|By Staff, EUbusiness, 07/31/2015|
MarketMinder's View: So says the EU, further demonstrating the IMF’s hesitance to sign on to bailout number three until Greece implements more reforms and gets debt relief isn’t a huge stumbling block or game-changer. The IMF will continue participating in talks and advising on bailout terms. They just won’t agree to their own program with Greece until the EU’s program is finalized and showing some actual progress. That is basically business as usual. It doesn’t mean this will be smooth-sailing, and the tentative deal could fall through, but so far things seem more or less on track. Meanwhile, in other Greek news, this happened.
|By Justin Lahart, The Wall Street Journal, 07/31/2015|
MarketMinder's View: Sorry, but consumer spending doesn’t tell you where the economy is going. Like every other GDP component, it is backward-looking—“has happened” doesn’t predict “will happen.” To get a better sense of what lies ahead, we suggest looking at The Conference Board’s Leading Economic Index, with mashes 10 mostly forward-looking variables into one handy number. For 55 years, it has been a remarkable gauge of future trends. It rose in June and is up 16 of the last 17 months, which suggests growth continues.
|By Leonid Bershidsky, Bloomberg, 07/31/2015|
MarketMinder's View: We have no stake or interest in the debate among intellectuals mentioned in this article—we’ve overlooked it and encourage you to do the same, because in between it makes some dynamite points about Spain, Ireland and Greece. For instance: Ireland cut public spending far more than Greece, relative to GDP, yet Ireland’s economy is back to pre-crisis levels. Greece’s remains down about 25% from the peak. “Austerity is not necessarily the reason Spain and Ireland are finally recovering. It may even have slowed them down at certain points. But the two countries' performance makes it hard to accept the view … that cuts in government spending administered in crisis-hit European countries were ‘contractionary.’ The Spanish and Irish economies are growing despite stingier governments. Arguably, it makes them healthier than if they had had the opportunity to try to fix their problems by printing money.”
|By Henny Sender, Financial Times, 07/31/2015|
MarketMinder's View: Not really. The level of margin doesn’t indicate much of anything. A massive spike in margin’s growth rate can be one sign of euphoria, but we don’t have one of those today. Beyond that, this article just recycles a bunch of false fears from the past 18 months, like rate hikes, stock buybacks, rising corporate debt and bond liquidity. See here, here, here and here for why none of those should pack a bull-market-ending punch.
|By Chao Deng, The Wall Street Journal, 07/31/2015|
MarketMinder's View: China’s stock markets are nearly old enough to rent a car, but they still have a lot of growing up to do, as this fascinating piece shows. As they develop and become more open, they should theoretically move more like global markets, rationally weighing fundamentals over time. In the meantime, though, their wild swings remain insulated from global markets, reducing the likelihood of spillover from boom or bust.
|By Victor Fleischer, The New York Times, 07/31/2015|
MarketMinder's View: This one is mostly sociological, but it shows quite nicely why, whether you think Democratic presidential candidate Hillary Clinton’s tax plan is great or terrible for business investment, it probably won’t have much impact at all. It mostly hits high-income individual investors. Not retirement accounts, middle-income folks, private equity or fund managers, who comprise the bulk of the investor universe. Other factors will likely have far more influence over how businesses deploy capital, plenty of which already goes toward R&D and other long-term investments.
|By Jack Ewing and Liz Alderman, The New York Times, 07/31/2015|
MarketMinder's View: We guess this is one way to look at it, and Europe has since realized the approach taken in Greece and Ireland—funneling bank rescue money through the state, adding to the government’s debt load—is suboptimal. A new program to address failing banks, which was agreed to in 2014 and takes effect next year, is designed to break that link between banks and sovereigns, and something like that probably would have helped Greece some. But also, unaffordable debt is unaffordable debt, and Greece’s debt was unaffordable even before the state went on the hook for the banks. Moreover, this misses the broader point: Greece’s bailouts were never designed to jumpstart growth on their own. Their purpose was to buy Greece’s government time to implement reforms, cut tax evasion and strengthen its institutions and property rights so private investors would eventually return. That largely didn’t happen. Bailout number three will work only if the current government bucks the trend and passes laws other, more pro-euro governments couldn’t or wouldn’t. Given their recent track record, we wouldn’t hold our breath.
|By Jonathan Weisman, The New York Times, 07/31/2015|
MarketMinder's View: The macroeconomic implications of this agreement, which finalizes the environmental portions of the Trans-Pacific Partnership (TPP), are probably quite small. But this was a stumbling block to the full TPP, and its passage is noteworthy and raises the likelihood the full deal gets done. Though, as this article also notes, negotiators have a lot of ground to cover, and their goal of sealing the final deal today might prove overly ambitious. If it gets done, great! If they need another round or three of talks, that’s fine too. TPP would be a long-term net benefit for the global economy and markets, which love free trade, but it isn’t required for this bull market to continue. Markets have done fine without TPP and can keep on doing so.
|By Aaron Back, The Wall Street Journal, 07/31/2015|
MarketMinder's View: And fresh quantitative easing (QE) seems to be what gets folks hot for Japanese stocks, so that could reduce the chances of another sentiment-related pop. That’s all just speculation, though, and not actionable for investors. More interesting are the other factoids discussed, which highlights why early 2015’s Japanese optimism seems too far ahead of itself. Economic fundamentals appear to be heading south, and the BoJ has apparently resorted to tweaking its inflation calculations to make the numbers look more in line with the target. Not that there is anything wrong with amending “core” inflation from “inflation excluding food and energy” like the US and UK to “inflation excluding fresh food and energy”—like the eurozone. We guess to each their own. Neither is inherently more accurate. But at this point it just seems like flailing, which probably won’t do much for investor confidence.
|By Staff, Reuters, 07/31/2015|
MarketMinder's View: The travails of Greece’s stock market probably mean little for global investors. But we pass this on anyway because we have a lot of experience with human behavior, and when Greek markets re-open Monday, some might see it as a once-in-a-lifetime “buy when there is blood in the streets” opportunity. If US-traded Greek stock ETFs are any guide, though, the dust hasn’t yet settled. Perhaps, one day, there will be a time to own Greek stocks. For most folks, though, we reckon that time isn’t here yet.
|By Michelle Jamrisko, Bloomberg, 07/31/2015|
MarketMinder's View: This actually doesn’t say much at all about labor market strength or economic growth. Employment alone doesn’t drive wage growth. When employers compete for workers, they factor in inflation. Thanks to falling oil prices, inflation mostly ran flat in Q2, giving firms less need to raise nominal wages. So all this article really tells us is firms responded to waning price pressures in a predictable manner.
|By Jeanna Smialek, Bloomberg, 07/30/2015|
MarketMinder's View: No, they won't. These economic reports are those a bunch of private-sector folks with no real insight into what transpires at Fed meetings these days think will determine when the Fed raises rates. But hey, even if they are right—that GDP, inflation, wage gains and employment—are the rate-hike linchpins, none of them have any inkling into how the Fed interprets the data. There are always myriad ways to view a set of economic data. Additionally, how does the Fed forecast a rate hike might impact these numbers? Said differently, how much pride have they accumulated? You can't know, so forecasting is folly. And irrelevant. There is zippo history of Fed initial hikes triggering a bear, and we doubt it is so very different today. Long and short, we'd be muuuuuuuuuch happier if the Fed would just get on with it and hike already. Then we could stop reading speculative stuff like this!
|By Jonathan Weisman, The New York Times, 07/30/2015|
MarketMinder's View: Talks are continuing on the Trans-Pacific Partnership (TPP) in Hawaii this week, with negotiators trying to drill through the last few remaining barriers to a deal. One such barrier? Pharmaceutical patent protection. In the US, firms’ patents give them exclusive marketing and sale rights for 12 years—allowing them ample time to recoup R&D costs before generic firms get into the fray. But this isn’t the global standard! Australian patents only allow for five years of exclusivity. Some countries want that number to be zero. This may seem like a small matter, but Pharma is an $800 billion industry in the US, which means we have a pretty big interest in getting other TPP nations to see it our way. This is just the latest, and arguably biggest (in dollar terms) headwind confronting a deal. We would gladly be wrong because a free-trade zone spanning 40% of world GDP would be great, but we are still a little skeptical a deal gets sealed, passes all the various legislative bodies, and comes to fruition any time soon.
|By Peter Spiegel, Financial Times, 07/30/2015|
MarketMinder's View: If this headline were the whole story, that could jeopardize the third Greek bailout before talks really get down and dirty, because many EU nations would likely not join in the bailout if the IMF wasn’t ponying up some funds, too. However, the title isn’t the whole article. You see, what they need is Greece to implement some reforms and the Troika to pledge some sort of debt relief, and blammo, the IMF board approves their involvement. Maybe that delays things and maybe it doesn’t, but this is not a gamechanger, friends. Actually, nothing in Greece is really a gamechanger, as illustrated by the five-plus years of bailout haggling and Grexit fears. Greece lacks size and surprise to materially impact global stocks.
|By Nicole Friedman, The Wall Street Journal, 07/30/2015|
MarketMinder's View: Here is a very interesting article highlighting two critical points for investors in the course of documenting a discrepancy between the US Energy Information Administration's weekly and monthly oil output reports (the weekly data are estimates and have shown falling output in recent reports, monthly data are reported production and show output at a 44-year high). For investors, those two lessons are:
Don't use short-term data to pinpoint the bottom or top of market moves. You can’t pinpoint a peak or trough anyway. Give it up. Instead, wait for a trend to be substantiated, which will reduce your error rate. That would have prevented you buying into a false rally.
Investors are likely still overly optimistic about oil stocks, as demonstrated by the keen interest in output reports—they're looking for an entry point, not capitulating.
|By Simon Kennedy, Bloomberg, 07/30/2015|
MarketMinder's View: The lesson is supposedly that the Fed waited too long to hike, allowing inflation to spike. Whatever you think of that history (inflation fell in 1967, so is 1966’s lack of a hike really the problem?), the application to today seems well wide of the mark. While we believe the economy can take a hike or three, there are very few signs problematic inflation looms today.
|By Michael Rittershaus, US News & World Report, 07/30/2015|
MarketMinder's View: ...can hurt you! This is a good primer on the basic types of annuities and some major issues to consider. Listen, if you are thinking of buying an annuity, read this article. Then go to Fisher Investments’ annuity education portal here. Full disclosure: We are not fans of annuities. You should at least find out why before you lock up your retirement in one.
|By Shuli Ren, Barron’s, 07/30/2015|
MarketMinder's View: The new draft law governing how monetary policy is set in India has some nice upside, but some pretty big downside, too. Namely, this: “To be sure, a consensus-building committee is better than the current system. At the moment, the central bank Governor can make rate cut decisions on his own and is under no obligation to follow the recommendations of his staff. But the problem is that the draft code suggests that out of the seven-member committee, only 3 would be appointed by the central bank and 4 would come from the government. This 3-4 rule takes a lot of power away from the central bank.” This comes after moves made in recent years were trending in the correct direction for India, including installing an inflation target for the Reserve Bank of India. Remains to be seen how this plays out, but having politicians with big sway over monetary policy is not a plus.
|By Daisy Maxey, The Wall Street Journal, 07/30/2015|
MarketMinder's View: Here is a slew of anecdotal evidence claiming folks are selling high-yield ETFs ahead of a rate hike, yet the very same article offers up this factoid: “Nearly $26 billion flowed into high-yield bond ETFs from 2008 through 2014, according to Thomson Reuters Corp.’s Lipper unit. Another $1.09 billion has flowed into the funds this year through July 22, bringing their assets to $37.8 billion, Lipper says.” So it would seem these folks are in the minority—which is fine! But also, it seems very odd to us to sell high-yield debt because a rate hike looms. You see, high-yield bonds tend to mimic equities more than short-term Treasurys. Rate hikes tend to impact short-term Treasurys most of all, because they are purely exposed to short-term interest rate risk. If an economic expansion drives up corporate profitability—and hence, creditworthiness—private-sector debt may not be affected nearly as much by a hike. We aren’t suggesting you dive whole hog into high-yield, but understand that there is more going on in corporate bonds than just rates.
|By Matt Levine, Bloomberg, 07/29/2015|
MarketMinder's View: This is an excellent look at how bond markets work, why liquidity fears are likely overwrought, and how markets are evolving to overcome regulatory hurdles to banks’ playing a big role in primary dealing. We recommend reading the whole thing, but here’s a fun teaser: “Sometimes people criticize market participants who act as pure middlemen and do no fundamental analysis. You see this mostly in markets with lots of high-frequency traders: Those traders aren't adding to the information content of markets, the argument goes, so they are probably just skimming money from real investors and should be banned or disfavored or spoofed. Here, though, the real-money investors have done the fundamental analysis, but still can't trade. What they need is someone to do the non-fundamental analysis, to figure out how many buyers there are and how many sellers and what the price should be so that all the fundamental investors can trade. The middlemen aren't adding information to markets, but they're allowing the information that's already there to flow freely. And without them, you can't find the information.”
|By Paul R. LaMonica, CNN Money, 07/29/2015|
MarketMinder's View: The Big One being a stock market correction—a short 10%-20% drop—which hasn’t happened in over three years, considerably longer than the average time between I corrections since World War II. This isn’t predictive, however. Markets don’t mean-revert, and averages comprise much shorter and longer periods. There is no way to tell when the next correction will come, whether the last one was 6 months or 36 months ago. Also, while it is largely true corrections can help “cleanse the market” of frothy sentiment by heightening fear, they are neither necessary nor unnecessary. We’ve had three-plus years of correction-free gains, yet sentiment is far from bubbly. (Though, we also see no signs of “extreme fear,” and the components in the “Fear and Greed Index” are simply an odd mix of technical indicators, not actual sentiment gauges.) Finally, while niche industries like semiconductors and transportation have corrected, this isn’t telling for the broader market. These “highly cyclical” industries aren’t leading indicators—stocks don’t predict stocks. These industries just face unique headwinds at the moment.
|By Debarati Roy and Eddie Van Der Walt, Bloomberg, 07/29/2015|
MarketMinder's View: Gold’s near four-year bear market, in which prices have dropped about 40% while stocks are up, has tarnished sentiment for the glittering metal, and many forecast further declines ahead. But regardless of where you think gold might be headed, we think it has no place in diversified portfolios. Contrary to popular belief, it does not protect against inflation or economic or financial calamity, it does not pay a dividend, and it generates no earnings, unlike stocks. An ounce of gold today will not grow into two or three ounces 5, 10, or 20 years out. It will still be an ounce of gold.
|By Walter Updegrave, CNN Money, 07/29/2015|
MarketMinder's View: The first eight paragraphs are a mostly great look at timing market peaks and troughs precisely is basically impossible. We do think investors can benefit from trying to navigate market cycles, but it isn’t about nailing a top and bottom. It’s about trying to avoid at least part of a bear market if you can identify one before the bulk of the downside has past—and being able and willing to get back in before stocks start recovering so you don’t miss the rebound. This is why we have several quibbles with the final two paragraphs, which take a hard turn into Buy and Hold land, encouraging investors to pick a static mix of stocks and bonds, based solely on their risk tolerance, and stick with it forever and ever. The trouble here is most people are simply unable to accurately assess their long-term risk tolerance, because the recent past skews their perception. After a long, booming bull market investors are much more likely to believe they are quite comfortable taking risk, and after a brutal bear market they probably want little to do with risk. In our view, it’s better to determine which allocation provides the best chances of meeting your needs over your investment time horizon. Comfort with volatility and ability to withstand short-term declines are important, but needs and goals should come first. You can’t aim without a target.
