|By L.A. Little, MarketWatch, 09/30/2014|
MarketMinder's View: Well, maybe, because these things are only clear in hindsight. None of the technical analysis here can really tell you whether a correction is forming or not—corrections (quick, sharp drops of -10% to -20% over a few weeks or months) are driven by sentiment, not past performance. Plus, this analysis is overall very confused on whether it’s trying to predict a correction or a bear market—again relying on past performance rather than trying to identify a fundamental cause. We look at potential fundamental risks every day, and we can’t identify any with enough scope or surprise power to cause a bear market tomorrow. With the bull market extremely likely to continue over the foreseeable future, if folks get out of stocks on “the offhand chance [the approaching rainstorm] turns into a hailstorm,” but instead it “turns out yet to be another sprinkle,” missing “some opportunity at the cost of safety” is not a “small price to pay.” Opportunity cost is expensive. For more, see Todd Bliman’s 06/09/2014 column, “The Cost of Trying to Time Corrections.”
|By Szu Ping Chan, The Telegraph, 09/30/2014|
MarketMinder's View: With the third revision to UK Q2 GDP—bumped up to growth of +0.9% q/q, beating expectations—we finally have the expenditure breakdown. Business investment rose +3.3% q/q (+11% y/y), and real disposable household income jumped. We also got the results of the big recalculation, which adds R&D spending to business investment (and adds some colorful, illegal activities to GDP) all the way back to 1997, and it shows some interesting things. Like businesses invested a heck of a lot more throughout this recovery than statisticians first thought. And the world’s oldest and second-oldest professions are pretty big moneymakers. All interesting. Backward-looking, but interesting. We guess, if nothing else, the UK is on even firmer footing than everyone thought?
|By Staff, EUbusiness, 09/30/2014|
MarketMinder's View: Eurozone inflation fears continue as inflation dropped to +0.3% y/y in September (a flash estimate). However, much of the weakness continues to come from falling energy prices—not a mark of actual deflation. Core inflation, excluding energy and food prices, is at +0.8% y/y. As for the ECB angle, we’ll see whether ECB President Mario Draghi gives more details on his upcoming quantitative easing (QE) program on Thursday, but we still believe this is a solution in search of a problem. As we wrote here, QE is deflationary and contractionary.
|By Staff, Xinhua, 09/30/2014|
MarketMinder's View: Good news: “China will allow direct trading between the yuan and the euro.” That the government is making currency trading cheaper and more accessible (no need for parties to use the US dollar as an intermediary) will likely make the yuan more attractive globally and strengthen investing relations between China and the EU. A win-win!
|By Timothy B. Lee, Vox, 09/30/2014|
MarketMinder's View: “Burn rates” (the amount of cash a company burns through in a given period) are important, and high burn rates were one sign dot-coms were hugely overvalued at the Tech Bubble’s heights. But those were publicly traded companies. As far as we can tell from the reporting here and the study it cites, the analysis includes only pre-IPO firms. High burn rates among firms reliant on venture capital funding aren’t signs of euphoria—this is just sort of how it goes for fledgling firms taking big risks. What would be a sign of euphoria is if all these firms went public tomorrow at huge premiums.
|By Staff, Bloomberg News, 09/30/2014|
MarketMinder's View: China spent most of the past four years curbing second and third home purchases in order to contain rapidly rising prices. Meanwhile, cities continued investing in massive home construction projects to boost growth. The result? A supply glut and artificially pinched demand—and weaker prices. So now China is removing those curbs to boost demand. Theoretically, this should support prices and help combat that supply glut, but it isn’t a panacea for China’s property market.
|By Anna Prior, The Wall Street Journal, 09/29/2014|
MarketMinder's View: If this bull market is indeed “overdue for a major pullback” 27 months after the most recent correction ended, then why did the 1990s bull have zero corrections between 4/8/1992 and 7/20/1998? Why did the 2002-2007 bull not have its first correction until nearly four years in? And if heightened volatility means a correction is nigh, why didn’t we see corrections after the -2% or greater daily drops earlier this year or in 2013? Volatility doesn’t predict volatility. Volatility doesn’t predict anything. Volatility is past performance, and past performance doesn’t tell you about anything other than the past.
|By Katy Barnato, CNBC, 09/29/2014|
MarketMinder's View: The “why,” according to the Geneva Report, is that China and the other so-called “fragile eight” countries have an apparently catastrophic combination of slowing growth and high public/private debt loads. They say China, in particular, is in nasty shape because each new dollar of credit generates less and less growth, yet officials keep trying to stimulate through new credit. Thing is, this doesn’t make China automatically the epicenter of the next financial crisis. Or even ripe for a crisis. This piece tempts the reader to draw parallels with past Emerging Markets crises, but developing economies have evolved since then. Much of this credit is denominated in local currencies, not foreign (dollars), and most of these nations (except China) have floating currencies. That should help contain the damage in the event that any of these countries really do experience credit bubbles that go poof.
|By Alexandra Scaggs, The Wall Street Journal, 09/29/2014|
MarketMinder's View: This illustrates why small cap usually underperforms during maturing bull markets: Investors get jittery over what they (rightly or wrongly) see as riskier buys and flock to the perceived quality (and relative earnings stability) of the largest firms. That sentiment shift is evident here. Whether or not small cap keeps falling or creeps back up, it seems highly unlikely to lead for the remainder of this bull market. For more, see our “Ken Fisher: ‘Nothing Is Better—Stocks are Stocks.’ Even Small Caps.”
|By E.S. Browning, The Wall Street Journal, 09/29/2014|
MarketMinder's View: According to this, “priced for perfection” means stocks have priced in practically perfect future earnings and economic fundamentals, so any actual results that fall even a bit short of perfect will cause stocks to fall. This is blamed for last week’s market declines, though there is zero evidence to support this general opinion. This also, apparently, makes stocks extra vulnerable to things like a rate hike, geopolitical tensions and slowing Chinese growth. This line of reasoning is incorrect. These things don’t automatically move stocks, and we have a wealth of history to prove it. High P/Es, whether traditional or Shiller, don’t change this conclusion, because we also have a wealth of history to prove high P/Es do not mean stocks are overvalued or primed for a pullback. Also! Economic fundamentals are quite a bit better than this piece supposes.
|By Paul H. Kupiec, The Wall Street Journal, 09/29/2014|
MarketMinder's View: “Macroprudential regulation” boils down to regulators changing capital requirements and restricting loan issuance to do what they think is correct at the time to deflate a bubble they think is brewing. The US, UK and other central banks have given themselves broad powers to do this, giving them the ability to limit credit for very arbitrary reasons. There is a ton of room for human error and bias to bring unintended consequences here. While we don't see much risk this ends the bull market within the foreseeable future, as the measures that have been announced are small and toothless (particularly the UK’s mortgage lending caps), there is some surprise potential here: “Since there is no scientific means to definitively identify bubbles before they break, the list of specific lending activities that could be construed as ‘potentially systemic’ is only limited by the imagination of financial regulators.”
|By Yoon Ja-young, The Korea Times , 09/29/2014|
MarketMinder's View: We see this the same way we see all those fears about Baby Boomer retirement upending the US’s fiscal health and economic prospects—unsupported myth and way too long term for markets to care about today. Just as the US Congress has occasionally tweaked the law to put Social Security on a sounder footing, so can Korea tweak its entitlements. What matters for investors now is that none of this comes to a head within the next 30 months—the furthest limits of what markets usually price in. In the foreseeable future, with debt still very low by international standards, Korea’s fiscal situation shouldn’t be a huge risk for Korean or world stocks.
|By Peter Dominiczak, The Telegraph, 09/29/2014|
MarketMinder's View: This was sort of the missing piece to the UK’s recent assault on the de facto requirement for pensioners to buy an annuity. They’d scrapped the tax incentives to buy an annuity, but the proposed tax treatment of annuity death benefits made things sticky. By dropping the punitive 55% tax on inherited pensions when pensioners over age 75 die and replacing it with marginal income tax rates (and scrapping tax entirely when pensioners under age 75 pass on), Chancellor Osborne will give retirees one less reason to buy an annuity. Assuming, of course, this rumored legislation is actually proposed and passed.
|By Peter Spence, The Telegraph, 09/26/2014|
MarketMinder's View: Ok, so this is one of many stories we’ve seen tying volatility in some fixed income and currency markets to Mr. Gross’s resignation. On the theory that he liked Asset X, and he will no longer be at Pimco to buy or tout Asset X, therefore Asset X will lose support and fall. Our beef with this is entirely philosophical. The sentiment and market forecast of one fund manager—even one who more or less oversees $2 trillion—is not a market driver over any meaningful stretch of time. Nor are the transactions of one fund manager—even one who more or less oversees $2 trillion. Just not how it works in a world where millions of people trade every day and there are hundreds of trillions of dollars in investable assets globally.
|By Staff, Associated Press, 09/26/2014|
MarketMinder's View: Surging business investment, exports and consumer spending are all just great, but let’s get one thing clear. Nothing here will “provide momentum for strong growth the rest of the year,” because that isn’t how economies work. The past doesn’t drive the future, and growth doesn’t stay strong just because it was strong. Otherwise every quarter’s GDP would be a self-fulfilling prophesy and the business cycle wouldn’t turn ever. Don’t get us wrong, we think growth continues forward at a healthy clip!! But it’s because leading indicators and bank lending are picking up. Not because Q2 was swell.
|By John Carney, The Wall Street Journal, 09/26/2014|
MarketMinder's View: Oh boy. The thesis here, best as we can tell, is this: Stocks drive consumer sentiment, which drives consumer spending, which drives growth, but the Fed is about to hike rates, so returns will sag, confidence will flag and the economy will stag(nate). What a drag. That probably sounds scary, so here is some good news: None of this is true. Stocks have some influence over consumer sentiment, but so do things like recent economic numbers, scary (or happy) things they see in the news, the weather, what folks had for breakfast and their general mood. This is why—as this piece even points out, contradicting its own thesis—consumer confidence fell for much of this bull market’s first two years. Consumers who tell confidence surveys they’re sad very often go out and buy things, which is why consumer spending—and economic growth—often move differently than confidence gauges. And Fed rate hikes, as you can see here, are not bad for stocks inherently.
|By Peter Spence, The Telegraph, 09/26/2014|
MarketMinder's View: Does anyone else have a mental image of Vladimir Putin running around the KaDeWe department store in Berlin, hiding behind displays, then jumping out and shouting “Boo!” at shoppers? Anyone? Anyone? Errr … we didn’t either. Anyway, we’ve no doubt Putin’s sanctions and saber rattling are spooking folks in Europe. Because it’s scary when a self-important fascist madman gets involved in a war on your continent. But, that doesn’t mean the conflict in Ukraine is an economic risk. This survey could actually be an indication expectations are too low, setting up a positive surprise down the road.
|By Sue Chang, MarketWatch, 09/26/2014|
MarketMinder's View: Ladies and gentlemen, here is your wall of worry … in pictures! Wheee! None of these seven things—which include ISIS, Vladimir Putin, political unrest, Ebola, border disputes and US midterm elections—are bull market killers. Some, like midterms, are positives dressed up as negatives. Could any or all of these trigger some emotional volatility? Could that volatility be big enough to qualify as a word that starts with “c” and rhymes with “korrection”? Sure! Those—quick drops of 10% to 20% over a few weeks or months—can start at any time, for any reason or no reason. But corrections are normal in bull markets. Corrections don’t end bull markets. Bear markets end bull markets, and again, the items here that are negative aren’t nearly big enough to whack a few trillion dollars off global trade, GDP and markets. And if you are still feeling skeptical, here are seven more pictures.
|By Scott Grannis, Calafia Beach Pundit, 09/26/2014|
MarketMinder's View: Just an interesting look at how misguided policies can destroy once-vibrant economies. Argentina was once one of the western world’s economic jewels. Now it’s bleeding cash, suffering over 30% inflation by many estimates, and watching private businesses leave in droves. It’s also a little lesson in what it really means to print money en masse—unlike US quantitative easing, which is often called “printing money” but in reality is the central bank creating electronic reserve credits, swapping these for bonds on the secondary market, and then relying on banks to lend off these new reserves (they aren’t). “For years, Argentina’s central bank has expanded its balance sheet in classic ‘money printing fashion,’ by lending significant sums of money, mostly in the form of newly printed currency, to the government, in exchange for a flimsy promise that it will be repaid. Argentina is literally a proving ground for the theory that when too much money (actual peso currency) chases a limited amount of goods, the result is inflation.”
|By Joseph E. Stiglitz, Project Syndicate, 09/26/2014|
MarketMinder's View: So there is a lot of ideology here, which means there are lots of unsupported general statements and strong opinions stated as facts. Those are your signs this thesis is probably not grounded in reality or supportable by tangible evidence and, therefore, not the sort of thing you should base an investment outlook on. We sort of agree, actually, that the eurozone’s recent economic turnaround wasn’t prompted by austerity policies—cycles just turn. But the structural benefits of privatizing unproductive state-run assets, allowing businesses to streamline, putting more economic activity in the hands of private businesses and citizens and—more recently—cutting taxes are vast. They largely haven’t been realized yet, as these measures typically impact the real economy at a substantial lag, but the UK in the 1990s and Korea in the 2000s—to name just two—show just how much of a boost they can bring.
|By Daisy Maxey, The Wall Street Journal, 09/26/2014|
MarketMinder's View: If you use surveys like those described here, it is indeed quite difficult to get a sense of how much volatility an investor can truly withstand emotionally. No quibbles there. But this piece assumes risk tolerance should be the basis of every investor’s strategy—and completely ignores the issue of goals. Trying to pick a strategy without first identifying your goals—the primary purpose for your money over your investment time horizon—is like aiming without a target. You’ll probably miss. Risk is important, but it comes after figuring out what long-term return you need to reach your goals over time—and the discussion should center on the tradeoffs between long-term growth and short-term volatility and what you’re comfortable with on both of those fronts.
