|By Toru Fujioka and Masahiro Hidaka, Bloomberg, 10/31/2014|
MarketMinder's View: So we have this sneaking suspicion that these moves—¥10 trillion more in “quantitative and qualitative easing” (QQE) and boosting the national pension fund’s equity allocation—are coordinated, as Shinzo Abe sought a buyer for all those bonds he’s about to sell. But aside from that! These moves clearly stimulated sentiment, but they likely won’t stimulate actual output or Japanese stocks. The pension thingy has been telegraphed nearly two years now, and it would be bizarre if markets hadn’t already (mostly) discounted it. As for QQE, it was a negative at ¥70 trillion annually and is still a negative at ¥80 trillion. It hasn’t done anything but boost bank balance sheets and flatten the yield curve.
|By Chad Bray, The New York Times, 10/31/2014|
MarketMinder's View: After deliberating for a couple years, the BoE finally set the leverage ratio for UK banks. For most banks, the minimum will be 3% (capital to total assets, not risk-weighted) by 2018. The biggest banks will have a higher threshold (unspecified, but estimated at just under 5%) and earlier deadline (2016). Most expected tougher, but this makes the BoE a touch more flexible than the Fed. The biggest banks are also pretty near compliant already and should be able to get there in time without unplanned capital raises. As ever, we don’t think this spells the end of bank failures—you can’t de-risk finance!—but it shouldn’t be a huge headache either. Considering this has been in the cards for years, banks (and markets) have had plenty of time to prepare.
|By Ben Wright and Denise Roland, The Telegraph, 10/31/2014|
MarketMinder's View: Not just World War I bonds! (And actually they’ll still have about £2 billion in open-ended WWI debt outstanding after this.) This also closes the book on—wait for it—the taxpayer bailout of the South Sea Company in 1720. And you thought TARP took too long! Her Majesty’s Treasury is also paying off debt used to fund Irish famine relief in 1847, the Napoleonic Wars and the Crimean War. All of which helped ratchet UK debt-to-GDP up to nosebleed levels. And they’re just now paying it off! (And not even paying it off, because they’re probably rolling it over to lower-yielding gilts—this is just smart financial management.) Ladies and gents, if you ever needed proof high debt doesn’t doom, this is it. (Also: They don’t make posters like they used to.)
|By Mark Gimein, Bloomberg, 10/31/2014|
MarketMinder's View: The theory here, of course(!), is that that markets can’t get enough
cowbell quantitative easing (QE). However, the market has known since May 2013 US tapering was approaching—and even a reality at the end of 2013. Yet stocks went up a lot. The correlation shown in the chart included is not convincing. There was a little matter called “The Global Financial Crisis” that hit in 2008 that made the chart look like that. It was not the end of Japan’s 2001 – 2006 QE, which occurred two years before the bear hit.
|By Mark D. Cook, MarketWatch, 10/31/2014|
MarketMinder's View: So, this seems a lot like a longstanding bear doubling down on an earlier call that hasn’t materialized. But can we share a little insight about the “three components” this “leading indicator” the call is based on—the “CCT”?
“The strongest component is the duration of buying versus the duration of selling. A healthy bull market sees mostly buying, indicated by the NYSE tick.” But wait. There is a buyer and a seller in every single transaction, forever and always. So, whaaaaaaaa?
“A second component of the CCT focuses on the NYSE “big block” buying and selling in isolated segments of time. This is different than the duration component, as it measures isolated situations of what fund managers are doing. A strong bullish market has numerous big blocks of buying. A print on the NYSE tick in excess of +1000 signifies fund buying by numerous entities, which accompanies a healthy bull market.” So no managers sell big blocks when they expect a bear? No fund managers are ever wrong and buy into a bull? Evidence like 2000-2 suggests that is flat wrong. Further, why is the NYSE the only market cited? The US is dotted with trade venues. What if the fund—as most do—uses a dark pool?
“A third and final component is the cumulative number of the NYSE tick. Each day I record the amount of total plus tick, less the amount of minus tick, on the NYSE. A bull market has a tight correlation of a up day for stock prices corresponding to a plus day in the cumulative NYSE tick.” Not if market breadth is falling, which is typical in a maturing bull and has been ongoing all year. But again, why only look at the NYSE? This is not how the market functions.
|By Daryna Krasnolutska, Elena Mazneva and Ewa Krukowska, Bloomberg, 10/31/2014|
MarketMinder's View: We are not saying the tensions in Ukraine are over, but the payment deal between Ukraine and Russia should help alleviate one potential concern: Russia turning off the gas to Europe because of Ukraine siphoning it for its own use.
|By Mike Segar, Quartz, 10/31/2014|
MarketMinder's View: This is a mish-mosh of non-threats, late-lagging and widely known statistics and seemingly big numbers that are taken completely out of context. Here is a chart-by-chart rundown:
Southern Europe’s Jobless Youth: Yep, unemployment among those ranging from high school sophomores to 24-year olds is high in Souther Europe. But that has been true since 2008. Why should it be frightening now? Especially when the overall figure is slowly falling?
Japan demographics. This is another widely known factor that is a false fear. Demographics move too slowly to materially affect global markets or the economy. It is a structural shift of the sort markets adapt to easily.
So this part mentions €136 billion in non-performing loans on EU bank balance sheets, but it fails to mention the eurozone banking system has assets in the tens of trillions. This is a pittance.
Student loans are up. But scale is missing here, too. According to the New York Fed’s study, median student loan debt is $12,000—roughly the size of a modest car loan. And nearly three quarters of borrowers have less than $25,000 outstanding.
Yes, the cost of college is rising fast, which is largely a government issue created by too much money chasing a relatively fixed supply of accredited universities.
China hard landing! This fear is over four years old. The bull market has continued throughout.
The Ukrainian economy’s annual output is about $175 billion, 0.2% of global GDP. The country’s annual output would make it the 27th largest state by output in the US. There are individual stocks with bigger market caps. Apple, for one, is more than three times the size of Ukrainian output. Things are not good in the Ukraine, and we can sympathize with residents impacted. But this isn’t scary for the global economy or markets.
Venezuela? Argentina? Small and widely known.
Canada’s housing market isn’t much of a scary threat to the world, and the reality is the US housing market didn’t cause the financial crisis in 2008—FAS 157 and the government’s haphazard behavior did that.
There is no deflation in Europe. There is disinflation, largely driven by falling energy prices. But also, slight deflation isn’t bad economically. See: The US industrial revolution.
Look, are there some negatives in the world? Yes. But there always are. Whether or not they should concern global investors is an entirely different question, one requiring a more sober analysis than this article provides.
|By Szu Ping Chan, The Telegraph, 10/31/2014|
MarketMinder's View: Hiiiiiighway to the danger zone! Sorry, but Kenny Loggins’ Top Gun anthem really is the only thing you should take away from this or any of the 100 or so other warnings October’s teensy uptick in eurozone inflation suggests the region still risks deep deflation. Economies and consumer price indexes are not like Air Force jets piloted by Tom Cruise and Val Kilmer in 1986. They do not need jet fuel and bursts of energy to achieve lift-off, and they don’t crash like Goose if they fail to achieve a certain velocity. Inflation is always and everywhere a monetary phenomenon. The eurozone’s money supply is growing (anemically, but growing), and banks might just be a wee bit more comfy lending now that stress tests are over. Those are not deflationary monetary conditions.
|By Matt O'Brien, The Washington Post, 10/31/2014|
MarketMinder's View: Urrrrgggghhhhh. Ok so we got a giggle out of the headline, because anyone who watched TV in the 80s fondly remembers these commercials. But that’s about the only point we can award here, because the actual analogy is juuuuuuuust a bit outside. (Sorry.) Potential GDP, as we explain in today’s commentary, is nothing more than a forward straight-line extrapolation of the average growth trend. Of course the CBO would have calculated a higher number in 2007 than today. That doesn’t mean we’ve fallen and we can’t get up! Potential GDP, you see, isn’t a ceiling or even a “where we should be.” It is just an arbitrary thing cooked up by some dude in an ivory tower one day. It has zero real-world significance—it’s an academic fairy tale and nothing more. That we’re under it today doesn’t mean the last recession made us “permanently poorer.” It just means real life has economic cycles, while that fairytale straight line doesn’t. Also? The chart, which is lifted from Harvard Economist Lawrence Summers’ commentary here, is at least six months old, because it shows the US on a downswing. Guess what! We’re on an upswing now! Actual GDP is marching closer to fairytale GDP! (Also meaningless, but still, a counterpoint is a counterpoint!)
