting here or the motives and morals of the countries in question, but experience tells us getting a bloc of 28 nations to agree on big policy moves (particularly those in the economic arena) is mighty difficult. If they do pass the “draconian” sanctions theorized here, though, they likely don’t carry enough of a global economic impact to put this bull market at risk. They’d hurt Russia. Hard. But EU states don’t depend on their trade relationship with the Motherland for continued growth. Energy is an issue, but the EU has been preparing and storing up gas reserves just in case. For more, see our 07/18/2015 commentary, “About Ukraine and Russia …”
|By William D. Cohan, The New York Times, 07/25/2014|
MarketMinder's View: Well, actually, she’s settling for words—and words are only weapons if you’re insulting someone. But our beef with this metaphor (and metaphors in general) aside, the broader problem here is the assumption Fed policy (or anything else at large today) is driving markets to “misprice risk.” Stocks are high, but so are earnings. Yields are down, but so is default risk—economies are growing, balance sheets are healthy. Maybe, just maybe, investors just see all this strength and are pricing things appropriately. Hopefully for investors’ sake, the Fed will realize this and not try to use its regulatory toolkit to try to deflate a bubble that doesn’t exist. That’s the real risk here.
|By Brett Arends, The Wall Street Journal, 07/25/2014|
MarketMinder's View: Or burning anyone who concentrates in their employer’s (or any) stock, whether it’s a fresh IPO or a blue-chip warhorse, in their brokerage account of their 401(k). The planner quoted here gets it right: “Those with big stakes in their employers are taking on ‘multiple layers of risk’ and running the danger of ‘double trouble’ … if things turn down, as happened after 1999, they may see their savings and job vanish at the same time.” Owning too much of any single company stakes your financial future on something very narrow. Even if things are flying now, ask yourself: What if? By diversifying—limiting any one company to 5% or less of your portfolio—you can guard against company-specific risk. Don’t believe us? Ask any former Enron employee.
|By Paul Vigna, The Wall Street Journal, 07/25/2014|
MarketMinder's View: This format doesn’t grant us the space to discuss everything that’s wrong inside this piece, so we’ll stick with the biggies. 1) Stocks aren’t “out.” Stock demand is still high and rising. 2) Trading volumes don’t indicate demand. Or predict future performance. Or really correlate with market direction coincidentally. They. Mean. Nothing. 3) Participating in Airbnb isn’t “investing in yourself.” It’s finding another avenue to earn money. Most folks then do something else with that money. Maybe spend it. Maybe save it. Probably invest at least some of it for retirement—probably in stocks. Look, we get it, tech is cool. Some of the services and companies described here are new frontiers of the economy. But they aren’t the end of stocks. One day, they’ll probably become publicly traded firms, and the industries that spring up around will beget more publicly traded firms, and investors will own all those stocks. (Though, we’re kinda sketchy on the untested direct corporate financing thing. Like, what backs it? What determines return? Is there a ceiling? Maybe do some more due diligence there, mmmkay?)
|By Alan Tovey, The Telegraph, 07/25/2014|
MarketMinder's View: Huzzah. But this neat little factoid is backward-looking. UK stocks surpassed their pre-crisis peak a while ago. It just goes to show you, by the time data confirm growth over any period, stocks have long since moved on. (Also, can someone please explain to us how the UK economy is like a cappuccino? Because we really just don’t get the graphic in here. Is it meant to imply the industrial sector is espresso, and Britain’s economy needs a second shot? Or that the services sector is like foam and it’s too frothy? Both are wrong, because the UK is just concentrating on the things it does best and making the ghost of David Ricardo proud. But we’re still curious.)
|By Staff, Jiji Press, 07/25/2014|
MarketMinder's View: If more cooperation between Japan’s business federation (keidanren) and government means the two sides are working together to improve corporate governance and foster competition in corporate Japan—and the business lobby is serious about shattering the status quo—then this is an encouraging sign. But if it means Prime Minister Shinzo Abe is desperate for political support as his poll numbers decline and is making tradeoffs and exemptions from potential reforms, then it’s discouraging. Which is it? Too soon to tell, but one could make a pretty compelling case that Abe is trying to curry favor and fend off rival politicians who smell weakness as his popularity ebbs.
|By Steven Russolillo, The Wall Street Journal, 07/25/2014|
MarketMinder's View: You might look at this and say, “Gee, that’s silly. After all, you’re a shareholder and this is business, and you own a slice of a business’s profits, which would be bigger in more business-friendly tax climes.” But on the other hand, saying “There are other fish in the sea, so I’ll sell,” is an entirely capitalistic way to register your personal displeasure with the practice of inversion tax deals, if you’re so inclined. We happen to disagree these deals are a significant drag on the economy or America’s tax dollars (and by extension, public investment), but the beauty of a free market is said market can judge these and other corporate practices as investors vote with their wallets. In our view this, not new (and quickly implemented) regulation, is the most beneficial way to “address” these things.
|By Eric Balchunas, Bloomberg, 07/25/2014|
MarketMinder's View: Just because you can soon go hog-wild for mainland Chinese stocks doesn’t mean you should—everything in moderation. China has some positives, sure—it’s growing swiftly, and its capital markets are opening—but it also has political and other risks. China is a small piece of the global market, and we think long-term growth investors are best off staying diversified, not concentrating in one Emerging Market. Also, note, index classification isn’t really a meaningful driver of stock returns. This piece implies mainland Chinese stocks should get a boost by becoming part of the MSCI Emerging Markets Index, but history shows this isn’t true (Israel’s reclassification from Emerging to Developed Markets being a recent example).
|By Jason Zweig, The Wall Street Journal, 07/25/2014|
MarketMinder's View: While this article purports to be about the merits of advisers charging exit fees, more broadly, it’s an example of the broad misunderstanding of the fiduciary standard in the investment industry. The fiduciary standard simply requires disclosure of potential conflicts of interest and other items. It does not eliminate conflicts or ensure low fees. Investors should always do thorough due diligence—discover all costs and potential conflicts of interest as well as the adviser’s expertise, values, track record and resources—to decide whether an adviser is the best fit for them. Relying on a rule won’t get you far. Simply, “the word ‘fiduciary’ isn’t a guarantee that your adviser will put you first.” It takes ever so much more. For more, see Todd Bliman’s 11/14/2013 column, “The Compass.”
|By Staff, The Yomiuri Shimbun, 07/25/2014|
MarketMinder's View: And Mexico is eager for foreign investors, so this could work out! Now, Japan investing in Mexican shale oil and gas extraction—and ultimately importing liquefied natural gas—won’t materially boost the fortunes of either country in the here and now. This isn’t a cyclical factor. But it is a very long-term positive for both countries and, if nothing else, a sign both are focusing on global trade and investment. That’s good for the world.
|By Jim O’Neill, The Telegraph, 07/25/2014|
MarketMinder's View: Wait. So. The world didn’t take Brazil, Russia, India, China and South Africa seriously before, even though they represent 21% of the global economy, but now that they have a $100 billion development bank, we’ll give them some street cred? Errrrrrr … given how key a role these countries already play, and given how much most of the world tends to ignore the IMF and World Bank, we’re pretty sure this won’t change much. Nor should it. Bully for them for creating an institution they believe will do good in the world and improve quality of life in less developed countries (and here’s hoping they’re right), but this just isn’t a significant global economic development.
|By Michael Rapoport, The Wall Street Journal, 07/24/2014|
MarketMinder's View: Starting in 2018, the International Accounting Standards Board (IASB) will require non-US banks to book loan losses based on expected losses over the next 12 months—currently, banks don’t record losses until they actually happen. Its US counterpart, the Financial Accounting Standards Board (FASB), has proposed a stricter standard, forcing banks to book all losses expected over the lifetime of the loan up front. Problem is, you can’t forecast into perpetuity—how can a bank know today whether a new 30-year mortgage will ever default?—so pricing a loan for some far-future possibility may yield bizarre results. However, we don’t think this is a huge negative for Financials. The rule operates on banks’ own expectations of loan losses, not market prices a la FAS 157. Mark-to-forecast seems a far better standard since it’s tied directly to banks’ primary business, lending, and not the market’s occasionally irrational pricing of some illiquid assets they might hold on their balance sheet.
|By Ian Wishart and James G. Neuger, Bloomberg, 07/24/2014|
MarketMinder's View: Color us skeptical on the likelihood these proposals become actual sanctions: "The options in the document for responding to Russia’s intimidation of Ukraine included something for virtually every EU government to dislike. France has held out against an arms embargo, German industry fears for its exports to Russia, Britain and Cyprus have been reluctant to scare away wealthy Russian investors, and Hungary has opposed wider sanctions altogether.” And all these countries (and 23 more) must agree on any measures enacted. That’s, like, hard. For reference: So far, the sanctions the US and EU have imposed on Russia—largely targeting individuals and specific companies—have been fairly muted.
|By Megan McArdle, Bloomberg, 07/24/2014|
MarketMinder's View: “Food and energy loom disproportionately large in the budgets of retirees. They’ve already acquired a lot of stuff, so they’re less apt to get excited about fantastic deals on television sets and furniture manufactured in China. On the other hand, they buy food and gas and medicine every month. When they see how much those expenses carve out of their income, they think, ‘My income is not keeping up,’ and the idea that the government is using the wrong inflation index seems like a reasonable explanation for why it’s so hard to make their money stretch. But however compelling this explanation may seem, it’s wrong. The government knows about food and oil prices. And it’s taking them into account when it calculates your Social Security check.” For more, see our 06/30/2014 commentary, “Should the Fed Hike Rates to Make It Rain?”
|By David Gelles, The New York Times, 07/24/2014|
MarketMinder's View: Here be the latest on this protectionist solution in search of a problem, which we covered in detail last week. Treasury officials are pressing Congress to pass a law effectively banning “inversion” M&A deals that would apply retroactively, likely stripping at least some recently agreed-to deals of their tax benefits. Democratic Senators support the notion, but Republican Senators don’t want to backdate a crackdown. Perhaps they find a middle ground, but even if this clears the Senate, passing the House is a tall order. In our view, that’s a plus. Protectionism is a negative, and an inversion smackdown is simply protectionism dressed as patriotism. Retroactive tax grabs are also no bueno—they undermine confidence in America as a good place to do business (for an extreme example, see businesses’ reaction to India’s recent move to backdate a foreign merger supertax to the 1960s). Just because we’ve done it before, as this piece documents, doesn’t mean it’s wise to do it again.
|By Brian Lund, Daily Finance, 07/24/2014|
MarketMinder's View: No. “Robo-advisers” are, after all, designed by humans, and their algorithms could be based on the same investing biases and industry mythology many less-savvy human advisers use. As this highlights, they also use the same risk-based approach to determine an investor’s strategy that the rest of the brokerage world uses—wrongly, in our view. Risk tolerance is important, but your long-term goals and time horizon should come first, and robo-advisers can’t help here. They can’t truly get to know you no matter how many survey questions you answer. They can’t have a back-and-forth dialogue to help you identify your long-term goals, objectives and time horizon. Nor can they counsel you through the many emotions and temptations the market’s ups and downs bring. For more, see Elisabeth Dellinger’s column, “Robots, Marie Antoinette and You.”
|By Scott Grannis, Calafia Beach Pundit, 07/24/2014|
MarketMinder's View: While we would go a bit further in our critique of quantitative easing (QE)—in our view, QE has hurt growth by discouraging bank lending—this nicely shows how the bull market hasn’t relied on the Fed’s “easy money” at all. “This is a genuine economic expansion and the rise in equity prices is a reflection of that growth. It’s not a liquidity-driven mirage, it’s real.” And there are 11 charts to prove it!
|By Staff, Xinhua, 07/24/2014|
MarketMinder's View: By “real economy,” they mean businesses other than those state-run behemoths that enjoy cheap, plentiful credit. The big guys have long hogged bank lending, forcing small and private firms into the evil clutches of loan sharks or the treacherous waters of peer-to-peer financing, which can make them vulnerable to the death penalty if they do it wrong. Needless to say, this is a key problem to address. To help these firms gain better access to financing, officials pledged to create new banks dedicated to small/medium businesses, expand capital markets financing to smaller firms, broaden credit derivatives markets and cut a bunch of red tape. Only time will tell whether they see this through successfully—prior attempts haven’t borne fruit—but the whole shebang would be quite beneficial.