|By Michael J. Casey, The Wall Street Journal, 09/26/2014|
MarketMinder's View: Oh boy oh boy. This is all based on the assumption that a strong dollar hurts the economy because it makes exports more expensive and “undermines competitiveness.” But a strong dollar also makes imports cheaper, which drives down our manufacturers’ input costs and makes them—wait for it—more competitive! Now, this isn’t to say a strong dollar is best. Or that a weak dollar is worst. Or that a strong dollar is bad and a weak dollar is good. Just that currency moves have plusses and minuses, and over time, they tend to offset. The stronger dollar isn’t an economic headwind. It’s just a thing.
|By Bob Swarup, The Guardian, 09/26/2014|
MarketMinder's View: To the argument that the eurozone can’t grow and thrive without “large-scale debt forgiveness,” we offer a tale. Once upon a time, there was a big country whose debt-to-GDP ratio passed 100% after they borrowed to fund an unprecedented war effort. This debt was never forgiven, never paid off and sits on the Treasury’s balance sheet today, along with another $15 trillion or so in IOUs. Yet the economy grew amazingly, and nearly 70 years later, this country sits atop the world in terms of economic size and clout and fiscal stability. All this country—the US!—needed was a competitive economic foundation. Many of the most troubled eurozone countries have spent the past few years making themselves more competitive, too. Let this bear fruit over time, and we have a strong hunch they can grow their way out of high debt. Just like America did.
|By Craig Israelsen, Financial Planning, 09/26/2014|
MarketMinder's View: Why are we asking this question? Why are we assuming “low” inflation is a market driver? Why are we ignoring all the many, many, many factors that actually impacted stock, bond, real estate, commodity and all other markets over the last 15 years? Why are we looking at 15 years only? Why are we assuming a “12-asset portfolio” is superior simply because it beat large-cap US stocks over these 15 years? What about individual investors’ unique goals, objectives, financial situations and time horizons? What if some or all of those 12 assets don’t match their needs? What then? This is one of those studies that is probably super interesting for academics but has no use in the real world. Please do yourself a favor and do not consider any part of this study to be actionable investment advice. Including the statement that cash is like a seat belt so investors should always have a good-sized cushion just in case—opportunity cost is a risk, too.
|By Scott Grannis, Calafia Beach Pundit Blog, 09/25/2014|
MarketMinder's View: This fascinating piece highlights some lesser-known, industry-specific economic measures that add more evidence to the following claim: The US expansion is on sound, if underappreciated, footing. No, we won’t get a recession if there is a slight dip in a gauge measuring Architectural Billings. But these tangible gauges can help one better see and relate to the broad economy.
|By Matt O’Brien, The Washington Post, 09/25/2014|
MarketMinder's View: Hey look! Another Chinese Hard Landing fear article! You know, not that we are counting, but it seems to us there is about one of these articles written for every individual living in China. This version posits a bunch of reasons why China may be in trouble. Its central banker may be ousted. Shadow banks inflated a debt bubble. And a housing bubble. And China may be turning Japanese or American(?). Marry these reasons with some recent weaker economic data and voila, The Hard Landing. But China, contrary to the theory here, has still shown solid growth this year with no signs of a major letdown—including in its Leading Economic Index, which has surged in recent months. Perhaps there is a message about the direction of reform in central banker swap, but that’s all speculation. In our view, it’s more likely the path the government has traveled already—setting expectations for slower growth and slowly pursuing more reforms—continues. For more, see our 09/18/2014 commentary, “The Li Keqiang Put.”
|By Ben King, BBC News, 09/25/2014|
MarketMinder's View: Not to be outdone by his American counterpart, BoE governor Mark Carney is warning that, “financial markets may be mispricing risks” based on the notion investors are complacently piling into riskier assets in search for yield in the current low interest rate environment. But this “hunt for yield” meme is a bit overwrought in our view. Yes, rates on high-yield bonds are down, but there is still a relatively normal spread between their rates and high-quality sovereign yields, which is a better measure of whether investors are demanding to be compensated for taking risk than rates alone. In our view, the reason markets aren’t reacting with more volatility to the suggestion the BoE may raise rates at some vague future point is because they realize 1) initial rate hikes don’t really threaten the bull market materially and 2) forward guidance is really just cheap talk.
|By Edward Bonham Carter, The Telegraph, 09/25/2014|
MarketMinder's View: In one way, there are similarities: Both the outbreak of WWI and the 2008 Financial Crisis were caused by big, negative shocks. But it wasn’t a surprise that banks were globally interconnected, and the cause wasn’t Lehman’s failure. Stocks were down more than 20% before Lehman. Rather, the surprise was the unnoticed impact of an accounting policy change—FAS 157—which caused those failures in the first place. It deepened into a panic after Lehman because the Fed surprisingly outsourced its crisis management to the haphazardly run US Treasury. Listen, history has a lot of value for those who study financial markets—it’s a laboratory providing a range of probable scenarios of how current events may turn out. For example, we can use past data to show that terrorist attacks don’t derail bull markets. Or we could use history to show conflicts only truly matter for stocks when they go global—like WWI’s impact back in 1914.
|By Eva Taylor, Reuters, 09/25/2014|
MarketMinder's View: But the ECB has already been trying various stimulus measures, to no avail. Exhibit 1: The first round of the ECB’s ballyhooed Targeted Long-Term Refinancing Operation took place last week, and fewer banks than forecasted took advantage of cheap funding for small-business lending. Monetary stimulus isn’t a great solution for the real problem, which this article pays short shrift to: “Eurozone banks, particularly in the crisis-stricken countries, have tightened up on lending as they adapt to tougher capital requirements and undergo health checks …” And if they fail those health checks, many speculate a bank could be wound down, which is regulatorese for “put out of businesses.” The issues are regulatory more than they are monetary, and no amount of central bank generated acronyms is all that likely to counter them.
|By Martin Crutsinger, Associated Press, 09/25/2014|
MarketMinder's View: Here is an instructive lesson about how one monthly data point from one economic gauge never tells the whole story. Durable goods fell -18.2% m/m in August because of a big drop in commercial aircraft demand. Sounds bad! But this is coming off a scorching July, when durable goods rose +22.6% m/m led by … wait for it … commercial aircraft! Investors: Never fixate on any one data point, particularly in a series as noisy as durable goods can be.
|By Howard Gold, MarketWatch, 09/24/2014|
MarketMinder's View: We completely agree with the first half of this article, which is summed up well by this: “The debate now is over when the rate hike will happen in 2015 — spring or summer. It’s a foolish discussion and impossible to predict, even for people whose livelihood depends on calling Fed turns and market tops.” But as to the second half, the stock market can’t price in Fed moves before they happen, because the Fed isn’t a market function. And actually, the data here are very unconvincing: 5% pullbacks happen regularly. Corrections, too—and they are often sentiment-driven. Bear markets are fundamental, but if they started before the hikes, there is little reason to think the hike caused the bear and not the reverse. Finally, it is worth viewing this table for a little bit nuanced view of how rate hikes affect stocks once announced, since that is when markets can really discount any impact.
|By Victor Fleischer, The New York Times, 09/24/2014|
MarketMinder's View: So there is a lot of factual accuracy in this piece, and if you are looking for the raw details of what the Treasury can and cannot change with respect to inversions, this is a wonderful source. But while it may be correct that these rules do modestly discourage some deals structured solely for tax reasons, there is an unintended consequence that goes unaddressed here: This is yet another way in which the US tax code discourages US-based multinationals from repatriating the oodles of cash they have sitting fallow abroad, cash they could use to build factories, invest in R&D, etc. Now, this issue is beyond the scope of what the Treasury or Executive branch can unilaterally “fix,” but the actions in this case likely hurt more than they help in that regard.
|By Jeff Kearns, Bloomberg, 09/24/2014|
MarketMinder's View: So Fed head Janet Yellen is doing her best Mark Carney impression, warning investors are just too complacent about the timing of her first rate hike? So what. Hey! Here’s a novel thought! Maybe investors have long since realized there is no point in relying on Fed guidance, because their fuzzy plans are subject to change (and communication of said plans is mere marketing spin). Maybe markets also know, deep down, that rate hikes are not inherently bearish, so there is no point in bracing for impact. Basically, this whole discussion is just noise. At least it’s an entertaining sideshow, though, if you’re into that sort of thing.
|By Mark Schoeff, Jr., InvestmentNews, 09/24/2014|
MarketMinder's View: We covered the issue of financial professional transition disclosure yesterday, so this is kind of an add-on. Listen, the point here is not about asking your broker to disclose their financials to you. It’s rather to identify where there may be conflicts of interest pertinent to your future financials. You may have to ask some hard questions to get to that point, but you can start by just asking your broker to share any and all conflicts of interest with you, whether they’ve changed firms or not. There are never zero conflicts of interest in this industry. Never! So if your broker says, “Ain’t none!” when you ask, our suggestion is he or she is either a bit ignorant or unwise, fooling themselves or trying to fool you. None of those are exactly great reasons you should retain their services.
|By Jeanna Smialek, Bloomberg, 09/24/2014|
MarketMinder's View: So housing is actually a pretty teensy segment of the US economy, but we think folks sometimes like data, so we present these data with the caveat that they are not the Most Significant Data Point Ever: “Purchases of new houses jumped 18 percent to a 504,000 annualized pace, the strongest since May 2008 and surpassing the highest forecast in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. The one-month increase was the biggest since January 1992.”
|By Aaron Back, The Wall Street Journal, 09/24/2014|
MarketMinder's View: Well, yes, we agree fears the BoJ doesn’t have “the scope” to do more quantitative easing (QE) are “overdone.” But not because the BoJ has not in fact run out of bonds to buy. Rather, because we see no point in fearing the BoJ can’t do something that is ultimately an economic hindrance. Like, folks should hope the BoJ can’t or won’t do more QE, because Japan would probably benefit from a steeper yield curve and more bank lending. The twisted sentiment here—and overall cheer surrounding the prospect of more QE—is a pretty big reason why we think expectations for Japan don’t match the likely reality. Better investment opportunities, in our view, lie outside the Land of the Rising Sun.
|By Jack Ewing, The New York Times, 09/24/2014|
MarketMinder's View: The “business indicator” referred to here is actually Ifo’s survey of German business manager sentiment, which isn’t so wonderfully predictive. For example, the gauge of expected business activity in Ifo’s survey overall fell more than this from 1994-1996 and from 1997-early 1999—when it then jumped right before the tech bubble burst—early 2003 when the new bull began and 2005. We suspect the respondents here may be keying off the report published during August that German GDP fell -0.2% q/q in Q2. But hey, even if German GDP does dip in Q3 and they enter what some people define as a recession (two consecutive quarters of falling GDP), let’s remember that all of the eurozone was in an 18-month long recession from Q4 2011 through Q1 2013. During that span, the MSCI World Index rose more than 34%. A weak eurozone—much less a weak Germany—simply isn’t powerful or surprising enough to quash the bull market.
|By Saurabh Chaturvedi, The Wall Street Journal, 09/24/2014|
MarketMinder's View: Now, to be clear: India has a long history of corrupt government officials granting favors to certain businesses, which is a drag on the overall economy. However, cancelling 214 of 218 coal mine licenses granted in the last 21 years (including 42 active mines and 172 that are not in production) isn’t exactly a great fix. Businesses have already invested in developing some of the mines, and 70% of Indian power comes from coal-fired utilities. India not only has a history of corruption, but a history of taking trips on the business-unfriendly way-back machine, which isn’t exactly rolling out the red carpet to foreign investors—this just seems like the latest example, and a sign of the challenges the government under Prime Minister Narendra Modi faces in trying to make India more friendly to business.
|By Mohamed A. El-Erian, Bloomberg, 09/23/2014|
MarketMinder's View: This presumes:
1) That bond yields are more rational than stock returns, so falling yields imply trouble.
2) That bond yield wiggles, in isolation, are predictive.
3) And that interest rates fell last week.
None of these are really quite right. For one, both markets are overall rational but prone to short-term irrationality. Two, the yield spread is more meaningful than the level of long-term rates. There is no correlation between long-term rate moves and stocks. And three, 30-year Treasury yields closed at the following last week: 3.34%, 3.36%, 3.37%, 3.36% and 3.29%. So yes, Friday’s yields were down from Monday, but a dip of 0.05 percentage point is what we at MarketMinder call, “a rounding error,” friends, not a warning sign. 10-year Treasury yields moved similar to an even smaller extent: 2.60%, 2.60%, 2.62%, 2.63% and 2.59%. One basis point is what we call, “Flat.” This article is a whole lot of pixels to spill over one basis point. The word-to-basis-point-move ratio in this article is 328-to-1. We would hate to see how long this would be if rates gyrated by 25 basis points!
|By Peter Spence, The Telegraph, 09/23/2014|
MarketMinder's View: While ECB President Mario Draghi’s plan likely doesn’t solve the underlying issue—the ECB’s looming bank stress tests, which have caused banks to hoard cash instead of lend, in turn, slowing inflation—the two charts highlighted here don’t speak to this. These charts—inflation expectations and consumer confidence—illustrate today’s sentiment, nothing more. And sentiment doesn’t determine whether Draghi’s policy will actually work or not—after all, inflation is always and everywhere a monetary phenomenon (not a psychological one). (Also, as an aside, much of the actual slowing in real inflation—not forecast, that is—is tied to cheap food and energy, which we don’t really think is such a terrible thing.)
|By Michael Sincere, MarketWatch, 09/23/2014|
MarketMinder's View: We bet there are some folks whose confidence is growing. But irrational exuberance? We don’t think so. P/Es, a signal of sentiment, aren’t stretched. It isn’t hard to find bearish analyses (like this one). Those bears capitulating are forecasting subpar, middling returns—they’re not exactly running wild with optimism. (Heck, even Morgan Stanley’s S&P 3000 by 2019 forecast cited here calls for less than 10% annualized returns! Bull markets average more than 20% annualized.) The notion the Fed’s monetary policy is solely responsible for propping up stocks ignores corporate profit growth, revenue growth, business investment, global economic growth, rising leading economic indexes and tons of other positive fundamental market drivers that speak to the fact the bull market isn’t all illusory. It also ignores the fact loan growth—which the Fed supposedly sought to stimulate—has been anemic while all this has gone on. The Fed bubble is faux, but folks’ still clinging to this notion is a sign of euphoria’s absence.