|By Staff, EUbusiness, 10/31/2014|
MarketMinder's View: Regulators are regulators, folks. The only thing backing the ECB’s statement that its brand of regulation will be superior to national regulators is hubris. They’re all people, and people make mistakes. Having one regulator to rule them all should improve consistency in theory, but that hasn’t been tested yet—and the blueprint leaves them plenty of wiggle room to do as they see fit for whatever reason in the heat of the moment. In short: This move doesn’t crisis-proof the eurozone. As for the concerns having one institution oversee monetary and regulatory policy reduces transparency and potentially politicizes monetary policy, we too are inclined to raise a skeptical eyebrow, as we are fairly confident placing the monetary policy and regulatory committees in different buildings and having them meet at different times doesn’t amount to a firewall. People can just pick up the phone or send an email, ya know? That said, the US and UK aren’t much worse for the wear for having their central banks pull double duty.
|By Alan S. Blinder, The Wall Street Journal , 10/30/2014|
MarketMinder's View: So all the eurozone needs is Germany to stop being a stickler with the ECB’s purse strings, allow various “unconventional stimulus programs” and the region will be back on a sustainable path of economic growth? Well that’s simple! After all, we saw how fiscal and monetary stimulus returned the “economic powerhouse” label back to Japan. Errrrr. Wait. Japan remains in an economic malaise despite having the most aggressive monetary easing in the developed world and repeat fiscal stimulus. So maybe it isn’t so simple? Besides, most of the austerity in the eurozone has been incremental tax hikes, not huge spending cuts, so the German approach doesn’t really seem to be dominating the landscape. Heck, many nations missed deficit targets in recent years. We would suggest the structural reforms this article downplays plus a good solid dose of deregulation and less shifting rules around banking would probably do more over time than allowing France to spend a wee bit more.
|By Russell Gold, Erin Ailworth and Benoit Faucon, The Wall Street Journal , 10/30/2014|
MarketMinder's View: As this piece nicely illustrates, fears that falling oil prices will put the US’s spectacular energy boom at risk are overwrought, as many firms can remain profitable at even lower prices. That isn’t to say some companies aren’t feeling pain, though—smaller companies drilling in areas with higher costs may need higher prices to break even. But it will take time for that effect to be truly felt, and it seems unlikely (as of now) to really hit the US’s largest shale fields, like the Bakken and Eagle Ford. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Staff, The Wall Street Journal , 10/30/2014|
MarketMinder's View: Though many have extolled the Fed’s quantitative easing (QE) program as a success, this take is sensibly skeptical. For one, the Fed’s bond buying may be over, but its balance sheet isn’t about to be wound down any time soon—QE’s effects will remain for a while. And two, though some point to the US’s lower unemployment and faster economic growth compared to Europe as evidence of QE’s effectiveness, this is a misleading comparison. US growth (and hiring) actually picked up as slower bond buying became a reality. Additionally, consider these two counterpoints: Japan and the UK. Japan used QE from 2001 to 2006, and yet trailed most developed nations’ growth and market returns over that period. It is also employing it on a vast scale (relative to GDP) today, yet the economic outlook is murky at best. Second, UK growth improved after it stopped its QE program—which seemingly corroborates the US’s acceleration when tapering neared. Finally, loan growth and economic growth are slow in this cycle—which is supported by roughly a century of theory stating that the money supply and yield curve are keys to growth. QE disavowed those lessons, instead fixating on low rates to spur demand, supply be damned. All in all, QE’s negatives seem to outweigh its positives.
|By Martin Crutsinger, Associated Press, 10/30/2014|
MarketMinder's View: First, the data: Q3 US GDP rose at an annual rate of 3.5%, led by consumer spending, exports and business investment. Wheeee! But before getting too high off this growthy-sounding number, a caveat—this is the first estimate of Q3 GDP. The first estimate of Q1 2014 GDP initially showed 0.1% annual growth, but that has since been revised to a -2.1% annual contraction. Now we aren’t trying to be a wet blanket about Q3 GDP—it could get revised higher like Q2 GDP was (first estimate of 4.0% to current estimate of 4.6%). But for investors, this backward-looking figure merely confirms what stocks have already moved on—the US economy is growing nicely, a leader in the developed world.
|By Reynolds Holding, The New York Times, 10/30/2014|
MarketMinder's View: Well, we doubt it will be the perfect test, which would have to weigh costs against benefits. Fraud will and does happen, Sarbox or no. Markets dealt with that risk for generations before Sarbox passed in 2002, and the fact is fraud was already illegal. As the article sensibly notes, “One reason Sarbanes-Oxley isn’t used more often may be that it overlaps with older statutes that prosecutors are more familiar with and that have been tested in court. The reform has also pushed companies to create procedures that require low-level employees to tell chief executives or chief financial officers that financials are up to snuff. That makes it tough to prove higher-ups knew of inaccuracies.”
|By Josh Zumbrun, The Wall Street Journal, 10/30/2014|
MarketMinder's View: Here’s a fun way to see words, words, words don’t make for clearer (or better) monetary policy. Which isn’t that bad in the sense unclear and vague “Fedspeak” (as perfected by former Fed chair Alan Greenspan) keeps investors from gaming the next monetary move and doesn’t put central bankers’ credibility at risk if they decide to change their minds, which human beings tend to do. Words from the Fed often equate to obfuscation, a point investors would be well served to keep in mind.
|By Staff, The Economist, 10/30/2014|
MarketMinder's View: This article posits essentially three questions about quantitative easing’s (QE) legacy: did it work?; did it have unacceptable side effects?; was the Fed right to stop? The argument here says: yes; not really; maybe. Here are our answers: no; yes; yes. When you consider that loan growth took off after the Fed began tapering its QE program, it seems clear there may be significant unintended consequences that this article doesn’t account for. Here is a tip to interpreting monetary policy: If all the article discusses are interest rate levels, the thesis may well be off target. After all, we never questioned whether QE would be a force contributing to lower overall interest rates, just that this isn’t proof money was easy, inflation boosted and growth stimulated. Increasing the money supply would do all four of those things, but that requires banks to make loans, which QE discouraged. Yes, low rates may encourage businesses and individuals to try to borrow. However, this ignored banks’ role in the borrowing relationship—thanks to a flatter yield curve and smaller rate spread caused by QE, banks had little incentive to lend to anyone but the most creditworthy. Why take on more risk when the payoff was so little? Now then, we do agree the risks of hyperinflation and a bubble were overstated, but that is largely because this program was never stimulus in the first place.
|By Christopher Bjork, The Wall Street Journal, 10/30/2014|
MarketMinder's View: With all the negative sentiment surrounding the eurozone recently, stories like this are overlooked—Spain is estimated to have grown 0.5% q/q (2.0% annualized) in Q3, its fifth consecutive quarter of growth. This suggests reality, while not wonderful, is better than many investors believe. That gap is fuel for continued bull market ahead, as folks gain confidence when their fears don’t materialize.
|By Neil Irwin, The New York Times, 10/29/2014|
MarketMinder's View: An impressive collection of misperceived data and theories about the Fed’s quantitative easing (QE), in pictures! We’ll go chart by chart, for your convenience.
Chart 1—Fed Balance Sheet: Yep, it’s up a lot. The taper is also not going to bring it down, as they intend to reinvest maturing principal and no bonds are being sold. The discussion here is accurate.
Chart 2—Mortgage-Backed Securities: Yep, they bought ‘em.
Chart 3—Corporate Bond and Mortgage Rates: Yep, they’re down. Though, we’d note that corporate bonds have not been targeted outright by QE.
Here is where we get wackier.
Chart 4—The Cyclically Adjusted P/E Ratio (CAPE) is at Pre-Bust Levels: It is, but this has next to nothing to do with QE, is a poor measure of valuations and isn’t a timing tool for investing. Since it blends together earnings from the last decade, it’s currently more inflated by the recession’s slashing the “E” in CAPE than anything with QE. Stocks aren’t expensive by historical standards using better measures, and even if they were, they could still rise.