|By John Authers, Financial Times, 07/29/2015|
MarketMinder's View: While tradition categorizes stocks according to sector, country and size, newfangled factors like momentum, volatility and value are gaining notice. Proponents believe factor investing—weighting stocks according to certain factor characteristics—can generate better returns with less risk. But some researchers have concluded this isn’t the investing holy grail some presume. For starters, some studies show factor investing works best when you’re selling short (trying to profit off a decline)—a tactic near-impossible to execute successfully repeatedly. Plus, stocks rise about 70% of the time, so a tactic geared toward something that happens a minority of the time seems odd and perhaps counterproductive. And that assumes the study in question is statistically rigorous. Most studies on factor investing, as this article notes, aren’t. They rely on carefully controlled back-tests, using tactics nearly impossible to replicate real-time, with real money. We also aren’t sure how you can buy something that isn’t a thing, like momentum. Momentum is an observation, not an asset class. Stocks have “momentum” only until they don’t. Overall, this all just strikes us as ivory-tower fairy tale with little practical use.
|By Nikos Chrysoloras and Eleni Chrepa, Bloomberg, 07/28/2015|
MarketMinder's View: Well, there they go again: “Greece’s latest cycle of talks with its creditors started with a quarrel, as officials argued over which up-front commitments the government has yet to implement in order to tap emergency loans next month.” They have two or three weeks to settle this if they want to seal the deal in time for Greece’s next big loan repayment (due to the ECB on August 20), otherwise they’ll need to hash out a bridge loan to get Athens over the hump. Meanwhile, the ruling Syriza party’s leadership had its second emergency meeting in two days Tuesday, and they’ve set another one for Thursday. The far-left wing is pushing for a full-party vote on whether to pursue the bailout, which could complicate talks with creditors. PM Alexis Tsipras is trying to keep a lid on dissent until after the deal is sealed, but the more noise the Left Platform makes, the more it raises the specter of early elections, potentially before bailout talks conclude. In short, negotiations are hanging by a thread and could fall through at any moment, bringing “Grexit” dread back to the fore.
|By Emily Cadman, Financial Times, 07/28/2015|
MarketMinder's View: Whee! The UK grew again and accelerated in Q2. Yet reactions were decidedly mixed, as this collection of them shows—a good sign sentiment remains in check. Some are pleased, citing the recovery in per-capita GDP, strong employment and rising wages. Others think the real test looms when the BoE hikes rates, and as ever, some bemoan a “two-speed” economy with strong services but weak manufacturing. We wouldn’t overthink any of it. Overall, the news simply confirms what other indicators already suggested: Economic growth continues underpinning UK stocks. For more, see “Britain’s Boom Can Still Zoom.”
|By Charles Riley, CNNMoney, 07/28/2015|
MarketMinder's View: Why? Because it might give the impression policymakers are flailing or retreating from market-oriented reforms. And perhaps there is a kernel of truth to that, but this overlooks a broader point: Chinese reforms have moved in fits and starts since Deng Xiaoping first began opening the economy 30-plus years ago. Three steps forward, two steps backward is pretty much the norm for Chinese reform. We wouldn’t expect this to be a smooth-sailing process in any country. Recent events might be a high-profile hiccup, but they probably don’t represent a sea change.
|By Staff, The Yomiuri Shimbun, 07/28/2015|
MarketMinder's View: With Japan reportedly agreeing to phase out tariffs on chicken, wine, pork sausage (yum), liquid egg and salt, another Trans-Pacific Partnership (TPP) piece is falling into place. Yay! Though, as this makes clear, Japan still clings to those infamously high rice, auto part and beef tariffs, which could yet throw a wrench into TPP talks or result in a watered-down deal. If TPP gets done, it seems increasingly clear it won’t be an instant jolt for growth. Tariffs and other barriers will likely fall gradually, over several years (like the tariffs discussed here). Free trade is overall a net benefit and great for stocks, but keep your TPP expectations in check.
|By Staff, Reuters, 07/28/2015|
MarketMinder's View: The buffer in question is the “total loss absorption capacity” surcharge, which would require the world’s 30 or so biggest banks to “hold enough liquid assets to cover between 16 and 20 percent of their liabilities.” This buffer would come on top of normal capital requirements, and it looks like banks will meet it primarily through the issuance of new bonds (likely convertible to equity if things get dicey). This overall seems like a solution in search of a problem—as we wrote here and here, “too big to fail” wasn’t the issue in 2008—but it also probably isn’t the biggest deal in the world. Banks have four years to comply, and many have already begun raising the necessary capital in advance. So this shouldn’t materially hamstring lending.
|By Matthew Lynn, The Telegraph , 07/27/2015|
MarketMinder's View: By our unofficial count, the concerns highlighted here comprise roughly 87% of the bricks in the wall of worry bull markets love to climb, from Chinese hard-landing fears and a shaky eurozone recovery to the current bull market’s advanced age and seasonal circumstances ready to roil the market. Now, we’re not saying August is going to be either a good or bad month for stocks—volatility can always knock markets in the short-term—but we don’t see the bull dying in the near future, especially for any of the reasons listed here. In short, China’s domestic stock market bumpiness doesn’t equal a hard landing, the eurozone has grown despite Greece and the ECB’s quantitative easing, bull markets don’t die of old age and no one month is automatically good or bad for stocks. Also, picking out several random historical events out of context isn’t evidence that one month may be more volatile than another (though it may be a fun and educational summertime activity for the kids). Do you know what the end of World War II, the 1971 “Nixon Shock” and Russian Ruble Crisis of 1998 have in common? None of those events immediately triggered global bear market.
|By Staff, EUbusiness, 07/27/2015|
MarketMinder's View: Over the weekend, news broke that now-former Finance Minister Yanis Varoufakis had a secret “Plan B” to set up a parallel payment system, which would create euro liquidity if Greece lost ECB emergency funding and could switch to a new drachma at the push of a button—a currency transformer of sorts. To do this, Varoufakis hired an IT expert from Columbia University and had him hack into the tax revenue systems, copy the source code, and finagle a new system that would attach a new reserve account to every Greek tax ID number. Supposedly it was all ready to go in May, but when they took it to PM Alexis Tsipras for approval he quashed it. Amazingly, this story broke because Varoufakis told it to 84 financial industry bigwigs during a recorded conference call, someone squealed, and the organizers released the whole shebang online Monday. And it is a doozy, if only for sheer entertainment value, it is a must-listen. We’re personally fond of the Godfatheresque tale of brotherly love that starts at 19:51. It all sounds like a scene from a bad Hollywood thriller, and there is plenty more where those spoilers came from. For investors, it highlights Tsipras’ increasing struggle to control rebel members of his Syriza party (though Varoufakis is only loosely affiliated, not a full-fledged party member), which underscores just how difficult it will be to pass legislation to comply with bailout terms, much less implement them over the next several years (assuming he even remains in power). So we probably haven’t heard the last of “Grexit” fears. But we do know this: The likelihood Greece knocks global markets still remains close to nil.
|By William Mauldin, The Wall Street Journal, 07/27/2015|
MarketMinder's View: For as much progress as the US has made towards the Trans-Pacific Partnership, it isn’t a done deal yet. Even though it’s now in the “final round,” many variables and what ifs still persist. New Zealand is trying to milk out more favorable terms for dairy exports while Canada—and its domestic dairy industry—is sour towards that idea. Australia wants a sweet deal for its sugar exports, which US domestic interests are bristling against. The US also has beef with Japan over some agricultural products, like cattle and rice. As we’ve said before, the completion of the TPP would be a big positive for the global economy (although a huge negative for punnery), but until it actually gets finalized and completed, we wouldn’t count the chickens before they hatch.
|By Matt Egan, CNN Money, 07/27/2015|
MarketMinder's View: China’s domestic stock market isn’t a leading indicator for the economy. While China’s domestic (A-shares) stock market is on a wild ride—like Monday’s -8.5% drop—contagion fears are overwrought. For one, foreign participation in the A-share market is extremely limited, as individual investors make up less than 1% of market capitalization. A-share bear markets in 2009-2010 and 2011-2012 didn’t presage Chinese economic hard landings or a global bear market. Plus, slowing Chinese economic data aren’t surprising or particularly alarming—and in some cases, results are better than anticipated. As long as China keeps making its still sizable contribution to the global economy, that’s likely good enough to exceed dour expectations—a bullish scenario for global markets. For more, see our 7/9/2015 commentary, “About China …”
|By Nouriel Roubini, Project Syndicate, 07/27/2015|
MarketMinder's View: If you thought the only two choices in investing were passive (owning an index) and active (making investment decisions in an effort to beat an index), there is an alleged third way: “smart beta.” “Smart beta” investing means you adhere to certain quantitative rules that allow you to target specific parts of the market, combining components from both passive and active investing. That might mean owning an equal-weighted index instead of a capitalization-weighted one, or an index weighted by book value. If you’re a wee bit confused, you aren’t alone—it all sounds like “active” investing to us. Beyond that, we just question the value any of this adds. Most smart beta strategies are back-tested to show how they would have done if they existed in the past. That isn’t an actual performance history. Tread with caution and know what you’re buying.
|By Jennifer Rankin and Helena Smith, The Guardian, 07/24/2015|
MarketMinder's View: So Greece has some islands, companies, stadiums and other things to sell, and creditors gave them a €50 billion target. Most attention focuses on the government, as the ruling Syriza party has not exactly been keen on this whole privatization thing. PM Alexis Tsipras cancelled some sales after he took over, and as far as we can tell, the only thing he privatized was Emmanuel Kondylis, former chief of the privatization fund. But setting aside the government’s questionable willingness to privatize Greece’s many unproductive state-owned assets, we are just darned skeptical that they reach €50 billion if their deadline is any time within the foreseeable future, which is one of many reasons we’d suggest tempering enthusiasm about this bailout deal. One, market values are depressed right now. Two, fire sales don’t tend to fetch market prices. Spain just tried to sell one of its “ghost airports” for €40 million, a bona fide bargain compared to the hundreds of millions it cost to build. But the final selling price was €10,000. No, we didn’t accidentally leave off three zeroes. There was only one bidder, and bidding wars raise prices. We struggle to see things going much differently for Greece. Not when everyone in the world knows they have to sell.
|By Mark Schoeff Jr., InvestmentNews, 07/24/2015|
MarketMinder's View: Welp, the Department of Labor (DOL) received 775 comment letters on its proposed fiduciary standard for all investment professionals working with retirement accounts, and it now has 18 months to shepherd a final rule through. 18 months sounds like a long time, but Labor Secretary Thomas Perez has suggested several changes are forthcoming, and if they modify the rule heavily, it will likely have to face another round of public comments. So wait and see, but the likelihood this rule becomes reality appears to be slimming. If it dies, we think it might be to investors’ benefit. The rule’s aims are noble, but rules can’t ensure anyone acts in your best interests, and the execution has a lot of holes. Literally—escape clauses and loopholes are rampant. Though, the door remains open for the SEC to introduce its own uniform fiduciary standard, so there is a lot up in the air right now. Anyway, regardless of what shakes out, investors should always do thorough due-diligence on any investment adviser or broker they’re considering so they can determine whether that firm has the values, resources and drive necessary to truly put clients first. For more, see Todd Bliman’s commentary, “The Compass.”
|By Staff, Bloomberg, 07/24/2015|
MarketMinder's View: Though incremental and anecdotal, this is nonetheless a handy counterpoint to long-running fears about Chinese “ghost cities” being evidence that China’s recent growth is an unsupported construction boom that will soon tank the whole country. For all the talk of market-oriented reforms, China remains a command economy in many ways, and officials plan rural-to-urban migration years in advance. Their urban planning follows what we like to call the “Field of Dreams” method: “If you build it, they will come.” Build city, relocate farmers, lather, rinse, repeat. One of these pre-built cities, a replica of Manhattan located in Tianjin, is about to become home to Tianjin’s free-trade zone (FTZ). It sat vacant for about five years, but since gaining FTZ status, 6,000 firms have registered for business, leased office space and planned to move in. Soon it will be bustling! Whether this quadruples Tianjin’s GDP is another matter, but it is still evidence China’s growth is no mirage.
|By Phil Gramm, The Wall Street Journal, 07/24/2015|
MarketMinder's View: So there is a lot of sociology here, and we ask you to tune that out and turn off your ideological/partisan biases and opinions, because this reflection on Dodd-Frank is a great illustration of a risk we call “government creep.” Whatever you think of the law, its intent and its aims, it transferred power to regulatory agencies with little to no Congressional oversight, giving them carte blanche to define and enforce the rules in ways that might violate decades of precedent. The more government creeps like this, the greater the potential for some sweeping regulatory change decided in smoke-filled rooms away from public scrutiny—a big surprise that stocks don’t get the chance to slowly discount before it takes effect. That’s risk one. Risk two? Government creep drives uncertainty, which could discourage risk-taking among businesses and investors. We don’t say any of this to creep you out—risks appear minimal for now, and we’re still bullish—but this is a trend worth paying close attention to.
|By Jo Craven McGinty, The Wall Street Journal, 07/24/2015|
MarketMinder's View: Though not a complete analysis, this is a nifty look at the ins and outs of calculating and forecasting GDP. What goes into it? Which reports does the Bureau of Economic Analysis use? Which data are delayed and what do they use to fill in the gaps? How do analysts forecast GDP? And most importantly, what the heck are we supposed to make of all these numbers, revisions and statistical noise? “Even the best and most thorough forecasts are subject to noise in the data. Estimates substitute for missing source data until that information becomes available, but source data also may be revised after its initial release. These constantly shifting factors lead some analysts to question the usefulness of quarterly GDP reports and even wonder whether a tool conceived in the 1930s can adequately account for today’s digital goods and services. ‘There is a very simple rule,’ said Louis Crandall, chief economist at Wrightson ICAP. ‘When GDP numbers surprise you in light of everything else you know about the economy, you should always ignore them. And if they don’t surprise you, they haven’t told you anything. … The quarterly values can move sharply,’ he said. ‘They swing up. Then they swing back down. It’s not like they follow some monotonic path to a reasonable conclusion.’” And sometimes they are revised decades after the fact. GDP has its uses, but it is simply a late confirmation/aggregation of data released days, weeks and months earlier. So we wouldn’t spend much energy searching for meaning in bouncy GDP.
|By Matt Levine, Bloomberg, 07/24/2015|
MarketMinder's View: Aaaaaaaaaaaaand here is a fun piece inspired by the prior article. We highlight it mostly for the fun look at how various markets work—and how pricing can be efficient even without short-sellers. Here is one such fun nugget: “But short selling is not the norm for normal markets; it's a weird way to introduce competition into weird markets. Here are Dan Davies and Tess Read explaining short selling through the example of borrowing overpriced shoes and selling them on eBay, and just reading it should make clear how weird short selling is. No one but a sociopath would actually borrow a friend's shoes and sell them on eBay. If you think shoes are overpriced, you open a shoe factory. Short selling is just a way to open a stock factory.” Also, make sure you don’t skip the ninth footnote.
|By Robert J. Shiller, The New York Times, 07/24/2015|
MarketMinder's View: Well, of course it isn’t as efficient as the stock market, because a) stocks are totally fungible and b) they are extremely liquid. Hence, you get lots and lots of bids for what amount to the same thing (shares of company XYZ). A house may have one bidder. Or two. Or none. Hence, price discovery is largely done by two people, not many. There is a wisdom in crowds—to an extent!—but there is no wisdom in a pair, and no one claims there is. All that said, short sellers are not a cure all for this, as stocks show. Even with more liquidity, short sellers and fungibility, bubbles and irrationalities happen because people are people. Efficiency is relative, not absolute.