|By Matthias Rieker, The Wall Street Journal, 09/23/2014|
MarketMinder's View: The Financial Industry Regulatory Authority is stepping away from a plan that would have required brokers to disclose to clients all the aspects of their reason for moving to a new firm. Instead, it seems they will provide a list of questions to consider. So public service message: Like before, the onus is squarely on you to determine if it makes sense to follow your present financial professional to a new firm, and to figure out whether moving with them is also in your interests. Ask questions—regarding transfer costs, the implications of moving from a forced-liquidation standpoint, conflicts of interests, etc.—before making any move to follow them. We aren’t suggesting brokers may have nefarious motives, just that there may be downsides for clients he or she might not have fully thought through.
|By Pan Pylas, Associated Press, 09/23/2014|
MarketMinder's View: The eurozone’s flash composite purchasing managers’ index (PMI) fell from 52.5 to 52.3 in September (though, it’s still in expansionary territory). The article’s right: There is “a general sense of pessimism about the eurozone economy’s plight,” but that general sense is so pervasive it has lost its power to negatively impact stocks materially. Moreover, these statistics—and most eurozone data that have come out recently—are still in expansionary territory! Which shows you the sentiment is detached from reality. That’s bullish, folks!
|By Staff, Xinhua, 09/23/2014|
MarketMinder's View: China’s flash HSBC manufacturing purchasing managers’ index (PMI) ticked up from 50.2 to 50.5 in September, beating expectations—and forward-looking new orders increased, too. A positive! Now, the HSBC gauge is rather narrow in that it covers only smaller, private firms and none of the behemoth state-owned enterprises. However, the broader, official PMI hasn’t fallen below 50 (considered the dividing line between growth and contraction) at all in the last year, so the hard landing folks seem to fear isn’t rearing its head in either series of data at this point.
|By Lawrence Lewitinn, Yahoo! Finance, 09/23/2014|
MarketMinder's View: So it’s true that the Russell 2000, a gauge of US small-cap stocks, is down year to date (by -2% if you include dividends) while pretty much every other index is up to varying degrees. And in our view, it is likely small-cap stocks don’t lead as this bull market matures. But this is not why: “For the first time in over two years, the Russell 2000’s 50-day moving average traded below its 200-day moving average.” This depiction of past performance is known by some as the “Death Cross,” but it is really all just past performance and isn’t predictive. In fact, there have been two S&P 500 Death Crosses in this bull market. Neither proved as fatal as the name implies. Technical indicators—positive or negative—might tell you what has recently happened, but they don’t predict the market’s future direction.
|By John Ficenec, The Telegraph, 09/22/2014|
MarketMinder's View: We’d actually call this list “10 False Fears” for the following reasons. 1) China likely doesn’t see a hard landing. 2) Lower iron ore prices are not an indication of said Chinese hard landing. 3) Oil prices move on supply and demand. Supply is up. Demand is perhaps up less, but energy efficiency plays a huge role here. Falling oil prices does not mean falling global demand for goods and services. 4) Nor do falling commodity prices. What about that huge supply glut caused by years of high investment? 5) Investors usually shift away from small-cap stocks as bull markets mature. This is also when market breadth (the percentage of companies outperforming) narrows. 6) Seems like rational behavior, no? 7) The Fed isn’t printing money—it’s electronically increasing its balance sheet to purchase assets through quantitative easing (QE). Banks aren’t doing much of anything with these reserves. 8) The cyclically adjusted P/E ratio—aka Shiller P/E—is terrible at predicting cyclical turning points. It was at or above today’s level for the last three and a quarter years of the 1990s bull. 9) Length alone never ended a bull market. That this is the fourth-longest on record is trivia. 10) History suggests an interest rate hike, whenever it happens, likely won’t materially impact stocks. Nor will it shock the world economy, which has decidedly more going for it than low short-term rates. In our view, each of these represents a brick in the wall of worry. The more investors fear these—and more—the bigger the wall of worry the bull has to climb.
|By David Rosenberg, Financial Post, 09/22/2014|
MarketMinder's View: Here is a summary of this article: “Currencies are wiggling, interest rate futures are wobbling, the Fed is Feding, Japan is monetizing its debt(?!?!), the ECB isn’t trying hard enough, the dollar is up, gold is down, war is a thing, so buy defense stocks.” In other words, this potpourri of observations, misperceptions and widely discussed fears has pretty much no use for long-term growth investors. Though, we guess it also gets like half a nod for not suggesting you flee from stocks because of any or all of these things.
|By Jonathan Clements, The Wall Street Journal, 09/22/2014|
MarketMinder's View: The three tips here have one thing in common: They are terrible ways to “assess your financial progress,” which is jargon for “see if you’re on track to have enough money in retirement.” Let’s take them one at a time.
Your total net worth—home plus investments minus debt—is not an appropriate baseline for measuring your retirement savings. This says you have “six years of financial freedom” if you have a $300,000 net worth and $50,000 in annual expenses, but we are pretty sure you can’t spend your house. You’d actually have to sell it or borrow against it, and then your expenses would probably rise because of rent or interest. Folks should generally count only liquid assets as retirement savings.
We have no qualms with the 4% rule or the suggestion that folks should calculate their retirement expenses first, and then work backward to see if they’ve saved enough. But where we are in the market cycle on your retirement day has nothing to do with whether or not you’ve saved enough, because your time horizon does not end at retirement, and bear markets are temporary. There is no evidence experiencing a bear market early in retirement raises the risk of running out of money, provided you are invested in the ensuing bull market.
Looking at your retirement cash flows as “a multiple of your income while you’re working” is a cookie-cutter approach that doesn’t account for your actual retirement expenses. Life is a lot messier and complicated than this one-size-all trick suggests, and it’s well worth the extra time it will take to sit down and map out your actual expenses—and to look at the historical rates of inflation for the main items included, as these can vary widely from headline CPI.
|By Lu Wang, Bloomberg, 09/22/2014|
MarketMinder's View: Why does corporate insiders’ behavior “defy” buybacks? Because if execs personally are net sellers, but their corporations are still buying back stocks, then their “hearts aren’t in” these buybacks, which we’re supposed to interpret to mean this bull market is a house of cards. Let us count the holes! One: How do they know which sell-happy insiders are also overseeing buyback programs? Two: What if insiders are selling because they want to diversify (which is good), buy a home, send their kids to college, pay for a wedding, or any of the other many reasons that have zippo to do with their view of their company’s future? Three: If executives receive most of their shares as compensation, wouldn’t they by definition always be net sellers? Four: Comparing today’s seller-to-buyer ratio to October 2010 through April 2011 (the eve of “the closest the market has come to ending the bull market,” which is just a weird way to describe a fairly typical bull market correction) is just plain cherry-picking. Five: If insiders are “always right,” why do other data show companies whose insiders have sold a lot haven’t done repeatedly worse than other companies?
|By Jana Randow, Bloomberg, 09/22/2014|
MarketMinder's View: So a few things here. One, the implicit thread running through all of this is that a weaker euro is ultimately a fix for the eurozone’s sluggish growth and inflation. But Japan shows otherwise. Two, there was never any evidence the ECB needed to throw a bunch of stimulus at slowing inflation, because slowing inflation isn’t an economic risk. Nor is it a monetary issue, considering the primary drags on CPI are falling food and energy prices. Three, let’s connect the dots between dismal demand at September’s TLTRO offering and the expectations for a big takeup at the December offering. September is pre-stress test, when banks are still gunning for pristine balance sheets. December will be post-stress test, when banks know whether they can lend more. So of course demand will probably be bigger than—and this underscores further that eurozone lending troubles are a regulatory issue, not a monetary policy one.
|By Allister Heath, The Telegraph, 09/19/2014|
MarketMinder's View: Lots of speculation here. Issues like business confidence in Scotland, the UK’s chances of staying in the EU and the economic impact of devolving more fiscal powers to the UK’s constituent countries are absolutely worth considering! But it is too early to say how any of these shakes out, especially with the three main UK parties split over what a more federalized UK should look like. Political issues like this are a factor for markets, but the question is whether they’re big enough to dim the UK’s strong economic prospects and corporate profitability over the foreseeable future. For now they aren’t, and the outlook for UK stocks looks bright.
|By Morgan Housel, The Wall Street Journal, 09/19/2014|
MarketMinder's View: There are two very sensible sentences in this piece: “Once you realize how normal and inevitable market volatility is, you might think of it differently when it comes. It might look less risky, and more like the cost of admission to achieving the market’s long-term returns.” Unfortunately, the rest is riddled with misperceptions and detrimental advice. It doesn’t differentiate between bull market corrections—quick, steep, sentiment-driven drops of 10% or more over a few weeks or months—and bear markets, which are bigger (usually down -20% or more), longer and have identifiable fundamental causes. Corrections’ emotional nature makes them impossible to predict and time. Bear markets’ fundamental causes make them more predictable, and if you can correctly identify them as they’re forming, it can make sense to leave stocks for part of the downside. This piece, however, encourages buying and holding regardless of what the market does—and insulating against downside by keeping five years’ worth of living expenses in cash and bonds. Beware of personal finance “advice” championing a blind, volatility-driven, one-size-fits-all approach that ignores individual needs and opportunity cost. Every investor has their own unique long-term goals and objectives, time horizon, cash flow needs and financial situation. Those factors should be the bedrock of a personalized investment strategy. Cookie cutters like this don’t cut it.
|By William Pesek, Bloomberg, 09/19/2014|
MarketMinder's View: Urrrrrgh does it even matter? This entire article rests on the assumption the world economy can’t grow unless the central bank of some big country is pumping out new money. And that with US quantitative easing (QE) ending, the world will tank unless China takes the baton and floods the world with cheap cash. Only thing is, this isn’t how it works. The global economy isn’t dependent on stimulants. Pundits might be addicted, but economic data from the US and UK have long since proven QE is a downer and we’re better off without it. We don’t need China, the eurozone, Japan or anyone else to open the floodgates. Just sensible, boring monetary policy that’s appropriate for each country. As long as regulatory policy and the yield curve allow banks to lend and keep money moving, stable money supply growth should be a-ok.
|By Ian Talley, The Wall Street Journal, 09/19/2014|
MarketMinder's View: So here is a real-time example of how you can spot scams in email and snail mail alike. Don’t be duped! No matter how official the communication looks, complete with familiar seals, logos and signatures from important people, if it’s written in broken English—containing gems like “you pointed to ‘criminal delay’ in making vital for Kiev decisions and insufficient amount of the regular tranche,” and “we are seriously concerned with the Bank’s premature emission of extra money”—it is probably a fake. Whether they’re posing as Nigerian princes or the head of the IMF, fraudsters generally don’t have the time or wherewithal to make sure their writing is grammatically correct or even makes sense. The more you know!
|By Wei Tian, China Daily, 09/19/2014|
MarketMinder's View: In the year since Shanghai’s ballyhooed free trade zone launched, officials have made progress on free(er)-market reforms, but financial measures are behind expectations. Don’t get us wrong, China should benefit economically from fewer restrictions on launching a business—especially if these changes roll out nationwide—but larger issues like liberalizing the capital account, exchange rates and interest rates are apparently moving slowly. It’ll likely be a while before China emerges as a true global market force.
|By Kathleen Hunter, Bloomberg, 09/19/2014|
MarketMinder's View: They also extended the Export-Import Bank through June 30 and kept internet access tax-free till December 11—also the day this very short continuing resolution to fund the feds and keep the government open expires. Nothing like kicking the can just barely to the other side of an election! Still, enjoy your shutdown-free autumn. And be thankful campaigners have one less thing to argue about maybe.
|By Ambrose Evans-Pritchard, The Telegraph, 09/19/2014|
MarketMinder's View: Sigh. Here we go again: “Finance minister Michael Noonan said GDP surged 7.7 pc in the year to June, but is the austerity poster child repeating history?” We think not—and despite the teaser, this article highlights a lot of the evidence supporting our thesis. Ireland is surging ahead of the eurozone because it is one of the bloc’s most competitive countries, home to free markets and a friendly tax code—and home to many multinationals as a result. Debt ballooned after 2007, but most of that came from the bank bailouts and how Ireland was forced to account for some bailout loans (something EU leaders eventually agreed was a negative but didn’t rectify). Public finances are moving in a sustainable direction, and borrowing costs are at a euro-era low. Rising home prices alongside all this improvement seems rational, not bubbly—just like rising home prices in the US these past few years.
|By Staff, Reuters, 09/19/2014|
MarketMinder's View: But the detractors were new home permits and new orders for core capital goods—two of the noisier components of the 10-variable Leading Economic Index (LEI). The three main contributors were overall factory orders, credit availability and the yield curve, which has steepened a wee bit lately. All points to solid growth looking ahead. L-E-I! L-E-I!
|By Ian Talley, The Wall Street Journal, 09/19/2014|
MarketMinder's View: At first we thought this was a technical glitch—a mid-2011 article featured on the front pages by mistake. But no, the IMF really did come out with a report calling Italy’s rising debt a big global risk. Let’s think this through, shall we? Italy regularly runs a primary budget surplus, which in plain English means tax revenue more than covers every expense except bond interest payments. So interest is the kicker here, and interest payments are—wait for it—falling! Wheeeeeeeeee! Look. If Italy didn’t implode and take down the world in 2011 and 2012, when it was refinancing debt at pretty darned expensive rates (but still managing to find buyers!), in all likelihood, it won’t implode and take down the world when it’s paying less than 2.4% on 10-year debt. Is there room for reform? Sure! Would it be nice for that recession to end? You bet! But these are Italy-specific issues, not global risks.
|By William Selway, Bloomberg, 09/19/2014|
MarketMinder's View: So far, it seems fears the exclusion of muni bonds from the pool of “high quality liquid assets” banks can use to meet the Liquidity Coverage Ratio would hollow out the muni bond market (and drive up borrowing costs) is a nonstarter. Full-well knowing munis don’t qualify, banks snapped them up anyway, and it doesn’t appear to be because the Fed is considering allowing some munis after all. Most banks are already well on the road to complying with the rule even without munis! Turns out banks just like their relatively low default risk and cash-beating yield, so they want to own them anyway. So do humans, who make up about 40% of the muni market.