Chart 5: Inflation. QE, particularly QEs 2 and 3, is deflationary. It weighs on long-term interest rates, narrowing the spread between short- and long-term yields. This spread is a key determinant of banks’ lending profits. More narrow equals less profitable, and as a result, less plentiful lending. Those low rates discouraged loan supply. Without lending, the Fed is powerless to boost money supply and inflation.
Chart 6: Potential GDP and GDP: GDP is an imperfect reflection of the economy, and potential GDP is an imperfect extrapolation of the trend of this imperfect reflection. None of this is telling.
Chart 7: Jobs follow growth, growth has been slow in this cycle, in part due to QE.
Loan growth in this cycle has been the slowest of any on record. Growth has been too. That is not coincidence, and QE is partly to blame, not laud.
|By Ambrose Evans-Pritchard, The Telegraph, 10/29/2014|
MarketMinder's View: An enjoyable read, but the thesis here is off and the evidence less convincing when you put it under a finer lens. The Riksbank cut rates to zero because it seeks higher inflation, which is the primary role of most central banks the world over. They didn’t explicitly target a weaker currency, the aim of a currency war. But even if they did, you don’t win a currency war—you win and lose, because import prices rise, impacting businesses’ and consumers’ bottom lines. Finally, the notion, “The Riksbank faces an acute dilemma, forced to pick between the competing poisons of deflation or an asset boom” is great writing but off-target analysis. For one, they weren’t using rates to control housing prices (the perceived asset boom), they were using macroprudential policies (their own flavor of wrong). But that is also a false either/or. The debt to disposable income figures cited here as “jumping” from 120 percent to 175 percent over the past twelve years as evidence of the bubble amount to a compound annual growth rate of less than 2.5 percent per year. That’s it folks, 2.5 percent. Never mistake high quality wordplay employing a certain dramatic flair for fact-packed analysis.
|By Paul Vigna, The Wall Street Journal, 10/29/2014|
MarketMinder's View: Full disclosure: We are not fans of technical analysis. But this article actually just completely argues against itself, illustrating why we don’t buy into the predictive quality of lines on a page. We are told by one devotee that, “Well, those two key technical markers having been hit, there isn’t much upon which traders can key, he said. ‘They are behind us, leaving no live formations to key off of. That and support being light means that we should be prepared for the expected volatility in the day’s final two hours.’” But here is the thing: The rest of the article shows you that technical analysis didn’t foretell anything that has happened over the last two weeks or even longer. But now we’re in uncharted territory. What were we in then? Here are the facts: Technical analysis relies on devotees’ interpretation of past price levels. But stocks aren’t serially correlated, so you can never predict returns by “drawing lines on charts and extrapolating them into the future.”
|By Szu Ping Chan, The Telegraph, 10/29/2014|
MarketMinder's View: This is a “timebomb” with an exceptionally long, slow-burning wick to ignite what could be a big ol’ dud anyway. The argument is similar to the one offered in the US about the government’s “unfunded liabilities”—long-term forecasts and projections of the impact of entitlement spending on the public debt. Suffice it to say, we strongly doubt any of the forecasts here for what UK debt-to-GDP will look like in 2061 are very reliable. But even if they are, and their worst case scenario comes to pass, we’d like to point out Britain has had debt exceeding 200% of GDP before—when it had an empire the sun never set on. Japan, by the way, has 220% debt-to-GDP right now. Now Japan isn’t exactly a shining economic star, but it isn’t because of their debt—the neo-mercantilist, anti-competitive tendencies create that issue. Britain doesn’t have those factors. Besides, we’ve seen many nations reform pensions and other benefits in recent years, and there is no reason the UK couldn’t do so at any point in the next 47 years if it were necessary to avoid a potentially bad 2061.
|By Pedro Nicolaci Da Costa, The Wall Street Journal, 10/29/2014|
MarketMinder's View: Sorry, but we struggle to see why this is news at all. Of course it doesn’t end the concept. It isn’t as though the Fed is actually acknowledging the policy was wrongheaded and publicly lambasting Ben Bernanke for championing it. They are merely ending a (wrongheaded) program designed to stimulate based on the fact the recession ended 20 quarters ago. (!) But here is something to keep in your back pocket: If, and this is an if, we see a recession with deflation and the Fed launches quantitative easing, we would suggest that is a potential complication, not a benefit. Oh, and also, we are confused as to why the Fed thinks a “worst-case scenario” is one “in which the forecasts for growth and inflation were very poor and officials had already exhausted other tools to spur the economy.” We would suggest an actual deflationary depression a la the 1930s is more like the worst-cast scenario than a forecast of poor growth. And quantitative easing (QE) would not have helped then, as driving down long rates while hiking short-term rates amid an inverted yield curve isn’t likely to be a plus.
|By Matthew Boesler, Bloomberg, 10/29/2014|
MarketMinder's View: For one, no one has announced an “unwinding” of quantitative easing (QE), which would involve the Fed selling bonds on its balance sheet or not reinvesting securities when they mature. This isn’t part of the taper, it would be a separate, additional announcement. But also, this presumes QE boosted asset prices a bunch, which isn’t really proven using factors like price-to-earnings ratios, because they are only slightly above average presently. Soooooooooo? Last, if it is the effect—higher long-term interest rates—that some presume will tank stocks, why did they go up last year amid rising long rates?
|By Toru Fujioka and Keiko Ujikane, Bloomberg, 10/29/2014|
MarketMinder's View: Well, this is an upturn from recent months’ falling output. And it joins Japanese retail sales, which bounced in a report published yesterday. But it is premature to say this represents anything other than a dead cat bounce in light of April’s potential sales tax hike. After all, we just saw Japanese businesses and consumers respond to incentives rationally in late 2013/early 2014 with a rush of purchases ahead of the prior sales tax hike. A very similar factor could be at work as this year winds down, barring Abe declaring clearly that he won’t enact the second hike.
|By Robbie Whelan, The Wall Street Journal, 10/29/2014|
MarketMinder's View: A slower pace of inflows into nontraded REITs doesn’t mean “investors are backing away” from them. That would be if there were net outflows, which isn’t the case here. That being said, in our view, nontraded REITs should be a nonthing or a non-holding in your portfolio, because they are merely illiquid, high-fee and nontransparent versions of traded REITs, which are fine. Suggesting these “as bond alternatives,” as the article notes some brokers did, in our view, is a mistaken notion. The purpose of a bond in your portfolio should be to buffer against market volatility in a way you can measure, using a saleable instrument. You can’t say any of those things about nontraded REITs because you can’t, well, trade them.
|By Staff, EUbusiness, 10/29/2014|
MarketMinder's View: Well, it seems the US’s fight against individual income tax avoidance has gone global. In a new agreement, more than 80 nations (including Switzerland* after 2018) will exchange information on foreign nationals banking at institutions within their borders. This is basically an agreement in principle for a global FATCA, which basically eliminates the chance there is a big global backlash to the currently US-specific law. *Switzerland kinda sorta will join, as the article notes, its agreement to this deal was hedgy.
|By Edward Conard, The New York Times, 10/28/2014|
MarketMinder's View: Whatever your view of income distribution, let’s be clear: The wealth gap isn’t due to anything the Fed has done, which presumes low rates disproportionately benefit the wealthy, as they own more stocks and we all know low rates are good for stocks (sarcasm alert). There is no real evidence things like quantitative easing boosted stocks. But the article here raises the sound points that the Fed attempting anything with respect to the wealth gap is a bigger risk than benefit, particularly since it is far outside their mandate. Again, whatever you think of income or wealth distribution, you don’t want government agencies skewing far outside what they are legally permitted to do. Disagree? Answer this: What if the agency were controlled by someone you categorically disagree with?
|By Joe Carroll and David Wethe, Bloomberg, 10/28/2014|
MarketMinder's View: Recently, there has been a lot of debate over whether falling oil prices will hit US oil production, principally tied to shale producers. The logic here is unconventional oil production has higher costs, and therefore needs higher oil prices to retain profitability. And that is true, to an extent. However, before people jump to conclusions, we’d suggest considering the following salient points this article raises: Price swings aren’t unusual. “The oil industry already has demonstrated it can generate solid profit at lower price.” Firms are becoming more efficient. Finally, we’d note prices typically must stay low for some time to hit production. We aren’t saying they won’t, but it seems premature to presume they will right now tied to a couple months' big volatility.