|By Stephen King, Financial Times, 07/24/2015|
MarketMinder's View: That dilemma, apparently, is to let rates stay low and inflate asset bubbles—leaving the Fed powerless if things crash while rates are at zero—or hike rates now and risk choking so they have something to cut later. This is a false choice, folks. Near-zero overnight rates in the US and UK haven’t blown bubbles. Both countries are enjoying perfectly normal, fundamentally supported bull markets. Despite both countries enduring flattish yield curves for years. And neither country really needs rock-bottom interest rates at this point. There is a reason the Fed calls their next move “normalizing” monetary policy, to the extent there is even such a thing as normal. Folks, if your country is growing fine six years into an expansion, you probably don’t need rates near zero. Even if the Fed hiked half a point, rates would be at 0.5%, exactly where the UK has been for years. Worked fine for them. Besides, the first hike in a tightening cycle has never killed a bull market. The real risk comes later on, when the central bank inevitably overshoots and inverts the yield curve. US and UK yield curves are steeper these days (with spreads over 200 bps), so that risk is likely a few hikes away at least.
|By Andrew Critchlow, The Telegraph, 07/24/2015|
MarketMinder's View: Well, gold’s price doesn’t really have any foundations for these metaphorical termites to eat. It has never been an inflation hedge, safety blanket or stable store of value. It hasn’t been a currency-ish thing since we went off the gold standard in 1971. It is just a commodity with little industrial use and a lot of sentimental attachment. And like other metals, it is dropping like lead (ha) right now. To do well with gold you must be an extraordinary market timer, and we think gold just has little place in a diversified long-term portfolio. For more, see our 7/22/2015 commentary, “Gold: The Pyrrhic Hedge.”
|By Peter Spiegel, Tony Barber and Shawn Donnan, Financial Times, 07/24/2015|
MarketMinder's View: Speaking of Greece’s third bailout, here is your update, which is just full of fun and weirdness. Negotiations between Greek and IMF/EU/ECB (“troika”) officials were supposed to start today in Athens. But they haven’t, because they’re too busy arguing over whether the troika people can stay at the Athens Hilton, which is apparently too close to government offices for Greek officials’ tastes. Not to be overly myopic or anything, but an inability to sort out basic lodgings doesn’t exactly bode well for sorting out pension cuts, tax hikes and streamlining the public sector. (What’s next, haggling over the shape of the negotiating table?) Meanwhile, there is some chatter about the IMF cancelling its extant Greek aid program, due to wrap next March, and starting a new one that would include massive debt relief. Which Germany remains mostly opposed to. So, lots of ground to cover these next few weeks. Whatever the outcome, though, there are no signs of contagion, and absent contagion, Greece is too small (0.3% of the world economy) to wallop a bull market.
|By Staff, EUbusiness, 07/24/2015|
MarketMinder's View: Apparently eurozone growth did not grind to a halt this month, despite all those all-night summits and Greek Parliamentary votes. People did not, as it happens, shirk work to follow live-blogging or sit around discussing Game Theory and whether negotiations would go better if Greek PM Alexis Tsipras wore a tie. Instead, it was “business as usual,” as Markit’s chief economist noted, and the eurozone composite purchasing managers’ index stayed well above 50, the line between growth and contraction. Once again, Greek chaos proves too insignificant to disrupt the bigger picture.
|By Matt Levine, Bloomberg, 07/23/2015|
MarketMinder's View: Wednesday, the Volcker Rule took effect: a rule intended to make the financial system safer by banning banks’ allegedly risky proprietary trading. But after five—that’s right, five—years since Congress first ordered regulators to design the law, the rule’s implementation has a very limited impact since the targeted banks have already shut down their proprietary trading desks. This law was always a solution seeking a problem, considering prop trading had nothing to do with 2008. And, as this piece notes, eliminating it doesn’t de-risk banks. No law can accomplish that, as lending and banking in general is risky, and attempts to mitigate those risks through regulation nearly always create unintended consequences—and the Volcker Rule is no exception, as both this piece and we have pointed out. For those who wonder what can be done to deter banks from reckless behavior, the last footnote here offers some sound analysis: “Of course enforcement actions can send a signal to other banks to change their own policies. Though, again, the losses themselves, if they and their causes are observable by other banks, might have the same effect. Banks don’t actually want to lose money.”
|By Martin Crutsinger, Associated Press, 07/23/2015|
MarketMinder's View: Besides the headline number—up 0.6% m/m in June, beating expectations of 0.2%—here are some more interesting tidbits about The Conference Board’s Leading Economic Index (LEI). While 6 of the 10 indicators rose, only one actually declined—stock prices, which sold off some at the end of June and have subsequently rebounded. (Also, fun fact: The Conference Board uses the S&P 500’s average daily closing price for the month, not the actual price movement from start to finish.) The interest rate spread was the biggest contributor, a positive sign for lenders. And with LEI now up in 16 of the past 17 months, it has been high and rising for a while, suggesting US growth will keep chugging along. Since 1959, no recession has begun when LEI was high and rising.
|By Matt O’Brien, The Washington Post, 07/23/2015|
MarketMinder's View: Well, in short, the euro isn’t the reason Finland is in its longest recession in living memory. Finland is actually the poster child for why undiversified economies are problematic: If your primary sources of growth are one moribund smartphone company and some timber companies, you’ll be in a wee bit of trouble if a more popular smartphone comes around and paper demand falters. If Finland still used the markka, devaluing it would just paper (sorry) over those problems, not fix them. A cheaper Finnish markka may change how the numbers look, but that dependency on an uncompetitive smartphone company and paper would remain. Oh, and comparing Finland to Sweden (which uses the krona) is more than a stretch, considering Sweden’s economy isn’t just a smartphone company and timber. Blaming certain countries’ struggles on the euro is en vogue right now given high-profile spots like Greece, but the common currency is no economic straitjacket—for more, see Elisabeth Dellinger’s column, “The Common Currency: Cure or Curse?”
|By Matt Clinch, CNBC, 07/23/2015|
MarketMinder's View: There isn’t much of a sign of gold bottoming yet, and already folks are talking up a rebound and bizarrely bullish signs like an obscure “U.K.-based online gold exchange,” noting “Tuesday ranked as one of the highest for new account openings so far this year.” Which seems like a stretch when the S&P 500’s two gold miners both reported rising production against a backdrop of falling prices in earnings releases over the last two days. Maybe this is correct, and 2017 does prove to be the bottom. Maybe not. We struggle to see what use this information is to you now considering it is all based on bizarre takes like, “equity markets will have really exhausted themselves” by then—which is a) wrong, because stocks and gold aren’t negatively correlated and b) speculation based on very, very little other than bull market age. Gold is prone to big booms and big, lasting, years-long busts. (For example, after peaking at $843 in January 1980, it didn’t break even until 2008.) Au has lower longer-term returns than stocks and more volatility. It doesn’t hedge against recession, inflation, deflation or equity-market weakness, as highlighted by its -25% decline during 2008’s Financial Crisis. In our view, gold has little place in a longer-term investors’ portfolio. For more, see our 7/22/2015 commentary, “Gold: The Pyrrhic Hedge.”
|By Tom Randall, Bloomberg, 07/23/2015|
MarketMinder's View: While we aren’t keen on scary-sounding headlines, this piece succinctly lays out the current Energy sector scene and notes its primary headwind: Global supply is outpacing demand, despite producers’ cutting costs. We would quibble with one aspect of this report: According to the US Energy Information Agency, US production is still in a longer-term uptrend. The most recent monthly data (for April) show production was only 3% below the highest level seen since 1971, achieved a month earlier. In other words, yes, OPEC is pumping more, but the US isn’t slashing either. Given all the factors contributing to supply—innovations in US shale oil, OPEC members determined to maintain market share and potential new sources coming online—we don’t see this Energy sector headwind letting up any time soon. For more, see our 7/15/2015 commentary, “Assessing the Iran Deal’s Investment Impact.”
|By Callie Bost, Bloomberg, 07/23/2015|
MarketMinder's View: We have many qualms with this piece. There is much too much of an effort to make stocks’ breeching record highs seem like mountain climbing when you claim they earlier “powered to records with ease” but are struggling now. That implies the bull is “tired,” but the past doesn’t determine stocks’ future whatsoever. Sure, in retrospect, bull markets seem like they go up without a hitch, but in real time, the ride never feels smooth. Moreover, markets don’t obey the laws of physics—they don’t need to hit certain arbitrary levels to keep rising or stop falling, and taking some time before setting more record highs doesn’t tell you anything about future market direction. What’s more, fear and skepticism are virtual constants in bull markets—it is never easy—and this one is no exception. Furthermore, Fed stimulus had little to do with record highs in this bull. Broken records are fairly typical in bull markets, quantitative easing or no. Ultimately, all-time highs are nice trivia. Nothing more. Nothing less.
|By Staff, EUbusiness, 07/23/2015|
MarketMinder's View: As Greece’s government lurches forward, passing tough reforms needed to unlock further bailout money, the divides in Prime Minister Alexis Tsipras’ Syriza party persist. Tsipras’ cabinet is in flux, and he is forced to rely on opposition parties to pass bailout-related legislation. While polls suggest the prime minister’s personal popularity remains high, recent polling’s lack of accuracy (think: 2014 midterms, UK election and, yes, the Greek referendum) doesn’t instill much confidence. It will be difficult for him to continue leading a divided ruling party—the possibility of early elections remains. And while this subplot bears watching for those interested in the Greek soap opera, our views about Hellenic Republic remain unchanged: The impact on global markets is close to nil. For more, see our 7/17/2015 commentary, “Greece Gets Some Euros.”
|By Staff, The Economist, 07/23/2015|
MarketMinder's View: With trade ministers set to meet next week to put the final touches on the Trans-Pacific Partnership (TPP), this piece highlights the agreement’s potential benefits (impacting 40% of the global economy) and real obstacles (contentious points remain and domestic governments still must approve). While some of this veers into the trade agreement’s sociological impact—specifically regarding China—the TPP ultimately would be a big positive for the global economy if it doesn’t get significantly watered down. But despite the optimism emanating from the White House and elsewhere regarding the deal’s prospects, the TPP still has a ways to go before becoming reality. We would be happy to be proven wrong by a non-watered-down deal arriving sooner rather than later, but for now, we’d counsel tempering expectations.
|By Kira Brecht, US News & World Report, 07/22/2015|
MarketMinder's View: So this article offers a rather sound look at how commodity cycles work: High prices encourage production, production overshoots demand, prices fall, low prices discourage production, producers cut back too much, supply lags demand, and the whole cycle begins anew. Oil is somewhere in the “low prices discourage production” stage, and at some point producers probably will overcorrect, bit it is impossible to pinpoint when. Overall though, we think it is premature to load up on Energy now anticipating a strong and sustained rebound in the near future. Oil rig counts have plunged, but idled rigs are, for the most part, the least productive ones. Firms are now doing more with less, and despite the reduction in active rigs, global oil supply continues growing. Also, though shale oil tends to be costlier than conventional sources—discouraging new supply as oil has dropped below the cost of production—many wells can easily be flipped back on again once oil prices rebound, keeping a lid on price increases. This is commonly known as a “fracklog”, and may be a powerful force keep oil prices low for some time. For more, see our 4/24/2015 commentary, "Don't Gush Over Oil Stocks."
|By Jeff Cox, CNBC, 07/22/2015|
MarketMinder's View: Low oil prices create winners and losers, and this piece suggests the winners (consumers having more money to spend elsewhere) aren’t offsetting the latter (struggling energy companies). And perhaps they aren’t, as there was never any guarantee people were going to splurge their gas savings on other fun stuff. They could also save or pay down debt. But also, this analysis relies on retail sales alone, which is the minority of total consumer spending. Service spending is the kicker and has held up firmer. So to the extent the theory here is true, it probably doesn’t amount to very much relative to the overall economy. On balance, the positives above and beyond energy still far outweigh the negatives, and if one positive isn’t quite as smashing as some thought it would be, that doesn’t mean it is an economic headwind. It is just a smaller positive amid many other big ones.
|By Mehreen Khan, The Telegraph, 07/22/2015|
MarketMinder's View: The thinking here is that the eurozone would benefit not from Greece leaving the currency union, but Germany, because a weak euro is propping up German exports, creating a big trade surplus that Germany doesn’t recycle to the rest of the bloc. If Germany would just buy more and invest some of those budget surpluses, the logic goes, everyone would live happily ever after. Or, if Germany would leave the euro (Germexit?), Germans could use stronger deutschemarks to buy far more southern European goods. But that really isn’t how it works. German demand alone won’t boost eurozone growth to the top of the world leaderboard. Germany is big but not that big. Its 2014 budget surplus was €18 billion. Its trade surplus was €215 billion. The eurozone economy excluding Germany is €7.2 trillion (nominal). Becoming more competitive globally is likely what will ultimately foster more investment and consumption in the periphery, from international and domestic sources alike. Many countries are making great strides on this front and growing, even with Germany remaining in the union.
|By Andrew Oxlade, The Telegraph, 07/22/2015|
MarketMinder's View: UK rate hike expectations have ping-ponged all over the map since Mark Carney took over the Bank of England two years ago, due largely to his own ping-pongy forward guidance and constant goalpost moving. We wouldn’t bank on current predictions’ accuracy any more than we would have prior predictions, whether based on Carney’s words alone or futures markets. Nor is the BoE’s next move really necessary to predict. Like their US counterparts, initial UK rate hikes haven’t ended bull markets or economic expansions. For more, see Elisabeth Dellinger's 10/3/2014 column, "Fun With Mark and Janet."
|By Blaise Robinson, Bloomberg, 07/22/2015|
MarketMinder's View: The main reasons being a weak euro and falling corporate borrowing costs, scoring one point out of a possible two. Falling borrowing costs do boost profits. But like the strong dollar, the weaker euro is probably zero sum or close, boosting overseas revenues but also raising overseas costs. Plus, there is another, much bigger reason eurozone profits are expected to be higher this year than those in the US: they are rebounding from depressed levels while US profits have grown for six years and are well into record highs. Profit growth is usually bigger early in recoveries, then slower as the year-over-year comparisons make the hurdle higher. That’s not to pooh-pooh eurozone earnings, which are a neat story, but the comparison with the US is false.
|By Matthew Lynn, MarketWatch, 07/22/2015|
MarketMinder's View: Yes, Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro bolstered confidence and helped the eurozone move past the acute crisis mentality plaguing it for much of 2010 - 2012. The ECB chief’s apparent decisiveness and willingness to act reduced sovereign default dread and encouraged banks, hedge funds and other entities to buy peripheral eurozone government bonds. A few weeks after the pledge, he announced a bond-buying program—Outright Monetary Transactions—essentially a free put option for Spanish, Portuguese, Irish and Greek debt. This helped further reduce interest rates, particularly in Spain and Italy, and ultimately paved the way for a regional economic recovery. But expecting anything beyond that, including a rip-roaring economic expansion in all eurozone nations not named Greece, was always a bridge too far and an example of society’s irrational fascination with central bankers. They are people, not magicians. Also, a Finnish recession, Italian stagnation and sky-high Spanish unemployment are not evidence of a eurozone economic crisis. Overall, the region is in much, much better shape. It has grown for eight consecutive quarters, and sovereign borrowing costs (again, other than for Greece) have declined dramatically. Pockets of weakness persist, but this is normal in any large, varied region. This piece is another sign sentiment for the eurozone remains detached from reality.