|By Bill Gunderson, MarketWatch, 09/19/2014|
MarketMinder's View: Here are three reasons not to jump on any hot-country bandwagon: 1) Past performance. 2) Past performance. 3) Past performance. “Because they’ve underperformed” is not a good reason to pile in. (Neither is, “because they’ve outperformed!” for the same three reasons.) Nor is widespread enthusiasm for political improvement, cited as a reason to go nuts for Brazil and India. High hopes are often dashed, and you must have strong fundamental reasons to believe reality won’t disappoint. Look, we aren’t saying investors who want some Emerging Markets exposure should rule out these countries—but the “analysis” here is not what we’d consider a solid foundation for investment decisions.
|By Mohamed A. El-Erian, Project Syndicate, 09/18/2014|
MarketMinder's View: Indeed, how have markets risen amid war in Eastern Europe and the Middle East, diverging monetary policy from the world’s biggest central banks, political gridlock in the US, delayed reforms in the eurozone and Japan, some wobbling Emerging Markets economies and supposedly slow corporate spending? Are they in another world? Jupiter or Neverland? Uhhhhh, no. Markets pretty quickly discount all widely known information, including perceived risks and misinterpreted false fears (gridlock, capex). Long-running fears like these are bricks in the wall of worry bull markets usually climb. For more, see Todd Bliman’s 05/09/2014 commentary, “That (Wonderful) Wall of Worry.”
|By Staff, EUbusiness, 09/18/2014|
MarketMinder's View: Want more evidence weak eurozone bank lending isn’t a liquidity issue? Round One of the ECB’s Targeted Long-Term Refinancing Operation—designed to spur small-business lending by providing banks cheap funding—came in well below forecasts. The ECB anticipated a €100 billion to €300 billion takeup, but banks borrowed only €82.6 billion. See, the thing is, banks are waiting for the results of the ECB’s stress test and asset quality review—and waiting to see if they need to raise yet more capital after deleveraging €4.3 trillion over the past few years. Between stress tests and the ever-tougher capital ratios and other limitations, incentivizing banks with cheap financing and liquidity won’t do much if they’re also told they can’t lend. For more, see our 08/08/2014 commentary, “Should the ECB Go Big?”
|By Shawn Pogatchnik, Associated Press, 09/18/2014|
MarketMinder's View: If you find yourself fretting over stories about eurozone weakness, consider Ireland—bailed out in 2010, enjoying gangbusters growth today and trying to repay bailout loans early. Now we’re not saying one reading of GDP or even one country in general tells the entire story of an 18-country bloc—but that’s also our point. No bloc as big and varied as the eurozone will grow uniformly. Nor, in our view, does it need to. Considering most seem to think the eurozone is about to get sucked into 20 years of deflation and shrinking nominal GDP a la Japan, choppy growth, with the strong pulling along the weak, should be plenty good enough to beat expectations.
|By Paul Wiseman and Martin Crutsinger, Associated Press, 09/18/2014|
MarketMinder's View: Brace for the inevitable what? This insinuates something bad will happen to the economy and/or stocks once the Fed hikes rates. But history has shown rate hikes aren’t an automatic bad. Plus, might we point out they said the same thing a year and a half ago about rising long-term rates when quantitative easing (QE) ended—then, too, headlines warned of pricier mortgages, car loans and all the rest. Except QE wound down, rates rose, and borrowing didn’t tank. It rose, too! As for that widespread sigh of relief that first hike probably won’t happen until mid-2015, that isn’t inevitable either—it’s speculation based on charts showing where Fed people think rates will be over the next several years. Not where they think they should be or where they will be for sure, no ifs, ands or buts. In our view, investors shouldn’t pay this talk much heed—actions speak louder than words, words, words.
|By Jacob M. Schlesinger and Kosaku Narioka, The Wall Street Journal, 09/18/2014|
MarketMinder's View: It’s interesting to compare the sentiment surrounding the monetary policy portion of Japanese PM Shinzo Abe’s “Abenomics” economic program from when it was first launched to today. When ultra-loose monetary policy sent the yen to plumb new lows, stocks soared as investors cheered what they were sure was the end of deflation and entrenched slow growth—and they ignored the weak currency’s impact on import prices, which was very bad for a country that relies on imported energy. Fast forward 18 months, and the shine is off. The BoJ is making noise about easing again, and folks are worried about the import effect. Sentiment is catching up with reality.
|By Paul Hannon and Jon Sindreu, The Wall Street Journal, 09/18/2014|
MarketMinder's View: While EU rules prohibiting the sale of stronger vacuum cleaners may have sucked some household goods spending from September into August, they were far from the only factor powering August’s robust retail sales growth (+0.4% m/m, +3.9% y/y)—another data point highlighting the UK economy’s strength. Coupled with other recent data like July industrial production (+0.5% m/m) and total trade (+2.3% m/m), the UK remains a leader of developed world economic growth.
|By Staff, The Wall Street Journal, 09/17/2014|
MarketMinder's View: Don’t you feel like the title of this article should have an exclamation point or two after it? “Read the Full Text of the Fed’s Statement!!!” Just kidding, here’s one of the more dull things you’ll ever read (boldface ours): “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” Zzzzzzzzzzzzzzz. [Drools on keyboard.] And yet whether the two bolded words would be in this statement has led to a whole lot of misplaced handwringing this week. Talk is cheap, especially fedspeak. Which is basically marketing spin. For more, see our 09/16/2014 commentary, “Words, Words, Words.” About the only meaningful part of this Fed statement? That they will slow quantitative easing bond buying again, to a pace of $15 billion in October. Which is no surprise.
|By Eduardo Porter, The New York Times, 09/17/2014|
MarketMinder's View: A few things about this. One, globalization is not synonymous with the decline of US manufacturing. In fact, many US manufactured goods source parts from other places around the world, which is what globalization is: an interconnected global economy where nations specialize in what they do best and trade flows move freely. It would be to our great detriment if globalization “retreated.” Second, there is no decline in US manufacturing. US manufacturing output has steadily risen despite fewer workers in the industry. Why? Because technological advance is the real key that’s destroyed American manufacturing jobs. See it for yourself in this chart we created on the St. Louis Federal Reserve’s wonderful website comparing US industrial production and US manufacturing employment as a share of total payrolls. We manufacture more with fewer workers, and that’s good for the economy, not bad. To paraphrase Milton Friedman, we could go hire a bunch of folks to dig ditches with spoons. Employment would skyrocket. But is this a good use of scarce capital? In case you want even more on this, maybe read Todd Bliman’s 11/09/2010 column, “The Ever-Evolving Economic Engine” or this 04/28/2014 article by Businessweek’s Charles Kenny, “Why Factory Jobs Are Shrinking Everywhere.” It’s easy to blame China and foreigners, riling up the xenophobia, but the facts don’t comport to that theory very neatly.
|By Matthew Yglesias, Vox, 09/17/2014|
MarketMinder's View: So the claim here is Obama, by not nominating two more “unemployment fighters” to the FOMC, has doomed America to many to years of unemployment because the Fed hasn’t been as accommodative as—wait for it—the UK(!). This is just plain ol’ backwards. First, the linkage between monetary policy and employment is not nearly this direct. Second, quantitative easing—the policy launched with the intent of boosting hiring—wrongheadedly flattened the yield curve, a disincentive for banks to lend because it meant the spread between banks’ funding costs and interest revenues were lower (less profitable lending). Bank lending is the transmission mechanism for the Fed’s policy to reach the real economy, so a lower yield spread will work against the Fed’s intent to “stimulate” growth, which begets hiring. But the big miss here is the commentary involving the UK. The UK recovery was back and forth until the Bank of England ended quantitative easing. They stopped buying bonds long before the US started winding down its program, and their economy accelerated! The Fed actions cited here as “unwisely tightening monetary policy” are the very actions that caused the UK economy to perk!
|By Michael Calia, The Wall Street Journal, 09/17/2014|
MarketMinder's View: We guess the desired reaction to “For Now” is something like, “Oooooooooooooooooooo! A potential downgrade!” But when you read the rationale, it’s a little more like, *yawn*. It’s all predicated on the long-run costs of social security, which is an entitlement program that could be altered at any point, like it has been historically. Second, it cites the dollar’s status as a reserve currency as the factor allowing the US to “carry more debt than other nations.” Yet Japan doesn’t have the world’s reserve currency and it does have more than twice the US’s debt load as a percent of GDP. The pound is also not the dominant reserve currency, and yet it has similar debt levels and low rates. See, Moody’s has it backwards. The simple truth is the vast amount of outstanding US Treasury securities is what allows the dollar to be the biggest player in the forex reserve market. Anyway, it’s a ratings agency—which aren’t exactly known for displaying oodles of forecasting prowess.
|By Neil Irwin, The New York Times, 09/17/2014|
MarketMinder's View: Well of course you can’t. We mean, have you ever tried to eat a net export? It leaves you a little wanting. But you also can’t eat a median household income, because that, too, is just a statistic—subject to many flaws. You can’t just assume the families earning median household income in 1999 are the same families earning it today. You also can’t assume the term “household” is defined the exact same way today it was decades ago. Further, national median household income is a wee bit of a meaningless statistic. If you earn the median US household income and you live in a low cost-of-living area like South Carolina, you may be sitting pretty. If you earn the median US household income and live in the Bay Area, you might just be residing in a studio flat the size of a postage stamp with two of your closest friends. Finally, as to the claim that there is “so much other evidence” of an imperiled middle class, how about all the evidence suggesting the contrary? Like rising life expectancies, improved work conditions and the very real changes in the amount of hours worked it takes to consume goods like this.
|By Nicole Hong and Matt Day, The Wall Street Journal, 09/17/2014|
MarketMinder's View: This operates on the notion that the Fed’s easy money has led to a flood of capital racing into Emerging Markets (EM), supporting EM equities. The trouble with this notion is the facts don’t support it—at all. For it to be true, then EM stocks should have done phenomenally well during the period 2010 – 2013—since this was when the US launched quantitative easing (QE) (as well as Japan and the UK for part of the period). Yet they lagged by a sizable margin. Also, the same thesis was rampant in January—a thesis widely known as the “Fragile Five” Emerging Markets (Turkey, Indonesia, India, Brazil and South Africa)—in which these EM nations would supposedly falter because they ran current account deficits that QE hot money plugged up. But considering the QE kept winding down and the fragile five soared, we think it’s fair to say this notion isn’t on target. We doubt it is different in this latest iteration.
|By Matt Egan, CNN Money, 09/17/2014|
MarketMinder's View: Well, no. Half the Nasdaq (52% by number of issues) are down more than 20%. But that doesn’t mean they are “in trouble” as past price movement isn’t predictive. In addition, it is normal for market breadth to fall as a bull market matures. For more, see our 06/14/2012 research analysis here.
|By Jeffry Bartash, MarketWatch, 09/17/2014|
MarketMinder's View: This is a totally sensible take on August US CPI, which showed a headline dip of -0.2% m/m and a flat core read (excluding energy and food prices). What’s interesting about this is comparing this logical point of view with the eurozone inflation take. The causes for low reads are basically the same, but in the eurozone faster rising prices are coupled with deflationary spiral warnings. In our view, these two articles in concert tell you a thing or two about sentiment toward the eurozone and US.
|By Ian Wishart, Bloomberg, 09/17/2014|
MarketMinder's View: Yep, headline inflation was 0.4% year-over-year in August, a slight upward revision from the prior 0.3% y/y read. But the bigger story here is what’s driving the slow inflation: Energy prices fell -2.0% y/y in August, a big detraction from that headline figure. Food fell too. Now, if it’s really so necessary to pump inflation up (taken for granted in this article, as evidenced by statements like, “…as it [the ECB] tries to avert a downward spiral in prices…”), perhaps the ECB should sabotage some oil rigs (without hurting anyone of course). That’d make energy prices rise! But it would be odd and not really very beneficial for the economy, if you get our drift. We are fairly sure, though, that affecting weather, geopolitical tensions and the shale revolution—big determinants of energy price fluctuations globally—are beyond the scope of the ECB’s mandate.
|By Robyn Post, Reuters, 09/16/2014|
MarketMinder's View: You can’t buy past performance. Period. Looking at an adviser’s track record is important—and the longer the better—but more for the things this shows about an adviser. Like whether their decisions have a history of being right more often than not, and whether their success was repeatable over time. But this is only part of the due diligence we’d suggest investors perform when picking a money manager.
|By Larry Elliott, The Guardian, 09/16/2014|
MarketMinder's View: “Consider the evidence. There were five big sterling crises in the 20th century, and four of them came to the boil in September. In the circumstances, it's not hard to see why foreign exchange dealers will be at their desks early on Friday morning to await news from Edinburgh about the referendum vote.” Well, yes, it isn’t hard—but not because this is an actual thing. More because people pretty easily fall prey to coincidental arguments like this. It is a bizarre quirk that four of the pound’s worst moments occurred in September. That’s it.
|By Jim Snyder, BloombergBusinessweek, 09/16/2014|
MarketMinder's View: If the US government allows US oil producers to swap lighter oil with Mexico’s heavier oil then that will likely be an incremental win-win for both countries—the US has quite the supply of lighter oil, but its refineries are better equipped to process heavier oil. And Mexico could “benefit from an improved mix of crude.” However, this doesn’t mean US exports will skyrocket—the oil export ban is still in place. Other obstacles exist, too, like infrastructure limitations.
|By John Jamieson, Daily Finance, 09/16/2014|
MarketMinder's View: This piece touches on several financial fraud red flags to watch out for. Here are two: advertised returns are too good to be true and “you’re told complicated yet compelling stories about why the returns are so strong.” But then it introduces this very dangerous point: “There are legitimate financial products that offer and deliver stable returns with no market risk (such as some annuities) but these are backed by old, valuable companies with many assets on the books. And they don't pay those too-good-to-be-true returns.” Annuity holders aren’t immune to market risk—consider inflation, fees, opportunity cost and all the rest. Plus, those “old, valuable companies” aren’t immune to bankruptcy (ahem, AIG). Nothing is risk free. Period.