|By Damian Paletta, The Wall Street Journal, 10/28/2014|
MarketMinder's View: Yes, debt is rising. And the article even provides a fun factoid to illustrate that: “That [$5 million in gifts] covered the growth of the debt for less than six minutes.” But the article completely ignores something very important when it comes to government debt—is it affordable? And it is! The US doesn’t need big donations from citizens to finance the debt, because it is plenty affordable as is. And that is a good thing, because if we were Uncle Sam, we would not bank on getting big donations from civic-minded people. As long as the government can afford interest payments on its debt and has access to markets—something unlikely to change in the foreseeable future—the debt isn’t a real risk to the economy or markets.
|By Margaret Newkirk and James Nash, Bloomberg, 10/28/2014|
MarketMinder's View: Georgia’s ports—Savannah and Brunswick—are major hubs for US import activity, and the state has been reaping benefits: "Together, the two ports contributed $32.4 billion to Georgia’s economy in 2011, or 7.8 percent of the total, according to the most recent University of Georgia study. They were responsible for 352,146 jobs, including 37,000 in Savannah’s home Chatham County." Rising imports just aren’t job or growth killers. Next time you read imports detracted from economic activity, remember this article.
|By Mark Gilbert, Bloomberg, 10/28/2014|
MarketMinder's View: Currency markets are no smarter than stock or bond markets. They are markets, and markets are markets. Period. Volatility in one is not predictive of moves in another. As an aside, the MOVE index (along with the other volatility gauges cited here) is quite flawed. Simple fact here, friends: Volatility does not predict future volatility, just as past performance does not dictate future returns. Period.
|By Kathleen Madigan, The Wall Street Journal, 10/28/2014|
MarketMinder's View: Consumer confidence surveys are a tiny snapshot of sentiment—in this case, suggesting optimism is growing—but that’s about it. They don’t predict stocks, the economy or consumer behavior since they reflect how people felt at the time they took the survey, not what they’ll actually do. And how they felt has a tendency to be impacted by recent economic news and market action. So it might be a bit of a stretch to say the reading “should be a welcome sign for retailers.”
|By Paul Davidson, USA Today, 10/28/2014|
MarketMinder's View: Speculation continues surrounding rate hike timing and the end of quantitative easing (QE). Will the Fed choose to keep the “considerable time” language intact? Heck. We don’t know. But it doesn’t really matter either way—central bankers’ speak is about as reliable as politician speak, which is to say, not reliable. Instead, we should assess their actions. And historically, the first rate hike in a tightening cycle hasn’t been materially bad for stocks. Also, all the QE / Taper Tantrum talk presumes this meeting is sneaking up on people, which it isn’t. The end of QE, should they follow through as expected by many analysts, would not be a surprise. (Nor is it a very big deal—it’s a positive step in a series of positive steps bringing deflationary, non-stimulative QE to a close.)
|By Lu Wang, Bloomberg, 10/27/2014|
MarketMinder's View: Evidently, the reason stocks have cooled is because the market has come too far, too fast relative to GDP. And while so-so growth was good enough then, the US economy will need to show far more mojo to boost stocks looking ahead. This thesis ignores a simple, fundamental truth: Stocks aren’t GDP. GDP is a rather flawed measure of total US output—private and public sector included—that does weird things like count imports (a measure of domestic demand) as a negative. Stocks are ownership slices of publicly traded companies—pure private sector. When you own a stock, you own a share in future earnings—not a future reading of one arbitrary econometric. Earnings have grown swiftly during this bull market and appear poised to keep doing so.
|By David Biller and Mario Sergio Lima, Bloomberg, 10/27/2014|
MarketMinder's View: Brazilian stocks are down big since markets realized Dilma Rousseff would likely win a second term as President, but sentiment is probably too dour. Rousseff’s recent rhetoric and actions (including replacing Finance Minister Guido Mantega) suggest she is moderating, which could provide markets some relief as her second term kicks off. She will have plenty of chances to re-earn the private sector’s confidence. The political reforms outlined here would be an incremental positive on that front, should they come to fruition.
|By E.S. Browning, The Wall Street Journal, 10/27/2014|
MarketMinder's View: The thesis here? Volatility ain’t over. Why? Stocks aren’t cheap, central bankers seem less reassuring about monetary policy, the eurozone is growing slowly—so is China—and commodity demand is slowing. But none of these are exactly new or unique fears. They are more or less the same darn fears lurking for most of this bull market. Monetary policy globally needn’t be coordinated—and that actually seems like an end of US quantitative easing fear above all else, which is and has been off target, in our view. Stocks needn’t be “cheap” to rise, or else low valuations would regularly predict returns, and they don’t. The dour discussion of global growth here is just more of the same skepticism. In our view, that folks continue to bemoan such false fears suggests pockets of skepticism remain—and the euphoria typically seen at bull market peaks is still far away.
|By Andrea Coombes, The Wall Street Journal, 10/27/2014|
MarketMinder's View: Emotions are one of the biggest detriments (or perhaps the biggest) to many investors’ reaching their retirement goals. According to prospect theory, we hate losses almost two and a half times as much as we like equivalent gains, so it is easy to see how volatility can get the better of some folks. Perspective (as in numbers one and six) is a valuable thing. Also, not getting sucked into the short-term-ism by not following every wiggle too closely or focusing on your goals (numbers two and four) is key. But when volatility is high isn’t a great time to assess risk. You have to think about trade-offs, and you should be thinking about that pretty much always in investing. You must take some measure of risk to earn a return commensurate with your goals.
|By Jeff Black and Nicholas Comfort, Bloomberg, 10/27/2014|
MarketMinder's View: Initially, 25 banks were on the ECB’s naughty list, failing to meet the new regulator’s requirements. But the data were based on information as of 12/31/2013, and as we’ve noted, banks have been stingily raising capital all year. So instead of having to come up with at least €25 billion, they must come up with only €9.5 billion over nine months to fill the shortfall. One bank accounts for half of that. That’s a drop in the bucket compared to the eurozone’s aggregated balance sheet of more than €31 trillion. All in all, the best thing we can say about these is exams is they are over. This removes one source of uncertainty and could make banks a wee bit more amenable to lending. (Though we don’t expect an explosion of loan growth in the eurozone—other headwinds, like ECB quasi-QE remain.)
|By Morgan Housel, The Wall Street Journal, 10/24/2014|
MarketMinder's View: Parts of this are a bit buy-and-holdy, and it downplays the opportunities to capitalize on trends that arise throughout the market cycle. But those wee drawbacks aside, it is a handy look at some of the ways our brains and feelings trick us. These are four lessons every investor who isn’t a robot or otherwise lacks an emotional “off” switch would benefit from learning.
|By Jason Zweig, The Wall Street Journal, 10/24/2014|
MarketMinder's View: The sciencey stuff in the first half is interesting, but probably not actionable. The second half, however, is full of good solid sense about how people err in perceiving their own ability to withstand market volatility—and what they can do about it. Why is this important? “For most investors, the most damaging risk is probably … ‘deviating from your long-term plan in pursuit of short-term emotional comfort in a time of unease.’” The four-part questionnaire at the end can help you avoid this trap.
|By Ruth Mantell, MarketWatch, 10/24/2014|
MarketMinder's View: This piece highlights an NBER paper claiming stocks do best under Republican governments but the economy does best under Democrats. This. Is. Hogwash. Stocks don’t prefer either party. Of the 13 bear markets since 1926, six started on a Democratic President’s watch and seven started under a Republican. The reason one is higher than the other is that there is an odd number. Differing economic growth rates during Democratic and Republican administrations stems from countless variables, many beyond the President’s control. Politically, we think the biggest swing factor is gridlock. When Congress can’t agree on anything, they can’t reshape property rights, regulation or the distribution of resources and capital. Stocks usually love the stability of the status quo.