|By Stephanie Yang, CNBC, 07/22/2015|
MarketMinder's View: Because, according to a study about the relationship between commodity and stock prices, since 1957, stocks have performed better when commodities are trending down than when they aren’t. Look, we’re bullish on stocks, and we agree low commodity costs benefit households and many businesses, but we don’t think it makes sense to be bullish on stocks just because commodity prices are slumping. The technical case to do so, as described in this article, implies past performance predicts future returns and that one liquid market (commodities) predicts another (stocks). Neither of those claims is true. Stocks and commodities price in all widely known information pretty efficiently and simultaneously. Moreover, many factors influence stocks, commodity costs being just one, and what matters is: of the total, which weighs more, the positives or the negatives.
|By David Wilson, Bloomberg, 07/21/2015|
MarketMinder's View: All these graphs document is the recent pattern of the biggest stocks leading markets higher (declining market breadth), a typical maturing bull market trait. And one we’ve long expected to arrive.
|By Ben Levinsohn, Barron's, 07/21/2015|
MarketMinder's View: Yuuuuuuuuup. In a 30-stock, price-weighted index, when two stocks with high share prices miss earnings, you get a much bigger decline than the broad stock market. This documents just that, based on Tuesday’s discrepancy between the Dow and the S&P 500. For more on this, and why the Dow Jones Industrial Average ≠ the stock market, may we suggest our 6/25/2015 commentary, “Down With the Dow?”
|By Dhara Ranasinghe, CNBC, 07/21/2015|
MarketMinder's View: The answer to the titular question is actually, “Who knows?” Because none of the people interviewed in this long, speculative piece actually have insight into what data the “data-dependent” Fed is looking at or how the 10 individuals on the Federal Open Market Committee choose to interpret those data. Will they consider this latest round of weak commodity prices any differently than the almost four years’ weakness that preceded it? This theory seems very much like an attempt to connect recent news to a widely held fear, and that’s about it.
|By Roxana Zaga, Bloomberg, 07/21/2015|
MarketMinder's View: Well, yes, earnings growth in Europe is expected to be relatively robust compared to the US (in all fairness, it is growing off a much smaller base). Yet it isn't because of ECB actions. You see, eurozone corporations posted solid 11.8% earnings growth in Q1, too. The ECB didn't launch QE until March, so fully two-thirds of the quarter occurred before it. Finally, the tail end of this article's skepticism about the sustainability of eurozone earnings growth shows the gap between sentiment and reality in the eurozone remains (bullishly) wide.
|By Matthew Lynn, The Telegraph, 07/21/2015|
MarketMinder's View: It has long been predicted Moore’s Law (the principle named for Intel founder Gordon Moore, which posits chips’ computing power will double every two years while their size shrinks) will eventually reach its outer limit at the atomic level. However, that time has been repeatedly predicted and disproved over the years, as it just was recently by a team of scientists. However, innovation isn’t all about Moore’s Law, powerful as it is, even within the Tech sector. There are the Shannon-Hartley Theorem and Koomey’s Law as well, which pertain to the speed of information transmission and computing energy efficiency, respectively. And, importantly, these ideas don’t just apply to computing. They have real world application, and how the real world combines powerful computing devices with other goods and services can unlock a whole universe of new products, innovations and functionalities. Ultimately, the conclusions this article reaches are speculation based on speculation. There is little concrete reason to think the world’s technological advance and innovation will slow any time soon.
|By Everett Rosenfeld, CNBC, 07/21/2015|
MarketMinder's View: While we presume this headline is not a joke, we share it as a lighthearted break from your regular financial reading. A palate cleanser!
|By Staff, Reuters, 07/21/2015|
MarketMinder's View: While we quibble with the notion China is “dumping” gold based on a few days’ declines in prices seen on the Shanghai Gold Exchange—for every seller there is a buyer—the discussion of Indian gold demand is somewhat sensible, noting that there are few signs jewelry consumption in the world’s biggest market for gold will come to the shiny yellow metal’s rescue. The only thing we’d add is this: In the April/May 2013 go-round, Indian demand likely rose because rupee-denominated prices fell -10% in two days, and about -23% over the period November 2012 – May 2013. This time? Prices are down only -8% and it’s all in the last 21 trading sessions. That is likely too short term and too small to materially boost demand.
|By Lawrence Goodman and Stephen Dizard, The Wall Street Journal, 07/21/2015|
MarketMinder's View: This is just the latest in a slew of articles positing the combination of the Fed’s quantitative easing Treasury bond buying and regulatory shifts requiring banks to stock up on high quality capital has sapped the Treasury bond market of liquidity, potentially driving big volatility in bond markets. While it’s true those two factors have led to high demand for Treasurys, there is little sign lack of liquidity is a problem. For one, through June’s close, the peak-to-trough move in benchmark 10-year yields was 84 basis points. The median in the last 60 years is 85 bps. What’s more, policy shifts, like then-Fed head Ben Bernanke’s allusion to a taper on May 22, 2013 or the announcement of the actual taper in December 2013, didn’t result in big problems executing Treasury trades. All in all, we see few signs the fears over liquidity are anything more than a widely discussed false fear tied to Fed policy.
|By Ros Krasny, Bloomberg, 07/20/2015|
MarketMinder's View: This would be a very nice tailwind for global trade indeed, slashing tariffs on a huge array of products including MRIs, GPS technology, semiconductors, chips and more. As the WTO’s Director-General Roberto Azevêdo said, “‘This is a big deal,’ said WTO Director-General Roberto Azevêdo. ‘The trade covered in this agreement is comparable to annual global trade in iron, steel, textiles and clothing combined. By taking this step, WTO members will help to provide a jump-start to the global economy and underline the WTO's role as the central global forum for trade negotiations.’”
|By Ese Erherine, The Wall Street Journal, 07/20/2015|
MarketMinder's View: There are a whole lot of articles like this hitting the newswires lately, with analysts scratching their heads over gold’s recent decline to a five-year low while Greece and China concerns are widespread. Why isn’t the “safe haven” rising against this backdrop? Well, a couple reasons, in our view: 1) Greece and China aren’t real risks, so even if Gold were a safe haven, it wouldn’t much matter here. And 2) Gold is not a very effective safe haven. Gold fell -25% peak-to-trough in 2008 (admittedly, better than stocks but still not very safe-haven-y and no one claims stocks are a safe haven). Read these words carefully: Gold is a commodity, subject to the fundamental law of supply and demand. Right now, there is too much supply relative to demand and prices have fallen for almost four years as a result. Forget everything else about gold-as-a-hedge or so on because history doesn’t support it. Commodity. That’s it folks, commodity.
|By Mitch Tuchman, MarketWatch, 07/20/2015|
MarketMinder's View: The true challenge of investing is separating what is pertinent and matters from the noise. Here, it seems JPMorgan’s CEO is offering a helping hand and lending his view that Greece and China aren’t big risks and all is hunky-dory. While we don’t always agree with Mr. Dimon, we’d suggest he is spot on here. “The Greek economy, measured by GDP per capita, is comparable to the smallest U.S. state economy, Mississippi.” Or Detroit, which defaulted in 2013, a great year for stocks. Or Frankfurt, Germany; Madrid, Spain; Melbourne, Australia or roughly Phoenix, Arizona. China’s economy is certainly large enough to be pertinent for global markets, but its stock market is small and investing in domestic shares is limited by capital controls, so the global reach of Chinese stocks is small.
|By Stephanie Yang, CNBC, 07/20/2015|
MarketMinder's View: So the theory here is the Chicago Board of Options Exchange Volatility Index—the “VIX,” allegedly Wall Street’s fear gauge—is at low levels, signaling bullishly smooth sailing ahead. Which seems very odd considering the usual wrongheaded adage folks cite when discussing the VIX is, “When the VIX is high it’s time to buy.” This argues, something like “When the VIX is low go with the flow.” (Full disclosure: We made that rhyme up and fully accept that it is quite awful.) It is all based on the past movement—recent options prices—which doesn’t predict the future. And the VIX only (imperfectly) attempts to foretell expected volatility (not direction) for the next 30 days: Far too short term to matter for long-term investors. Plus, the index could change at any time, implying more volatility and rendering this reading of less volatility meaningless. Volatility is normal, folks.
|By Romy Varghese, Bloomberg, 07/20/2015|
MarketMinder's View: Go without more credit ratings, that is. As mentioned here, fewer municipal bond issuers are getting ratings from all three primary agencies (Moody’s, Fitch and S&P). Why? Two reasons: One, they have to pay for them, given the issuer-pays model behind bond ratings. And two, they see little benefit as bond yields are showing little influence from raters—suggesting either investors are paying little attention to raters now or they never paid as much as many feared. Which seems about right to us, as the bond ratings agencies have a history of following markets—like in the cases of Enron, Lehman, Greece, mortgage-backed securities and more. Markets are often the best place to determine riskiness. Not frequently backward-looking, late-to-the-game credit ratings that amount to an opinion an issuer pays for.
|By Lu Wang, Bloomberg, 07/20/2015|
MarketMinder's View: Stocks aren’t subject to physics. What has been happening for a while has no bearing on where things head from here. Sometimes, stocks that have been rising more than the market will rise faster. Sometimes they will do the opposite. You simply cannot use past returns—in any way, shape or form—to predict future results.
|By Peter Eavis, The New York Times, 07/20/2015|
MarketMinder's View: The Fed is continuing its quixotic quest to slay “Too Big to Fail,” and has this time finalized a surcharge for big banks based on their relative riskiness, as determined by their funding sources and involvement in Wall Street trading. They did not, however, choose to include this metric in the annual “stress tests” the Fed subjects big banks to, and the impact of the rules seems pretty limited—which a flattish day for the eight stocks covered suggests, too. While one bank has to raise capital (and less capital than expected, as compared to the figure Fed Vice Chair Stanley Fischer slipped up and stated last winter), “The other seven banks already have enough capital to meet the requirements of the new rule.” All in all, it’s another solution seeking a problem, but one that seems to have fairly limited impact.
|By Andre Tartar, Bloomberg, 07/17/2015|
MarketMinder's View: This gives the single currency too much credit—and blame—for all things in Greece’s economy the last 15-ish years. For example, the 2003 – 2007 bull was a global bull market that Greece participated in, not a celebration of it joining the common currency. Also, you can’t blame the downturn (GDP or stock market) entirely on the euro, when you consider there was a little matter of the global financial panic that hit in 2008 – 2009 at the front of Greece’s decline. You also can’t claim the downturn since 2010 is due to the euro when you consider Greece had a structurally uncompetitive economy with a history of serially defaulting that dates back to 1825, long before the euro. Finally, the chart depicting Greek exports to euro and non-euro nations that claims faster growth to non-euro nations undermines “a key argument in favor of creating a currency union in the first place” is wrong because economic growth in the much larger “rest of the world” could have been (and was) quicker over the one 15-year period assessed. It dismisses most of modern Greece’s economic history and structure to presume all their woes can be summed up in one little four-letter word.
|By Eric Pianin, CNBC, 07/17/2015|
MarketMinder's View: Strangely, this is not an article about Cyprus’ 2013 debt crisis. No, it is an article about the US’s debt ceiling misadventures, wrongheadedly deemed a “debt crisis.” Folks, for an actual debt crisis, look at Greece. Not the US in 2013, today, or pretty much ever in modern history. This article operates on the presumption that if the US debt ceiling—the legal cap on increasing outstanding debt—isn’t raised before the government hits it, than it will default. Which is wrong. You see, the US government’s tax revenue covers interest payments roughly 10 times over, and the 14th Amendment’s Public Debt Clause requires the feds to prioritize it above other payments. The debt ceiling, friends, is pure politics.
|By Michael Johnston, Fund Reference, 07/17/2015|
MarketMinder's View: Well, yes, there are many folks who make repeatedly awful market calls, and poking a little fun can be interesting. (Most of these are more marketing ploy than analysis, in actuality.) However, we highlight this for an entirely different reason: This is the kind of article you should expect to see in droves when we near euphoria. Right now this is a relative rarity, but if we continue to climb the wall of worry, this will become a regularity.
|By Eric Morath, The Wall Street Journal, 07/17/2015|
MarketMinder's View: So here is a great example of an article that is a victim of the noisy inflation data we warned readers about last month. Throughout the piece, year-over-year CPI figures are referenced with quotes like this to lead off the article, “Americans paid more for rent, groceries and gasoline in June, pushing a broad measure of annual consumer inflation into positive territory for the first time in 2015.” That statement is true, but only on a year-over-year basis. Month-over-month headline CPI has been positive in five straight months through June. Here is a picture of the difference.
|By Jason Zweig, The Wall Street Journal, 07/17/2015|
MarketMinder's View: While parts of this go too far for our tastes—and it presumes some wrongheaded things like Greece is a threat worth hedging, China is a risk to US investors and gold is a currency—there is a lot of sense here and it is worth reading in that respect. Here is a taste: “When you are in the grip of cognitive dissonance, anything that could be regarded as evidence that you might be wrong becomes proof that you must be right. If, for instance, massive money-printing by central banks hasn’t ignited apocalyptic inflation, that doesn’t mean it won’t. That means it is more likely than ever to happen—someday. You don’t want to be one of these people, spending years telling reality that it is wrong.” For more, see our 8/25/2011 article at The Street, “In Trivial Pursuit of Gold.”
|By Timothy Aeppel, The Wall Street Journal, 07/17/2015|
MarketMinder's View: There are a variety of issues with the government's official productivity tally (GDP per hour worked), and this article does a good job of documenting them. "One problem with the government’s productivity measure, Mr. Varian says, is that it is based on gross domestic product, the tally of goods and services produced by the U.S. economy. GDP was conceived in the 1930s, when economists worried mostly about how much, for example, steel and grain were produced—output easy to measure compared with digital goods and services. Technological improvements and timesaving apps are trickier. For one thing, it is tough to capture the full impact of quality improvements. For example, if a newer model car breaks down less often than older models but cost the same, the consumers’ gain can get lost in the ether."
|By Nick Timiraos, The Wall Street Journal, 07/16/2015|
MarketMinder's View: Last year, the White House projected US net debt-to-GDP would decline from 74% in 2014 to 69% by 2024. Now they project 74.6% of GDP in 2024, even though their deficit forecasts (in dollars) are largely unchanged. Why? They assume that because growth has been slow it’ll stay slow—a straight-line extrapolation of the recent past into the far future. Folks, that isn’t how real life works. Growth rates vary, and America could easily speed up. Straight-line forecasts also rely on averages and don’t account for things like recessions and recoveries. Nothing moves in a straight line ever, and we rather doubt this forecast is any more reliable than the Congressional Budget Office’s prior long-term projections (like the one in 2002 projecting perpetual surplus and a 7.4% net debt-to-GDP ratio by 2012). Besides, even if debt doesn’t decline in the long run—or even if it rises—stocks don’t move on far-future possibilities. They move on what’s likely to happen over the next 3-30 months, and US debt should remain plenty affordable over the foreseeable future. The Treasury has locked in financing at ultra-low rates for years to come, extending the average maturity to nearly six years, so for debt to become unaffordable, interest rates would have to skyrocket to nosebleed levels and stay there for a long time. Possible, but highly unlikely. But don’t just take our word for this, take the bond market’s word: Low borrowing rates are evidence US creditworthiness is rock solid.
|By Eric Platt and Kadhim Shubber, Financial Times, 07/16/2015|
MarketMinder's View: With less than 50 S&P 500 companies reporting thus far, it is still very early in Q2 earnings season, but these initial results suggests analysts’ dismal projections were way off the mark—just as they were in Q1, when preseason forecasts called for a –4.6% y/y decline, but when all was said and done, earnings actually grew 0.8%. This time, expectations were nearly identical at –4.5%, but many companies have consensus forecasts. “Blended” growth, which mixes actual results with estimates for companies that haven’t yet reported, has already eased to -3.7% y/y, according to FactSet. If companies keep beating expectations from here, earnings could easily surprise by as wide a magnitude as last quarter. There remains a big gap between sentiment and reality, which is great for stocks.