|By Staff, BBC, 09/16/2014|
MarketMinder's View: German investor confidence might be falling, but that doesn’t mean German stocks—or European stocks—will. Confidence surveys report how investors feel about recent economic and stock market data—and whatever big news is out there—but they don’t predict future returns or what folks will actually do (like, maybe, pay more for stocks). They’re a coincident indicator at best. For instance, the ZEW was at a low point for much of 2012, but the MSCI Germany still rose 30% that year (Source: FactSet, MSCI Germany Total Return Index (gross) in EUR, 12/31/2011-12/31/2012).
|By Luzi Ann Javier and Marvin G. Perez, Bloomberg, 09/16/2014|
MarketMinder's View: Here is an example of why measures aimed at protecting a domestic industry often end up harming consumers: They often end up limiting supply, driving prices higher. In the case of the US’s sugar tariffs and recent spat with Mexico, which provided 18% of sugar consumed in the US last year, it also crimps US food processors, who face higher costs. This isn’t a whopping negative or anything, just an illustration of why markets like free trade.
|By Patti Domm, CNBC, 09/16/2014|
MarketMinder's View: These two words—“considerable time”—have gotten a lot of play recently as folks try to interpret what the Fed’s decision about whether to keep them will mean. It’s all much ado about nothing. Whatever the Fed says tomorrow about the timing of the next rate hike—whether they allude to it coming a considerable time after quantitative easing ends or not—says nothing. Fed guidance isn't carved in stone. It’s written on paper that can be torn up and on Internet postings that can be revised.
|By Chuck Jaffe, MarketWatch, 09/16/2014|
MarketMinder's View: Target-date funds, rightly or wrongly (wrongly, in our view), are meant to be a very long-term investment to guide investors toward their retirement date, gradually “gliding” down equity exposure as that date nears. They’re meant to be held for decades. An exchange-traded version, with minute-by-minute pricing and access, would seem to open investors to all sorts of short-term decisions, doing themselves more harm than good—and it seems investors realized this, saying thanks but no thanks to the available target-date ETFs. Though, we’d still strongly suggest folks also say thanks but no thanks to traditional target-date funds, too—see this and this for more.
|By E.S. Browning, The Wall Street Journal, 09/15/2014|
MarketMinder's View: So, the conclusion is if inflation rises, we’re all doomed because the Fed will hike and then the music stops, Ukraine will become economically significant, P/Es will suddenly become predictive, gravity will shock stocks, investors will en masse remember that after August comes another month (that we’re already in), and corporate margins will revert to the mean. Suffice it to say, there is little or no historical evidence supporting these fears, including the Fed hike fears. For more, see this, this, this, this, this and this, respectively.
|By John F. Wasik, Morningstar, 09/15/2014|
MarketMinder's View: This article commits what we believe are a few fatal mistakes: One, it considers all negativity equal (“Can you stomach a 10% decline? 20%? How about 37%, which is what happened in 2008?”). But all negativity is decidedly not equal, and not something you should or can prepare for. A correction—a short, sharp, sentiment-driven drop of 10-20%—is a normal part of a bull market. We’ve seen five since the financial crisis ended, and with these, the bigger risk is opportunity cost. A bear is a long, fundamentally driven drop of 20% or more whose start is usually followed by a recession. It is possible to forecast them, though not perfectly so, and it can be beneficial to sidestep some of the downturn, if you foresee it. The other thing is there is a lot of hypothetical “how would you feel if your portfolio fell XX%” going on here, and we’d like to point out that folks’ behavior frequently doesn’t match those words, written or spoken. Now, we agree the time to prepare for market conditions is before they happen. But when most articles—like this one—suggest it’s time to prepare for a drop, we’d suggest it’s probably more likely time to prepare for a melt-up to an eventually greedy point. When these get-ready-for-a-drop articles vanish, it may be time to get ready for a drop.
|By Mohamed A. El-Erian, Bloomberg, 09/15/2014|
MarketMinder's View: Words equal talk and talk is cheap. As we’ve seen both in the US and the UK for quite some time now, anything a central banker says is subject to revision, deletion, alteration, adjustment, removal, tweaking, changing or other alteration. Trying to game when the next rate hike will be based on the Fed’s words—forward guidance or any other part of the policy statement for that matter—is a pointless exercise. The Fed is not a market function and its actions cannot be reliably forecast. The best you can hope to do is assess the impact of those actions once they are made. For more, see our 09/16/2014 cover story, “Words, Words, Words.”
|By David Wessel, The Wall Street Journal, 09/15/2014|
MarketMinder's View: A fair few problems with this thesis, in our view: One, the currency war alluded to (“Last time, the emerging markets were doing the complaining”) was talk of a currency war in late 2010. Did one break out? How do we know? Do we really care? The economy has grown for four years! Second, the US has grown faster since Ben Bernanke first alluded to tapering in May 2013, which is the opposite action of the weak-currency-spurs-growth meme. Finally, in a globalized world, the likelihood you can boost exports without boosting imports is low. That’s the lesson Japan has taught over the last few years. For more, see our 09/08/2014 commentary, “ECB’s Latest Move Spurs Currency War Chatter.”
|By Robert S. McIntyre, The New York Times, 09/15/2014|
MarketMinder's View: A few years ago, folks commonly accused corporate America of hoarding cash. Now, it seems the common charge is they are using cash solely to enrich themselves through stock buybacks, at the expense of investing in their business’s future. But “Corporations spend well over a trillion dollars on capital investments annually, using both retained earnings and borrowing, according to the Commerce Department.” And they’ve done so recently, too! Which is one of the reasons growth has accelerated over the last four quarters. Moreover, as noted herein, most buybacks are debt-financed, meaning buyback and business investment aren’t mutually exclusive. Now, this article is way too dismissive of the positive impact of buybacks to investors: Buybacks increase each shareowner’s stake in earnings and reduce share supply—both fundamentally bullish, as equity supply and demand are the ultimate forces moving stock prices.
|By Staff, Associated Press, 09/15/2014|
MarketMinder's View: The headline figure was skewed heavily by the way the government adjusts auto production for calendar impacts—July’s 9.3% increase in auto production was inflated, as firms usually shut during the month remained open. This boosted July’s gain to August’s comparative disadvantage. All in all, as the article suggests, we just wouldn’t read much into the dip. Especially in light of the slew of growthy data it discusses late in the piece.
|By Staff, Reuters, 09/15/2014|
MarketMinder's View: Forget the surplus chatter here—as we’ve often said, seeing imports as detracting from economic activity is a bizarre take. What this really shows more is the lack of impact of Russia sanctions. Exports to Russia fell by 14% m/m, yet the overall downtick in exports is pretty darn small (-0.2%).
|By Robert Shiller, Project Syndicate, 09/12/2014|
MarketMinder's View: Here is the thesis: The world’s spirits are in the doldrums right now, which puts us at risk of—at best—economic stagnation and, at worst, rampant war. Here are the holes in the evidence:
1) The “new normal” meme refers to an early 2009 prediction of a sad future of below-average stock returns, which the past five and a half years have disproven.
2) National ennui didn’t drive evil tyrants to try to take over Europe and decimate innocent people.
3) Incidentally, the same author wrote this last month, which says: “So nothing I’ve come up with is a slam-dunk explanation for the continuing high level of valuations. I suspect that the real answers lie largely in the realm of sociology and social psychology—in phenomena like irrational exuberance …” So which is it? Are we depressed or euphoric?
4) Feelings don’t move economies. Capital, technology, resources and labor do. Capital has moved slowly since 2008, ergo slower growth. Capital is moving faster now, and so is growth.
5) We’re pretty sure depression was a consequence of the Great Depression, not the cause, and that second leg down in the mid-30s had way more to do with premature tightening of monetary policy than people’s feelings.
|By Morgan Housel, The Wall Street Journal, 09/12/2014|
MarketMinder's View: While we’d take some of the numerical evidence here with a grain of salt—and the passive investing angle is a tad far afield from the subject matter—this is otherwise a handy discussion of three ways investors’ brains and feelings make them mess up again and again. Particularly insightful is the discussion on the dangers of misjudging your ability to stay cool when markets gyrate: “‘The vast majority of people overestimate their willingness to take risk. Fear is a strong emotion and often plays a much greater role in decision making than logic.’ Past behavior may be the best way to judge risk tolerance. If you panicked and sold stocks in 2008, you probably have a low risk tolerance, regardless of what you think today. If you went headfirst into technology stocks in 1999, you are probably susceptible to future bubbles, regardless of how contrarian you think you are now.” Now, don’t take this as advice to allow your risk tolerance to steer allocation—your goals should be your guiding light here—but rather, a check to potential overconfidence, which is a huge behavioral risk many individual investors struggle with.
|By Max Ehrenfreund, The Washington Post, 09/12/2014|
MarketMinder's View: Can we please dispense with the notion of Americans leaving the workforce in droves since 2000? Because while the labor force participation rate is down since then, the total labor force isn’t—it hit a fresh all-time high in March. The population has just grown faster. One would hope the Fed would look at both sides of a fraction before deciding what to do with interest rates, but even if they do, there is zero way to know how each FOMC member would interpret the numbers—along with the many other numbers they claim they consider at each meeting—so there isn’t much point to speculating how this one report could impact monetary policy.
|By Timothy B. Lee, Vox, 09/12/2014|
MarketMinder's View: Private property rights and free enterprise, together, are the backbones of our thriving capitalist economy—so, at first blush, you might think it terrible that the Supreme Court is striking down a number of software patents on the grounds that “using a computer” to perform age-old human and commercial tasks does not constitute a new invention. But here is another way to look at it: Patents on things that don’t exactly represent new technology limit competition, keeping many would-be players—and potential innovators—off the field. There is a happy medium in intellectual property law—and, at the very least, a pretty big silver lining to the Supreme Court’s actions.
|By Ambrose Evans-Pritchard, The Telegraph, 09/12/2014|
MarketMinder's View: Well, “crippling” is relative. Compared to the travel bans and asset freezes levied on a few mid-tier Russian pols and execs earlier this year, we guess partly banning a couple of banks and oil firms from capital markets financing is like tough or something. But not nearly enough to whack global commerce. Ditto for Russia’s planned retaliations, which—according to Prime Minister Dmitry Medvedev—include barring western commercial jets from flying over the Motherland. So add a few hours to your next trip to China? But that’s about it in terms of global impact.
|By Patrick Graham, Reuters, 09/12/2014|
MarketMinder's View: So here is the thing about the dollar: Currency swings don’t really tell you anything about a country’s economy, stock market, bond market or anything else. Not in an absolute sense or relative to the rest of the world. The dollar’s current run is not a “measure of how the economic fortunes of the United States and its major economic peers are diverging after six years of financial turmoil.” A rising dollar is no more a sign of economic strength than a falling dollar would be a sign of economic weakness. It is just bouncy-wouncy noise.
|By Je Hyun-jung, The Korea Times, 09/12/2014|
MarketMinder's View: Free trade is generally a really big benefit—both economically and for stocks. Historically, however, it has been an extremely tough sell in Asia, where domestic producers are valued as symbols of national pride. Yet Korea has embraced it with gusto over the past decade, recognizing opening markets to competition allows you to make huge strides on the global stage—and they’ve benefited tremendously. Their reasoning is one investors (and countries!) everywhere should keep in mind when trade talks hit the news: “Korea originally benefited from and strongly supported the multilateral trade regime, the World Trade Organization. However, Korean companies found that they were slowly losing competitiveness, as the rest of the world began granting preferential treatment to their FTA partners from the late 1990s on. Moreover, having experienced the Asian financial crisis, the Korean government came to recognize the need to transform and strengthen the Korean economic structure. It was thus inevitable, rather than voluntary, for Korea to transform its trade policy from supporting the multilateral trade regime to pursuing bilateral free trade agreements to encourage competitiveness of Korean products.”
|By Victoria McGrane and Pedro Nicolaci Da Costa, The Wall Street Journal, 09/12/2014|
MarketMinder's View: Ladies and gentlemen, meet your bubble hunters! You know, the people at the Fed who are like totally making sure we never have another financial crisis again, because that is a humanly possible thing to do. Not! Look. It’s fine—good, even!—to be hyper vigilant about threats to the financial system, and the Fed is theoretically in a good position to do it, considering its wealth of insight into the banking system. But the problem here is there is no evidence Fed people are at all good at spying bubbles before they’re a thing—to say nothing of deflating them without any collateral damage. Same goes for the similar committees at the BoE and elsewhere. Just because officials want to be seen as “doing something!” to prevent a crisis repeat doesn’t mean they’re actually able to. Or that it’s even necessary, considering it was a misapplied accounting rule that caused the housing bubble to lead to hemorrhaging bank balance sheets—a phenomenon only one Fed person is documented as noticing before the avalanche started in early 2008.
|By Fergal O’Brien, Bloomberg, 09/12/2014|
MarketMinder's View: We wouldn’t be quite so Debbie Downer about the eurozone. They’ve had a lot of good news! Like an economic recovery. And growthy PMIs. And rising Leading Economic Indexes. And Portugal and Spain doing great in bond auctions. And the Baltic states growing nicely. And Ireland in such great shape that it’s about to repay its IMF loans years ahead of schedule because it can borrow way cheaper. There are some headwinds, too, but so it is with any 18-nation bloc.
|By Staff, China Daily, 09/12/2014|
MarketMinder's View: Yep, seems about right: After some economic indicators wobbled a wee bit in July, traditional and shadow bank lending jumped, suggesting policymakers are stepping on the gas some. Just another sign they’ll do what is needed to keep that long-feared hard landing as mythical as ever.
|By Steve Goldstein, MarketWatch, 09/12/2014|
MarketMinder's View: Well there you have it. If you have been lying awake wondering how retail sales could be flat last month when everything else looked strong, you can now rest easy because they were revised up. Yippee! This, in a nutshell, is why we don’t put much emphasis on any one month of any one indicator. They’re noisy and usually revised, and by the time you get the final (supposedly most accurate) reading, they are very old and have zero bearing on future growth or forward-looking stocks. Oh, and the real answer to the “puzzle” is that retail sales are a small subset of consumer spending, and they don’t include service spending, so yah.
|By Staff, The Economist, 09/11/2014|
MarketMinder's View: True, geopolitical risk won’t go away—but that statement and most of this article imply the cascade of conflicts in the last five years is somehow new or unprecedented. What about the scores of skirmishes throughout the 20th century? There is nothing new or different for markets to price in—just the same old lack of world peace we’ve had since about always. Markets have long since learned how to deal. For investors, the question is whether we have World War III—and the answer is almost certainly not in the foreseeable future.