|By Carl Richards, The New York Times, 07/23/2014|
MarketMinder's View: There is some wonderfully sensible commentary here, though the article has a couple of warts too. Differentiating between knowledge and behavior is crucial for individual investors. All too often, investors know what the right answer is (need growth, buy stocks; don’t sell deep in a bear market; don’t concentrate in employer stock/high performing stocks/any stock) but they do it anyway based on a rationalization (“it’s different this time,” etc.). The knowledge doesn’t influence the actions, and the actions matter most. That said, there is a balance problem here. The article touts the merits of attaining knowledge—the past—and discounts a forward-looking view as risky. Yet the entire purpose of knowing the past is to help you put the present and the future in context. Finally, financial literacy is important (we are passionate about this at MarketMinder)—but there is a stark difference between being literate and being an expert, just as the fact someone can write a grammatically correct sentence doesn’t make him or her Hemingway.
|By Naftali Bendavid and Matthew Dalton, The Wall Street Journal, 07/23/2014|
MarketMinder's View: To be fair, the details won’t be released until Thursday. But to be judgy, it appears based on existing reports the EU is again going to avoid imposing material sanctions on Russia, targeting mostly individuals and very specific organizations, rather than sector-wide sanctions. What’s more, it appears the notion of ceasing arms trade with Russia is also failing. If they can’t agree to stop selling weaponry to Russia after last week’s downing of a civilian aircraft using Russian technology, we kind of think it might be a wee bit of a stretch to expect harsh sanctions overall.
|By Jeremy Warner, The Telegraph, 07/23/2014|
MarketMinder's View: So another big organization is out with their market take, and it’s another one of those investors-are-too-complacent, low-volatility-will-end-badly, too-long-since-a-correction, markets-are-frothy-blame-central-bankers(!) rants. But is it really bubbly that global stocks are up ~40% in the last two years? Prior to this cycle, based on S&P 500 data since 1926, bull market average annualized returns are roughly 21%, so it wouldn’t seem like it. Why are markets up so much? Earnings and revenues are up! A healthy private sector still isn’t fully appreciated by the skeptical public, as illustrated by this piece. Also, two of the three risks are dubious: a rate hike (no history of regularly causing downturns) and the wiggling of other central bank rates. The third risk, the success of macroprudential regulation in deflating bubbles is real, but it is misperceived here: The issue, in our view, is not whether the Fed can successfully deflate a bubble. It’s whether they cause collateral damage trying—or deflate a nonexistent bubble. Finally, a simple correction: The 2007-2009 crisis began following corrections in 2006 and 2007. It wasn’t placid right before the storm, nor were investors complacent.
|By Todd Buell, The Wall Street Journal, 07/23/2014|
MarketMinder's View: This January, Lithuania will become the 19th nation to use the common currency. For those of you scoring at home, the current 18 are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Also interesting is the new voting rotation for the 19 national central bank chiefs that will take effect in 2015: The larger nations (Germany, France, Italy, Spain and the Netherlands) will share four votes, with the smaller 14 countries splitting 11. That means one major nation will sit out every five months, a factor potentially ruffling some feathers occasionally.
|By Matthew Lynn, MarketWatch, 07/23/2014|
MarketMinder's View: This article operates on a completely false either/or selection: That the reason stocks haven’t cratered over the crises in Ukraine, Gaza and Iraq is either that wars aren’t bad for stocks anymore or Fed bond buying. Ultimately, the thesis becomes clear: “Either way, investors can safely ignore war and politics from now on when they are structuring their portfolio.” This. Is. False. Politics are a key driver for markets—always have been, always will be. But war and geopolitics have pretty much always mattered only when they have huge global scope. Consider the “examples” of market impact listed here: “After the 9/11 attacks on Washington, DC and New York, the stock market fell dramatically. The Iraqi invasion of Kuwait sparked a wave of selling, and the Middle Eastern conflicts of the 1970s sent the oil price soaring and the stock market crashing.” 9/11, a tragedy of epic proportions, occurred 18 months into the bear market that began on March 24, 2000, and the September 10 level was regained 19 trading days later. The Iraqi invasion of Kuwait occurred after the 1990 S&L-crisis driven bear began, and it ended months before the US ever became militarily involved in early 1991. The Middle East conflicts—we presume this is the Yom Kippur War in 1973—began in October, but the 1973-1974 bear began January 11, 1973. (The OPEC embargo began two weeks after the Yom Kippur War and ended in March 1974, but the bear didn’t bottom for seven more months.) If conflicts are the proximate cause of all these downturns, why don’t any of the dates match? Finally, why wouldn’t larger conflicts (Korean War) cause one? Or similar conflicts (Iraq War in 2003, Arab Spring, etc.)? Perhaps the reality is the crises of the day now just aren’t big enough because it takes something really huge, a la WWII.
|By Sridhar Natarajan and Katie Linsell, Bloomberg, 07/23/2014|
MarketMinder's View: "Indigestion Burns Buyers " is one heck of a statement to describe a 0.38 percentage point dip in one month to date (15 trading days!). This largely seems to us like markets being markets and analysts practicing one of their favorite 2014 pastimes: Searching for meaning in the most myopic and microscopic of market movements.
|By David Gelles, The New York Times, 07/23/2014|
MarketMinder's View: Corporate inversions don’t mean outsourcing, relocation of investment or other facilities. Nor do they permit US firms to evade all US taxes, so it’s hard to see how they are a “virus” or “plague” afflicting the US economy. That said, politicians impeding the free flow of capital to avoid sensibly amending the US tax code risk a potential protectionist response, which is a negative. This is a long way from being done, and protectionism requires more than one player, but this is a matter to watch, in our view. For more, see our 07/17/2014 cover, “Economic Patriotism or Protectionism?”
|By Russell Gold, The Wall Street Journal, 07/23/2014|
MarketMinder's View: This proposed rule would require rail transport firms to upgrade thousands of tank cars employed in moving oil by rail over the two years after it becomes final. This is an increasingly common practice, considering the lack of other oil transport infrastructure in booming regions to get oil from, say, the Bakken shale in North Dakota to storage in Oklahoma or refineries along the Gulf Coast. Assuming this isn’t amended or killed, this is likely a plus and minus—an added cost for rail firms they might be able to pass on to oil producers (and, many steps removed, you). But one person’s cost is frequently another’s revenue, and that’s likely the case here.
|By Noah Smith, Bloomberg, 07/23/2014|
MarketMinder's View: No model will ever perfectly predict economic direction and, even if we live in academic economists' fantasyland (Ivorytowerland, where potential GDP matches real output, long-term forecasts come true and the wage-price spiral comes alive!), it still wouldn't be perfectly predictive of stocks' direction. Stocks are not only influenced by economic reality, but how folks feel about that reality. Models frequently fail to forecast the former, much less the latter.
|By Steven Russolillo, The Wall Street Journal, 07/22/2014|
MarketMinder's View: Well, global stocks corrected more than 10% in 2012 (the S&P 500 Total Return Index fell 9.6% then), and the Russell 2000 had one in 2014. So if you’re trying to use the time since a correction to forecast the next one (a complete fallacy), then we guess you also have to pick the right gauge. That a correction hasn’t hit the S&P 500 in over 1,000 calendar days doesn’t tell us whether or not we have a long ways to go until we see another or if one looms. The amount of time since the last sentiment-driven, short-term move won’t tell you anything about the next one. Folks’ fears and whims don’t move on a schedule. For more, see Todd Bliman’s column, “The Cost of Trying to Time Corrections.”
|By Simon Kennedy, Bloomberg, 07/22/2014|
MarketMinder's View: Sure, robots/automation might displace certain existing jobs in the future, but that doesn’t mean better and higher paying jobs won’t form as a result. For instance, many jobs disappeared as a result of the Industrial Revolution, but the shift to new manufacturing processes created even more opportunities. We shouldn’t fear automation—it is innovation and opens the door to more innovation as ideas collide. But what’s more, studies like the one included in this article aren’t very telling of what will actually happen to jobs in the next 10-20 years—they tend to assume a lot and extrapolate trends years into the future.
|By Saabira Chaudhuri, The Wall Street Journal, 07/22/2014|
MarketMinder's View: Smaller banks should want to hit $50 billion in assets. Right? Well, maybe not so much if that means they’ll get the “systematically important” designation, a label bringing higher capital requirements, Fed stress tests, bonus rules and more, all of which can be quite costly (and annoying). So, go figure, some smaller banks are self-installing a ceiling at about that $50 billion in assets mark. One bank noted here is even “restraining its lending growth” to try and stay below the threshold (unless they can land a whopper deal that would dramatically boost their assets to offset the costs associated with the requirements). All this is yet another unintended consequence of post-2008 banking requirements. We are waiting for the day when banks shed subsidiaries and certain lines of business to avoid the marker, in what we hope will be called, “a systemically unimportant spinoff.”
|By Peter J. Henning, The New York Times, 07/22/2014|
MarketMinder's View: The part of this that really caught our eye was the concept of creating a law that would hold corporate executives criminally liable for not releasing information about malfunctioning products, a la the ongoing GM recall investigation. Stamping out the intentional cover-up of such issues is a noble concept, and with that we have no gripe. But Federal legislation that would attach a criminal liability to issues that go knowingly undisclosed for more than 24 hours seems likely to accomplish little more than jacking up compliance costs, increasing executive pay (more risk, more reward) and incentivizing executives to avoid knowledge of such matters. The world is not a perfect place, and no doubt there are issues that crop up from time to time. But blanket fixes like this run the risk of being Sarbanes-Oxley-like overreaches. We are happy to report this is unlikely to pass through a gridlocked government.
|By Robert Pear, The New York Times, 07/22/2014|
MarketMinder's View: In two separate cases, Federal appellate courts in Virginia and the District of Columbia issued contradictory rulings in challenges to the Affordable Care Act’s subsidizing of premiums for policies sold on Federal Exchanges. The conflicting rulings virtually ensure the Supreme Court will ultimately decide the issue. Interesting as this may be, the development has no immediate market impact.
|By Douglas Anderson, The Telegraph, 07/22/2014|
MarketMinder's View: Yep, lifespans are increasing, and many do live beyond average life expectancies—that’s the meaning of an average. But none of that means immediate annuities are the only (or best) way to ensure lasting cash flow. It could just mean you need more growth-oriented investments to kick off cash flow later in life. Look, some investors will still pick annuities. But before assuming they’re the automatic best option, it behooves investors to weigh what they could be doing instead and determine which investment best suits their long-term goals and objectives.
|By Dr. Mark J. Perry, AEIdeas, 07/22/2014|
MarketMinder's View: “By tapping into previously inaccessible reserves of tight oil and gas trapped in shale rock formations miles below the Earth’s surface, US drillers increased domestic production of oil and gas by 40% between 2005 and 2013, bringing America’s output up to the highest level (44.11 quadrillion BTUs) last year since 1973, and just shy of the all-time record of 44.85 quadrillion BTUs in 1971.”
|By Liz Hoffman, The Wall Street Journal, 07/22/2014|
MarketMinder's View: While this is a state-level case, the state is particularly important for corporate America, as Delaware is the state of incorporation for many S&P 500 and public firms. This appears to be the first case testing Delaware’s “loser-pays legal fees” provision that resulted from a suit a couple months ago, and the plaintiff’s attorneys are directly challenging it here. For more, see our 06/11/2014 commentary, “Class Dismissed?”
|By Benoit Faucon, The Wall Street Journal, 07/22/2014|
MarketMinder's View: While Libya’s oil industry still faces hurdles and some turmoil, it is making some progress (albeit slowly)—Libya’s oil production has been incrementally rising from its 2011 low, two major export facilities are now back online, and the country plans to finally export oil from its biggest oil field next week.