|By Matt O’Brien, The Washington Post, 10/24/2014|
MarketMinder's View: No it didn’t. It just got argued, once again, which doesn’t make it remotely accurate. This time, two economists tried to model “secular stagnation” and came up with three reasons why it’s a thing and could stay a thing. Those reasons are household deleveraging, inequality and declining population growth. Let’s take a look. Households did deleverage quite a bit after the financial crisis, but borrowing bounced last year and is accelerating. Not that you need higher household borrowing and less saving to boost interest rates and boost growth—a bizarre thesis considering the paper goes on to argue we need super low rates to boost growth. (When arguments argue against themselves, they fail the logic test.) Moving to inequality, we have never seen reliable evidence it is widening. Most studies use pre-tax, pre-entitlement median household income. Which doesn’t account for a) programs created to address income gaps, b) the fact more houses are headed by singles today than 30 years ago and c) age. The household income of a 24-year-old college grad in her first job versus the household income of her parents, combined, in their prime earning years, is not inequality. It’s just life. Finally, demographic trends aren’t market drivers. Though, we’d also point out, Millennials outnumber Boomers. Japan didn’t have a lost decade because its working-age population started declining. Those economic troubles had a wee bit more to do with Japan’s structurally unsound state-sponsored neo-feudal-mercantilist economy.
|By Eunkyung Seo, Bloomberg, 10/24/2014|
MarketMinder's View: Wheeeeeeeeeee! Growth! We’d give you more analysis, but these early releases never give you much to go on—consumer spending grew, exports fell, and it’s all backward-looking. But still, whee, growth.
|By Matt Levine, Bloomberg, 10/24/2014|
MarketMinder's View: Why did the SEC reject two firms’ applications to create the first “non-transparent” actively managed ETF? (Which is sort of like your typical mutual fund, which reports holdings quarterly, except it’s also an ETF.) It largely comes down to this: They “proposed a product that was too slow, that wouldn't allow for incorporation of information into prices on a microsecond-by-microsecond basis, that wouldn't let market makers make near-risk-free profits by trading quickly in multiple markets. And the SEC said, no, that's not allowed. Modern equity markets are about speed and efficiency. If your product doesn't align with those values, you can't trade it.”
|By Szu Ping Chan, The Telegraph, 10/24/2014|
MarketMinder's View: Let’s be clear: The service sector didn’t “falter.” Growing 0.7% q/q—a 2.8% annualized rate—is not a fall, stumble or wobble. It is growth, and not of the snail-speed variety. Same goes for total GDP, which grew at the same rate. The UK is doing fine. As for all that stuff about a Q4 slowdown, it all seems a tad speculative. Though, it suggests expectations are nice and low, giving reality a fairly easy hurdle to beat.
|By Allister Heath, The Telegraph, 10/24/2014|
MarketMinder's View: There are some quite sensible nuggets here, including the headline argument that too big to fail is a myth. Markets didn’t seize in 2008 because Lehman was too big. They panicked because the government’s inconsistent, haphazard response scared the pants off people. When the government arbitrarily picks winners and losers in a crisis—forcing Lehman to go bankrupt after engineering JPMorganChase’s purchase of Bear Stearns under identical circumstances six months prior—investors and firms have no way to set expectations. Ergo, chaos. We also agree, in theory, that having credible resolution programs that allow banks to fail in an orderly manner is an ideal, market-oriented solution. We just don’t have much confidence the BoE’s plans accomplish that. The framework assumes the bank will pre-emptively identify banks on the brink and take them over before disaster hits. Ideally on a Friday. That just seems a little too rosy considering how quickly bank runs start and escalate during a panic. Washington Mutual was seized and sold on a Thursday, after a 10-day run. Things happen.
|By Floyd Norris, The New York Times, 10/24/2014|
MarketMinder's View: We’re just skeptical that the “skin in the game” rule requiring banks to own a slice of any mortgage-backed securities they create does all that much to make the banking system stronger. We’re also skeptical of the related concern here, which is that regulators’ decision to scrap down payment requirements on the high-quality mortgages exempt from the skin in the game rule somehow makes the system extra-vulnerable. Seems like everyone’s missing the elephant in the room: Fannie and Freddie didn’t go broke in 2008 because evil banks hoodwinked them into buying securitized loans the banks knew were “toxic” and were eager to dump on the poor, innocent, unsuspecting government-sponsored enterprises. They went broke because mark-to-market accounting rules were misapplied to those illiquid assets, eroding their balance sheets. The actual loan losses from the crisis were about $300 billion, and those were spread across the banking industry. Total writedowns were nearly $2 trillion. The rule was toxic, not the assets. The rule is no longer a factor, so much of this debate seems moot.
|By Staff, EUbusiness, 10/24/2014|
MarketMinder's View: This has zero market impact, but it’s fun, and it illustrates how feckless and arbitrary the EU’s deficit limits are. If Italian PM Matteo Renzi makes good on his pledges here, we’ll probably see how ironic those spending limits are, too. As for France and Italy, this entirely political, administrative debate doesn’t have much bearing on their fiscal health or economic outlook. Again, this is just fun noise.
|By Teresa Tritch, The New York Times, 10/24/2014|
MarketMinder's View: We would say the following regardless of which political ideology this article espoused, as we favor neither party and tend to see all politicians as slick self-promoters and nothing more: Beware of political opinion pieces dressed up as economic analysis. That is what this article is. An ideological rallying cry without factual support. It does not portray reality. It argues sluggish growth in 2011, 2012 and 2013 showed America’s vulnerability to events like Japan’s earthquake, the eurozone crisis and the weather. Actually, we think the fact a Japanese recession, 18 months of shrinking eurozone GDP and other obstacles couldn’t knock the US expansion off track shows just how resilient our economy is! Also it would be very bizarre for the Fed to look for “signs of real recovery” when real output passed its prior peak 12 quarters ago—recovery usually comes after, you know, a recession. Not during an expansion.
|By Joshua M. Brown, The Reformed Broker, 10/23/2014|
MarketMinder's View: While the takeaway—there is no permanent must-own stock on Wall Street—is fine, we’d suggest this is too myopic and narrow to reach big conclusions. A third of the Dow is only 10 stocks, and we’re talking about a 12-month period. Some of those stocks will be oil and commodity-oriented too. Those aren’t facing issues specific to their firm, but rather, the industry-wide headwind of falling oil prices. Sure, some others face company specific issues. But the article sourced here doesn’t prove the point. Oh and besides—the biggest firms in the world, those many would consider blue chip, have blown small caps out of the water over the last 12 months.
|By Shobhana Chandra, Bloomberg, 10/23/2014|
MarketMinder's View: The Conference Board’s US Leading Economic Index (LEI) rose 0.8% in September, with nine out of 10 indicators—led by the interest rate spread—increasing. The one negative contributor? Average consumer expectations for business conditions, which are among the most limited components in this forward-looking indicator—-surveys tell you only how folks felt on a given day. US LEI has now increased in seven of the past nine months, and no US recession has begun while LEI is rising in its 50+ year history. Huzzah!
|By Max Colchester and Tommy Stubbington, The Wall Street Journal, 10/23/2014|
MarketMinder's View: While the ECB’s much-anticipated stress test results will be made public on Sunday, banks are being notified privately today. Though it’s amusing to imagine failing banks’ reactions—we’re picturing a shamed student who has to get his report card signed by his parents—experts expect most banks to pass, considering they spent the past year deleveraging and hoarding capital in preparation for this assessment. Though we wouldn’t be surprised if a high profile name or two failed, the completion of the ECB’s stress tests is a positive development. In our view, this regulatory headwind has been the primary culprit for weak eurozone lending, which should start to improve with this uncertainty passing.
|By Max Colchester and Tommy Stubbington, The Wall Street Journal, 10/23/2014|
MarketMinder's View: While the ECB’s much-anticipated stress test results will be made public on Sunday, banks are being notified privately today. Though it’s amusing to imagine failing banks’ reactions—we’re picturing a shamed student who has to get his report card signed by his parents—experts expect most banks to pass, considering they spent the past year deleveraging and hoarding capital in preparation for this assessment. Though we wouldn’t be surprised if a high profile name or two failed, the completion of the ECB’s stress tests is a positive development. In our view, this regulatory headwind has been the primary culprit for weak eurozone lending, which should start to improve with this uncertainty passing.