|By Timothy B. Lee, Vox, 07/16/2015|
MarketMinder's View: The euro gets a bad rap these days, with many considering it a monetary straitjacket—a device forcing countries to accept Germanic austerity and inflation-fighting regardless of whether it’s right for them. And we get it, it is mathematically impossible for the ECB’s policies to be a net benefit for every member state. But that doesn’t mean the euro itself is strangling countries. Actually, the euro is an amazing economic benefit—a free-trade marvel. Not only do all these countries trade with each other tariff-free, but removing the hassle of currency conversions and exchange rates vastly reduces the administrative costs of trade. Spain, for one, has benefited hugely from this the last couple years, with a strong export-led recovery. The trouble here isn’t the euro itself. The issue is more that the monetary union includes countries with varying degrees of competitiveness and open (or in Greece’s case, closed) markets, and it can’t compensate for these divergences with fiscal transfers. Ultimately, the eurozone will probably have to either become a fiscal transfer union, allow debt monetization, or shed those who don’t conform to the central tenets of liberalization and competitiveness. But this is a long-term academic issue.
|By Kathleen Madigan, The Wall Street Journal, 07/16/2015|
MarketMinder's View: We agree the outlook for the US economy is bright, but the broader thesis that rising employment and housing markets are a) meaningful economic drivers and b) necessary to offset weaker trade and investment stemming from China’s stock market decline seems rather wide of the mark to us. While China’s tumbling mainland stocks can hit sentiment globally, this is the sort of thing investors tend to get over relatively quickly once they see reality isn’t so bad as feared, so we see little chance China could hit sentiment to the extent it “[restrains] business investment, weighing on the rest of the world.” Businesses base investment decisions on their economic outlook, and soon enough they’ll see China’s economy remains as insulated from its stock markets as ever. Moving on to the domestic factors, housing is indeed picking up, but residential real estate is a sliver of GDP—this is a tiny tailwind. Also, some of the economic headwinds cited here—weak business spending and low productivity—are not really headwinds per se, as they don’t impede future growth. Instead, they are coincident indicators and they may pick up going forward.We’re much more inclined to base a positive outlook on steep yield curves here and globally, strong loan growth, healthy business and consumer balance sheets and other similar factors.
|By Tom DiChristopher, CNBC, 07/16/2015|
MarketMinder's View: Alright folks, time to set aside all your political leanings and biases so we can explore this one objectively, as there are some potential market implications in what the Junior Senator from Pennsylvania said and suggested. Look, we agree that the Fed, whose members are mostly academics with little to no real world banking industry experience, isn’t perfect, and often implements policies that are far from optimal. (E.g., Quantitative Easing, Operation Twist, etc.) And we entirely agree the Fed has repeatedly moved the goal posts on both the timing of and criteria for hiking rates. First it was 6.5% unemployment, which came and went. Then six months after quantitative easing ended—but it ended last October, and we’re still at zero. Now Chair Janet Yellen says it will happen this year maybe, and who knows whether that turns out to be true. The Fed really does risk losing credibility, and a central bank without credibility is feckless and probably negative for markets. However, shackling monetary policy to the Taylor Rule or similar isn’t the answer, in our view. For all its academic rigor, the Taylor Rule would hamstring the Fed and quite likely prevent it from acting pre-emptively to both fight inflation and stoke a recovery. It also uses suspect variables like potential GDP growth, which is often far removed from the real world. No, the Fed isn’t perfect. But we suspect allowing policymakers to continue using real-world inputs, human judgment and creativity will improve the chances they make sound decisions. And as for the credibility issue, ceasing the jawboning known as “forward guidance” would do the trick.
|By Michelle Kaske, Bloomberg, 07/16/2015|
MarketMinder's View: “America’s Greece,” as some call Puerto Rico, just inched closer to default as ”one of its agencies failed to transfer funds to a trustee to cover an August 1 debt payment because the legislature didn’t appropriate the funds when it passed the budget last month.” They could still make the payment, but the legislature would have to approve it, and they’re on holiday until mid-August, so Puerto Rico may well have its first-ever debt default. Some fear broader market fallout from Puerto Rico’s burgeoning debt crisis, but the risk of contagion seems awfully slim. Anyone concentrated in Puerto Rican bonds will probably get squeezed, but Puerto Rico is even smaller than Detroit, and muni bond markets didn’t implode when Detroit went under in 2013, or when Orange County, CA did in 1994. This saga simply serves as a reminder to investors to diversify and consider factors beyond tax status (Puerto Rican bonds were popular for their favorable treatment) when choosing investments.
|By Agnieszka De Souza and Jesse Riseborough, Bloomberg, 07/16/2015|
MarketMinder's View: Sorry, but Dr. Copper lost his economics degree years ago. In the early 20th century, when America’s economy was construction-heavy, copper had some merit as a leading indicator—high prices meant high demand and, therefore, lots of building. Ditto for China, in all likelihood. But as economies evolve from construction and heavy industry to services (underway in China in recent years), copper is less meaningful. It was kicked out of the US’s Leading Economic Index eons ago and, notably, it isn’t in China’s (The Conference Board uses a broader index of raw materials). Further, this piece ignores the impact of the huge supply increase in recent years as high prices (which peaked in early 2011) spun miners into overdrive. This supply glut will eventually correct—falling prices are a signal to cut production—but it will take a while (mines have a long lead time), and commodity-dependent nations will feel some pain between now and then regardless of Chinese demand, which is still growing. But for commodity importers, low prices are a handy cost-cut and net benefit, so the global impact here should be zero-sum or close to it.
|By Staff, The Yomiuri Shimbun, 07/16/2015|
MarketMinder's View: The more political capital Japanese Prime Minister Shinzo Abe spends on military matters, the less he has available for economic reform—and there are still a bunch of unfinished economic items on his policy to-do list. His approval ratings have tumbled during Parliament’s debate on these self-defense bills—the public’s goodwill is eroding. The window for economic reforms—still a swing factor for Japanese stocks—is narrowing, and many investors don’t seem to realize it. Sentiment here still seems too detached from reality, and we suspect better opportunities for investors lie elsewhere.
|By Staff, Bloomberg, 07/15/2015|
MarketMinder's View: Chinese GDP grew 7.0% y/y in Q2, beating estimates and matching Q1. The service sector—now the biggest piece of China’s economy—grew 8.4%, while industrial production rose 6.1% and agriculture 3.5%. So, good news, even if one must wonder whether the numbers are perhaps a bit more “manmade” (as Premier Li Keqiang once described China’s GDP) than usual as officials continue trying to shore up mainland stock markets. Even if that’s the case, though, China is still clearly growing at a fine pace and contributing heavily to global GDP growth. At its present pace, it would add about three Greeces to world output this year. A big China contribution, whether it comes with 7% growth or a bit lower, is all global markets really need.
|By Binyamin Appelbaum, The New York Times, 07/15/2015|
MarketMinder's View: As Fed head Janet Yellen told lawmakers today: “Efforts to further increase transparency, no matter how well-intentioned, must avoid unintended consequences that could undermine the Federal Reserve’s ability to make policy in the long-run best interest of American families and businesses.” Sounds about right to us. Political intervention is a recipe for disastrous monetary policy. Depending on lawmakers’ biases and leanings, giving them influence over Fed decisions could prevent the FOMC from hiking rates to prevent inflation or cutting rates to stoke an economic recovery. Proposals to shackle the Fed to monetary policy blueprints like the Taylor Rule might sound ok, as they’re grounded in academic theory, but they’d still hamstring the Fed in real life and potentially yield suboptimal moves. We aren’t the sort to encourage faith central bankers will always get things right, but in this case, the more independent they are, the better off we all are. Tightening political control could be the sort of sweeping legislation that would spook stocks—thankfully, gridlock makes it highly unlikely. For more, see Elisabeth Dellinger’s recent commentary, “Congressmen Attempt to Invite Monetary Error, Fail.”
|By Lingling Wei, The Wall Street Journal, 07/15/2015|
MarketMinder's View: Before Tuesday, foreign institutions required special approval to buy Chinese bonds and faced strict quotas. Now, they don’t—market is open for business! That should broaden access tremendously and put China one step closer to being a global reserve currency, though low bond supply likely remains a headwind. The $6.1 trillion bond market cited here includes municipal and corporate debt—not the sort of stable, liquid securities countries usually like to hold in their forex reserves. Central government debt is about one-fifth the size of the total market—and smaller than the UK gilt market. So there is a long, long, long way to go before the yuan even approaches the dollar’s dominance. But still, open markets are a long-term positive for China and the world. For more, see our 6/8/2015 commentary, “The Yuan’s Rise Doesn’t Doom the Dollar.”
|By Paul A. Merriman, MarketWatch, 07/15/2015|
MarketMinder's View: This piece isn’t perfect, as it pays a bit too short shrift to many investors’ need to continue growing their portfolio through retirement. But the first half is chock full of good sense. Relying on simple formulas like “I can retire when my portfolio is XX times my cost of living” is myopic and fraught with peril, as it ignores your actual retirement expenses, the fact they can change over time, and your broader long-term goals. Thinking critically about your actual, changing needs, the tradeoffs you’re willing to make and how long you need your assets to provide for you or loved ones (also known as your time horizon) is the key first step. Once you determine how much cash flow you’ll actually need from your portfolio, you can crunch some numbers to figure out how big a nest egg you’ll need in order to reduce the risk of running out of money (the more you save, the lower your withdrawal rate will be). Finally, long-term portfolio simulations using real historical data can help you see which asset allocation (blend of bonds and stocks) stands the best chance of meeting your goals. This article seems to suggest using actual returns from 1970 on, but we’re partial to Monte Carlo analyses, which aggregate the results of a couple thousand simulations based on randomly selected monthly returns since the 1920s, spooled together over a length of time equivalent to your time horizon. This process isn’t as easy as using a one-sentence formula, but it could very well save you some heartache down the road.
|By Steven Rattner, The New York Times, 07/15/2015|
MarketMinder's View: Yup. While “austerity” gets all the attention in the Greek bailout debate, structural reforms are just as important—and would reap big benefits for Greek consumers and would-be entrepreneurs. Letting shops open on Sundays, pharmacies compete on over-the-counter drug prices, grocers stamp a longer shelf-life on a bottle of milk and bakers sell bread in any weight and shape they want would improve consumer choice, boost shops’ revenues and probably lower prices for all. Making it easier for people to become taxi and truck drivers, engineers and actuaries would boost employment and, by extension, Greek revenues. The country has a lot to gain here if they see reform commitments through.
|By Peter Spiegel, Alex Barker and Elizabeth Rigby, Financial Times, 07/15/2015|
MarketMinder's View: Looks like EU officials are closing in on a solution for short-term loans to get Greece over next week’s big bond repayment hump: A €7 billion aid tranche from the European Financial Stabilisation Mechanism (EFSM), the temporary fund that bridged the bailout gap before the permanent European Stability Mechanism (ESM) was born in 2013. The UK and Sweden aren’t totally keen on this, as the EFSM is an EU-wide fund, and Greece is a eurozone-only problem, but officials are also progressing on a workaround that would guarantee non-euro states. So, things are slowly falling into place more or less for now, improving Greece’s chances of honoring a €3.5 billion ECB bond payment due Monday, though any disbursement depends on how Greece’s big reform vote goes Wednesday night. Stay tuned …
|By David Harrison, The Wall Street Journal, 07/15/2015|
MarketMinder's View: Wheeeee! But it fell in Q2 overall, according to the Fed, which isn’t surprising considering it fell six months straight prior to June. Time will tell whether June’s rebound represents the start of a new trend (we’d expect mining to weigh on the headline index for a while longer, given the strains on crude oil producers), but either way, the US economy doesn’t depend on heavy industry. Services and consumption have a far bigger presence and are growing just fine.
|By Josh Barro, The New York Times, 07/15/2015|
MarketMinder's View: The headline seems a bit of a stretch next to the article, which is an insightful, easy-to-understand look at why the eurozone will probably ultimately need tighter integration to carry on for the long haul. In other words, it isn’t that the euro doesn’t work, but that the union really isn’t complete. Since Greece’s problems metastasized, there have been three eventual endgames: turning the eurozone into a fiscal transfer union, as the IMF describes; monetizing the debt; or a euro exit by Greece and any other states that don’t share core members’ fiscal values. It is premature to handicap how the IMF’s new stance plays out and ultimately impacts the bloc’s long-term future, but perhaps they are sowing the seeds of fiscal transfer union today. Regardless, this is more of a thought experiment and academic issue than a global market driver—Greece’s sway over world stocks remains tiny.
|By Margarita Noriega, Vox, 07/15/2015|
MarketMinder's View: News you can use! Bloggers, Twitter users, journalists and your MarketMinder editors alike have gone gaga for puns and portmanteaus these last five years, and here are the definitions (along with other key abbreviations) in one handy place. Though, it is missing an old favorite: “Drachmail,” coined when many believed Greece was using threats to leave the euro and go back to the drachma to extract better terms from creditors.
|By Robert J. Shiller, Project Syndicate, 07/15/2015|
MarketMinder's View: While some of this is perhaps overwrought, it is an interesting counterpoint to widespread belief the rise of index funds removes the opportunities for active investors to capitalize on opportunities others miss—basically, the theory that markets are too efficient. In the long run, stocks are indeed pretty darned efficient. But in the short term, as this shows, they can be very irrational indeed. And even if folks use index funds, people usually aren’t passive. Investors often trade those passive instruments, flipping in and out based on fear and greed. There is zero evidence fear and greed have stopped moving markets, and those emotions are part of the human condition. As are biases, outlandish theories and all the rest. Perfect efficiency in the short as well as long term “is no less illusory than the rational Utopia that inspired generations of central planners. Human judgment, good and bad, will drive investment decisions and financial-market outcomes for the rest of our lives and beyond.”
|By Justin Lahart, The Wall Street Journal, 07/15/2015|
MarketMinder's View: Not terribly surprising that fed-funds rate futures markets aren’t moving in line with Fed head Janet Yellen’s supposed telegraphing of a 2015 rate hike—the Fed has changed its guidance multiple times under her stewardships. We don’t think the odds of a September rate hike went up or down with her Congressional testimony today, because rate hikes are not something you can ascribe odds to, or “game” in the vernacular. They aren’t a market function. They aren’t predictable. They are based on 10 humans’ interpretations of volatile, unpredictable economic data. Those interpretations are often colored by bias. Finally, the disconnect between Fed words and fed-funds futures doesn’t “mean a volatile end to the summer for markets” looms if the Fed hikes. Stocks discount all widely known information, and rate hikes have been discussed to death for about two years. Pundits said all the same stuff about the end of quantitative easing—it didn’t rock stocks.
|By Anora Mahmudova, Marketwatch, 07/14/2015|
MarketMinder's View: S&P 500 revenues may very well decline for the second consecutive quarter in Q2, but this is precisely because of the strong dollar and falling oil prices. These issues will likely drag down the headline number, just as they did in Q1, but it will not mean companies “can’t generate sales.” It will simply mean the strong dollar reduced overseas revenues, whether through higher prices or currency conversions, and it will mean falling oil prices hurt Energy firms’ revenues even as demand rose. The Commodity-dependent Materials sector will likely experience a similar impact from low metals prices. This article also errs in pooh-poohing earnings growth—ignoring earnings means ignoring the big cost cut many firms receive from the strong dollar and cheap energy. The strong dollar reduces overseas costs as well as revenues, and the net impact is often zero-sum or close. Analysts failed to account for this in Q1 and were forced to raise their estimates as data rolled in and trounced their too-low expectations. They didn’t raise their Q2 expectations, though—that’s bullish. Stocks move on the gap between reality and expectations, and the bar is set very low today.