|By Lauren Davidson, The Telegraph, 09/11/2014|
MarketMinder's View: Well, huzzah to our friends across the Atlantic. The Brits have plenty of reasons to be optimistic about their economy—it’s the fastest-growing in the G7! So of course their confidence will be the highest, too—confidence tends to lag growth a bit. This is why we suggest not digging too deep for signs of what higher confidence means for a country’s growth prospects. How people feel today doesn’t tell you what they’ll do tomorrow. For more, see our 08/26/2014 commentary, “The Trouble With Surveys.”
|By Jesse Eisinger, The New York Times, 09/11/2014|
MarketMinder's View: Let’s pop the many misperceptions here. First, the 2008 Financial Crisis was not caused by an imploding credit bubble—the misapplication of FAS 157 (mark-to-market accounting) to illiquid, hard to value assets wreaked havoc on bank balance sheets 18 months after a housing bubble began to burst. Second, central bankers have a pretty poor track record of spotting bubbles, so we have a hard time believing they could preemptively deflate them—especially without any collateral damage. Third, it doesn’t make much sense for the Fed to set some hard and fast exit strategy or predetermined “tightening course”—setting those expectations and not following through if conditions change risks undermining credibility (no-no time). And a final quibble with the suggestion, “this long bull market has been one of the smoothest and steadiest in history.” Sure, if you looked at a chart, the line has gone up since March 2009, but we’ve had five corrections in five and a half years.
|By Greg Robb, MarketWatch, 09/11/2014|
MarketMinder's View: Those two words—“considerable time”—generated over 460 words in this article. The punditry will spend thousands more speculating over what it means if the Fed strikes those two words from its forward guidance, scrapping even the fuzzy hypothetical guesstimate of when they’ll hike rates. (For the record, Fed head Janet Yellen said those two words mean “about six months or so” after quantitative easing ends, but take that with many heaps of salt.) Our advice: Don’t get caught up in the noise. The Fed will hike when it hikes—it isn’t predictable, because the function has no rational variables—and we will all have to evaluate the decision on its merits when it happens.
|By Staff, The Economist, 09/11/2014|
MarketMinder's View: Something is wrong here, but it isn’t either the stock or bond market. It is the super long-term, overly hypothetical, thinly supported mean-reversion argument. Also wrong: The assumption slow US GDP growth means high stock prices aren’t “justified.” Newsflash: Stocks aren’t GDP. GDP is an imperfect, backward-looking gauge that tries to capture an entire country’s economic growth but does some weird things like count government spending as a positive (even though it could be inefficient and crowd out more profitable innovators) and imports as a negative—even though they directly measure domestic demand. Stocks are publicly traded companies. Stocks move over time on supply and demand—a function of economic growth, the political backdrop and sentiment. These generally make stocks do wildly different things than long-term forecasts underpinned by arbitrary assumptions and based on mean reversion and straight-line math would predict. Oh, also, unless you can see the data and methodology, might we suggest being skeptical over citations of very old financial statistics—like US inflation since 1790—that are not publicly available?
|By Rich Miller, Bloomberg, 09/11/2014|
MarketMinder's View: This piece bizarrely implies a flatter yield curve is more of a tailwind than a steep one, which tells you all you need to know about the logic underpinning it. Yes, the US is in great shape! But slow growth elsewhere isn’t why. And low gas prices aren’t an economic tailwind—spending is spending. And it’s not like demand is even down in Europe and China.
|By Chelsey Dulaney, The Wall Street Journal, 09/11/2014|
MarketMinder's View: While the scams investors face can sound complex, the steps you can take to protect your portfolio are simple. This piece highlights a big one: “An easy way to make sure this doesn’t happen is to never give your money to a fund manager outright.” But it misses two others and instead gives a bunch of intimidating procedural advice that might make fraud seem harder to detect and defend against than it really is. So here are the other two. 1) Make sure advertised returns are realistic—not always up, not steady eddie every year no matter what. 2) Force the adviser to explain their strategy in words you can understand, so you can gauge whether it’s consistent with their advertised returns. For more, see our 08/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Staff, Xinhua, 09/11/2014|
MarketMinder's View: While China’s economic reform progress is encouraging and should provide many long-term benefits, reform tends not to be a short-term economic driver. Cutting dozens of restrictions to starting a business is great! But it still takes time to get a new business off the ground—and generating revenues—so the near-term economic boost is usually minimal. So reform hasn’t and probably won’t replace stimulus completely—the government has used targeted stimulus measures this year to support steady growth, and more wouldn’t surprise. Though officials have signaled they intend to pursue reform at the expense of slower (but steadier) growth, it’s also in their best interest to ensure the reform process is as pain-free as possible and the masses remain content. For more, see Joseph Wei’s 08/07/2014 column, “China’s Balancing Act.”
|By Jeff Kearns, Christopher Condon and Steve Matthews, Bloomberg, 09/10/2014|
MarketMinder's View: So now the Fed may delete the reference to keeping rates low for a "considerable time" after its long-term bond buying is done. Which of course gives them more flexibility than being bound to Janet Yellen's earlier handcuff statement that a considerable time "probably means something on the order of around six months, that type of thing." Here is the thing with words: They aren't binding. Just look at the BoE, where Mark Carney has flipped and flopped like he ran for his current office. (He didn't—BoE governor is an appointed and supposedly apolitical position.) Here is the other thing about words: It's an error to think Fed officials flapping their gums about future policy is an ironclad indication of where short-term rates will go and when. So, yeah, delete the vague reference to keeping rates low for "a considerable time." But don't think for a moment they need more "flexibility." They already have that.
|By Stan Collender, Forbes, 09/10/2014|
MarketMinder's View: Have you heard? There is a possibility of a government shutdown at the end of the month, when fiscal 2013 ends. Hooray? Here are two things about this we think are pertinent now: First, a government shutdown is just not an economic or market problem, except for those government contractors who may be directly impacted. Second, as this article correctly notes, this time it doesn’t even seem like much of a problem for them, because it isn’t likely to happen. There is little chance either side wants to draw the ire of frustrated voters a month before midterms. Hey, as we’ve said before, folks: About the only things amounting to a material deadline in politics are elections.
|By Spencer Jakab, The Wall Street Journal, 09/10/2014|
MarketMinder's View: Well, low interest rates play a role, but it’s actually a pretty small one. Interest payments, after all, are less than 10% of tax revenue currently. What you should thank is rising tax revenue, up more than $600 billion between fiscal years 2009 and 2013—and the $2.47 trillion in receipts thus far in 2014 already top all of 2013’s $2.20 trillion with two months’ reports to go. What’s more, this all operates on the notion the Fed’s radical actions like QE created the recovery and pulled us “back from the brink” in 2008, which is far from proven when considering they flattened the yield curve and weighed on loan growth—contributing to the tepid economic recovery. But also! The Fed’s outsourcing crisis management to Treasury played a big role in creating the panic, so you can argue they pushed the economy to the brink, if that means we entered a deep recession, which isn’t at all clear. Finally, if you want to play loose and fast with statistics like moving around interest rates without regard to the economic conditions that have so much to do with them, you can prove literally any point you want. But, hey, other than that this is right.
|By Jeff Cox, CNBC, 09/10/2014|
MarketMinder's View: When you apply some math and knowledge of market history, this call seems like another example of the media confusing tepid optimism with super bullishness. This wildly bullish forecaster is suggesting stocks could rise 6% by the end of 2014 and 17% over the next 15 months. Neither of which are all that wildly bullish, considering US stocks, as measured by the S&P 500 Total Return Index, have risen by more than 10% in 58% of calendar years since 1926—more than 20% in the plurality of years, 37.5%. Seen in this light, the call seems more like expecting what is most common. So let the common times roll?
|By Neil Irwin, The New York Times, 09/10/2014|
MarketMinder's View: Listen, we can completely understand that not everyone has recovered as well as some of the best. But these data don’t prove that point and are greatly skewed. The Fed’s data make no real attempt to take either of these two necessary steps: 1) Adjust for the number of earners per household 2) Track the evolution of household finances to see if the people are the same or different. Also, the first exhibit here lumps together households by age, educational attainment and income—which likely double counts and presents a very weird picture of income. Another way income is weird here? They tally investment return as income (capital gains, dividends, interest) and use pre-tax, pre-transfer payment information. Over the time period shown, income taxes (particularly on high earners) went up. Finally, the Fed’s keeping interest rates low weighs on interest income, and dividends and capital gains are a function of wealth.
|By William Watts, MarketWatch, 09/10/2014|
MarketMinder's View: The caption in the graph leading off is worth noting: “Top strategists see S&P 500 rising 1% by end of 2014.” Now, maybe these strategists are right this time, though we feel obligated to point out they’ve been downplaying this bull all year (if not longer), hence the need to lift the target. But lifting to expect a 1% gain really just exemplifies the fact professional sentiment still is far from appreciating factors like the historical tendency for midterm Q4s (and the two quarters beyond) to be powerfully positive. For more, see our commentary, “Running of the Bears?”
|By Kazuaki Nagata and Reiji Yoshida, The Japan Times, 09/10/2014|
MarketMinder's View: So this is the first of Japan’s 48 idled nuclear reactors to get restart approval from national regulators, which is interesting and potentially beneficial for the country as it could lower some of firms’ and consumers’ energy costs that have skyrocketed due to the need to buy imported gas while the yen is very weak based on BoJ policy. However, even this plant still needs equipment inspections, municipal and prefecture level approvals to move forward, and it is widely expected Prime Minister Shinzo Abe will weigh in too. (Though his approval seems a given today, you never know which direction political winds could blow when the time comes.) And this review itself took twice as long as previously expected. That doesn’t bode terribly well for a widespread restart any time soon.
|By John Letzing, The Wall Street Journal, 09/10/2014|
MarketMinder's View: So the notion that Swiss banks are somehow magically better at “preserving capital” is nonsense. Preserving capital can only truly happen if you sit exclusively in cash—it’s meaningless where that cash is, provided the custodian doesn’t take off with it or plug it into currencies like Zimbabwean dollars. Also, the notion America is unfriendly to capital preservation because it is a “relatively bellicose nation” is odd for a slew of reasons. It is unfriendly to strategies claiming to offer capital preservation and growth, but hey, that’s universally true regardless of nation, currency, bank safety or geopolitical neutrality. All that said, it is interesting to us that a business is seeking to target the financial needs of American expats in light of many banks’ turning them away following the implementation of FATCA. That, folks, is how capitalism adapts!
|By Editorial Board, The New York Times, 09/10/2014|
MarketMinder's View: While we agree with the general thrust here—that Japan’s economy needs structural reforms above all else—our view is the measures suggested here do not address the protectionist tendencies, labor market issues and more. That aside, whether or not to hike the sales tax again in 2015 is a very valid question to ponder, but perhaps premature as we don’t have full data on how the economy bounced back from this April’s initial increase.
|By James Marson and Olga Razumovskaya, The Wall Street Journal, 09/10/2014|
MarketMinder's View: This is your standard Ukraine update: The cease-fire seems to be holding, but there is no agreement on what to do with the eastern regions that demand independence. Poroshenko’s offer here is to allow for special elections in the areas to elect new representatives, but the rebels don’t seem to like that those elected would be representing the Donbass region in Ukraine’s Parliament. Separately, there are some reports Russian gas giant Gazprom dialed back gas exports to Poland, which had been re-exporting to Ukraine. Gazprom claims it’s all normal winter planning, but that remains to be seen. Also worth noting: Gas stockpiles in Europe are high presently, helping mitigate the immediacy of the impact in the event Russia actually did pinch exports. It is worth noting none of these developments materially increase the likelihood this conflict escalates into something major that materially threatens the bull market.
|By Victoria Stilwell, Bloomberg, 09/10/2014|
MarketMinder's View: The facts included here—like job openings remaining near their highest levels since February 2001—are more or less fine, but very backward looking and not an indicator of future market or economic direction. After all, February 2001 showed many jobs waiting to be filled (and low unemployment, by the way) but it was also about a year into the dot.com bear market and the month before a US recession officially began. It's bizarre to have a bunch of labor market gauges on a dashboard, a driving analogy that incorrectly presumes 1) you can tell where the economy is heading from a bunch of backward-looking stuff and 2) that the Fed head steers the US economy, which gives them way too much credit.
|By Victoria McGrane and Ryan Tracy, The Wall Street Journal, 09/09/2014|
MarketMinder's View: On the one hand, the Fed is doing giant banks a small favor by being very open-kimono and giving them plenty of time to prepare for whatever high capital standards they eventually agree on. On the other, there are some potential unintended consequences here. If the biggest banks hold the most capital, depositors probably flock there in the next crisis, putting the smallest banks at risk of failure. So what happens then? Bailouts for “too small to fail”? Big banks magically forgetting all the lawsuits they faced the last time they stepped in to assist with their failing brethren and buying up failing small banks? Or a rash of failures and like a dozen big banks standing? Are any of these outcomes really beneficial in the long run?
|By Jennifer Ryan, Bloomberg, 09/09/2014|
MarketMinder's View: The UK expansion continues—in July, industrial output increased +0.5% m/m and exports and imports of goods jumped up (+2.1% m/m and +3.9% m/m, respectively). Add this to the mountain of evidence the Ukraine and Russian sanctions are not a huge economic risk for Europe.
|By Jennifer Ryan, Bloomberg, 09/09/2014|
MarketMinder's View: A year ago, BoE Governor Mark Carney said he’d hike rates when unemployment improved to 7%, probably late 2016 sometime. When unemployment fell below that in February, he said don’t worry, I ain’t hikin’ any time soon. Earlier this summer, he said sometime next year. Then he said folks were nuts for thinking sometime next year. Then he said who knows, we’ll do it when we do it, but it’ll be gradual. And now he’s saying that if a bunch of things happen the way straight-line math would indicate, then it’ll be next spring. See why we don’t think this latest signal is terribly reliable?