|By James Titcomb, The Telegraph, 10/23/2014|
MarketMinder's View: Starting in January 2015, the BoE will deal with failing banks in a three-step process. Step one: Stabilize the firm. Freeze its stocks and bonds from trading, give it a lifeline for funding. The BoE will directly step in, move deposits to a solvent third party and/or bail-in bondholders, converting debt to equity. Step two: Restructuring, which attempts to fix the causes of failure, including firing the current executives (presumed to be to accountable for the failure). The BoE will replace them with outside selections made in roughly 48 hours (the BoE thinks it has a great Human Resources and Recruiting department). Then, the third step is resolution, in which either the bank ceases to exist or will exit liquidity support. A few questions about this plan: 1) What if the failure doesn’t happen on a timeline? All the steps here presume the bank is deemed to have failed after shares are halted from trading and an assessment is done. Then over “Resolution Weekend” new directors are selected, deposits moved, bail-ins are decided on, etc. Busy weekend! What if they don’t get that time? 2) How will they determine a failure is looming? Who’s to say the BoE’s hand-selected choices will make the best decisions? What if the failures are not exclusively the fault of management—but rather, the unintended consequence of regulatory changes, as in 2008? Or monetary decisions, like in the early 1930s? Who gets fired then?
|By Gabriele Steinhauser, The Wall Street Journal, 10/23/2014|
MarketMinder's View: Though we question the overall effectiveness of stress tests—passing one doesn’t guarantee solvency the next time banks face financial trouble, given no two crises are identical—they have definitely impacted current eurozone bank operations and strategy. This piece gives a nice rundown of the “what” and “why” behind the stress tests.
|By Matt Phillips, Quartz, 10/23/2014|
MarketMinder's View: This article shows how titles can be misleading. Now, we agree more or less with the thesis: “The US economy is really roaring forward at the moment.” But most of the data points here are pretty backward-looking (job statistics) or limited (University of Michigan consumer sentiment index). The data here mostly show past strength in lagging indicators—backward-looking numbers won’t tell you anything about where forward-looking stocks will go.
|By Editorial Staff, Bloomberg, 10/23/2014|
MarketMinder's View: We agree—it isn’t the Fed’s job to, “stop banks from making bad decisions that cost them money,” especially when the loss incurred pretty clearly didn’t represent a systemic threat. But we’d go further than that. The notion the Fed can proactively deflate bubbles or head off risks through “macroprudential regulation” disavows history. They have no such track record of expertise. The idea bad banker behavior created the crisis in 2008 isn’t accurate, in our view. To hedge against that, the Fed would probably have to spend some time analyzing the man in the mirror.
|By Alex Frangos, The Wall Street Journal, 10/23/2014|
MarketMinder's View: An intermission assumes the dramatic Hard Landing of China show was actually underway. However, the fear has circulated now for more than four years, with stocks rising the whole time. Heck, China has never grown slower than 7.3% in that time, which is pretty enviable by global standards. We don’t doubt headline writers will do their best to conjure up the drama and make it seem like China is just one slip-up away from having that long-awaited “hard-landing.” But the nonfiction tale of the world’s second-largest economy likely keeps chugging along—maybe a bit more slowly, but nowhere near cratering.
|By Staff, The Economist, 10/23/2014|
MarketMinder's View: After you read this, we suggest reading this. Neither of the two are exactly happy-go-lucky, everything-is-awesome-in-the-eurozone articles. Both are dour. But if you look at the data included there is no deflation and the economy is actually growing. For investors wondering where sentiment is, this article is prime evidence false fears are still rampant. But even if the eurozone continues floundering or actually falters, it isn’t exactly new news the eurozone is struggling. Even the alleged solutions—quantitative easing, increased German spending—are old. Look, we’re not saying the eurozone is poised to power the global economy—nor does it have to, given the current expansion has done just fine more or less without the eurozone. But if headlines proclaim a widely known, largely false fear is the “world’s biggest economic problem,” that’s just another brick in the wall of worry bull markets love to climb.
|By Jeff Reeves, MarketWatch, 10/23/2014|
MarketMinder's View: Well, we aren’t exactly pessimistic about holiday sales, but we don’t really think the stock market needs any saving. That said, this article gives us the opportunity to highlight some major misperceptions many folks have about holiday retail sales. One, retail sales is a small subset of consumer spending—equating them, as this piece does, neglects service spending. Two, consumer spending isn’t the ultimate economic driver some believe—while it composes about 70% of GDP, it’s usually a very stable aspect of growth and not the swing factor driving economic cycles. Stocks don’t need gangbusters consumer spending to rise higher. And three, lower gas prices may help some folks consume, but it also means they aren’t consuming gasoline. Money spent is more or less money spent.
|By Eric Morath and Josh Mitchell, The Wall Street Journal, 10/22/2014|
MarketMinder's View: Attention Social Security recipients: As noted in this article, you will receive a 1.7% bump in payments in the next 12 months, based on annual CPI-W! (That’s the Consumer Price Index for Urban Wage Earners and Clerical Workers, the basis for the Social Security Administration’s cost-of-living adjustments.) Huzzah? Whether you think that a paltry sum or a big windfall, it is largely based on the still-tame inflation rates experienced in many parts of the world lately. However, the thesis offered here to explain this phenomenon (slow economic growth results in tepid wage growth, which means little inflation) was debunked almost half a century ago by Milton Friedman in papers like this one. Headline inflation is being weighed down by falling commodity (energy, food, raw materials) prices. Core inflation, still slow, is being weighed down by slow loan growth, which is the result of monetary policy decisions like quantitative easing, which flattened the yield curve, reducing banks’ loan profits and, hence, their willingness to make loans. Inflation is always and everywhere a monetary phenomenon, and without loan growth, the money supply doesn’t grow.
|By David Goodman, Lucy Meakin and Ye Xie, Bloomberg, 10/22/2014|
MarketMinder's View: So the hopelessly confused theory here is that now central banks' measures target weaker currencies so they can make their trading partners’ currencies rise, and we all know a rising currency is deflationary, so this is the latest fear-morph labeled a "currency war," a splashy name. But here is the reality: Most central banks' primary function is to target inflation, avoiding deflation and hyperinflation, if successful. So isn't this round of policy making just a (misguided) attempt to do that? Second, quantitative easing hasn't proven to be very inflationary in Japan, the US or UK. Why would it be different now? Third, inflation and currency values are not one-to-one, directly related. Inflation is an absolute phenomenon, currency values are always and exclusively relative. Hence, two countries could both experience high inflation or low inflation, yet one of the two would (assuming some movement) likely have a stronger currency than the other.
|By Andrey Ostrukh, The Wall Street Journal, 10/22/2014|
MarketMinder's View: Well, we are sure the sanctions are having an impact on Russia’s economy, which reportedly grew 0.0% in September. But we would humbly suggest that oil prices are a bigger deal than the largely toothless sanctions the West has put in place. When your economy is basically a one-trick pony, and that one-trick pony faces an enormous increase in the volume of tricks from other ponies, the price that pony can fetch for its trick likely falls. That is what is happening in the oil market today, and the oil industry is much more price sensitive than volume. This means the vast majority of Russia’s budget is hamstrung.
|By Dina Gusovsky, CNBC, 10/22/2014|
MarketMinder's View: The short answer, from an economic and market perspective, is no. China cannot replace the West as an export destination for Russia, and Russia cannot replace America and the West with China. What’s more, the 30-year Gazprom deal signed between Russia and China may be denominated in yuan, but that isn’t negative for the dollar. The yuan is a non-player on the global stage in terms of transactions denominated in it or its share of foreign currency reserves. But even if it were, there is no sign that would be a real threat to the US. The British pound is alive and well, yet it pales in comparison the US dollar on the global stage. Ditto for the euro. And the yen! Moreover, not mentioned here but often connected to this reserve-currency fear, is the fear such a move would jack up interest rates on US debt. But this ignores the fact Japanese, German, French and UK rates are as low as or lower than US, and none have the primary global reserve currency. To the extent more countries can trade without converting to USD, that is an economic plus for the world. The US government doesn’t get a brokerage fee or tax on the trade, and there is a buyer and seller in every transaction. This is just a ghost story, pure and simple.