|By Peter Spence, The Telegraph, 07/14/2015|
MarketMinder's View: This one makes a couple of groovy points. It starts out by handily debunking transport indexes like the Baltic Dry as reliable leading economic indicators these days, pointing out falling shipping rates are tied largely to a supply glut in container ships. (We’d add that cheaper fuel also plays a role.) It also pokes a hole or two in those widespread Chinese hard-landing fears, explaining that the “Li Keqiang Index”—which is named after China’s Premier and sums growth in rail freight, electricity use and bank loans—is perhaps less relevant today, as China shifts its growth engine toward services and consumption, than it was eight years ago when Li suggested it as an alternative to China’s “man-made” GDP. A less factory-heavy economy will rely less on rail freight and energy consumption. But then it goes on to make a couple of not-so-groovy points, starting with the suggestion rising corporate bond issuance, coupled with rising M&A and share buybacks, indicates a market peak is near. If rising debt did indicate CEOs were out over their skis, we’d raise an eyebrow, but that isn’t the case today. As long as firms can borrow at a lower rate than their return on investment, borrowing makes sense—and that is the case today, with corporate bond yields near historic lows and below equity earnings yields. (We’d also note last decade’s leveraged buyout boom didn’t cause the 2007-2009 bear market.) And then it ends by warning the real shock will come when the Fed hikes rates—folks, decades of market data debunk that one, as we discuss here.
|By Jeff Black, Bloomberg, 07/14/2015|
MarketMinder's View: Eurozone news over the last few months has been dominated by Greek brinksmanship. Meanwhile, the region’s economic conditions have been improving, and these improvements are more meaningful for stocks. This article highlights one example, plucked from the ECB’s quarterly bank-lending survey: Demand for business lending is rising. Cool! That means firms want to expand. But even cooler is a factoid the article omits: Business loan supply is rising, too, as banks loosen credit standards. Demand gets lots of press, but supply was the real missing link as eurozone yield curves flattened and regulatory requirements tightened, both of which discouraged banks from lending more. It is no mere coincidence that eurozone business lending stabilized when supply finally picked up. This is another underappreciated positive for the eurozone.
|By Matthew Lynn, The Telegraph, 07/14/2015|
MarketMinder's View: For ages, folks have feared that the bigger the world economy grows, the more we’ll pollute the planet and deplete resources, ultimately forcing economic stagnation on the world for the good of mankind and dooming stocks to a lackluster future. However, official US and UK data show amazing growth over last few decades hasn’t resulted in more carbon emissions, raw materials use or energy consumption. Instead, we became cleaner and more efficient! Human creativity and technological innovation, which is all about finding ways to do more with less, has a lot to do with this. It has paid big societal dividends over time—and for investors who participated in the ride by owning stocks, it has created vast wealth. This trend can run on and on, benefiting investors and defying continued fears of environmentally driven economic stagnation. Just as mankind was pretty good at solving peak oil and rising carbon emissions, so can ideas and technology collide to solve any number of resource-oriented problems in the far future.
|By Callie Bost, Bloomberg , 07/14/2015|
MarketMinder's View: Perhaps, but the VIX, which tries to measure implied future volatility by aggregating various options prices today, isn’t predictive—of future volatility or returns. Also, some of the logic here doesn’t quite add up. It says “measures of correlation between the S&P 500 and VIX also point to ‘near-panic conditions,’” as “the two gauges are trading the most inverse to each other since December 2011.” But we didn’t have a panic in December 2011. Stocks rose that month, did great in 2012 and went on a tear in 2013. VIX swings are mostly just trivia.
|By Michael S. Derby, The Wall Street Journal , 07/13/2015|
MarketMinder's View: We agree with the take here at a high level—the US economy likely expanded in Q2, especially since the West Coast ports work stoppage and, according to the BEA, faulty seasonal adjustment calculations bear most of the blame for Q1’s small contraction. But in terms of forward-looking barometers, we are quite wary of the Atlanta Fed’s “GDPNow” tool, as its back-tested history has several false reads and some of its components are a bit odd. We prefer The Conference Board’s Leading Economic Index (LEI), which has a 55-year published history and has never falsely signaled expansion. US LEI rose 0.7% m/m in May—the 15th rise in the past 16 months—and no US recession has started while LEI was high and rising like it is now.
|By Staff, EUbusiness, 07/13/2015|
MarketMinder's View: The fact Greece will have to pass a bunch of laws 61% of its people denounced a week ago is getting most of the attention following Monday morning’s deal. But other national Parliaments could torpedo the ultimate deal, too. Eight of them must ratify whatever Greece and creditors ultimately agree on, and that cuts against campaign pledges in places like Finland. This is one reason we don’t expect we’ve heard the last of Greece and “Grexit” fears. For investors, however, our view remains the same: The market fallout here, whatever the endgame, won’t end the current bull market. For more on this low contagion risk, see our 7/2/2015 commentary, “Some Thoughts on Greece’s Don’t-Call-It-a-Default.”
|By Kristina Peterson, The Wall Street Journal, 07/13/2015|
MarketMinder's View: All right party people, it’s time to put your political preferences aside for a moment and get an objective look at what faces Congress later this year. The government shutdown and debt ceiling beckon at year’s end, and debates over highway spending and other transportation projects leave ample room for budget brinksmanship. Few believe they’ll cut a deal early (which seems like business as usual on the Beltway, but we digress).Couple all this potential bickering with various Presidential candidates jockeying for position in 2016 and you’ll likely hear a lot of noise from Washington in the coming months and warnings about a standoff’s impact on stocks. When it happens, just remember: Government shutdowns haven’t caused recessions or bear markets historically, Congress has raised the debt ceiling over 100 times before, and failing to kick the can in a timely fashion doesn’t mean the US will default—see our writings from 2013’s shutdown for more.
|By Chen Jia and Zhong Nan, China Daily, 07/13/2015|
MarketMinder's View: Folks, this tidbit of Chinese data—that June exports rose 2.1% y/y and imports slipped a bit -6.7% y/y—won’t make the front page, especially given the wild ride in the domestic (A-shares) stock market. However, it indicates much more about China’s economic reality than its stock market. After falling for the past two months, exports grew a bit while imports’ contraction slowed: consistent with China’s longer-term trend of slower overall growth. For global investors, this is more telling than the volatility in China’s domestic stocks, which aren’t a leading indicator for the broader economy.
|By Matina Stevis, The Wall Street Journal, 07/13/2015|
MarketMinder's View: We present this as an interesting perspective on how far back the seeds of Greece’s crisis were sown. As far back as 1996, Greece’s finance minister Alekos Papadopoulos noted Greece’s current path wasn’t sustainable and the country required economic reform. None of this helps Greece now as it attempts to secure a third aid program, but this piece does highlight how Greece’s problems are uniquely its own—not representative of the broader eurozone—and the diagnosis cuts beyond ideology and party creed. For Greece today, the question is this: Can its current government buck the trend, implement the cuts and reforms many vested interests oppose, and cultivate a culture of tax compliance nationwide?
|By Roger Bootle, The Telegraph, 07/13/2015|
MarketMinder's View: While Greece and China have dominated the news lately, here is another false fear that has persisted for most of the current bull market: Will rising interest rates knock (in this example) the UK economy and/or stocks? The question rests on a faulty foundation: assuming low interest rates and “easy” monetary policy have been the UK’s primary support. Never mind that UK growth actually accelerated after the Bank of England ended its quantitative easing program, debunking the notion that the fate of the economy rested in the central bank’s hands. Plus, the UK economy has been amongst the strongest over the past several years, and BoE rate hikes haven’t historically ended bull markets. Nor have Fed rate hikes. Similar to the US, the UK can handle an initial rate hike from near zero, whether that happens in a month, a half year or sometime beyond. The real risk, as noted toward the article’s end, is if central banks overshoot, flatten or invert the yield curve, and choke lending—but that is impossible to handicap today and, given the relatively steep curve today, shouldn’t happen with the first couple moves.
|By Costas Paris and Stelios Bouras, The Wall Street Journal, 07/10/2015|
MarketMinder's View: Want a possible explanation for Greek Prime Minister Alexis Tsipras’ post-referendum U-turn? Here it is. While Greece's woes impact on the European and global economies are tiny, they are huge in Greece. And, they have the potential to compound Greek budgetary issues, too. "All of this is choking large swaths of an already battered economy—and threatens to usher in even more austerity than Greek voters rejected earlier this week. The fresh shock threatens government tax receipts, adding pressure to Athens’s finances. It is also likely to make fiscal targets in any new deal with creditors tougher to meet. If budget-deficit forecasts weaken, Athens may need to find even deeper spending cuts."
|By James B. Stewart, The New York Times, 07/10/2015|
MarketMinder's View: This suggests that the reason China may succeed in intervening in the stock market directly and reversing recent losses in domestic A-share markets (an event isolated to Chinese investors and unlikely to foretell economic fallout) is that the Communist government has no tolerance for volatility and huge resources (forex reserves). We can’t speak to the Chinese Communist Party’s risk tolerance, but they do have huge resources. That said, analyzing resources misses the point. The haphazard and ineffective announcements by the government to date are actually stirring panic, not quelling it. Such actions give the sense the issues are more out of control and markets more manipulated than investors thought likely before. In that sense, China's government can have all the resources in the world and still fail.
|By David Wilson, Bloomberg, 07/10/2015|
MarketMinder's View: "Below-Average" refers to the S&P 500 Price Index level currently being below its 200-day moving average, which some folks believe is a bearish sign. This article argues otherwise, suggesting that it isn't bearish this time, because the gauge is still near its all-time high. And we agree it isn’t a bearish sign, but not for that reason. You see, the 200-day moving average isn't predictive of anything—it, like all chart patterns, averages and formations is an arbitrary depiction of past returns. Always remember: Past returns don't predict.
|By Zachary Karabell, Barron’s, 07/10/2015|
MarketMinder's View: While we don’t agree with all of this, there is a lot of sense in this piece about how to think about bear markets. “Voices in the financial world are always warning of the Big One [a bear market]. But the Big One rarely happens, and most of the time, it is a big mistake to heed those warnings. Opportunities are lost, and ‘inoculation’ investments—i.e. gold bars—often turn out poorly, at best. Of course, the Big One could be just around the corner. We only will know in retrospect. The next question to ask is whether it makes sense to prepare for it considering A) it may never come and B) the investment choices you make to protect yourself perform badly unless it does. How you answer these questions depends on your personal ability to manage the uncertainty and potential stress that come with a dislocating event. Remember, investment decisions born of the desire to protect against worst case scenarios will almost always do quite badly unless the events occur.”
|By John Harwood, CNBC, 07/10/2015|
MarketMinder's View: OK party people, what time is it? Time to set aside partisan politics so we can analyze what is in the white paper released by Presidential hopeful Martin O’Malley. (And admittedly, it’s too early to analyze these ideas, which we presume are being floated as a trial balloon for use later in the Presidential primaries.) But we feel compelled to point out the idea of having more Fed officials appointed directly by the President and not the Fed independently is a recipe for increasing the politicization of the Fed—not good. As for the rest, they seem like a collection of solutions seeking problems with varying degrees of related issues. Reinstating Glass-Steagall—separating commercial and investment bank operations—wouldn’t have prevented 2008, but isn’t hugely problematic. Breaking up the banks is more problematic and, like Glass-Steagall, wouldn’t have prevented 2008. If the government decided to stop the revolving door between Wall Street and government, that’d be fine with us. But they should apply it across all industries, not just banks.
|By Stephen S. Roach, Slate, 07/10/2015|
MarketMinder's View: While we quibble with aspects of this, it is overall a good summation of the problems in thinking about China as you would a western, modernized, open economy. And as such, it's a decent explanation of why China's markets are a poor leading indicator for the economy. Of particular interest to us: "And by fixating on China’s so-called ghost cities, the West misses yet another key milestone in the emergence of the next China. One district in Zhengzhou that was portrayed as ghost-like by 60 Minutes is now fully occupied. In China, proactive urban development anticipates migration. This stands in sharp contrast to India’s urban squalor, where urbanization is always struggling to catch up with migration from the countryside."
|By John Kimmelman, Barron’s , 07/10/2015|
MarketMinder's View: As we’ve documented on this website frequently, volatility is normal. The recent dip from all-time highs achieved two months ago seems to have unsettled some because it came with a slew of scary headlines, but the fact is, it wasn’t really even very volatile. The current decline “…doesn’t yet measure up to the 18 previous corrections greater than 5% since the March 2009 low.” And of those, there were five -10% or greater corrections. Volatility is normal—it’s the price equity investors pay for stocks’ high longer-term returns.
|By Nick Timiraos, The Wall Street Journal, 07/10/2015|
MarketMinder's View: Yes, but not because it poses some kind of a threat to the government’s ability to refinance debt, which is mythology. The debt ceiling doesn’t prevent rolling over debt, only increasing the amount outstanding. The government is also obligated by the 14th Amendment’s Public Debt Clause to prioritize bond interest payments above other expenditures, so hitting the debt ceiling doesn’t really threaten default. Now, you might read those two sentences and say, “Then why does it exist!?!?!?!” To which we’d say A) preach on and B) it’s a political tool to make the fine folks we elect to office look like they are doing something about debt.
|By Claire Jones, Anne Sylvaine-Chassany and Shawn Donnan, Financial Times, 07/09/2015|
MarketMinder's View: Welp, don’t hold your breath, but it looks like Greece and the EU are closing in on a big can-kick! When the dust settled on another rumor-filled day, reports indicated Greek Prime Minister Alexis Tsipras had conceded on just about everything voters rejected on Sunday (basically the mother of all U-turns)—but secured key wins to sweeten the pot: a three-year €50 billion loan and willingness from creditors to explore further debt relief, perhaps by extending maturities on debt owed other eurozone governments. Greece hasn’t officially reached a deal with creditors yet, but Tsipras’ cabinet approved the austerity/reform package, and he hopes to ram it through Parliament Friday morning to show creditors he means business. Optimism is so high even Germany’s stalwart (and often amusingly deadpan) Finance Minister Wolfgang Schäuble cracked some jokes! But we’ll see what happens—this could all easily fall apart by the time you wake up Friday morning. And even if they do kick the can, Greece has a tough road ahead, perhaps starting with a complete Cyprus-style restructuring of its banking system. (Here is another interesting, colorful take on the day’s news.)
|By Matt O’Brien, The Washington Post, 07/09/2015|
MarketMinder's View: This is an odd mix of both unwarranted pessimism and unwarranted optimism. Folks, a Chinese recession would be very bad for the world. Any time you get a severe contraction in the world’s second largest economy, you will get ripples globally. We always like scaling things, but in this case, using US exports to China relative to our GDP as the sole evidence a Chinese recession wouldn’t hurt us is simply too myopic. It ignores the complexities of the global supply chain and interconnectedness of the global economy. Hence why you should be relieved that the pessimism here is also unwarranted. China’s domestic (A-shares) stock market historically hasn’t been a leading indicator for China’s economy, and we find it highly unlikely the ongoing tumble presages an economic crash. Consider: Chinese A-shares have had three -20% (or worse) drops since 2009, yet the global bull marched on and China kept growing (albeit at a slower rate). With most of China’s economic fundamentals still strong, it doesn’t appear different this time. Yes, officials are trying to work through some local government debt issues, and recent choppiness in Chinese bond markets might compound this, but they have more than enough firepower to recapitalize the banks if needed—and every incentive to do so. Though broader sentiment may take a bit of a short-term hit, what happens among China’s A-shares stays with China’s A-shares. For more, see our 7/9/2015 commentary, “About China …”
|By Matt Levine, Bloomberg, 07/09/2015|
MarketMinder's View: Here is a great, easy-to-follow explanation for why market-wide trading didn’t stop because of a “technical issue” at the New York Stock Exchange yesterday. (Spoiler: It is only 1 of 11 exchanges!) We suggest reading the whole thing, but a snippet here: “The New York Stock Exchange is a place of great symbolism and many television sets, but the computers don’t watch TV and don’t care about symbolism. Or rather, their symbolism is much simpler and less emotional: To the computers, the New York Stock Exchange is a little letter ‘N’ next to a quote. When they see fewer Ns and more Ts and Ys and Ks, they take it in stride. Trading proceeds as normal.”