|By Angus McDowall and Andrew Torchia, Reuters, 07/22/2014|
MarketMinder's View: A notable move for Saudi Arabia as it aims to welcome foreign investors to its stock market in the next year—more developed capital markets likely aid the nation’s businesses, attract capital and more.
|By Ryan Tracy and Victoria McGrane, The Wall Street Journal, 07/21/2014|
MarketMinder's View: Four years ago Monday, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. According to some estimates, only about half of the law is currently enforceable. A large part of the remainder constitutes a swath of “potential rulemakings” Congress punted to regulators, which are risks worth watching as they emerge. Fact is, the legislation itself—hotly debated, widely known—wasn’t as problematic as the potential rule crafted quietly by regulators that rears its ugly mug when least expected.
|By Suzanne McGee, The Fiscal Times, 07/21/2014|
MarketMinder's View: This spends altogether too much time delving down into the true meaning of Janet Yellen’s statement that certain teensy sectors were highly valued. Maybe her opinion is just and maybe not, but we’d suggest crediting any government official with having wonderfully clear-eyed visibility on the economy and markets is a bit of a stretch. Greenspan was three-plus years early with his “irrational exuberance” call. (Or wrong). Bernanke was way wide of the mark with his preliminary assessments of the damage of FAS 157. The Fed in the 1930s sucked about a third of the US money supply out of the economy in a recession. These are not the moves of an institution with a high degree of forecasting acumen. And even Yellen’s comments this week commit the same error her 2008 forecasts made: Forecasting based on past data. You don’t have to outright ignore what the Fed says–but we caution investors from investing based on what Janet Yellen (or any other central banker) says.
|By Jeff Sommer, The New York Times, 07/21/2014|
MarketMinder's View: If you pick a mutual fund, money manager, variable annuity subaccount, stock, bond, CD, real estate investment trust, MLP, ETF, ETN, call option, put option, straddle strategy, hedge fund(!) or any other investment product (are there any others?) based on past performance alone, this article is for you. Simple fact: Past performance is not predictive of future results. Dig deep to find the right option that’s aligned with your goals and objectives, not your greedy side.
|By Richard Evans, The Telegraph, 07/21/2014|
MarketMinder's View: After introducing a sweeping pension reform plan in March—highlighted by the ending of the effective requirement for pensioners to buy an annuity—the UK Treasury announced more details about the options and flexibility investors will have starting in April 2015. Options and flexibility are a plus, but these changes seem likely to give UK insurers the capability to offer high-priced riders and, potentially, even the deferred annuities so common in the states. In case you weren’t aware, the most “super” thing about those annuities are the “super” watered-down returns. For more, see our 03/20/2014 commentary, “Retiring the Annuity Requirement” and our sister website, Annuity Assist.
|By Paul Krugman, The New York Times, 07/21/2014|
MarketMinder's View: A sensible take on inflation in this expansion: “…It is important to realize that relative prices are always shifting around, and that some prices inevitably go up more than the average. As the figure shows, if you go back to the beginning of the Great Recession, food prices have risen more than the overall CPI (although hyperinflation it isn’t), but car prices have risen more slowly (and high-tech stuff has, of course, gotten much cheaper).”
|By Caroline Valetkevitch, Reuters, 07/21/2014|
MarketMinder's View: Well, no—reported earnings show the private sector’s health, not the entire US economy. And though many pundits are still waiting for evidence of stronger US economic growth, especially after the Q1 GDP pullback, earnings have grown for 18 straight quarters, including Q1 2014—a sign of the private sector’s strength. What’s more, stocks are a forward-looking indicator, not backward. Q2 results may bring a short-term reaction, but the likelihood one quarter’s earnings change market direction is low.
|By Jiang Xueqing, China Daily, 07/21/2014|
MarketMinder's View: We wish we agreed with the headline here, as China opening its financial markets and increasing the use of the yuan globally is a positive long-term development for both China and the world—it means deeper, more diverse global capital markets and easier global trade with the world’s second biggest economy. But alas, when we consider the still-stiff capital controls and the slow pace of tearing them down, we become more skeptical than this allows for. Especially just days after The Wall Street Journal reported, “China's major banks have halted an experimental program, sanctioned by the country's central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter.” It’s easy to impress with big percentage growth figures when you grow from near zero. Harder for the Communists is to stay the course if the economy gets further out from under its thumb.
|By Jessica Silver-Greenberg and Michael Corkery, The New York Times, 07/21/2014|
MarketMinder's View: This theory doesn’t pass the logic test, right in the headline: Folks, a bubble is all about a mispricing of risk. But if these risky borrowers who cannot afford to pay seek to borrow—and they pay high rates—that doesn’t appear to be happening. Hence, no bubble. Finally, this preys on still-latent fears of 2008 that incorrectly blame subprime. Absent FAS 157 and the government’s haphazard actions that created the crisis, there is little to no chance anyone is talking about subprime (secured) auto loans at rates priced commensurate with risk.
|By Liam Dann, The New Zealand Herald, 07/21/2014|
MarketMinder's View: This is a bit too dismissive of the conflict in Ukraine and Israel—going so far as to call them a mere “distraction to be shrugged off.” Now, we’d suggest they aren’t likely to create a bear market barring major, global escalation, but the scenario is at least worth following for that potential, however unlikely. On the good side, this does seem to stress the strength of this cycle and the fact it won’t easily be overturned. This type of article is a rarity today. Were it common, we would be more worried about potential euphoria. For more, see our 7/18/2014 commentary, “About Ukraine and Russia …”
|By Ambrose Evans-Pritchard, The Telegraph, 07/21/2014|
MarketMinder's View: Germany is frequently accused of not doing its part in helping the eurozone’s periphery by hogging all the wonderful export business and not importing enough from its neighbors. However, trade deficits are the least of the periphery’s concerns. In fact, Spanish exports have been surging for years now. Portugal’s also snapped back. The periphery’s problems were more tied to a lack of economic competitiveness, bloated public sectors and poor productivity, to name a few. But consider the alternative here: How on Earth do you expect Germany to fix this? Slap caps on BMW’s shipments to Spain? Are we sure Spanish dealers wouldn’t be upset by that? And what would the collateral damage be? In the globalized world we live in, it’s unlikely any countries’ finished goods exports are 100% made in their borders. And raw materials, well, they are used to make products abroad. This is just a very 1930s winners-and-losers theory about global trade, and a wrongheaded one at that. For more, see Elisabeth Dellinger’s column, “Don’t Fret German Austerity.”
|By Neil Irwin, The New York Times, 07/18/2014|
MarketMinder's View: Should investors listen to the Fed? Sure. Should they put much stock in forward guidance, jawboning or whatever you want to call it? Nah. And should they let Fed statements on stock prices dictate investment decisions? Heck no! “For a sense of the risks there, consider this: Mr. Greenspan’s warning of irrational exuberance in the stock market was in December 1996. The worst excesses of the dot-com bubble occurred years later; even at the low point of the post-dot-com stock crash and the financial crisis of 2008, prices never again fell that far. A person who ignored Mr. Greenspan’s advice and bought into the Standard & Poor’s 500-stock index the morning after his speech has earned a 268 percent return since then (including reinvested dividends).”
|By David Weidner, MarketWatch, 07/18/2014|
MarketMinder's View: More like this article ignores the reality of market history. Stocks didn’t fall “20% in the months after the Bay of Pigs and the Cuban Missile Crisis in 1962.” The 1957-1961 bull market peaked on December 12, nearly eight months after the Bay of Pigs. The S&P 500 then fell -28%, but stocks bottomed on June 26, 1962, nearly three months before Kennedy’s standoff with Khrushchev over those missiles in Cuba. Stocks did wobble as the standoff started, but they bottomed the day after Kennedy announced the blockade—and started rising the day Khrushchev called the blockade “an act of aggression.” By the time the Soviet ships turned around, stocks were up over 9% off that relative low, and the bull market lasted another three-plus years. The moral of the story: Localized international incidents, no matter how terrible, simply aren’t meaningful long-term market drivers. For more, see today’s commentary, “About Ukraine and Russia …”
|By James Quinn, The Telegraph, 07/18/2014|
MarketMinder's View: Yes, the UK banking industry has a bit of a competition problem. But breaking up the biggest banks, in our view, isn’t a sensible or beneficial fix. Why not just figure out what caused the banking sector to be so concentrated in the first place, then fix those market inefficiencies and regulatory barriers so small banks can steal market share naturally?
|By Chuck Jaffe, MarketWatch, 07/18/2014|
MarketMinder's View: From the unfair headline to the second-to-last sentence, this paints an entirely false picture of how investors should think about the potential for a uniform fiduciary standard in the financial services industry. We know plenty of brokers who put clients’ interests first because their values compel them to even though the rules don’t. We also know, from websites like this, that advisers held to the fiduciary standard are as prone to defraud as those who aren’t. The rule doesn’t guarantee behavior. And it doesn’t guarantee advisors following the standard have the experiences and resources to do what’s best for each client. The rule improves the disclosure of conflicts of interest, which we’re all for, but it isn’t a prophylactic against bad advice. For more, see Todd Bliman’s 11/13/2013 column, “The Compass.”
|By Editorial Board, The Wall Street Journal, 07/18/2014|
MarketMinder's View: Please pardon the political slant in this article—as always, we’re looking at it solely from the angle of market impact. And politics aside, it fairly captures the impact of protectionist tariffs like those the US just enacted against imported steel: “When Washington imposes tariffs, it raises prices on the many to benefit the protected few. The injured in this case will include untold workers, shareholders and customers of U.S. companies that use steel—especially the domestic manufacturers that everyone professes to love. U.S. firms will have greater incentive to expand overseas, where the tariffs don't apply, and household energy costs will be higher because of the added expense to drillers.” It also raises the risk other countries retaliate, throwing up tariffs and barriers against US goods and services. The result is a disrupted flow of resources, capital, goods and services globally, which markets generally hate. For more on that, see Thursday’s commentary, “Economic Patriotism or Protectionism?”
|By Walter Updegrave, The Wall Street Journal, 07/18/2014|
MarketMinder's View: In our experience, investors’ self-described risk tolerance does change with the market’s ups and downs. A library of behavioral finance studies and our own actual work experience support this theory, too. We can’t opine on whether the outfit highlighted here has crafted a survey that somehow compensates for volatility-driven emotions, but that’s beside the point anyway. No matter how “good” a risk tolerance survey, the fact remains risk tolerance (or comfort with volatility) alone shouldn’t determine your investment strategy. Your long-term goals—the primary purpose for your money—and the length of time you must be invested to reach them should be starting point. Otherwise, you could increase a different risk, the risk you run out of money.
|By Andrew Ackerman, The Wall Street Journal, 07/18/2014|
MarketMinder's View: Public service announcement, folks: If you buy a CD or any other investment product that turns out to be pure fraud, regulators won’t compensate you. SIPC is insurance against deposits held at failing brokerages. Not against products you buy and hold in an account in your name.
|By Yao Jing, China Daily, 07/18/2014|
MarketMinder's View: It appears some Chinese policymakers have learned that age-old lesson: If you restrict sales of something, people buy less of it, and prices fall. Now, we probably wouldn’t go as far as to say China’s housing slide is an unnecessary result of misguided efforts to curb the purchase of second and third homes—it seems pretty clear there is a supply glut—but restrictions certainly didn’t help matters. Lifting them, at the very least, will allow normal market forces to kick in and perhaps stem the tide some.
|By Michael Rapoport, Saabira Chaudhuri and Andrew R. Johnson, The Wall Street Journal, 07/18/2014|
MarketMinder's View: Specifically, three of the US’s biggest banks averaged three-plus percent loan growth in Q2, a big turnaround from falling lending a year ago. Yes, it’s anecdotal, but since the FDIC’s sector-wide data are released at a considerable lag, it’s a handy early snapshot. And it shows banks are bouncing back nicely as Fed bond buying winds down, defying all those old fears of “taper” doom. Add this to the pile of evidence showing the end of quantitative easing is good.