|By Matt O’Brien, The Washington Post, 10/22/2014|
MarketMinder's View: There are numerous logical flaws with basing analyses like these on median household incomes. Try these on for size: 1) The median income may not change, but the people earning the median income may dramatically shift. And in a separate study published this January, the same economist whose work is cited here found income mobility is no different today than it was 30 or 40 years ago. 2) Median household income doesn’t adjust for demographic shifts in what defines a household. 3) Wealth is not a fixed pie. What the 1% or 0.1% or 0.01% (yada) have doesn’t limit another’s ability to earn more. In our view, one should be more wary of attempts to fix income inequality than the statistic itself, which is on a shaky foundation. Oh by the way, the notion here that “the middle class doesn’t own that much in stocks” is off. Since 1999, Gallup polls have repeatedly shown more than half and often more than 60% of respondents own stocks. The stock market isn’t a white shoe club for only the superrich, it’s a retirement planning staple for many Americans.
|By Howard Gold, MarketWatch, 10/22/2014|
MarketMinder's View: Are there historical instances where the Fed has helped head off a crisis in a timely fashion? Yep—as noted here, the actions in 1987 seem appropriate, largely because tightness in financial markets was one cause of the bear that began that August. However, we feel compelled to note that neither 2012, 2011 nor 2010’s corrections ended with the Fed announcements noted here. 2012’s and 2010’s were already over (June 4 and July 5, respectively—a month or more before each of the announcements noted herein). 2011’s ended after the announcement—and Operation Twist didn’t boost money supply at all, merely changing the types of bonds bought, not the quantity. You cannot simply look to the Fed to figure out when to buy. That would have proven a disastrous strategy many times in the past, when fighting the Fed was profitable. Oh by the way, here is a more telling statistic, in our view: During the 18 months FAS 157’s Mark-to-Market Accounting was in place (October 2007 – March 2009), the S&P 500 price index fell -57%. Since the March 9, 2009 bottom—days before FAS 157’s suspension and while Congress heard testimony on the rule’s deleterious impact—the S&P is up 187%. Maybe that’s a coincidence, but we kind of doubt it. Yes, there have been blips and corrections along the way. Yet there isn’t really any sign they were anything more than sentiment-driven blips in a broader bull markets—normal, causeless, fleeting.
|By CW, The Economist, 10/22/2014|
MarketMinder's View: Sheesh, how about looking at more than one month’s (August’s) data? Doing so would show that drop in August exports came after a record high in July. Industrial output and more surged in July as well. And most economists do not see the Q2 dip as indicative of trend, because the explanation was largely warmer weather pulling forward some activity into Q1 this year. Moreover, for investors, this is all very widely known. Europe is weak? The only way you haven’t heard this tale before is if you’ve been backpacking in Antarctica for the last five years. (We don’t recommend that.)
|By Staff, Reuters, 10/22/2014|
MarketMinder's View: Well, we think they left out the word “Standards” from the article’s title, because the debate here in passing the “risk-retention rule” (aka, the skin-in-the-game rule requiring banks to hold 5% of any securitized loans on their books), the two dissenters basically argued lax lending standards were at root of the 2008 crisis. Now, we have no doubt standards swung to be too loose. And we have no doubt there were occasionally poor-quality securitized loans issued. However, neither of these individually nor the two combined are truly responsible for the downturn, as illustrated by the Fed’s profit on so-called toxic debt and the fact actual loan losses were dwarfed by mark-to-market writedowns.
|By Sophia Yan, CNN Money, 10/21/2014|
MarketMinder's View: Yes, China’s economy is growing at a slower pace (7.3% y/y in Q3). And there is a chance China might not reach its 7.5% annual growth target. Should we be concerned? Not necessarily—China is still growing at a rate most countries would love. The hard landing so many fret still isn’t here. Plus, GDP growth alone isn’t the only factor to consider—the government has also been in the process of implementing reforms, which will likely be a long-term positive for China. For more, see Joseph Wei’s 08/07/2014 commentary, “China’s Balancing Act.”
|By Simon Kennedy, Bloomberg, 10/21/2014|
MarketMinder's View: “By estimating that zero stimulus would be consistent with a 10 percent quarterly drop in equities, they calculate it takes around $200 billion from central banks each quarter to keep markets from selling off.” So by starting from the presumption that the Fed’s actions are in fact stimulus, you find that the Fed has to do a lot to prop up stocks. But the problem isn’t the math, it’s the logic on this thesis, which starts from a fallacious point. Quantitative easing (QE) hasn’t been all that great for the economy—it weighed on long-term interest rates, decreasing banks’ profit margins. Banks had less incentive to lend, which meant money supply growth was painfully slow (which means not much new money could even have leaked into stocks, to the extent that was a thing at all—we think not so much). Now, maybe slow growth is good for stocks because it keeps worries higher for longer. That is possible. But it is equally possible faster growth would have benefited stocks more. Ultimately, this looks to us like trying to explain why markets bounced back the last few days, which presumes there was a fundamental reason they fell.
|By Isaac Arnsdorf and Bradley Olson, Bloomberg, 10/21/2014|
MarketMinder's View: Oil prices have fallen as of late. But concluding that a few weeks’ long blip will cause companies to change behavior and pump less seems like an awfully big leap. Oil firms do not respond to every little wiggle in oil prices real-time—nor can they. It isn’t that easy to switch production on or off. Lastly, recent oil price swings don’t necessary result from longer-term supply and demand fundamentals—sentiment can also drive short-term volatility. Plus, we are a bit skeptical of the notion prices at $80 a barrel are below firm’s shale breakeven points.
|By Peter Eavis, The New York Times, 10/21/2014|
MarketMinder's View: A couple of high ranking Fed honchos, New York Fed President William Dudley and Fed Governor Daniel Tarullo, have launched a bit of a political campaign aiming to refine the culture of big Wall Street firms, on the belief that this could prevent illegal or unethical practices, or just outright greedy behavior that “contributed to the  financial crisis.” Tarullo separately stated that Wall Street firms can’t just apply a “Check the box” regulatory structure. The fallout if they don’t? The two implied big firms will be broken up. However, completely unaddressed was the issue of small firm behavior, like Countrywide Financial Group, which we are told wasn’t good. Or the nonpublic, small firms in the S&L crisis. They do bad things too! And what about other industries? Shall we say, break up GM due to the recall issues it faced last year? Are there cultural issues there, too? We were told it was necessary to bail out GM in 2009 because the macroeconomic fallout would be immense. Which is too big to fail in a nutshell. Our point isn’t that bankers are the Partridge Family or something, but rather, that there are baddies in every industry. Banking isn’t special. Oh and greed had nothing to do with the crisis. The accounting rule Mr. Dudley loosely identified in early 2008 did. Regulators attempting to regulate corporate culture is a rather ridiculous notion.
|By F. Landis MacKellar and Jose G. Siri, The Wall Street Journal, 10/21/2014|
MarketMinder's View: Now, there is no evidence pandemics impact stocks—stocks rose 26% during deadliest on record, the 1918 influenza outbreak. But there is also no evidence an Ebola pandemic is remotely likely, which this article does a fine job of putting into perspective: “A virus’s goal is to survive, which means infecting as many new hosts as possible. There are a number of ways to do this. One is to be highly transmissible, jumping from individual to individual through proximity or casual contact. Think influenza, which causes its hosts to spew massive numbers of infectious airborne particles. Another way is to cause only minor disease, but to remain infectious over long periods. Cold sores, for example, are caused by the herpes simplex virus and are lifelong. Ebola does neither. The period of transmission begins only after symptoms appear. There is no evidence for airborne transmission, and while sexual transmission is possible, it is not likely a major route of infection. Images of health workers in alien-looking protective gear spread fear and anxiety, but Ebola is not very contagious. Transmission requires direct contact with bodily fluids. The reason to use hazmat suits is not the probability of contagion; it is that, if you are infected, the probability of death is high.” Is it possible the illness morphs? Is it possible that impacts stocks? Yes and yes. But neither are very probable and the typical media coverage of this event isn’t helpful to the majority of investors.