|By Paul Davidson, USA Today, 09/09/2014|
MarketMinder's View: Long-term rates jumped up when the Fed first alluded to the end of quantitative easing (QE) in May 2013, and while they have ticked down some this year, they remain higher than before taper talk began. Many thought higher rates would dent demand for loans, but as this nifty factoid shows, that isn’t the case. Plus, banks have “eased their lending standards,” which is banker code for “increased loan supply.” It’s all going right on schedule, in our view: Higher long-term rates makes lending more profitable—which makes banks more eager to do it.
|By Victoria McGrane, The Wall Street Journal, 09/09/2014|
MarketMinder's View: Why? “Mr. Tarullo said that after several years of running its annual ‘stress tests,’ Fed officials have concluded that the regulatory benefit of running medium-sized firms through that process just isn’t worth the cost to those firms. ‘Their balance sheets are pretty easily investigated by us and their lending falls in a fairly discrete number of forms,’ Mr. Tarullo said.” Seems a pretty sensible conclusion to us, and one that should allow banks with $50 billion or so (or more) in assets more flexibility to lend to the smaller businesses they typically serve.
|By Alanna Petroff, CNN Money, 09/09/2014|
MarketMinder's View: So two big things here. One, if you’re going to panic the people by saying they should fear “the debt debate,” might we suggest pointing out that Scottish First Minister Alex Salmond has said his country, if independence wins, won’t pay a dime of its UK debt obligations unless the remaining UK agrees to a currency union, which by the way the BoE and Treasury have repeatedly ruled out? Go big or go home, ya know? Two, neither that nor anything here is a reason to “worry” about the referendum, because while there would undoubtedly be some negatives if Scotland were to secede, the surprise factor here is very small. The supposed negatives in this piece—and dozens of others—have been widely discussed for two years. And even if the “Yes” vote wins, the negotiation process will take at least 18 months, based on Scotland’s desired timeframe, giving markets even more time to discover and digest the changes. For more on this topic, see our 09/02/2014 commentary, “Insight on the Scottish Referendum.”
|By Max Colchester and Gabriele Steinhauser, The Wall Street Journal, 09/09/2014|
MarketMinder's View: In an encouraging attempt at transparency, the ECB will give banks a preview of their stress test results a few weeks before the official results are announced, giving them time to rectify shortfalls and point out miscalculations. Theoretically, this should reduce the risks associated with this exercise, which could carry stiff penalties for failure, and it suggests the ECB is more concerned with having a healthy, functioning banking system than looking tough.
|By Max Colchester and Gabriele Steinhauser, The Wall Street Journal, 09/09/2014|
MarketMinder's View: In an encouraging attempt at transparency, the ECB will give banks a preview of their stress test results a few weeks before the official results are announced, giving them time to rectify shortfalls and point out miscalculations. Theoretically, this should reduce the risks associated with this exercise, which could carry stiff penalties for failure, and it suggests the ECB is more concerned with having a healthy, functioning banking system than looking tough.
|By Jeff Kearns, Bloomberg, 09/09/2014|
MarketMinder's View: No matter how many “dials” Janet Yellen adds to her so-called “labor market dashboard,” folks still won’t be able to predict her next monetary policy move, as this points out. Though, the logic behind adding so many indicators—including the two broad composites of over a dozen labor market stats—escapes us. Whatever happened to looking at the quantity and velocity of money?
|By Alessandro Speciale, Bloomberg, 09/08/2014|
MarketMinder's View: Along with last week’s surprise jumps in factory orders and industrial production, record-high July exports suggest the conflict in Ukraine and Russian sanctions are so far not the huge drag many expected. Granted, July’s results don’t include Russia’s embargo against European food imports, but Germany doesn’t export anywhere near enough food to Russia to offset the many other factors driving trade higher.
|By Anna Shiryaevskaya and Elena Mazneva, Bloomberg, 09/08/2014|
MarketMinder's View: Here is more evidence that even if Russia does decide to cut off its nose to spite its face—err, we mean commit economic suicide by cutting off natural gas exports to Europe—Europe should have a ton of wiggle room. Reserves—which have piled up at a quick clip for six months—are at record-highs, putting the EU in a much better position than it was in 2006 and 2009, the last time Russia turned off the gas.
|By Mark Cobley, The Wall Street Journal, 09/08/2014|
MarketMinder's View: So 38 UK local councils (their equivalent of municipalities) plan to form a coalition to issue bonds together, allowing them to raise funds on the open market instead of being forced to borrow from Her Majesty. It’s an interesting idea, but it seems a stretch to assume this automatically leads to lower funding costs for councils. We see their point about having economies of scale, but it would also put so much more investor scrutiny on town finances, and since the towns are basically backing each other, one weak link could cause costs to rise. Ultimately, if this goes through, the market will determine all this—all the speculating here is premature.
|By Andrew Ackerman, The Wall Street Journal, 09/08/2014|
MarketMinder's View: Evidently, as part of their attempts to apply too-big-to-fail illogic to the mutual fund and asset management industries, regulators are considering forcing the biggest managers to go through stress tests “to determine how they would weather economic shocks such as a sudden change in interest rates.” That’s about all the information we have at this point, since these deliberations are all in the early stages and going on behind closed doors, but it’s all a bit curious. Because 1) the biggest crisis in decades (2008) did not cause the mutual fund industry to implode amid a vicious cycle of redemptions and falling markets, and 2) you don’t even need a crisis or panic or anything for stocks to fall big. Volatility, ya know? And also, the parameters for the stress test? Interest rates? So they’re just going to assume a bunch of things have some automatically bad impact on stocks, defying decades of market history?
|By Richard Rubin, The Washington Post, 09/08/2014|
MarketMinder's View: Making tax grabs retroactive 20 years wouldn’t do wonders for investors’ or businesses’ confidence in the US. However, this proposal is extremely unlikely to make it through this gridlocked Congress. This, in a nutshell, is why markets love gridlock: It prevents radical new laws like this.
|By Mohamed A. El-Erian, Bloomberg, 09/05/2014|
MarketMinder's View: The fundamental fallacy underlying this article appears in the second-to-last sentence: “The US and the global economy would benefit from stronger growth in the labor market.” Backward! The labor market would benefit from continued strong economic growth. That’s. How. This. Works. And when you think about it, this should be painfully obvious considering all the monetary policy mumbo-jumbo here. Low interest rates theoretically stimulate growth. Not jobs directly. Like, business owners don’t look at Bloomberg and see low interest rates and think, “Jeepers! Time to hire!” No. They see low rates and think, “Jeepers! Money is cheap! I can get a loan, use the money to expand my production capacity—grow my business—and if all goes well boost revenues and then hire someone!” So yah, about the only thing we agree with here is that politicians will seize on this jobs report, because that is what politicians do—though we’d add that little-to-none of their rhetoric will be useful for investors.
|By Paul Krugman, The New York Times, 09/05/2014|
MarketMinder's View: Now, we don’t believe hot inflation or deflation are likely any time soon, but this article exemplifies why mixing political ideology and economic/market analysis is dangerous—it leads to erroneous assumptions like “Party X wants deflation” and the invention of polarizing evidence to support them. We are pretty sure, based on our many readings and many conversations with people from all ends of the political spectrum, that people hate the idea of super-high inflation regardless of their ideology and political affiliation. We’re also pretty sure the “perceived class interest” angle here is patently false, because folks rich and poor would hate to see prices rise 10% a year—an obvious fact that this piece shuns entirely.
|By Jason Zweig, The Wall Street Journal, 09/05/2014|
MarketMinder's View: This illustrates some great points about the dangers of groupthink in investing and how easy it is to engage in herd-like behavior. But the good news is you don’t need to ditch your stock-pick-bragging pals in order to invest well. Simply being aware of behavioral errors and what causes them can help you steel your emotions and stay disciplined. We’d apply the advice here to media rather than friends—know the sources you’re following and think critically about who’s credible and who’s just trying to get eyeballs. Also, follow us on Twitter. #shamelessplug
|By Anatole Kaletsky, Reuters, 09/05/2014|
MarketMinder's View: This is one of many opinions and possible outcomes of the upcoming referendum on Scotland’s secession from the UK. It is far from certain and highly speculative. Markets move most on probabilities, not possibilities, and surprises move them most. Considering markets have seen polls narrowing for months—and see two years’ worth of guesses about the implications of a split—and probably have years to slowly discover the consequences of Scottish independence if the vote passes, a yes vote shouldn’t be a global bull market killer. Speculative as they are, none of the political consequences outlined here would shock anyone. For more, see our 09/02/2014 commentary, “Insight on the Scottish Referendum.”
|By Whitney McFerron, Bloomberg, 09/05/2014|
MarketMinder's View: Not to go all Marie Antoinette on you here, but it seems like European policymakers are ignoring some pretty obvious solutions to the fruit supply gluts created by Russia’s food embargo: When life hands you rotten pears, make pear cider. This logic also applies to apples and peaches. Excess fruit can also be canned, pureed, turned into sorbet, baked into frozen pies—the possibilities are endless, and we suspect European farmers would benefit far more (and gain more over time) from some policies to expand their food production (and export) options than from payments to destroy crops. We would also enjoy consuming their output. (Failing that, might we suggest the Dutch approach?)
|By Binyamin Applebaum, The New York Times, 09/05/2014|
MarketMinder's View: So here is the thing about this: The Fed’s study uses median household income and doesn’t account for the fact some households have more earners than others. It also doesn’t account for demographics. So you get a study comparing the income of a 23-year-old single gal in an entry-level job with the combined income of her parents, both in their late 50s and in their prime earnings years. This is not income inequality. It is life. Same goes for wealth, too—people in their 20s and 30s will have saved far less than people in their 50s and 60s. The only way to accurately gauge income distribution is to slice it by age and household size. Like Dr. Mark J. Perry did here.
|By Staff, The Yomiuri Shimbun, 09/05/2014|
MarketMinder's View: All it took was a simple cabinet reshuffle for Japanese Prime Minister Shinzo Abe’s approval rating to rebound from 51% to 64%—and that’s all it took for economic reform expectations to rebound, too, as this piece illustrates. Anything is possible, but we’re skeptical that adding some fresh faces to his posse gives Abe enough political capital to take on all the vested interests in the way of reform (and win). Seems to us expectations for Japan remain too high, likely setting investors up for disappointment down the road.
|By Simon Nixon, The Wall Street Journal, 09/05/2014|
MarketMinder's View: This all operates on the notion weaker currency = better for economy, which just isn’t the case and isn’t supportable based on recent data. With a strong euro over the past few years, Spanish exports have set repeated record highs. With a weak yen since the BoJ enacted extra fancy quantitative easing, exports haven’t rallied much and import costs have been a major drag on corporate profitability. In a globalized world, it makes no sense to think you can boost exports without imports jumping. After all, few major products or items source zero inputs from abroad. The whole concept of “winning” or “losing” a currency war misses this entirely.
|By Staff, Bloomberg, 09/05/2014|
MarketMinder's View: What’s funny is this article was syndicated on a Chinese state-run media site, alongside an article called “China Shares Rise for a 6th Straight Day, Helped by Port Shares”—the kind of piece the Bloomberg article is poking at—and we wonder whether the editors get the irony. But there is more to this than media humor. Yes, it does seem China’s leaders are trying to engineer a bull market. This is not a reason to own Chinese stocks—even in a command economy, you can’t command market forces. When deciding whether to invest in China, we suggest weighing the same things you’d weigh elsewhere: The gap between economic reality and expectations, the political environment and overall sentiment.
|By Josie Cox, The Wall Street Journal, 09/05/2014|
MarketMinder's View: Let’s stop for a second and consider the magnitude of this nifty development. On July 18, 2011, Ireland had to pay 22.78% on two-year bonds. Today, for a brief moment, bondholders had to effectively pay 0.001% for the privilege of lending Ireland money. Crises can fade a lot sooner than you think.
|By Zachary A. Goldfarb, The Washington Post, 09/05/2014|
MarketMinder's View: Nothing about today’s jobs report means the US economy is taking a “step backward.” Jobs are a late-lagging indicator—they follow economic activity months after the fact. So this is better described as a sign the economy took a step back several months ago and guess what! We already knew that! So did stocks, which are looking more toward the next year or so. Keep that in mind when you see all the political spin from both sides trying to argue otherwise.
|By Mark Gilbert, Bloomberg, 09/05/2014|
MarketMinder's View: Whatever has the best risk/reward tradeoff! And this piece nicely shows that eurozone banks don’t have many options there, with ultra-low long-term interest rates wrecking potential loan profits. It also illustrates why banks might not be keen to take the ECB up on its forthcoming TLTRO and quasi-quantitative easing (QE) programs: The assets the banks would sell in return for fresh cash are probably a lot more profitable than whatever they’d do with that cash. But, that doesn’t mean the ECB should have done QE ages ago. As the US and UK showed, eurozone QE probably would have lowered long-term interest rates, too, making banks want to sit on their cash instead of lend it.
|By Allister Heath, The Telegraph, 09/04/2014|
MarketMinder's View: If you needed one more reason why you shouldn’t assume there is a direct connection between GDP and stocks, this is as good as any. According to the Office for National Statistics, annual GDP in current prices has been revised up by an average of about £50 billion over 1997 – 2012, thanks to updates in how activities like R&D, military spending and … ummm … illegal activities are calculated as part of GDP. The revisions indicate the UK may have recovered from the 2008 Financial Crisis faster than believed, leading to rather useless retrospective criticism that, “if we knew then what we know now, things would be different.” To us, this is an interesting curiosity and that is about all. As useful as GDP is, why should the BoE use data from 1997 – 2012 to decide monetary policy in 2014 and beyond?
|By Mohamed El-Erian, Bloomberg, 09/04/2014|
MarketMinder's View: Before considering the global impact, let’s rehash what the ECB announced today. The overnight lending rate was dropped from 0.15% to 0.05%, the negative deposit rate was dropped to -0.20% from -0.10% and the ECB will initiate an asset purchasing program starting in October, with more details to come. While we suggest a wait-and-see approach before concluding a full-scale quantitative easing operation is around the corner, it seems the ECB remains focused on penalizing banks into lending—a futile push, in our view, so long as banks continue facing the regulatory uncertainty of the ECB’s stress tests. As we’ve already seen, the negative deposit rate has prompted banks to park their money somewhere—government bonds—where they won’t be charged, and it’s unlikely an asset purchase program will change banks’ approach. As for the notion the world depends on the success of the ECB’s latest moves, we think that’s a teensy bit misplaced. The global economy has expanded just fine thus far even with inconsistent growth (to say the least) from the eurozone.