|By David Zaring, The New York Times, 07/18/2014|
MarketMinder's View: Well that’s cute. And that’s about it. Look, we don’t mean to be dismissive, but we’re just a wee bit confused on how having an international college of regulators standing by to address Lehman’s failure, or Belgian bank Dexia’s failure, or any of the other banks that tumbled since 2008 would have helped any of these situations go better. Why would a regulator in, say, Helsinki be any more equipped to weigh in on Lehman, a US investment bank, than the Fed and SEC? How would this do anything other than create a slow-moving morass of groupthink? Besides, the real issue in 2008 wasn’t a bunch of international regulators screaming “not It.” It was the alphabet soup of US regulators not having the faintest idea of what constitutes a sane and orderly bank resolution.
|By Barbara Kollmeyer, MarketWatch, 07/18/2014|
MarketMinder's View: Newsflash: If you can write this headline about an asset’s price movement, and it’s true, then said asset is not, in fact, a safe haven.
|By William Mauldin and Paul Sonne, The Wall Street Journal, 07/17/2014|
MarketMinder's View: The US poked Russia with another round of sanctions on Wednesday, barring four major Russian firms from accessing funding in US capital markets. Though Russia bristled at the moves and some US business groups expressed concern about retaliatory action, the likelihood these sanctions bring a material economic or market impact is almost nil. The sanctions don’t limit the involved parties from doing business in the US, trading with US companies or completing transactions in US dollars. For more, see our 07/18/2014 commentary, “About Ukraine and Russia …”
|By Lu Wang and Joseph Ciolli, Bloomberg, 07/17/2014|
MarketMinder's View: According to the poll cited in this article, about 60% of financial professionals surveyed think, “the market is on the verge of a bubble or already in one.” That’s a pretty good indicator telling you that we’re probably nowhere close to a bubble—pros tend to be just as herd-like in misperceiving market conditions as the rest of the investing population. Whether it’s from the press, pros or regular folks, constant bubble chatter is a sign of skepticism, not euphoria (an environment where almost nobody utters the “b” word), suggesting the bull market still has a ways to go—and we recommend enjoying the ride.
|By Rob Wood, The Telegraph, 07/17/2014|
MarketMinder's View: Yes, confidence in central bankers matters, but confidence doesn’t come from bankers’ being super specific the timing of their next move. That’s the lesson for Carney in recent months: don’t give markets something they think is specific enough to front-run—do that, and you just lose credibility if conditions force you to do something different. That’s a confidence loser. In our view, Alan Greenspan set a pretty useful model: Just talk in long-winded riddles that don’t mean much, and let your actions speak for themselves. Then investors can weigh your actions and build up confidence in what you do—far more lasting than false belief in what you say.
|By Staff, Bloomberg News, 07/17/2014|
MarketMinder's View: Experts say that Huatong Road & Bridge Group Co., a construction company, looks likely to miss upcoming principal and interest payments which would make it China’s second onshore corporate bond default provided the government doesn’t intervene. While this would cause losses for bondholders, it would be a positive sign—evidence the government remains willing to subject China to market forces, staying true to reform pledges. For more, see our 03/06/2014 commentary, “China’s Path to Free-Market Reforms: Default?”
|By Ambrose Evans-Pritchard, The Telegraph, 07/17/2014|
MarketMinder's View: This operates on the assumption rate hike = liquidity squeeze = bad news. But there is no—zero!—evidence in history this is true. During the Fed’s past nine tightening cycles, global stocks were positive over the year after the initial rate hike vastly more often than not. Ditto for stock returns after the BoE’s initial hikes.
|By Rob Taylor and Rhiannon Hoyle, The Wall Street Journal, 07/17/2014|
MarketMinder's View: Politicians, environmentalists and sociologists will debate the merits and pitfalls of Australia’s repeal of the carbon tax, but the market impact here is basically nil. Proposals to modify the tax have been widely discussed a while, and current Prime Minister Tony Abbott won office last year thanks largely to his pledge to remove the scheme. So while the repeal of the tax removes an economic headwind for Australian businesses and consumers in the longer term, stocks have had plenty of time to digest this legislation and move forward.
|By Mark Gilbert, Bloomberg, 07/16/2014|
MarketMinder's View: The financial punditry’s preoccupation with all things central banky continues. Here is yet another attempt to game what’s in Mark Carney’s brain—frankly, you’d have thought his waffling double talk over his entire tenure at the Old Lady of Threadneedle Street would dissuade future attempts, but no. On the bright side: Like the Fed, initial Bank of England rate hikes are followed by positive global equity returns over the succeeding six, 12, and 18 months vastly more often than not. You can’t game central bankers, but you probably don’t need to anyway.
|By Dr. Mark J. Perry, AEIdeas, 07/16/2014|
MarketMinder's View: We feature this as another public service message in our continuing effort to educate the public this isn’t the 1970s. Here Dr. Perry looks closely at the three major shale oil producing regions of the US—North Dakota’s Bakken Shale and Texas’s Eagle Ford Shale and Permian Basin. As noted, these regions combined 2007 production was 1 million barrels per day. Today? Over 4 million and still rising fast. Current output from these three regions exceeds all global oil producing countries except Russia, Saudi Arabia, the US and China. For more, see our discussions here, here or here.
|By Yalman Onaran, Bloomberg, 07/16/2014|
MarketMinder's View: This goes a bit too far, in our view, by assuming the US gets a big advantage from being the most common currency used as a medium of trade, but it does very sensibly point out that there is no evidence foreign nations are ditching the dollar as that or a reserve currency. Talk of dumping dollars is cheap, dollars less so.
|By Staff, Reuters, 07/16/2014|
MarketMinder's View: Regulators are continuing their effort to slog through money fund reform, and one frequently cited plank is to require institutional money fund prices to float with the value of underlying investments—no more $1 per share. Overall, this is another solution seeking a problem, and highlighted here is an example of the trouble it can bring: Any redemption from an institutional money fund would drive a capital gain or loss under the US tax code. Congress is now talking of exempting money funds, but that seems to create a loophole for financial product creation, too. All in all, regulators would be better served to realize Reserve Primary’s “breaking the buck” in 2008 was an isolated aftereffect of the panic.
|By John D. McKinnon, The Wall Street Journal, 07/16/2014|
MarketMinder's View: This is highly, highly unlikely to become law in a divided Congress, and the direct effect would be only on a handful of companies. However, we feel compelled to pose the question: Would it not be preferable to just simplify the US tax code and lower corporate tax rates to compete with these foreign nations? Also, nothing about changing domiciles means funds aren’t invested in the US. They still make payroll, invest in facilities and more. Moreover, we’re as patriotic as the next American, if not more so. But calling for economic “patriotism” smacks of protectionism, an entirely different “ism” and a potentially dangerous message to send. Thankfully, it appears gridlock may help here.
|By Timothy W. Martin, The Wall Street Journal, 07/16/2014|
MarketMinder's View: The latest turn in the US v. ratings agency Standard and Poor’s is that the rater will seek a settlement in which it admits no guilt for its faulty ratings on mortgage-related debt in 2008. All in all though, we sort of think S&P’s earlier defense was the most accurate to the facts. Their ratings pretty much are puffery, and investors would be better off handling them as such. Or not at all.
|By Robert Shiller, The Guardian, 07/16/2014|
MarketMinder's View: “Booming Until It Hurts” sounds like a dance track from the 1980s. Seriously, though, could there be a better demonstration of still-present skepticism than an article that lauds skeptics just for being skeptical—whether they’re right or not? Chances are this type of an article will be a rare breed indeed when markets are actually euphoric
|By Matthew Yglesias, Vox, 07/16/2014|
MarketMinder's View: We often state that our commentary aims to be free of any political ideology and take on a theory on its economic/market merits. That is true here, as we ask you to overlook the overt partisan politics in this piece. We don’t support returning to the gold standard. But most of these reasons miss the mark. Here we go point by point. #1: But gold was at a fixed price when the US was on the standard, so that bounciness wouldn’t happen? #2 is sensible and a plank in our objection. #3 is a cyclical statement about a structural suggestion, but we agree for now. #4 is just odd. #5 is off; most economists agree the Fed is responsible for the Great Depression (the period shown), particularly since they were responsible for managing gold flow and “high-powered money” (bank reserve credits) at the time. #6 is true but doesn’t go far enough—market-based currencies mitigate political oversight because they can’t be as easily manipulated as a fixed exchange rate. #7 is also odd.
|By Christopher S. Rugaber, Associated Press, 07/16/2014|
MarketMinder's View: Just the facts, ma’am: “Despite June's small increase (a 0.1% m/m rise), manufacturing output rose in the second quarter at the fastest pace in more than two years….” “Factory output climbed 6.7 percent at an annual rate in the second quarter, the most in more than two years and up from just 1.4 percent in the first quarter.”
|By Josie Cox, The Wall Street Journal, 07/16/2014|
MarketMinder's View: Scotland’s independence vote, slated for this fall, is worth following both from a “hey, this is interesting!” standpoint and a potential political driver for UK stocks standpoint. But it’s quite unlikely to pass. Possible negatives always exist, which is why assessing probabilities and likelihoods is what matters most for investors.
|By Matt Levine, Bloomberg, 07/16/2014|
MarketMinder's View: The thesis offered here—that one SEC commissioner is upset because the SEC is losing turf—is sensible enough. But it’s all built on the shaky premise that the Financial Stability Oversight Commission (FSOC) is needed because overleveraged SEC-regulated Financials were the root of the crisis and Fed-regulated banks were the victims. But failures in 2008 ran the gamut of banks, brokers and insurers. Banks and brokers are in the business of leverage. Did some go too far? Yes. But what destroyed these firms wasn’t borrowing too much, it was the unnecessary destruction of regulatory capital that took place based on the unintended consequences of a 2007-implemented accounting rule and regulators haphazardly trying to fix it. And the Fed’s hands are far from clean. Created to be the lender of last resort, it failed in this primary role. The 2008 Fed transcripts make it crystal-clear Fed governors knowingly allowed Lehman to fail, objecting to a Bear Stearns-like government-backed sale to a healthier firm. The FSOC is objectionable because it is a solution seeking a problem, and a solution that may create more problems than it fixes.
|By Jesse Eisinger, The New York Times, 07/16/2014|
MarketMinder's View: While we don’t agree with all of this, the discussion regarding why it makes little to no sense to consider large asset managers a “too-big-to-fail” systemic risk is extremely sound. “Yes, when you invest in a bond fund, you get to take the money out at any point. And the investment manager puts that money to work in all sorts of investments with differing maturities. But the investor is on the hook for the losses, not BlackRock.” For more, see Elisabeth Dellinger’s column, “Too Big to Fail: Money Management Edition.”
|By Robin Harding, Financial Times, 07/15/2014|
MarketMinder's View: We’ll translate the Fedspeak: Interest rates could rise sooner or later depending on economic conditions, which the Fed doesn’t have much confidence in predicting. Some might find this noncommittal rumbling frustrating as it makes the timing of a rate hike harder to predict, but trying to read too much into any Fed communications is always a fruitless exercise. Yellen’s comments simply make clear what we’ve long said: Central bank decisions aren’t gameable market functions. They rest on too many unpredictable, unknowable human idiosyncrasies.
|By Anna White, The Telegraph, 07/15/2014|
MarketMinder's View: The UK housing market isn’t “overheating.” Sure, London’s home prices have been rising—but that’s mostly because home supply hasn’t. As for indebtedness, he seems to be trying to draw a parallel with 2007, ignoring that the global financial crisis wasn’t caused by housing problems alone. If you don’t have banks forced to mark mortgage-backed securities to market during a year-long firesale, you don’t get a crisis. You just get a housing bubble deflating slowly with limited economic impact, as housing is a very small slice of the total economy.
|By Ambrose Evans-Pritchard, The Telegraph, 07/15/2014|
MarketMinder's View: It has only been a little over a month since the ECB implemented a string of measures to try to boost lending—not nearly enough time to see results. So it’s a bit odd that the IMF would declare them a dud and clamor for quantitative easing (QE). Plus, QE isn’t exactly a fix. The US and UK show QE discourages lending by flattening the yield curve (weighing on banks’ profit margins). That would likely increase the chances of deflation—not the other way around.