|By E.J. Dionne, Jr., The Washington Post, 07/09/2015|
MarketMinder's View: Ok party people, what time is it? Time to set aside your personal political leanings and biases, look past all the partisanship in this article, and focus on the implications for markets. This piece argues Congress “needs to act now” to avoid a government shutdown and “fiscal Armageddon” this fall. Yowza! Except we experienced a government shutdown (mixed with the debt-ceiling to boot!) two years ago—and fiscal Armageddon (whatever that even means) never came. So we fail to see why it would materialize now. Plus, the suggestions here that Congress just needs to come together and “make a deal” to keep the economy steady is both unrealistic and unnecessary. Congress has been gridlocked since January 2011, and America has grown fine. For markets, gridlock is an underappreciated positive—it means contentious legislation has a lower likelihood of passing. But also, the private sector, not the government, is our primary economic growth driver, and it looks set to continue that role—whether or not Congress agrees with each other.
|By Tim Wallace, The Telegraph, 07/09/2015|
MarketMinder's View: In news that isn’t related to Greece or China, UK Chancellor of the Exchequer George Osborne posed with a red brief case and presented the summer Budget—the first Budget after the Conservative Party secured a majority in May. Like all Budgets, it contained long-term economic forecasts that will likely be wrong as well as something everyone could both love and hate—like the plans to bump up the National Living Wage to £9 an hour by 2020, corporate tax cuts for 2017 and 2020, and tax give-and-take for banks and high-street businesses. Tax proposals were also a mixed bag for individuals, with some allowances chopped while others were expanded. Many investors probably zeroed in on the big dividend tax hikes, which aren’t fun and might have a couple secondary effects. Businesses might be incentivized to return cash to shareholders with more buybacks and fewer dividends, and some folks might find their cash-flow strategy becomes less tax-efficient. If you’re impacted, call your tax adviser! But overall, while the Budget does create winners and losers, many of these proposals could get watered down. Backlash against several planks is high, and the Conservatives have to save their limited political capital for more contentious issues like EU membership and devolution.
|By Paul Wiseman, Associated Press, 07/09/2015|
MarketMinder's View: Umm … So the IMF lowered its global growth forecast this year from 3.5% to 3.3% primarily because the US showed a minor contraction in Q1 (-0.2% seasonally adjusted annual rate). However, the BEA has announced that come July 30, it will implement an extensive update to its seasonal adjustment calculations because first quarters have looked so weak historically—and many economists expect Q1 to show growth after the revision. So for investors, this serves as a friendly reminder: Don’t draw too many conclusions on backward-looking analysis, especially when it comes to forward-looking stocks.
|By Staff, Bloomberg, 07/09/2015|
MarketMinder's View: Well, yes, China’s overt market interventions suggest they aren’t comfortable with the concept of free market capital flows—though we’d add this is entirely consistent with the government’s approach toward reform in general (slow, gradual and on the Party’s terms). Whether or not this affects the IMF’s decision to include the Chinese yuan in its Special Drawing Right (SDR) currency basket this year is impossible to say—we don’t recommend trying to game how a group of individuals will determine the yuan’s “worthiness” to join the club. That said, being a SDR currency is more symbolic rather than fundamentally significant, and it’s not a major development for either currencies or markets now or in the near future.
|By Patrick Gillespie, CNN Money, 07/09/2015|
MarketMinder's View: Pockets of weakness are a constant in the global economy, and Latin America certainly has its share of headwinds. Many economies there are commodity-dependent, and they’re hurting not just from weaker Chinese commodity demand, but from falling prices globally. Weaker currencies are a drag for consumers too, as the article notes, though the effect is perhaps overstated. We do give points for acknowledging fears of a US rate hike’s impact on the region are probably unfounded (though we’d also argue the alleged flight of capital to Emerging Markets these last six years was more myth than reality). But for investors, this is all just a reminder to weigh the pros and cons globally. Latin American weakness is well-known, widely discussed and (probably) not a global macroeconomic risk.
|By Matt Levine, Bloomberg, 07/08/2015|
MarketMinder's View: “Gaming” an index fund involves buying a company scheduled to be added to a mainstream index like the S&P 500 before it’s added, then selling it to the index funds at a premium once the company actually joins the index and they’re all forced to buy. Some say this is a winning strategy for individuals and active investors, others say it disadvantages index funds—we think it is mostly a story about how efficient markets are. So here is a story highlighting that efficiency. Enjoy the great read!
|By Saumya Vaishampayan and Bradley Hope, The Wall Street Journal, 07/08/2015|
MarketMinder's View: This sort of thing just happens sometimes. In the old days it was paperwork and squirrels. This time it looks like a bug in a software update, and how many times have you dealt with similar headaches with your laptop or smartphone? Also, it wasn’t quite the standstill you might think: “The shutdown was isolated to specific trading venues, and investors could still buy and sell NYSE-listed stocks on other venues, such as NYSE’s own Arca exchange.” Rumors of capital markets’ technological fragility, as ever, are greatly exaggerated.
|By Avi Gilburt, MarketWatch, 07/08/2015|
MarketMinder's View: This is not a perfect discussion, but it makes a sensible point: While many believe gold is a hedge against turmoil, its actual behavior suggests it isn’t a hedge against anything—because it has no predictable or reliable relationship to stocks, inflation or fear. “As I have tried to convey for quite some time, gold is a sentiment trade. What you may think drives sentiment is not always the case. News may act as a catalyst at times, but then how do you explain when the market does the exact opposite of what you would have thought it would have done after a news catalyst? Do you think investors and analysts have learned their lessons from this latest Greek event? I doubt it. Did they learn their lesson from Ukraine? Or how about when gold dropped on tensions in the Middle East, specifically around events in Syria? Even more recently, as the Chinese markets have been dropping like a stone, has gold been its ‘safe haven?’”
|By Ambrose Evans-Pritchard, The Telegraph, 07/08/2015|
MarketMinder's View: This piece was published before EU and Greek leaders agreed on a roadmap for negotiations late Tuesday, so some of the “here’s what’s next” is out of date. But we highlight it anyway because it is a great, insightful look at the current political happenings in Greece and disarray in the ruling Syriza party. This, for example, is telling: “Greek premier Alexis Tsipras never expected to win Sunday's referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control. He called the snap vote with the expectation - and intention - of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 ‘ultimatum’ and suffer the opprobrium.” Oops. And then: “What should have been a celebration on Sunday night turned into a wake. Mr Tsipras was depressed, dissecting all the errors that Syriza has made since taking power in January, talking into the early hours. The prime minister was reportedly told that the time had come to choose, either he should seize on the momentum of the 61pc landslide vote, and take the fight to the Eurogroup, or yield to the creditor demands - and give up [volatile Finance Minister Yanis Varoufakis] in the process as a token of good faith.” It seems he has chosen the latter, and Greece is reportedly ready to offer up most of the concessions voters rejected on Sunday, perhaps with dire political consequences for Syriza down the line. We’ll see what happens.
|By Eduardo Porter, The New York Times, 07/08/2015|
MarketMinder's View: This comparison is a wee bit wide of the mark, in our view. Germany’s debt was WWII debt accumulated by the Hitler regime. It was forgiven largely because postwar treaties cut the country in half and a sustainable West Germany was seen as a hedge against the Communist Bloc. Also, because it was a totally different government, and few wanted to give people reason to resent Hitler’s defeat. None of that applies in Greece, where forgiving debt could backfire by encouraging extremists (right and left) across the eurozone. Besides, debt isn’t really Greece’s primary issue—it’s competitiveness and government involvement in the economy, which successive Greek governments have been slow to reform since 2010.
|By Randall W. Forsyth, Barron’s, 07/08/2015|
MarketMinder's View: Many commodities sold off this week, and people are playing connect-the-dots between Greece, China’s selloff and this factoid. However, before you start nodding along, consider: Copper, silver, gold, oil and many other commodities peaked in 2011. They’ve been sliding since, some drastically so. And yet, we haven’t seen material global deflation or major macroeconomic weakness associated with it throughout the period. Besides, not all deflation is negative—particularly if it results from a fast increase in supply brought by innovation (like oil).
|By Neil Irwin, The New York Times, 07/08/2015|
MarketMinder's View: Well, it seems to us the bigger issue is the more frequently and haphazardly a government attempts to act to stem panic, the more it actually encourages panic. That is why China's efforts have failed. Hence, also, why a "crash prevention team" would fail in the US, if it actually existed. Markets are too big, liquid and adaptable for governments to unilaterally stanch selloffs.
|By Gabriele Steinhauser and Tom Fairless, The Wall Street Journal, 07/08/2015|
MarketMinder's View: And tomorrow they’ll release detailed reform proposals. Then EU leaders will discuss the whole shebang on Sunday, and decide whether they form a sound basis for negotiations. If so, the “plan to have a plan” as we like to call these things would improve the odds Greece stays in the euro. Both sides seem to be inching closer to the middle, with Greece offering several concessions and Europe warming to the notion of debt relief, but there is still a lot of ground to cover. The waiting game continues. But for global investors, Grexit risk remains minimal—see Tuesday’s commentary for more.
|By Gabriele Steinhauser and Matthew Dalton, The Wall Street Journal, 07/07/2015|
MarketMinder's View: Welp, presuming they really mean it this time (prior deadlines were symbolic and toothless), start the countdown. The ECB has agreed to keep funding Greek banks through Sunday, and that’s the day eurozone leaders meet for another emergency summit on Greece—their self-imposed make-or-break meeting. Greece’s updated bailout request—with additional concessions, reportedly—is set to hit the wires tomorrow, then they’ll all negotiate, and leaders will decide on the viability Sunday. No one seems optimistic about agreeing to a full multi-year program by then, but we reckon a handshake agreement—a plan to have a plan—will probably be good enough for the ECB’s purposes. Greece’s proposal will probably include most of the items voters rejected Sunday, so that’ll be interesting, but they probably asked for enough sweeteners to rationalize it on the back end. And—most notably—German Chancellor Angela Merkel now seems kind of open to Greek debt relief, which was the biggest sticking point. So watch this space for more, but whatever happens, as we wrote in today’s commentary, global risks remain minimal.
|By Staff, Reuters, 07/07/2015|
MarketMinder's View: This is a whole lot of reading into one month’s report. Yes, exports fell -0.8% m/m and imports fell -0.1% m/m, with total trade (exports plus imports) falling -0.4% m/m. But this does not “highlight a change in America’s recovery from recession in which the economy has relied more on domestic drivers like construction and services, rather than export-led industries such as manufacturing.” Folks, this isn’t a change. America has been a service-based economy for decades. And manufacturing isn’t as weak as this piece suggests. Despite May’s fall, capital goods exports year-to-date are up from 2014 (at the same point). So are exports of consumer goods. Exports of industrial goods are down, but that probably has a lot to do with the fact this category includes oil and oil-related products—falling oil prices bear most of the blame. The US economy is simply in far better shape than this article suggests.
|By Dan Murtaugh, Lynn Doan and Bradley Olson, Bloomberg, 07/07/2015|
MarketMinder's View: Once again, technology debunks “Peak Oil.” The latest forecast from the Energy Information Administrated predicted US oil output would peak in 2020 due to shale wells’ short lifespan. But now producers are “refracking” old wells, vastly extending their production. Many estimate the technique could add 50 years to each shale field! Take that with a grain of salt since it is a long-term forecast and the practice hasn’t been broadly applied or tested, but it illustrates the point. Refracking is also cheap, and wider use in the near term could improve Energy firms’ margins as prices stay low, though at this point it is speculative. We haven’t seen analysis on how refracking would impact oil wells’ breakeven prices. So, cool, but still not a reason to plow into Energy stocks.
|By Lisa Pollack, Financial Times, 07/07/2015|
MarketMinder's View: We aren’t anti-CFA, CFP or any other financial industry designation. Advisers, analysts and brokers can develop some great skills and critical thinking by going through these programs. But you can’t determine whether or not an adviser is a good fit for you based on a professional designation alone. “Just because someone has learnt a certain way of doing things for a test does not mean they’ll be able to apply said knowledge in an uncontrolled environment; witness the way most people drive after obtaining their license. Consequently, charters typically require work experience, though this may be self-reported. Furthermore, be warned that professional qualifications may be used as justification for not doing deeper research. Due diligence of a prospective business partner may descend into a box-ticking exercise: x-number of employees have this or that set of (post-nominal) letters.” Always do your due diligence on how your adviser arrives at their recommendations—is it through research, critical analysis and independent thought? Or through myths, truisms and groupthink?
|By John Coumarianos, The Wall Street Journal, 07/07/2015|
MarketMinder's View: According to this, it can hurt investors by causing them to be complacent, taking on too much risk when things are smooth and then selling in a panic when things start to get bumpy. And that may be true for some—it’s easy to forget just how volatile stocks can be when they hit a lull. But volatility cuts both ways, and in bull markets, the good kind of volatility—upside volatility—swamps the bad kind. Don’t fear volatility’s return—celebrate it!
|By Staff, The Yomiuri Shimbun, 07/07/2015|
MarketMinder's View: Japan’s nuclear power plants have been offline since the Great Tohoku Earthquake and tsunami in 2011. Since then, Japan has had to import its energy, which was a significant weight on consumers before oil prices started falling last year. Japan hasn’t benefited from falling prices as much as other nations, because they import a lot of natural gas, and global natural gas prices haven’t fallen much alongside oil. So the impending reopening of the Sendai nuclear plant—the first since the quake—is a welcome development. But the fact it is just happening now (maybe), despite a nuclear restart being one of Prime Minister Shinzo Abe’s central campaign pledges in 2012, speaks to how little political capital Abe has—a big reason we aren’t optimistic about Japanese stocks.
|By Ben Wright, The Telegraph, 07/06/2015|
MarketMinder's View: Here is quite a sensible take on the results of this weekend’s “Greferendum” vote against austerity. Now, it seems to overstate the impact of a potential Grexit some, claiming this would “irrevocably alter” the eurozone. Yes, it would set a precedent that the eurozone isn’t some one-way street, but is that necessarily so bad? Couldn’t it actually mitigate fears of systemic risk if one country gets into trouble? Now, that may seem big but it is actually a fairly minor quibble in what we believe was an overall sensible piece. About the only things that changed this weekend are the following: Who exactly is doing the negotiating for Greece, Greek bond yields and CDS costs. (Which are both higher).
|By Oliver Staley, Bloomberg, 07/06/2015|
MarketMinder's View: Why, yes, fight-or-flight responses and the influence of body chemistry can impact how an investor reacts to various financial stimuli—in that sense, we agree. And yes! Men do have a behavioral tendency to trade too much relative to women. However, this article offers up the theory that this same trait is responsible for market volatility and crashes, which we find wanting. Did body chemistry make the Fed tighten policy drastically in the 1929 – 1933 period and fail to act as lender of last resort, while it also made Congress enact the disastrous Smoot-Hawley Tariff Act of 1930? Did it make them triple reserve requirements prematurely in 1937? We are also skeptical accounting regulators installed mark-to-market accounting for illiquid assets in 2008, bringing huge unnecessary writedowns, because of a hormone surge. It is too simplistic to blame greed and risk taking for crises.