|By Lorraine Woellert, Bloomberg, 09/04/2014|
MarketMinder's View: Hot dog! July exports increased 0.9% from $196.2 billion to $198 billion m/m. More good news: Imports increased 0.7% to $238.6 billion—domestic demand is healthy! This means total trade (imports plus exports, and a much better representation of economic health) increased in July. Huzzah! However, all the headlines seem to be focusing on is the narrowing of the trade gap—a bit baffling to us, since it treats exports as a positive input and imports as a negative one.
|By Peter Spence, The Telegraph, 09/04/2014|
MarketMinder's View: It’s far from a given that investors will need “protection” if Scots vote for independence in two weeks. Could there be volatility? Sure! But it’s impossible to predict, and these things tend to be fleeting. What matters more for investors with long time horizons is whether a yes vote would trigger a bear market, and we don’t think that’s likely. It takes a big, surprising, fundamental negative to end a bull when fundamentals are otherwise strong, like today. The Scottish referendum isn’t exactly a stunning new development, considering two years have passed since it was first scheduled. That’s two years for markets to digest all the possibilities and risks that could stem from Scottish independence, which have been quite widely discussed—and markets would have years more, considering how long the negotiation process would take. Markets are also well aware polls have narrowed lately. For more, see our 09/02/2014 commentary, “Insight on the Scottish Referendum.”
|By Mark Lister, New Zealand Herald, 09/04/2014|
MarketMinder's View: Those reasons: September’s poor historic performance, overpriced markets, slowing economic growth, geopolitics and New Zealand’s election. For the global investor, here are five quick counters: past performance is not indicative of future results; valuations give you a rough indication of sentiment but don’t say where stocks are going next; forward-looking indicators like the Conference Board’s Leading Economic Index suggest developed economies will grow fine; regional conflicts usually don’t derail global bulls; and while political uncertainty in New Zealand may cause some short-term volatility to the NZX50 index, it’s unlikely to have a huge impact on global markets.
|By Jeff Cox, CNBC, 09/04/2014|
MarketMinder's View: Well, let’s consider their dataset. It consists of—wait for it!—newsletter writers! People who make money from being as sensational as possible! Think about the ramifications of that incentive. With sentiment overall thawing lately, how much subscription traffic would a newsletter writer really get from hyping the end of the world right now? Might they possibly get more from hyping ways to capitalize on the bull market instead? And might this story then be more about the follies of following financial newsletters—which have no incentive to provide sensible advice—and less about overall sentiment? Because this article itself is evidence skepticism is alive and well.
|By Simon Kennedy, Bloomberg, 09/04/2014|
MarketMinder's View: The thesis and overall argument here are fine: Though they could move stocks in the short-term, “geopolitics rarely impact equity markets over the medium to long term.” However, we have a small issue with the examples cited as evidence that geopolitics could be a market negative. The 1973 Arab-Israeli war and the 9/11 attacks in 2001 happened during bear markets, when stocks tend to fall. For 9/11, even though stocks fell sharply after the event, they recovered 19 trading days later. And, it should be noted, both events happened well into their respective bear markets—perhaps both added some to the power of the bear market that took place, but since the bears begin before and end after the two events noted, it’s hard to argue they were the proximate cause.
|By William G. Gale, Christian Science Monitor , 09/04/2014|
MarketMinder's View: Let’s be clear: Budget deficits are down to about $460 billion in fiscal year 2014 through July. That amounts to a budget deficit of about 2.9% of GDP, as of Q2 2014, which is not a high level by historical standards. So this is about the Congressional Budget Office’s projected deficit, which they have a terrible track record of forecasting (not unique to them—long-term forecasting is fraught with peril). But let’s be generous and assume for a moment they’re in the ballpark with this one. The alleged problems: the second highest debt-to-GDP ratio ever and the projected long-term rise of the deficit (when adjusted for a host of assumptions about future interest rates and growth). However, debt-to-GDP alone doesn’t tell you anything about debt’s most critical issue—its affordability. In this low interest rate environment, the government is rolling over maturing debt at cheaper rates than when it was first issued—this isn’t a pressing fiscal or economic problem. The interest payments on US government debt amount to about 9% of Federal tax revenue, a historically low figure—and are unlikely to rise soon, given the interest rate backdrop currently.
|By Josie Cox and Emese Bartha, The Wall Street Journal, 09/03/2014|
MarketMinder's View: A testament to Portugal’s progress—about four months after Portugal officially exited its bailout, on Wednesday the country issued a 16-year bond, which raised €3.5 billion at 3.923% (demand was even higher at €8 billion). Not bad for a country many believed would need extra funding help this year—and pretty extraordinary when you consider Portuguese 10-year yields soared close to 10% in 2011. Once again, the eurozone periphery is trouncing expectations.
|By Paul Davidson, USA Today, 09/03/2014|
MarketMinder's View: “Crisis protection” is in the eye of the beholder, but yes, the Fed approved the new Liquidity Coverage Ratio, which requires the biggest banks to hold enough “high-quality liquid assets” to cover operational costs for 30 days in the event of a bank run—a buffer against short-term funding flight. Fifteen banks are subject to this rule, and another 20 must hold enough to cover a 21-day run. Assuming the FDIC and OCC approve this, too, the US rule will be more stringent than the international rule, with fewer securities eligible and a shorter phase-in. However, most of the biggest banks are already in compliance, and the others are estimated to have a collective $100 billion shortfall. That might crimp on lending a bit, but retaining earnings should get them most of the way there. For more on this topic, see our 10/25/2013 commentary, “Buffer Bluffing.”
|By Steven Russolillo, The Wall Street Journal, 09/03/2014|
MarketMinder's View: Yup, September really isn’t all that bad for stocks: “Stocks have risen in eight of the past 10 Septembers, with the lone outliers coming in 2008 (the worst of the financial crisis) and 2011 (the middle of the European debt crisis and one month after the downgrade of the U.S. credit rating).” But neither that observation nor the technical analysis mumbo jumbo that follows means this September will be all sunshine and lemonade—past performance never predicts future returns. We might get a correction in September! But we might not. These things are unpredictable. For investors, what matters more than the immediate outlook or the month is where stocks are poised to go over the next year or so—and all signs on that front point up and to the right.
|By Staff, Reuters, 09/03/2014|
MarketMinder's View: Last year, if factory new orders rose +10.5% m/m overall but fell -0.8% if you exclude volatile aircraft orders, headlines would have bemoaned the expansion’s impending end. Now? They’re finding silver linings all over the place, like lean inventories and a 14-year high rise in unfilled orders—and claiming it all points to continued growth in business investment and the economy. Seems about right, to us, and it’s more evidence of thawing sentiment.
|By Paul Hannon, MarketWatch, 09/03/2014|
MarketMinder's View: The eurozone composite Purchasing Managers’ Index (PMI) fell from 53.8 in July to 52.5 in August—down from the Flash estimate of 52.8—and the services PMI slowed from 54.2 in July to 53.1 in August, as strong improvement in Spain and Ireland offset flagging Germany, France and Italy. What this means exactly for Q3 eurozone GDP is impossible to say, considering PMIs have diverged from output quite a bit lately. But it is pretty clear the region’s choppy, uneven recovery continues—normal and expected for a diverse set of 18 countries. As for the ECB-related commentary here, our views are unchanged: Weak lending is a big headwind for the region, but quantitative easing and monetary policy in general can’t fix this. Not when the reason banks are deleveraging is the upcoming stress test and Asset Quality Review.
|By Scott Hamilton, Bloomberg, 09/03/2014|
MarketMinder's View: We aren’t sure how PMIs showing growth across the board—even if growth slowed a touch in manufacturing and construction while accelerating in services—mean the UK expansion is unbalanced. Seems to us the UK is firing on all cylinders, with the sector that accounts for about 80% of GDP leading the charge. This is good! Not bad.
|By Staff, Xinhua, 09/03/2014|
MarketMinder's View: Housing and construction pulled back some—unsurprising, given the ongoing property downturn and officials’ resistance to a quick growth boost through state-funded construction—but the overall expansion in China’s non-manufacturing PMI from 54.2 in July to 54.4 in August suggests growth is just fine.
|By James Bartholomew, The Telegraph, 09/02/2014|
MarketMinder's View: Yes, UK and US sovereign yields are super-low, and yes, that does present some risk for bond prices looking ahead (and yes, we’re bullish on stocks). But this piece places altogether too much emphasis on coupon payments and stock dividends as sources of cash flow. Bonds and high-dividend stocks aren’t interchangeable, and dividends aren’t guaranteed. If you hold fixed income as part of your long-term investment strategy, chances are your bonds are there to help reduce expected short-term volatility. Swap bonds fully for high-dividend stocks, as this piece implicitly suggests, and your asset allocation could veer dangerously out of step with your long-term goals.
|By Jonathan Clements, The Wall Street Journal, 09/02/2014|
MarketMinder's View: There is some value in the discussion of identifying fixed costs—those you have no flexibility to defer in a pinch. But that’s about all the positives we could glean from this as much of the advice offered here is literally contradictory: If you set aside five years’ worth of discretionary cash flow, your ability to “go for growth” is mitigated by this ginormous wad of cash earning basically zero. Bucketing money and not looking at your finances holistically is a behavioral error, not some solution. Second, relying on dividend and interest income to meet fixed costs is treacherous advice that doesn’t take into account 1) that dividends and interest aren’t categorically assured and 2) that selling securities is somehow unreliable. Also, how can you simultaneously defer Social Security and use it to meet fixed costs? Anyone? Crickets?
|By Sofia Horta e Costa, Bloomberg, 09/02/2014|
MarketMinder's View: We mean no disrespect to the authors of this forecast, and we generally agree most folks underestimate how much room this bull has left to run (though, we won’t make a forecast beyond the next year or so, since markets don’t care much beyond that). We simply wish to point out what this shows about sentiment, lest anyone think it represents euphoria. 3000 is only a 50% gain away—spread over six years, that is less than the market’s long-term historical average annualized return. So this is really a subpar-returns forecast dressed up as über bullish. We’d also be remiss not to point out that we could have a nasty bear market sometime during the next 6 years and still finish 2020 50% or more higher than today. Never underestimate markets’ extreme nature.
|By Peter Spence, The Telegraph, 09/02/2014|
MarketMinder's View: Well, maybe, but that isn’t new, and none of this explains why French (and German, Austrian, Finnish, Dutch and Belgian) bonds are extra sought-after now. It isn’t because folks are scared and need a safe haven, whatever that even means. It’s because the ECB is charging banks 0.10% to hold excess reserves, and bankers are good enough at math to realize pulling reserves and buying highly liquid, high-quality sovereign debt yielding between 0 and -0.04% is less costly than paying central banks 0.10% to watch their money.
|By Craig L. Israelsen, Financial Planning, 09/02/2014|
MarketMinder's View: That isn’t the right question. The right question is, “what are my long-term goals, how long do I need to be invested to reach them, and what asset allocation is likeliest to deliver the long-term average annualized return—accounting for all the ups and downs along the way—I need to reach them?” Ok yah that’s more like three questions, but you get the point. If all you do is pick a narrow strategy because of some cockamamie measure of certain asset classes’ “stability”—which in this case is a simple comparison of standard deviation and three-year annualized returns over the past decade and a half—chances are you’ll end up with a portfolio that doesn’t match your actual needs.
|By Staff, Australian Associated Press, 09/02/2014|
MarketMinder's View: Aussie Prime Minister Tony Abbott has secured the repeal of the country’s two-year old and largely feckless Mineral Resources Rent Tax, which was designed to tax large mining firms on profits earned above a certain, complex-to-calculate mark. Yet MRRT just plain missed the mark and was expected to raise only A$700 million over the next four years. In effect, the MRRT had a greater propensity to hit small miners than big, and even then the blow wasn’t huge. Both the enactment and repeal of this contentious measure had more political fallout than economic—the MRRT’s lack of popularity is one of the factors that led to the ouster of the two PMs preceding Abbott (Julia Gillard and Kevin Rudd). He should maybe send them a thank you note.
|By Jeffry Bartash, MarketWatch, 09/02/2014|
MarketMinder's View: The Institute for Supply Management’s US manufacturing PMI rose more than expected to 59.0 in August, accelerating from July’s 57.1, one data point alluding to continued growth in the quarter. Perhaps more significantly for investors, the new orders subcomponent of the index rose from 63.4 to 66.7—two thirds of businesses surveyed saw rising orders in August. While we approach survey-based reports like this with a bit of skepticism, and it’s one of few August data points out now, it’s hard to see this as anything but bullish.
|By Emese Bartha, The Wall Street Journal, 09/02/2014|
MarketMinder's View: So this is not the biggest deal in the world, considering it's a small (€1 billion), private offering, but this is one of those sign-of-the-times stories in this sense: Spain issuing debt maturing in 50 years at 4% would have been inconceivable to many folks just two years ago. Heck, in 2012 Spanish 10-year debt yields reached 7.5%! Here folks are lending the same government money at nearly half the cost for five times as long. See? Sign-of-the-times! The fear of a Spanish default triggering a collapse of the single currency seems to have evaporated. (Eurozone fears now seem centered on the fact many pundits think the bloc is in a deflationary depression, despite data that overall show growth and slow inflation is tied to falling energy prices, mostly. But this is a blurb for another article.)
|By Staff, EUbusiness, 09/02/2014|
MarketMinder's View: Well, two major issues with this. One, it is not a foregone conclusion that Russia / Ukraine tensions had anything to do with this result. After all, the retaliatory sanctions Russia slapped on the West were on agriculture. Factory output falling doesn’t seem very directly related. Also, this result still showed growth, so the reaction seems a bit overblown. And finally, it seems a bit overly dramatic to call 50 “the boom-or-bust mark.” PMIs are surveys, and 50 is merely the point at which more or less than half of respondents said output rose in the month. Output overall can actually grow when PMI is sub-50—the survey doesn’t tally the degree to which respondents grew or contracted.