|By David Lawder, Reuters, 07/15/2014|
MarketMinder's View: Uhhuh. And in 2000, the same CBO was predicting perpetual surpluses. The CBO has a long history of extrapolating trends years into the future, assuming policies are set in stone, and not considering the many other changes and unknown variables that will inevitably arise between now and 2039. Besides, the next 12-18 months matter most for investors. As does debt affordability, rather than total debt. Today, US debt remains very affordable by historical standards. Oh, and by the way, in the off chance the CBO is right, there is little evidence debt at 106% of GDP is catastrophic.
|By Zheng Yangpeng and Li Xiaokun, China Daily, 07/15/2014|
MarketMinder's View: While these initiatives are just talk for now, if seen through, they would be long-term positives for China. By cutting some subsidies to state-run businesses, improving private firms’ financing options and reducing state-run firms’ strangleholds on key industries, officials would foster a more competitive marketplace for private firms.
|By Miyuki Yoshioka, The Yomiuri Shimbun, 07/15/2014|
MarketMinder's View: From friction over some of the countries’ treatment of their state-run firms to environmental issues to intellectual property rights—this article highlights several obstacles to finalizing free-trade agreements (especially ones including so many countries—the Trans-Pacific Partnership consists of 12 nations). Each country has its own agenda, which makes it difficult for compromise across the board. Hence why Japan’s leaders are probably too optimistic in banking on a completed TPP to restore the country’s economic dynamism.
|By Jason Zweig, The Wall Street Journal, 07/14/2014|
MarketMinder's View: We don’t disagree with everything here. For example, we agree investment advisers should have performance compliant with the Global Investment Performance Standards (GIPS) on hand for those who request it. And most brokers simply can’t, because they recommend different things to different people. But this doesn’t mean you should run from advisers who don’t post returns on their websites. Ethical, experienced, knowledgeable firms generally don’t try to peddle performance investors can’t buy, and they know shady outfits selling hot returns has caused more investor headaches and heartaches than not publicizing them. Simply, past performance doesn’t predict future return. Track record is important, but so are things like values, expertise, investment philosophy and how a firm is structured to put clients first. A manager’s numerical returns are irrelevant without someone to coach you through market wiggles so you can actually get those returns.
|By Leslie Shaffer, CNBC, 07/14/2014|
MarketMinder's View: It wouldn’t at all surprise to see yields rise a tad as quantitative easing finishes winding down. But that doesn’t mean a bond bloodbath is nigh. Longer-term Treasury yields tend to move most on the market’s inflation expectations, and there are few (if any) signs of materially higher inflation in the foreseeable future. Some interpret the recent jump in inflation to mean a short-term rate hike is nigh, but inflation remains below the Fed’s target—which isn’t a maximum. Plus, all Fed actions thus far indicate they’ll take a measured, gradual approach to raising short-term interest rates. In our view, the likely interest rate environment looking forward doesn’t warrant wholesale asset allocation changes for investors whose long-term goals are consistent with at least some fixed income exposure.
|By Editorial Staff, The Washington Post, 07/14/2014|
MarketMinder's View: It is, but not because QE has blown bubbles in just about every investable asset known to mankind, as this alleges. Nor, in our view, is it really the Fed’s job to preemptively prick said bubbles. Nor has the Fed shown anything resembling an ability to even spot bubbles. So if Janet Yellen tells Congress the Fed aims to “limit the damage that bubbles do rather than deflate them in the first place,” contrary to the suggestion here, we don’t think that’s automatically cause for alarm—it’s just the Fed picking the lesser of two evils. Who knows whether they’ll be any good at mopping up a mess when the time comes, but if they don’t try to deflate bubbles that might not even exist, at least there is one less thing they can mess up.
|By David Gaffen and Jennifer Ablan, Reuters, 07/14/2014|
MarketMinder's View: This doesn’t pass the logic test. It uses the feds’ decision to halt trading in one company after a $6 billion run-up in its market cap as evidence of a stock market bubble—problem is, all evidence shows this was an inside-job pump-and-dump. Not at all indicative of the behavior of actual, you know, investors. Next on the list of evidence? The collapse of a Spanish firm following a huge accounting fraud. Again: Not a market-wide investor behavior thing. The rest of last week’s market activity, overall and on average, was normal volatility and firms reacting to said volatility. The rest of this article is just noise.
|By Kristen Grind, The Wall Street Journal, 07/14/2014|
MarketMinder's View: Why popular? They advertise super high returns and, in some instances, safety. Why dangerous? They’re often illiquid, expensive, complicated and largely lack proven long-term track records. In our view, there are far better, more efficient, ways than non-traded REITs, liquid-alternative funds and the like to reach your long-term goals.
|By Sam Mamudi, BloombergBusinessweek, 07/14/2014|
MarketMinder's View: While the Securities Industry and Financial Markets Association’s claims that their proposed changes will improve market instability seem overstated (considering there is no evidence high-frequency traders’ gaming arbitrage opportunities contributes to higher volatility), proposals to adjust the incentives to trade on certain exchanges and give brokerages more freedom to trade where they choose seems sensible enough. It might not make trading costs cheaper or pricing materially more efficient, but it would increase transparency, which is always a positive.
|By Clive Crook, Bloomberg, 07/14/2014|
MarketMinder's View: The fix? Put a government regulator in charge of the big-three raters and have said regulator develop a new rating system for them to follow. And, we presume, make sure they apply said scale appropriately. Thing is, these agencies also provide credit ratings for governments. Call us crazy, but we’re pretty sure the only thing less transparent than “issuer pays” is “issuer regulates.” Look. The raters have long since admitted their ratings are opinions—“puffery.” So why not just drop their status as “nationally recognized statistical ratings organizations,” scrap the “issuer pays” model, and just let them peddle those opinions as “independent analysis” to any investor who wants them? Like equity analysis!
|By Li Xiaotang, China Daily, 07/14/2014|
MarketMinder's View: From now on, Chinese banks’ can’t market wealth management products (essentially packages of iffy debt) as risk-free higher-yielding alternatives to savings accounts. It’s another step toward a market-oriented system and the Chinese government’s implicit reiteration that it won’t bail out products facing default. Though that doesn’t guarantee China has seen its last state rescue, and some of the near-term benefits described here seem overstated, it does give investors more awareness of risk, allowing the market to price risk more efficiently.
|By Steven Russolillo, The Wall Street Journal, 07/11/2014|
MarketMinder's View: Why? Because that’s how markets are. Assuming slow or negative growth, geopolitical tensions, a floundering Portuguese bank or a quarter of weak earnings must or should be a “catalyst” for a drop ignores how markets work. They don’t follow rules. If they did, everyone would know exactly when to buy and sell and no one would lose money ever. These assumptions about how markets “should” react are mere opinions, and stocks have a pretty strong tendency to discount all widely held and widely discussed opinions—and then do something different. That doesn’t mean we don’t get some short-term volatility on the actual news, but it doesn’t come like clockwork, and volatility isn’t a bear market.
|By Michael Mackenzie and Elaine Moore, Financial Times, 07/11/2014|
MarketMinder's View: Much as we usually point to the market as the best indicator of what’s likely, in this case, it isn’t. It reflects investors’ expectations for future interest rate moves, but central bank decisions aren’t gameable market functions. They’re human functions—the product of biases, emotions and ever-changing minds. Who knows how the handful of bankers at the Fed, BoE or anywhere else will react to developments in the economy over the next several months?
|By Elizabeth Olson, The New York Times, 07/11/2014|
MarketMinder's View: And investors continue falling for them because, while everyone knows Ponzi schemes exist, few are aware of their key traits. Here are some simple ways to check. Does the adviser take custody of your assets? Is the advertised return too good to be true, like Bernie Madoff’s advertised 10% a year regardless of market conditions? Is the strategy overly complex and the description full of jargon and buzzwords? If the answers here are yes, well, run. For more, see Elisabeth Dellinger’s 12/24/2013 commentary, “Don’t Be a Statistic.”
|By Ylan Q. Mui, The Washington Post, 07/11/2014|
MarketMinder's View: A few media outlets seem to be interpreting new Fed Vice Chair Stanley Fischer’s latest speech as a rousing endorsement for “macroprudential regulation” and firmer powers for the Fed and Financial Stability Oversight Council (FSOC) to manage financial stability. But if you read the entire speech on the Fed’s website, it’s clear he’s far more skeptical than this article suggests. His issues seem to be more with how Dodd-Frank structured the FSOC and increased the risk of confused policy—an interesting voice of dissent from Ben Bernanke’s mentor.
|By Matt Levine, Bloomberg, 07/11/2014|
MarketMinder's View: “The current equity market structure is in large part about the proliferation of many venues with many different rules, and the worry that middlemen are gaming those rules for their own self-interested purposes. You could solve a lot of the problems by just making all the venues have the same rules, regardless of what the rules were. Coming up with kooky new ways to allocate trades is a fun exercise, but you can't just assume that those ways will be adopted by every venue—and, if you could, then just standardizing venues on any set of rules would probably be a higher priority than picking the optimal cool new rules. And if your rules aren't adopted everywhere, then you'll probably just increase the fragmentation of markets, and the opportunities for mischief. The near-term goal, surely, should be reducing temptation, not increasing it.”
|By Mohamed A. El-Erian, Bloomberg, 07/11/2014|
MarketMinder's View: Huh? How would slow economic growth raise the likelihood of privately held conglomerates doing shady things and ultimately having to pay the piper when things go south? That sort of thing just happens, regardless of the economic outlook. Espírito Santo’s troubles aren’t an economic issue. They’re a corporate governance issue. Markets’ overreaction shouldn’t imply differently. For more, see today’s commentary, “The PIIGS Who Cried Wolf?”
|By Jason Douglas and Max Colchester, The Wall Street Journal, 07/11/2014|
MarketMinder's View: Why aren’t British banks lending more to small businesses? Because the BoE keeps changing (and threatening to change) the rules! Weighing an earlier and tougher leverage ratio than Basel III guidelines stipulate is just the latest in a string of moves fueling regulatory uncertainty. Now, this isn’t a huge headwind to bank balance sheets—they’ve already assumed higher ratios are coming—but it doesn’t give them much latitude to lend eagerly to relatively riskier borrowers, like small and new firms.
|By Chris Rugaber, Associated Press, 07/11/2014|
MarketMinder's View: We’d suggest investors not read too much into this. A lot of the pessimism is backward-looking, based on Q1’s contraction. Even if this growth does prove slower in 2014, it isn’t necessarily a negative for stocks. Markets have long since proved they don’t need rip roaring economic growth in order to keep on rising.
|By Dan Murtaugh, Bloomberg, 07/11/2014|
MarketMinder's View: The Louisiana Offshore Oil Port (LOOP)—the US’s biggest oil import terminal—is gunning for exporter status. Now, a lot would need to fall into place for this to happen, like permits, more Jones Act-compliant large tankers and a lifted or eased ban on crude exports for the port to export anything other than condensate. The Keystone XL Pipeline plays a side role here, too. It seems a fair assumption oil exports won’t start flowing any time soon. But how regulators handle LOOP’s push will be a key indicator of their sentiment toward freeing up US oil markets, which would be a long-term positive for the Energy industry.
|By Floyd Norris, The New York Times, 07/11/2014|
MarketMinder's View: Not that baffling. Unemployment is a very late-lagging indicator. Like, GDP bottomed in Q2 2009, but payrolls didn’t bottom until February 2010. The past few months’ strong jobs growth is likely a result of 2013’s economic growth. The other arguments here for a quick GDP recovery are all fine and dandy, but we wouldn’t add continued jobs growth to that pile of evidence.
|By Jiang Xueqing, China Daily, 07/11/2014|
MarketMinder's View: “Eventually” being the key operative here. The central bank chief also said that, in the meantime, China reserves the right to and probably will intervene in its currency markets if they don’t behave the way regulators want. This is all indicative of China’s broader tug of war between reform and growth. While reform remains a long-term goal, and plans are in place, they have every incentive to move gradually and avoid rocking the boat.