|By Dan Strumpf and Saumya Vaishampayan, The Wall Street Journal, 07/06/2015|
MarketMinder's View: Always remember: It isn’t reality alone that moves stock prices, it is how reality compares to sentiment. The degree of earnings growth doesn’t determine stock price movement in a vacuum. As Q2 earnings season begins, expectations for low results are rampant—similar to Q1. Now, this alone doesn’t necessarily mean we get an exact replay of Q1, when earnings smashed too-low expectations, but the fact heels-dug-in analysts still have low expectations shows sentiment doesn’t appreciate the bright reality around them. This is bullish news, folks.
|By Julie Verhage, Bloomberg, 07/06/2015|
MarketMinder's View: Yes.
|By Keith Bradsher and Chris Buckley, The New York Times, 07/06/2015|
MarketMinder's View: While China’s stock market decline is indeed as big as Greece’s GDP a few times over, it is worth considering that this is a very isolated event: The dip is centered in A-shares, which foreigners mostly don’t own; China has strict capital controls restricting money moving in and out, so the connections to the global financial system are few and far between; China A-shares aren’t a great leading economic indicator, considering they have had two bear markets exceeding -30% since 2009. The economy grew throughout and even accelerated during the first.
|By Kathleen Madigan, The Wall Street Journal, 07/06/2015|
MarketMinder's View: This article details both ISM’s and Markit’s US nonmanufacturing PMI, and both were in expansionary territory in June. So, growth! But they diverged a tad, with ISM’s gauge (which has much more history) accelerating while Markit’s (which surveys more firms) dipped a wee bit. However, both measures of the biggest slice of the US economy saw new orders rise, which is forward-looking—and bullish.
|By Megan McArdle, Bloomberg, 07/02/2015|
MarketMinder's View: We’re somewhat ambivalent about this one. On the one hand, it highlights a few key ways the US isn’t Greece: America has a much deeper and diversified economy (as this piece quips, it’s much more than tourism and olive trees), doesn’t suffer from Greek-style corruption, has much better tax collection and can set its own monetary policy. However, we don’t believe the US has “massively unsustainable borrowing.” Though many bemoan the US’s $18 trillion dollar debt, about 102% of GDP, that figure includes the government’s holdings, which effectively cancel (it’s money they owe themselves). Net debt (held by the public) is $13.1 trillion, about 74% of GDP. Plus, the ability to service this debt is what really matters, and US borrowing costs are very low and falling. Debt service is less than 8% of tax revenue. If debt rises for years at breakneck speed and interest rates soar to nosebleed levels and stay there, then we’ll have a problem, but that risk is almost nil in the foreseeable future. Markets don’t deal with remote far-future possibilities in the here and now.
|By Neil Irwin, The New York Times, 07/02/2015|
MarketMinder's View: Why? Because the labor force participation rate fell again. Folks, the labor force participation rate is a largely meaningless statistic. Everyone focuses on the numerator—labor force—forgetting the denominator, population, has as much influence on the ratio. The labor force itself isn’t shrinking—it fell a bit in June, but May was an all-time high. Population is just growing faster, ergo, falling ratio. Don’t overthink it. Also, the labor market is a late-lagging indicator, utterly meaningless for stocks. Growth drives jobs, not the other way around.
|By Dimitris Valatsas, The Wall Street Journal, 07/02/2015|
MarketMinder's View: This piece has a clear political agenda, and we normally wouldn’t highlight something of that ilk, but we’re making an exception in this case because it has such a simple, clear accounting of Greece’s increasing hardships as the Syriza government—elected on an untenable promise of continued euro membership with much less austerity—floundered in negotiations with creditors and ultimately lost the goodwill of Brussels and many of their constituents. When Syriza won January’s election, Greece was in a nascent economic recovery. Now they are back in recession, and the downturn is almost sure to steepen. Grexit seems perhaps a stone’s throw away, and for all the pixels spilled over how devaluation could boost Greek exports and competitiveness in the long run, in the near term it will be devastating: “As usual, it is the poor who suffer the most. The Greek elites’ Swiss bank accounts aren’t subject to withdrawal limits. The rich don’t stand to lose their savings if the government forcibly converts their money into newly minted drachmas.” We can’t help but wonder how closely Spanish voters are watching and whether this will turn them off of their Syriza equivalent, the Podemos party, which is polling well as the general election there approaches.
|By Jennifer Kaplan and Joseph Ciolli, Bloomberg, 07/02/2015|
MarketMinder's View: Analysts currently expect S&P 500 Q2 profits to fall year over year—“more ammunition for bears who say equity valuations are too high.” We would quibble with this for several reasons: (1) As this notes, most of the expected decline stems from cratering Energy profits. Excluding Energy, profits are expected to grow a little. (2) Market valuations typically expand in maturing phases of bull markets, and earnings growth can slow or even turn negative without derailing bull markets. (3) Part of the reason analysts expect earnings to drop in Q2 is the strong US dollar, which supposedly hurts exports. But they said the same thing in Q1, and earnings grew—turned out they forgot a strong dollar helps lower overseas costs, offsetting much of its impact on overseas revenue, as we discussed in more detail here. And finally, (4) stocks are forward-looking. Q2 is in the past now, and stocks have already discounted all these dreary expectations. They’re looking to the next 3-30 months or so, and most expect earnings to reaccelerate in that window.
|By Asjylyn Loder and Bradley Olson, Bloomberg, 07/02/2015|
MarketMinder's View: When oil prices started falling last year, many producers didn’t immediately feel the pain because they’d locked in delivery contracts at higher prices or used derivatives contracts to hedge away the immediate risk. When oil was in the $40s in January, many drillers could still sell at $90 per barrel. But many of these arrangements will expire this year, causing many drillers’ revenues will fall sharply—yet another reason we think expectations for Energy firms remain too high and bottom-fishing for stocks in that sector remains premature.
|By Paul Vigna, The Wall Street Journal , 07/02/2015|
MarketMinder's View: This is a load of unwarranted pessimism. The “green shoots” in question are the same “green shoots” then-Fed head Ben Bernanke observed in 2009. This says we are still waiting for them to “grow into stalks,” which we find confusing as all get-out considering real GDP has been clocking new highs since 2012. This is an expansion, people, not a recovery! We have a great big beanstalk already, to continue to metaphor! Listen, we get that growth has been below average throughout this economic expansion, but there is nothing magical about a 3% growth. Stocks don’t need rip-roaring growth for a bull market to continue—just a reality that beats dreary expectations. Articles like this help keep expectations low—bullish for stocks.
|By Jason Zweig, JasonZweig.com, 07/01/2015|
MarketMinder's View: Mr. Zweig, The Wall Street Journal’s personal finance guru, took to his personal blog to share this absolutely dynamite perspective on how the abundance of financial news and information can lead investors astray. It becomes all too easy to read too much into every short-term change and blip in prices. We start seeing patterns where none exist—like staring at an optical illusion for too long. Then we believe those patterns, decide they’re predictive, start trading on them—and trade too often. This is human nature: “The financial media’s habit of describing the stock market as if it were a living thing plays with the prediction circuits in the human brain. Seemingly slight changes in how reporters describe a rise or fall in the market can make a big difference in investors’ expectations. When investors looking at a rising price chart are told that an investment ‘climbed’ today, they are about 10% more likely to predict that it will go up tomorrow than people who are told that it ‘increased’ by an identical amount. Conversely, someone who sees that a stock ‘dove’ is almost 20% more inclined to predict it will drop tomorrow than somebody who is informed that its price “decreased” by the same amount. That’s because words like ‘climbed’ and “dove” imply that the market is alive — that it knows what it is doing, that it will keep doing it, and that its future course is therefore predictable.” Knowing is half the battle.
|By Jeremy Warner, The Telegraph, 07/01/2015|
MarketMinder's View: So here’s the thing about the many, many warnings the UK (and US and others) rely on fake “debt-fueled” growth: In fractional reserve banking systems, all growth is technically debt-fueled, because banks create money by lending more. In this way, savings don’t stifle spending—banks channel those savings throughout the economy, where others use them productively. Businesses use those loans to finance projects that reap big long-term returns. Households use those loans to buy homes and cars and maybe redo the kitchen and back yard, which helps create jobs for others. The charts here might imply UK growth is a credit card-driven mirage, but it just isn’t true. Another quibble: Household debt to gross income isn’t a meaningful metric. Debt is a level—an absolute amount outstanding that grows or whittles down over time. Income is a flow. A much more meaningful chart would compare like with like. Say, debt to total assets or wealth—both levels. Or debt payments to income—both flows.
|By Adam Davidson, The New York Times, 07/01/2015|
MarketMinder's View: This is just great. In terms anyone can understand, it explains quite nicely why economic statistics—useful as they are—can’t fully capture true growth, inflation, employment or how the economy impacts our overall quality of life. Official statistics have evolved little since the 1930s and 1940s, when they were created in the heyday of US heavy industry: “You could learn a lot about the wages and employment patterns of adhesive-bonding-machine operators (18,210 workers in 2014, median wage $16.28 per hour). But you’d be hard-pressed to find any guidance on whether you’d make more money learning the Ruby on Rails computer-programming framework instead of developing your graphic-design skills.” They can’t quantify intangible benefits, like the contributions of stay-at-home parents. They don’t capture Uber drivers and Etsy entrepreneurs. They can’t measure how technology improves everyday life and productivity. They can’t show, with numbers, how median-income households today might have significantly better lives than median-income households 30 years ago, even though by some measures median household income hasn’t much moved since then. Statistics, for all their mathematical rigor, are rough snapshots at best and still limited by the biases and assumptions of those who first crunched the numbers—as even the father of GDP, Simon Kuznets, so often complained.
|By Paul Vigna, The Wall Street Journal, 07/01/2015|
MarketMinder's View: No, it is a red flag for the Dow itself, which fell -1.4%, while the much much broader S&P 500 and MSCI USA indexes rose 1.2% and 1.7%, respectively (FactSet, total returns). Which better reflects US markets: Indexes with 500-600 firms, weighted according to each company’s size? Or an index with 30 companies, weighted according to each company’s share price and with zero regard for size? Also, past performance doesn’t dictate future returns, a year’s first half doesn’t predict its second half, and back-end-loaded years are common. For more on this broken index, see our 6/25/2015 commentary, “Down With the Dow.”
|By C.J. Polychroniou, The New York Times, 07/01/2015|
MarketMinder's View: While this probably overlooks some benefits Greece has received from euro membership, like improved cross-border trade, we highlight it for its no-nonsense explanation of why leaving the euro isn’t the surefire ticket to Greek prosperity that some suggest: “To this day, the authorities are unable to enforce even a smoking ban because so many people are unwilling to conform to the existing laws on smoking in public places. A competent Greek bureaucracy remains a chimera. … The transition from the euro to a new national currency would require that Greece become highly efficient and productive in order to survive in a globalized environment in which it now imports nearly 90 percent of all the products it consumes. To do so, it would have to embark on major public sector institutional reforms and change its political culture rapidly. But there is no evidence so far that the political class in Greece is either capable or willing to execute this task.”
|By Matt Levine, Bloomberg, 07/01/2015|
MarketMinder's View: We mentioned in a blurb yesterday that Puerto Rico’s debt troubles are much more a political and legal story than an economic one, and here is a great rundown of that political/legal story. Puerto Rico is not quite a state, not quite a municipality, and quite unable to declare Chapter 9 bankruptcy. Its constitution also requires it to make payments on General Obligation bonds before all other payments, so it is in quite a pickle as it angles to restructure debt. If you’re into the nuances of bond covenants and official debt payment statutes (as we are), this is all quite fascinating. But that’s about where the story’s significance ends for investors. Unless you own a chunk of Puerto Rican debt, very popular for its high yields and triple-tax-free status—in that case, any restructuring will have a direct impact, though markets have been pricing this in for two years, and Puerto Rican bondholders have already taken significant paper losses. (Also, as Mr. Levine highlighted in his morning linkwrap today, most Puerto Rican bonds are insured, and the bond insurers have a big incentive to do something to forestall default—and the power utility highlighted in this article reached a deal with bond insurers this morning.)
|By Ylan Q. Mui, The Washington Post, 07/01/2015|
MarketMinder's View: Here is a great example of just how skeptical sentiment remains six-plus years into this bull market and economic expansion. No one calls this a boom, even though by many measures it would qualify. Instead, like this piece, most bemoan alleged structural headwinds like aging populations, debt and the like and allege only Fed policy is driving growth and stocks. Bad news is good news because it means Fed support will stay, and good news is bad news because it means the Fed could hike rates—casting “a vote of confidence in the recovery [that] could be just the thing that ends the global bull market.” Few see all the many positives really driving stocks, like steeper yield curves, continued economic growth with or without the Fed’s “help” and a calm political backdrop. Overlooked positives are bullish. As for Greece, it is too small, widely discussed and too well-contained to put the bull market at risk.
|By Michael J. de la Merced, The New York Times, 07/01/2015|
MarketMinder's View: Over the past few weeks, we’ve seen a number of articles fretting the surge in M&A, worrying it is a sign euphoric execs are going hog wild for pricey deals without regard to risk. This piece shows an alternate—and in our view, more accurate—perspective, highlighting the overall tepid enthusiasm surrounding many of these deals. They’re still driven by a survival-of-the-fittest mentality, with many firms seeing consolidation as a way to steel themselves for some future downturn. Most deals are also funded with debt and cash on hand, not stock, so we haven’t yet reached the stage where execs and investment bankers are willing to massively dilute stock supply in order to chase hot deals—that would be true euphoria. What we see today, as the headline notes, is cautious optimism.
|By Rafael Behr, The Guardian, 07/01/2015|
MarketMinder's View: This is mostly sociological, but it is a very well-argued, even-handed look at why biased criticisms of EU institutions from both ends of the political spectrum are ill-informed and off base. One end sees Brussels as an undemocratic, austerity-obsessed autocracy that forces its principles on all member states and sees local democratic resistance as a “fly in the ointment.” The other end sees EU institutions as corrupt crony-capitalists that suffocate markets with red-tape and handouts for special interests. But the truth lies more in the less exciting middle, and ignoring that can cause people to forget just how much European integration has accomplished over the last few decades—not to mention forget why Europe began integrating in the first place—which could have dangerous side effects. “The EU could go the way of the League of Nations. An institution, conceived as the antidote to violent nationalism, where leaders gather to solve problems through negotiation and compromise, can fail. But there is no evidence that if it does the result is more democracy and better capitalism. The opposite seems more likely.” As Americans, we don’t have a dog in this fight, but it is something to think about. For all Brussels’ faults, ending the experiment probably won’t be the political or economic (or market) panacea some presume.
|By Kathleen Madigan, The Wall Street Journal, 07/01/2015|
MarketMinder's View: Growth!
|By Staff, Reuters, 07/01/2015|
MarketMinder's View: And more growth! Any PMI (purchasing managers’ index) reading over 50 indicates expansion, and JP Morgan’s global manufacturing PMI hit 51 in June. That is down a smidge from May’s 51.3, which most assume means growth slowed, but PMIs don’t measure growth rates. They measure how broad-based growth is. If slightly fewer firms grew in June than May, but they grew faster, then overall growth could speed. So don’t overthink PMIs—just look at the headline and new orders, and if they’re in growth trends, that is usually good enough.
|By Lauren Davidson, The Telegraph, 07/01/2015|
MarketMinder's View: Hey, sometimes laughter is the best medicine. Enjoy the chuckles.