|By Patricia Kowsmann, The Wall Street Journal, 07/10/2014|
MarketMinder's View: One Portuguese bank’s troubles seemed to have triggered a selloff in peripheral eurozone stocks and bonds—and caused some firms to shelve imminent IPOs and bond offerings—but suggestions this is the next phase of the eurozone crisis are overwrought. This is essentially a corporate governance issue at the privately held conglomerate that owns about 25% of one bank’s shares. It has nothing to do with Portugal’s solvency, and it doesn’t indicate deeper troubles within Portugal’s or the eurozone’s banking system.
|By Mark Gilbert, Bloomberg, 07/10/2014|
MarketMinder's View: Seems to us central bankers are taking entirely too much credit for economic growth and rallies in financial markets. Fact is, that ballyhooed “liquidity flood” remains on deposit at the Fed. It’s not in stocks, high-yield bonds or any other asset allegedly benefiting from mindless yield chasing. Stocks are up anyway because we have a growing global economy and high and rising corporate earnings. With few seeing this and most expecting market “whiplash” once rates inevitably rise, stocks still seem to have a (bullish) wall of worry to climb.
|By Staff, Xinhua, 07/10/2014|
MarketMinder's View: The data may have missed forecasts, but they were much improved from earlier this year: Exports rose 7.2% y/y and imports grew 5.5% y/y. While these numbers have prompted expectations for additional stimulus so the government can reach its 2014 growth target, and Premier Li Keqiang indicated more measures are forthcoming, this misses a larger point, in our view. With or without stimulus, China is growing at an enviable rate. Officials don’t need to hit the gas for China to contribute substantially to the global economy.
|By Andrew Ackerman, The Wall Street Journal, 07/10/2014|
MarketMinder's View: It seems the SEC is nearing completion of some long-awaited regulations for money market funds in an effort to prevent another 2008-style run on the category. While the full details remain a mystery pending the announcement, most believe they’ll include limits on fund redemptions (withdrawals). To us, that seems a solution in search of a problem. This all came about because one fund “broke the buck” as a side effect of Lehman’s bankruptcy, creating a temporary liquidity issue. But this “fix” would likely create another, permanent liquidity issue: Why would investors buy something they can’t liquidate if they need to in times of trouble? Something to keep in mind as we all await the final rules.
|By William Pesek, Bloomberg, 07/10/2014|
MarketMinder's View: It’s true the ongoing quantitative easing program alone can’t fix Japan, and the sales tax is indeed squeezing consumers who haven’t seen wages rise in line with prices. But the answer to this is not more quantitative easing, which would only flatten the yield curve and keep broad money supply growth subdued. The answer is addressing the structural issues that prevent Japanese markets and corporations from functioning most efficiently. These reforms, which PM Shinzo Abe highlighted as the lynchpin to his economic revitalization program, are the key to putting Japan back on track. Unfortunately, while he talked a big game, his actions suggest his priorities lie elsewhere.
|By Abheek Bhattacharya, The Wall Street Journal, 07/10/2014|
MarketMinder's View: Indian stocks have flown sigh since Prime Minister Narendra Modi won the election in May, and investors’ expectations for reform are high. To meet them, Modi will have to pass some major changes—historically difficult in India. And he’s not exactly off to an auspicious start, with a budget proposal that’s light on specifics and big reforms. It all rather reminds us not only of his predecessor, who failed to meet investors’ high hopes, but Japan’s Shinzo Abe, who still can’t seem to capitalize on his popularity enough to overcome vested interests and pass long-needed reforms. We’d suggest not getting caught up in markets’ blind enthusiasm for politicians who haven’t shown they can accomplish anything.
|By Jon Hilsenrath, The Wall Street Journal, 07/09/2014|
MarketMinder's View: We would gladly welcome the Fed following through on this batch of forward guidance, but the reality is it’s just an acknowledgement that the FOMC can do straight-line math. (The current rate of tapering would eliminate bond buying by October anyway.) Quantitative easing’s bond buying is the opposite of stimulus, narrowing the spread between short- and long-term interest rates, reducing banks’ loan profits. Less profitable lending is likely to be less plentiful, hence why the program didn’t much boost lending or economic growth. QE’s track record—in the US, UK and Japan—shows it isn’t stimulus at all, so our major critique of today’s news is the end isn’t coming soon enough!
|By Greg Morcroft, International Business Times, 07/09/2014|
MarketMinder's View: Brazilians may be heavily emotionally invested in their national soccer team, but drawing investment implications from its 1-7 trouncing at the feet of the Germans is an error. Which, frankly, you can see in this article, which oddly begins with the thesis the loss is bearish for Brazilian equities but ends with the notion that “should Brazilians’ mood sour to the point they decide to oust [President Dilma] Rousseff from office, that could spark a rally in its stock market.” The two theses seem a wee bit mutually exclusive to us, which leads us to humbly suggest this “forecast” fits the category of click-seeking noise.
|By Samuel Lee, Morningstar, 07/09/2014|
MarketMinder's View: While we agree with the notion that chasing yield as an investment strategy (in bonds or stocks for that matter) is a fallacious and likely eventually dangerous approach, we’d suggest it hasn’t happened to the extent this argues for. High-yield credit spreads over Treasurys aren’t abnormally tight, they’re in a bandwidth where spreads were for the period 1995 – 1998. That’s a long time, and thus you should question using this as a sell signal today. But more importantly, consider why you own bonds (if you do). Mostly, we believe they should be used to dampen volatility, not generate big returns. Hence, the yield chase is irrelevant. (PS: The oxygen analogy used early in this piece is an awful comparison that implies the opposite of what is intended. If “yield is like oxygen” then it would be very rational to reach for it when yields are low. Because of, you know, breathing. Beware the use of analogies, dangerous rhetorical tools that they are!)
|By Alen Mattich, The Wall Street Journal, 07/09/2014|
MarketMinder's View: The thesis here is that the eurozone is on a “relentless slide into deflation” and the ECB’s raft of measures including negative deposit rates—announced only about a month ago—haven’t halted the disinflationary trend. In a month! Well, 34 days to be exact. 34 days! Monetary policy is unlikely to have any impact in any region on any inflation trend in only 34 days. Now, we doubt the ECB’s fix is all that effective, given the issues are regulatory (stress test related, largely). But no policy is likely to have an effect this fast. Patience, grasshopper. Patience.
|By John Durie, The Australian, 07/09/2014|
MarketMinder's View: This whole argument rests on the assumption valuations are predictive of future returns, and that one must therefore find relative bargains. But however you slice them, valuations do not predict future market results. And value stocks do not always lead, so permanently seeking “cheap buys” isn’t always a winning tactic.
|By Joshua M. Brown, The Reformed Broker, 07/09/2014|
MarketMinder's View: If fund flows into and out of stocks were actually predictive of future market direction, the fact corporations are the major net buyer (according to these data—which are shaky and short-term) might be troubling. Yet the fact of the matter is they don’t predict much of anything. Which you can see solely by thinking about the fact that equity mutual fund redemptions greatly exceeded purchases for most of this bull market. The stock market is an auction, and while more cash entering doesn’t hurt stocks, it isn’t needed for a bull to run. And those corporate buybacks also aren’t troubling. They shrink equity supply and boost each shareholder’s slice of current and future profits. That’s kind of a fundamental reason to buy a stock.
|By Esteban Duarte, Bloomberg, 07/09/2014|
MarketMinder's View: The "crisis haunting Spain" is a mish-mosh of wrongly perceived and/or widely known factors like a lack of loan growth (true pan-eurozone for years, as banks have shed assets) and competitiveness issues the government already targeted with reforms. One bizarre practice here: If you are trying to show the borrowing costs relative to Germany, why (and importantly how) are the interest rates inflation adjusted? Firms borrow and repay with nominal euros, so this seems odd to us, and the lack of explanation behind the calculation and rationale even more so.
|By Neil Irwin, The New York Times, 07/08/2014|
MarketMinder's View: Yes, markets from rural real estate and office towers to junk bonds, formerly distressed eurozone sovereign debt, stocks and plain old US Treasurys have risen. But to say that this represents a bubble in everything under the sun simply because valuations appear high by whatever arbitrary standards one might use is a mighty big stretch. Bubbles are events of mass psychology—euphoria. We see precious few, if any, folks arguing any one of these asset classes will rise for all time. That would constitute a bubble. We aren’t there today.
|By Staff, The Wall Street Journal, 07/08/2014|
MarketMinder's View: No they don’t—it’s merely an interesting observation that the number of firms trying to ratchet down earnings expectations is falling. That isn’t predictive of future earnings growth. As for buybacks, it’s a stretch to say they’ve been the primary driver of earnings growth—they help the earnings-per-share calculation, but overall net income and sales (not per share) are still rising, too. Buybacks are nice—they reduce share supply—but it isn’t all that concerning that the pace slowed in Q2.
|By George Anders, The Wall Street Journal, 07/08/2014|
MarketMinder's View: We often point out the follies of long-term forecasting, and this fun read is a prime example of why. Why did The Wall Street Journal panel in 1989 miss social networking , envision hour-long flights from California to New York that you can board as easily as a bus, declare Olestra would change eating habits forever and consign the Soviet Union and China to perma-decline as they clung to hard-core communism? Because they extrapolated the recent past forward without considering the many things that would change between then and now. That’s no knock on them—it’s impossible to predict every little variable.
|By David Milliken and William Schomberg, Reuters, 07/08/2014|
MarketMinder's View: UK Manufacturing output fell 1.3% m/m in May—the biggest fall since January 2013. However, as this piece highlights, it’s likely premature to fear a longer slide. Ups and downs—especially month-to-month—are typical of economic recoveries, and even with the month-over-month slide, manufacturing output was still 3.7% over May 2013. Manufacturing is also less than 20% of the UK economy.
|By Jeff Black, Shane Strowmatt and Sonia Sirletti, Bloomberg, 07/08/2014|
MarketMinder's View: This is an interesting, deep look at eurozone banks’ efforts to prepare for this autumn’s stress tests—an exercise that, according to some ECB officials, could force some banks who “fail” to raise capital and “bail in” creditors and large depositors, potentially causing losses. Even though the banks themselves are solvent. Needless to say, no bank wants to fail, so many continue deleveraging and hoarding cash. This is the primary reason eurozone lending is falling and M3 money supply growth is anemic—and the reason why we wouldn’t expect the recent monetary stimulus measures to have an outsized effect in the near term.
|By Cullen Roche, Marketwatch, 07/08/2014|
MarketMinder's View: This list isn’t perfect, but it does highlight some key behavioral errors, like this one: “There’s no such thing as a ‘passive’ investor. No one can realistically replicate the performance of a truly passive index over the long-term. Accordingly, we’re all active portfolio managers in some sense, whether it’s establishing a lump-sum portfolio at initiation, rebalancing, reinvesting, reallocating, and the like. We need to be aware of how these actions can be positive or negative.” For more, see Todd Bliman’s 10/25/2013 column, “Passive Investors and Other Endangered Species.”
|By Sara Sjolin, Marketwatch, 07/08/2014|
MarketMinder's View: Just because some German data have weakened in previous months doesn’t mean Germany (or the rest of the eurozone) is about to fall off a cliff. Nor are the structural factors here necessarily strong enough to upend the many cyclical factors still working in Germany’s favor, despite what this piece suggests. Yes, the OECD’s Composite Leading Indicator for Germany has entered a downtrend, as noted here, but this is a very narrow gauge—it centers on manufacturing and ignores other key indicators, like the stock market. The Conference Board’s Leading Economic Index for Germany is broader, and we think it provides a more accurate gauge of Germany’s future direction. It also happens to still be rising.
|By Anne Kates Smith, Kiplinger, 07/08/2014|
MarketMinder's View: Some of the points here are truisms all investors should remember—corrections don’t last long and “are an inevitable part of investing.” But most of the actual advice assumes investors should try to time these pullbacks and focus on individual stocks—an impossible task and one that ignores an investor’s long-term goals and time horizon. What if you take money off the table now, as this piece suggests, but that “better buying opportunity” never comes? For long-term growth investors, those missed returns—opportunity cost—add up.
|By Amy Kazmin, Financial Times, 07/08/2014|
MarketMinder's View: For now, India’s plans to open its railroad network to foreign investment are preliminary—and part of a budget that, if previous budgets are any guide, is likely to face some political opposition after it’s unveiled in Parliament on Thursday. Ditto for the secondary legislation necessary for foreign firms to establish a presence. This will be an early test for the new government, which is riding high on investors’ expectations.
|By Peter Hodson, Financial Post, 07/07/2014|
MarketMinder's View: A lot of investors seem to be on correction watch right now, but as this piece shows, it’s a fruitless endeavor. Repeatedly predicting and timing short-term moves with any precision is as close to impossible as you can get in investing. What if you get out now and a correction never comes? What if it does come but you miss the ride back up and buy in at a higher point than you sold? Is peace of mind really worth missed returns and all the trading costs? For long-term investors, though it may be difficult, it’s better to tune out the day-to-day and focus on reaching your long-term goals and objectives. For more, see Todd Bliman’s 06/09/2014 column, “The Cost of Trying to Time Corrections.”
|By Ben Leubsdorf and Jon Hilsenrath, The Wall Street Journal, 07/07/2014|
MarketMinder's View: There is a world of difference between porcine epidemics sending pork prices higher, a California drought making produce pricier, citrus blight making oranges more scarce and a broad increase in the money supply and velocity that pushes the price of goods and services higher across the economy. The latter would warrant a rate hike. The former is, as our Fed head alluded, just noise—not actual inflation. Just temporarily higher prices in some goods. Nor is so-called foodflation a leading indicator of broad inflation. A do-nothing Fed, for now, seems most appropriate to us. For more, see our 06/30/2014 commentary, “Should the Fed Hike Rates to Make It Rain?”
|By Jason Zweig, The Wall Street Journal, 07/07/2014|
MarketMinder's View: Even investors who otherwise believe in the importance of diversification often have a big blind spot when it comes to their own company’s stock—familiarity, loyalty and sheer fondness get in the way, clouding their judgment and blinding them to risks. It happened to Enron’s, WorldCom’s, Bear Stearns’ and Lehman Brothers’ employees. It happens to many investors outside those worst-case scenarios, too: No matter how much you think you know about your company, “that doesn’t mean you know more about its customers, suppliers, products, technologies and competitors than the 100 million people who collectively price its stock every day.” Whether it’s the firm you work for or any other, limiting your exposure to no more than 5% of your total portfolio can save you a world of hurt.
|By Tom Stevenson, The Telegraph, 07/07/2014|
MarketMinder's View: While this nicely sums up—and warns against—some critical behavioral errors, its parting advice is no better than the myths the previous 11 paragraphs shattered. An index’s dividend yield is no better an indicator of its future performance than its price level, trailing return, P/E ratio or any other valuation metric. While comparing the stock market’s overall yield to bond yields can be useful as a measure of sentiment, using the earnings yield—the P/E’s inverse—is a better, more complete way (but still not a timing tool!).
|By Juan Montes, The Wall Street Journal, 07/07/2014|
MarketMinder's View: After last year’s rapid-fire pace of constitutional amendments to open key sectors in Mexico’s economy to competition—ending several state-sponsored or enabled monopolies—reforms have progressed at a sluggish pace as partisan bickering threatened to upend the celebrated “Pact for Mexico.” The weekend’s passage of secondary legislation to implement last year’s Telecom reforms is a welcome sign of progress and a long-term positive for Mexico. Though, we’d caution against expecting it to bear economic fruit. It might lift investor sentiment, but structural reforms take time to show up in economic results.
|By Alexandra Hudson, Reuters, 07/07/2014|
MarketMinder's View: No economic expansion is a straight shot up—that’s true whether you’re looking at narrow indicators like industrial production or broader measures like GDP. Growth often slows, flatlines or even turns negative at times. Tempting as it is to try to read into every data release for signs of what’s to come, most of it is sheer noise, and it’s all backward-looking. We’d suggest looking forward instead—to Germany’s rising Leading Economic Index.
|By Yoon Ja-young, The Korea Times, 07/07/2014|
MarketMinder's View: 10 years ago, South Korea adopted mortgage lending caps in an effort to prevent a credit bubble without jacking up rates. Now the incoming finance minister wants to scrap them in the name of economic stimulus—wise enough—but many fear a runaway debt increase without these macroprudential regulations in place. Seems like something the Fed, BoE, Riksbank and every other central bank touting macroprudential regulation as a weapon against supposed excess should monitor. What happens when you get to the other side and the underlying “problem”—real or not—remains?
|By Kenneth Corbin, Financial Planning, 07/03/2014|
MarketMinder's View: Maybe! And that’s fine. The fiduciary standard is neither a differentiator nor a guarantee of ethical behavior—and it says nothing about whether a retirement plan advisor, broker or investment adviser has the values, expertise, resources and wisdom necessary to give the best advice. Whether or not the fiduciary standard is applied more broadly, thorough due diligence will remain key to picking an adviser. For more, see Todd Bliman’s 11/14/2013 commentary, “The Compass.”
|By Rob Wood, The Telegraph, 07/03/2014|
MarketMinder's View: See, that’s the problem with forward guidance. It isn’t set in stone and isn’t meant to be, but investors (foolishly) rely on it and try to front-run it anyway. When the central bank inevitably has to reset expectations as conditions change, folks get testy over the apparent waffling, and credibility goes bye-bye. Now, Carney isn’t quite there yet—the economy has done great since he took the helm, and many seem willing to give him some grace. But losing credibility is one of the biggest risks a central banker faces. Looking ahead, the UK probably benefits most if he takes a page out of Alan Greenspan’s book and just mumbles unintelligibly without even trying to tip his hand.
|By Nicole Friedman, The Wall Street Journal, 07/03/2014|
MarketMinder's View: High gas prices are a drag on our wallet, but not the economy. A dollar spent on gas is the same—same!—as a dollar spent on clothes, gadgets, toys or food. Counts the same to GDP. As for higher prices being a reminder the US “still depends on imported oil,” we’re a bit confused. The US gets a heck of a lot more GDP out of each barrel of imported oil today than 10 years ago. We still import oil since it’s efficient, and it’s a global market place. It doesn’t mean we’re vulnerable. This isn’t the 1970s.
|By Jeanna Smialek, Bloomberg, 07/03/2014|
MarketMinder's View: Setting aside the trade gap, which doesn’t say anything about an economy’s health, this was a good trade report on all counts. Record-high exports? Smashing (though, as always, backward-looking). The 0.3% fall in imports isn’t great at first blush, but the decrease was tied to petroleum imports—a long-running side effect of the shale boom. Non-petroleum imports rose 0.5%. Domestic demand is on the rise.
|By Jared Bernstein, The New York Times, 07/03/2014|
MarketMinder's View: No they don’t. Job growth follows economic growth at a really late lag. Whopping jobs gains in June are probably a function of growth in late 2013. Which means GDP growth does not equal productivity growth plus jobs growth. Sorry kids, you don’t get to bust out your algebra skills after all. Now, none of this is to say we disagree with the broader thesis, which states Q1’s GDP contraction is probably an anomaly—that’s all good! It’s just the supporting evidence that’s sketchy. We’d suggest other evidence is better. Like the high and rising Leading Economic Index.
|By Joe Brennan and Donal Griffin, Bloomberg, 07/03/2014|
MarketMinder's View: And the Q4 decline was revised up from -2.3% to -0.1%. It’s all backward-looking, of course, but it still illustrates how far Ireland has come since 2010’s bailout. Ireland isn’t a ward of the state anymore. It’s contributing to global growth. Hip hip!
|By Julia Kollewe, The Guardian, 07/03/2014|
MarketMinder's View: By “serious threat,” he means debt is at 135% of household earnings. That’s big, but not as big as 2008, which also wasn’t a household debt crisis. Plus, the scaling isn’t very telling. You have to compare like with like. Debt service costs relative to total income would be meaningful, but he didn’t bother sharing. Total debt relative to total household assets is also better—cobbling that together from the limited available dataset, we get a 15% ratio. Seems manageable to us.
|By Todd Buell and Paul Hannon, The Wall Street Journal, 07/03/2014|
MarketMinder's View: Of course he did. He doesn’t want to be run out of town! Doesn’t mean he’ll actually launch quantitative easing, though, and the eurozone will be best off (in our view) if he avoids the temptation. The last thing they need is a flatter yield curve, weaker lending and shrinking money supply. Doing nothing seems to be the right move for now, and with Draghi also cutting the number of meetings on the ECB’s calendar, the mentality seems to be one of doing less, not more.
|By Richard Barley, The Wall Street Journal, 07/03/2014|
MarketMinder's View: Yet another iteration of the Fed-bubble theory that has floated around for ages now. It’s as wrong today as it was two years ago. There is no evidence yield-chasing has prices out of step with fundamentals, despite what this piece claims two cherry-picked examples of third-world sovereign debt suggest. The simple truth is this: long-term yields globally correlate with long-term US Treasury yields. Those happened to be at generational lows for a long while. So yields are down everywhere else. As for investors making returns on “relative value,” maybe some are, but broadly, it isn’t a thing. It implies stocks don’t have fundamental reasons to be up. Record-high-and rising corporate earnings and revenues and the growing world economy would disagree.
|By Ambrose Evans-Pritchard, The Telegraph, 07/03/2014|
MarketMinder's View: This is an interesting discussion of the tussle behind Sweden’s rate cut today, but it misses a key point. The macroprudential regulation the bank and others are calling for? Um, the bank adopted it in May. Mortgage caps, capital ratios, all of it. Maybe they want more now, but it seems a bizarre omission from not only this article, but most of the commentary on this topic. For more, see our 5/9/2014 commentary, “Bubble Hunting With Sweden’s Wild and Crazy Riksbank.”
|By Jonathan Cable, Reuters, 07/03/2014|
MarketMinder's View: Overall, eurozone PMIs don’t tell you much other than that the region’s economy is just sort of plodding along. Trying to read any more into it—like, say, trying to argue France’s contracting PMIs mean a French recession is nigh—is fraught with peril. France’s PMIs contracted throughout Q4 2013, but the economy still grew. These surveys just aren’t anything other than a rough snapshot of how broad growth is.
|By Steven Russolillo, The Wall Street Journal, 07/02/2014|
MarketMinder's View: Actually, before you even get to digging into component price movement, here are two better reasons not to fret the Dow’s returns year-to-date versus the S&P 500’s: 1) the Dow is broken and 2) the past isn’t predictive of future returns. Time spent hunting for an explanation for why these 30 stocks have underperformed those 500 (or, other 470 considering all 30 Dow components are in the S&P) would be better spent hunting sasquatch. Or bigfoot. Or yeti. Or Nessie. Or … you get the point.
|By Katie Morley, Investors Chronicle, 07/02/2014|
MarketMinder's View: We’d suggest this operates on a fair few misperceptions, like not assessing the investor’s goals before diving into risk, targeting narrow stock styles and conflating income with cash flow. Cash flow is withdrawals needed from your portfolio. Income is wages/salary, dividends or interest payments. When you conflate the two, you often wind up with bizarre bullet points like the third one under the dubiously named, “Safety Checklist,” which claims dividend-paying stocks should be your target to generate pension income. We’d suggest this can actually increase risk by reducing diversity and isn’t at all safe.
|By Charles Passy, MarketWatch, 07/02/2014|
MarketMinder's View: This article operates on the presumption any and all economic and financial market indicators should rise at the same time. Which has never been the case. Stocks and most market-oriented indicators (bond markets, commodities) are leading indicators of economic activity. Economic growth (GDP, industrial production, etc.) comes next. Unemployment, consumer confidence and the like tend to follow economic growth, as employers are unlikely to ramp costs before revenues and profits rise. Finally, the notion you could get growth in cash at one point because rates were higher misses a key point: Rates were higher because inflation was too, which is a huge risk to those who “go to cash.”
|By Michael P. Regan, Bloomberg, 07/02/2014|
MarketMinder's View: These are an awful lot of pixels to spill over a hypothetical illustration of a non-base-case scenario of what might happen if an oil shock were to hit based on action in the Middle East, which isn’t at all likely based on extant circumstances. Iraqi production can be offset by Saudi spare capacity, OPEC’s importance is far less than it was in the 1970s and North American production is a huge swing factor. What’s more, the discussion here of past oil shocks is overcooked. There is one episode in which that was the proximate cause of a bear/recession—the Arab Oil Embargo, 1973/4. And calling this a tail risk (an extremely unexpected or unlikely event few if any are aware of) is a wee bit off. High oil prices are a near-omnipresent fear for US investors whose mindset toward oil remains in the era of bellbottoms, platform shoes and butterfly collars. Sadly(?), those days are over.
|By Craig Torres and Christine Idzelis, Bloomberg, 07/02/2014|
MarketMinder's View: While we agree with the notion that, “Monetary policy faces significant limitations as a tool to promote financial stability,” we’d say the same about regulation. The limitations are driven by the fact both policies are designed by people and target a broad economy in which there are myriad different interests. This is all just more Fed mouth-moving, and squawk is cheep.
|By Adam Shell, USA Today, 07/02/2014|
MarketMinder's View: Globally speaking, the last correction began in April 2012 and ended in June 2012. (The S&P fell -9% then.) Forecasting a correction isn’t like catching a bus—short-term, emotion driven selloffs that aren’t tied to fundamentals don’t run on a schedule. Trying to time corrections is really largely a waste for long-term investors. Finally, we’re confused by this article’s inherent internal contradiction: The current period is, “the longest pain-free rally since a 1,127-day run without a 10% drop from July 1984 to August 1987.” Yet later we’re told, “The longest stretch without a 10% pullback dates back to the go-go 1990s, when the S&P 500 went 2,553 days in a seven-year span that began in October 1990 and ended in October 1997.” So is it the longest since the 1990s or 1980s? But we digress ….
|By Bob Pisani, CNBC, 07/02/2014|
MarketMinder's View: Well of course they can’t. Contrary to the commonplace assertion repeated here that “there is certainly evidence that low rates for abnormally long periods of times are a factor in the creation of those bubbles,” bubbles are psychological phenomena. Had ‘em before the Fed, had 'em since. The Fed doesn’t control your psyche. (And if they did they would probably bumble the job anyway. After all, there is a long history of Fed heads developing amnesia upon taking the chair.)
|By Kathleen Madigan, The Wall Street Journal, 07/02/2014|
MarketMinder's View: Private sector firms added 281,000 jobs in June per ADP, the third biggest month in this expansion. This report comes a day before the government’s official Employment Situation Report for June and, not to say that it will this time, but ADP’s payroll figures have undershot the BLS’s private hiring data in every month this year. Now, through the expansion, it’s a coin toss (31 under, 29 over) so we wouldn’t read a lot into that, but you know, it’s kinda interesting and stuff. Not a lot of market impact in any employment gauge, considering the late-lagging effect, but again, it’s interesting. We think.
|By Neil Irwin, The New York Times, 07/01/2014|
MarketMinder's View: Any piece claiming a sector representing between two and six percent of GDP (depending on the year) is a big driver of economy-wide boom and bust darn well better have more than one data point backing it thesis. This piece doesn’t. It uses—what else!—2008! And ok, sure, there was a housing crisis around then(ish). Only problem is, the housing bubble started bursting in early 2006 and didn’t bottom until 2012. Neither data coincides with the economy’s top or bottom. That inconvenient truth makes the accompanying rhetoric largely useless.
|By Mohamed A. El-Erian, Bloomberg, 07/01/2014|
MarketMinder's View: Err…if Fed policy is fairy dust, does that make Janet Yellen Tinkerbell? Bad metaphors aside, though, this is just another example of the financial media’s fruitless quest to search for meaning in #uppytimes. As long as few (if any) can accept that stocks might be rising because of strong corporate earnings and revenues, a growing global economy, accommodative political backdrop and favorable supply and demand drivers, it’s a good sign the bull still has a big wall of worry to climb.
|By Jeremy Warner, The Telegraph, 07/01/2014|
MarketMinder's View: The headline rests on a chart—lifted from a speech presenting the Bank of International Settlements’ latest annual report—showing the “trend in labour productivity growth” and the G20’s aggregate non-financial sector debt-to-GDP since 2000. Not included are the methodology—particularly for productivity, which raised our eyebrows as the line appears to be an overly smoothed hypothetical estimate. So we went to the source, which explained: “Hodrick-Prescott filter applied to annual growth of output per person employed. Aggregates are weighted averages of trend growth based on GDP at current PPP exchange rates.” In other words, they beat it with a baseball bat until it showed productivity’s growth rate falling by nearly half as debt rose a tad. Doesn’t seem very telling or, um, real to us. It also ignores about 50 other variables. Beware “smoothed” data where the smoothing is more like hammering.
|By Matt O’Brien, The Washington Post, 07/01/2014|
MarketMinder's View: “Bad policy” is code for too little fiscal stimulus, and “permanent” is code for lower potential growth—a fake stat loved by academics but of little use in the real world, whereas actual output has been above the pre-crisis peak since 2011. Yah, we get it: This expansion’s growth is the slowest since World War II. But there is no counterfactual—no, zero, way to know how fast (or slow) the US would have grown with more public spending (or any other policy difference). This thesis is simply a matter of opinion. Others have differing (opposite) opinions. We think the elephant in the room is money supply.
|By Jesse Solomon, CNN Money, 07/01/2014|
MarketMinder's View: Beyond misperceiving the Fed’s so-called “stimulus” as “easy money”—which implies it’s, you know, easy to get a loan (hasn’t been the case in this cycle), this is a list of factors that have no history of predicting market direction. The CAPE—and any valuation metric alone—tells you little to nothing about directionality. How folks interpret it is a sign of sentiment, and it seems most (bullishly) see it as a warning sign today. But the GDP to stock market ratio? CEO surveys? These just have no logical reason to be applied to forecasting direction, pure and simple.
|By Carl Richards, The New York Times, 07/01/2014|
MarketMinder's View: It isn’t unhealthy to have expectations in investing, it’s unhealthy to have wacky expectations—like thinking investing in stocks will be a smooth ride up, you can get growth with true capital preservation, or timing corrections is possible. If no one has repeatedly experienced such outcomes, that’s your sign to, as the kids say, check yourself before you wreck yourself.
|By Staff, Associated Press, 07/01/2014|
MarketMinder's View: But … it … never … left. HSBC’s PMI survey—a narrow measure focusing on smaller private firms—showed expansion for the first time since January. But the official measure—which covers a far bigger, more diverse swath of China’s manufacturers—never contracted. Not once. Nor have measures of actual output, which PMIs don’t capture. This piece just vastly underestimates China’s health.
|By Nick Timiraos and Kathleen Madigan, The Wall Street Journal, 07/01/2014|
MarketMinder's View: For stocks, arguably the most meaningful aspect of this report was the forward-looking new orders subindex’s rise to 58.9. This is one more data point alluding to the poor GDP result in Q1 being an anomaly.
|By Catherine Boyle, CNBC, 07/01/2014|
MarketMinder's View: While we understand that conflict can be worrisome, we’d suggest this shouldn’t much concern for investors. Contrary to the quoted analyst’s thesis, we don’t really think many expected big outcomes from the recent “cease fire”—we certainly didn’t. There is a very, very long history of bull markets continuing through regional conflict. We’d suggest this (and Iraq) are merely the latest examples. Now, if you are invested directly in one of Ukraine’s 170 listed equities, maybe worry more. But there were only 523 total trades on the Ukrainian stock exchange yesterday, so you know, you probably don’t.
|By Denise Roland, The Telegraph, 07/01/2014|
MarketMinder's View: Fragile? Seems like another iteration of the “escape velocity” meme that hogged headlines a couple months ago. The eurozone economy isn’t a Faberge egg, china doll or the relationship between Kennedy and Khrushchev in 1962. (Nor is it an airplane or spaceship.) Slow, uneven growth doesn’t make it extra vulnerable to recession. Especially when said slow, uneven growth comes in PMI surveys, which give a crude measure of how many businesses report increased activity—and when recent Leading Economic Index trends in France and Germany and the overall eurozone tell a much different story.
|By Gao Changxin, China Daily, 07/01/2014|
MarketMinder's View: In another regulatory tweak aimed at boosting growth, Chinese officials adjusted the calculation for banks’ loan-to-deposit ratio. The new methodology will make banks appear more liquid on paper, allowing them to lend more—ideally to the many small, private firms that became even more credit-starved after the crackdown on shadow banking began. Time will tell whether it works, but if so, it would be a small positive.
|By Matt Wirz, The Wall Street Journal, 07/01/2014|
MarketMinder's View: “Analysts and fund managers say there is little further room for yields to fall, or prices to rise, given expectations that the Federal Reserve will move toward higher rates in the coming year or so. Some investors already are preparing for a selloff in the credit markets when that happens.” They’ve largely said the same for years. Now, we think it is more likely rates rise slightly than fall moving forward, but the selloff many bond investors are supposedly “waiting for” is looking like Godot.
|By Emma Charlton, Bloomberg, 07/01/2014|
MarketMinder's View: Looking for an explanation for those #uppytimes? “The growth in new orders in June was one of the fastest since the survey began in 1992, while export orders increased for a 15th month, according to the report.” No, it isn’t that the UK is driving the world. It’s that stories like this abound, yet you hear more about troubles in Ukraine or Iraq.
|By Staff, The Wall Street Journal, 07/01/2014|
MarketMinder's View: It’s worth considering, before you wager the Bank for International Settlement’s recent meme about markets being euphorically disconnected from economic fundamentals is right, that central bankers’ history of prognostication is, well, a tad imperfect. Alan Greenspan’s famous “Irrational Exuberance” comment came on December 6, 1996, three-plus years before the Tech Bubble burst. The central banker’s paper noted in this article was published in 2003 (the beginning, not end, of a bull market). And then there were all those central bankers yukking it up as 2008’s crisis churned. Today, valuations are neither high nor low, most indicators allude to current and future economic growth and politics are benign. Now, is it more irrational to believe in the market’s foresight or central bankers, we wonder?
|By Staff, The Yomiuri Shimbun, 07/01/2014|
MarketMinder's View: Unlike last week’s third attempt at structural economic reform, Shinzo Abe’s reinterpretation of the Japanese constitution’s anti-war clause is jam-packed with specifics. That tells you where he’s spending his energy and political capital—likely a big reason why anyone expecting earth-shattering economic reforms likely ends up disappointed.
|By Marc Roca, Bloomberg, 07/01/2014|
MarketMinder's View: Maybe wind and solar do become economic enough that they get the bulk of private energy investment over the next 10 years. It’s possible! But who knows what other variables will arise between now and then to maybe direct funding elsewhere. For investors, this potential long-term structural factor isn’t a reason to go hog wild for renewable energy stocks today. Not when cyclical factors are decidedly against them.
|By Huw Jones, Reuters, 07/01/2014|
MarketMinder's View: No joke: British insurers made so much off of annuity sales that, in the wake of the government’s repeal of the annuity requirement, the BoE’s Prudential Regulation Authority is assessing the financials of annuity firms. Those big profits paid for annuities’ guaranteed income. Just maybe keep that in mind when you hear folks talk up guaranteed income on both sides of the pond.
|By Tara Siegel Bernard, The New York Times, 07/01/2014|
MarketMinder's View: According to the US Treasury, you are now permitted to buy a deferred income annuity in your 401k. Hooray! Except in the vast majority of cases, this is a terrible idea duplicating tax deferral benefits and locking funds into a complicated and often inefficient product. (Booo!) Case in point, the Treasury is banning them from including inflation riders. The whole notion that “buying an annuity that doesn’t begin making payments until much later—perhaps more than a decade—is more cost-effective than buying an annuity at retirement and collecting the income immediately” is a fallacy. It ignores what you would otherwise do during the period, and most annuities are very inefficient investment vehicles over the long run.