|By Bob Pisani, CNBC, 10/21/2014|
MarketMinder's View: Here is one gigantic flaw of many in this piece: The market is not, in fact, “calmer”—it’s just up! The market closed moments before we typed this and it rose almost 2%. 2% up is equally as volatile as 2% down. Plus, searching for meaning in bouncy times is a fruitless exercise—market volatility is normal. Forecasting the degree of dovishness at the next Fed meeting or setting up the straw man of one big tech company’s earnings as a bellwether (and then failing to knock down said straw man) is a fruitless exercise for investors. We’d suggest ignoring the noise and just staying focused on your long-term goals and objectives.
|By Michelle Jamrisko, Bloomberg, 10/21/2014|
MarketMinder's View: Here is a little check-in on a little slice of the US economy—housing. “Sales of existing single-family homes increased 2 percent to an annual rate of 4.56 million in September from the prior month, also the fastest pace in a year. Purchases of multifamily properties—including condominiums—rose 5.2 percent to a 610,000 pace.” This comes on the heels of a rebound in multi-family and single-family housing starts in September. Taken together, housing’s recovery continues its advance, albeit unevenly. Existing home sales are a financial transaction and aren’t captured in GDP. But even if we are generous and suggest all furnishings and household goods are tied to existing and new home sales, and add their economic impact to new housing construction’s, the two account for less than 5% of US GDP. So like we said, a little check in on a little slice of the US economy.
|By Robert J. Shiller, The New York Times, 10/20/2014|
MarketMinder's View: It is not impossible that these so-called “thought viruses” could cause fears, triggering stocks to fall and consumers to cease consuming. But it is incredibly unlikely. That back drop—fear or sentiment-driven moves—is associated much more with corrections, brief blips in a bull, than bear markets or recessions. In that way, of course “secular stagnation” fears, Ebola, worries of aging populations and 2011’s debt ceiling debate can influence stocks in the short run. But absent actual fundamental truth to back them up, false fears are bullish—as reality exceeds these expectations, the previously fearful are converted and buy stocks. This is really just how the wall of worry works, and these “thought viruses” are just bricks in it. The grand irony of this is that vastly more often than not, bull markets die when investors are drunk on euphoria (dare we say, irrationally exuberant?), not when they’re fearful. Finally, one thing we did enjoy was the discussion of the fact secular stagnation was a hallmark fear of the 1940s. Sure seems like that one missed the mark! (We’re betting it’s off again now.)
|By Mitsuru Obe, The Wall Street Journal, 10/20/2014|
MarketMinder's View: Appointing two women just a month ago to his Cabinet was a big symbolic move for Prime Minister Shinzo Abe. Encouraging more female workers and executives was a plank in his “third arrow” of structural economic reforms. This is a symbolic embarrassment for him as the two cabinet members noted here are both embroiled in scandals. Though, the notion that this is a big setback for Abenomics misses the fact the entire program hasn’t taken many steps forward. If Abe intends to push through the more contentious aspects of the third arrow, he will need significant political capital. Scandals like this against a still-sputtering economy do not bode well for future reform efforts.
|By Eva Taylor and Blaise Robinson, Reuters, 10/20/2014|
MarketMinder's View: The ECB’s asset purchase program—a sort of quasi-quantitative easing (QE) program—has officially begun, with the initial purchases of eurozone covered bonds Monday. In our view, this small QE program likely flattens the yield curve, reducing banks’ profits on new loans and, as a result, their incentive to lend. This is a negative, but the program appears likely to be very small relative to the QE programs in the US, UK and Japan over the last few years. While those stymied loan growth and likely slowed the economy, none ended the bull market. We doubt this version is different. More crucially for boosting lending and eurozone growth, the ECB’s stress test results are finally due out this weekend. This, in our view, will be the more telling event for eurozone loan growth looking ahead. Having these tests out of the way—and the rumored shuttering of banks that fail—likely does more to stimulate future eurozone bank lending than anything the ECB could do at this juncture.
|By Gerald F. Seib, The Wall Street Journal, 10/20/2014|
MarketMinder's View: With just over two weeks until Election Day, polls suggest gridlock could decrease if voters do what they say right now and put more politicians seen as “compromise-friendly” in office. Now, polls, particularly those on vagaries like “bipartisan” cooperation, often mislead. We think it is likely that on a partisan basis, Congress remains divided. As to whether the people elected sing kumbaya and pass more laws, we’ll have to wait and see on that one. However, we’d note that people have decried do-nothing gridlock for years, and yet it remains. We don’t really expect a sea change and widespread handholding now. Rather, the reporting here seems more like the typical buying-in-to-campaign spin that happens ahead of midterms, something that tends to increase stocks’ nervousness before the vote. Afterwards, as it gradually becomes clear gridlock remains, stocks revel in it and rise. As an aside, for those who will bemoan gridlock if (as is likely) it continues post-election, we feel compelled to note that when it comes to the government, by no means does bipartisan mean good, compromise mean sensible or active mean better for the country. For more, see our 10/09/2014 commentary, “Voting For Gridlock.”
|By Nathaniel Popper, The New York Times, 10/20/2014|
MarketMinder's View: As investing technology continues to advance, in many cases investors continue to reap the benefits—like improved efficiency in fixed-income trading. The bond market has traditionally been a relatively opaque, shadowy market where deals are struck between big players, with high operating costs passed on to customers in the bond price they pay. Having this shift to be more electronic and less human likely improves market liquidity, efficiency and drives firms to compete on price. This seems to us like taking the positive lessons of technology’s role in reducing bid-ask spreads in equity markets and applying it to fixed income.
|By Rakteem Katakey and Debjit Chakraborty, Bloomberg, 10/20/2014|
MarketMinder's View: It seems Indian Prime Minister Narendra Modi is sticking to his campaign promises, ending a decade of fuel subsidies. While it’s a politically risky move—a market-based structure may raise oil prices for Indian voters—it’s a bullish development for Energy firms who’ve been discouraged from investing in India over the past decade, as the prices they are able to charge may not reflect the market elsewhere or be sufficient to recoup costs. It also reduces the budget pressure of a costly subsidy. While what happens from here remains to be seen, increased Energy sector investment would be a welcome development for India.
|By Nicholas Comfort, Sonia Sirletti and Macarena Munoz, Bloomberg, 10/20/2014|
MarketMinder's View: This seems about right to us: “’After the comprehensive assessment, when worries about capital levels are clarified, banks will be more open with credit,’ said Giuseppe Castagna, 55, chief executive officer of Italy’s Banca Popolare di Milano Scarl. He’s targeting annual loan growth of about 5 percent through 2016, following a 4.2 percent drop last year.”
|By Tom Randall, Bloomberg, 10/20/2014|
MarketMinder's View: Here is an interesting and thorough discussion of the impact of vast increases in world oil supply on producers’ profits from various regions. Oil projects vary greatly in complexity, which means oil price fluctuations could cause some to actually run in the red sooner than others. Here is an example from Brazil. The big increase in oil supply does threaten profit growth at oil firms worldwide, including those in the US. This is one key reason why the shale revolution is bullish for the world, but not necessarily for every sector in the world. Energy is one of those it doesn’t favor. As an aside, lower priced oil isn’t really stimulus for the global economy. A dollar spent on oil goes to an oil firm, which then pays people, buys equipment and so on. Spending on Energy is no different than spending on anything else.
|By Brett Arends, The Wall Street Journal, 10/17/2014|
MarketMinder's View: Yep. Asset allocation is fundamental to long-term portfolio return. But after the mix of stocks, bonds, cash and other securities you use, in our view, the next most impactful thing is the category of those securities you pick. Valuations, including the Cyclically Adjusted Price-to-Earnings ratio (CAPE), aren’t long-term return drivers. They aren’t predictive of cycles or long-run returns, as illustrated by the 1990s—CAPE was above 20 as early as 1992 then. It was at the present level as early as 1996. CAPE was also above-average for pretty much all of the 1960s. While most P/Es illustrate sentiment, the CAPE is too distorted to even accomplish that. Because it mixes in earnings a decade old, the figure wraps in data that may be a full cycle behind. Many CAPE apologists excuse this by claiming it adjusts corporate results for economic cycles. But this is a statement that doesn’t pass the logic test: Stocks and corporate earnings are inherently tied to economic cycles. The macroeconomic picture matters a whole lot for individual company results, and ignoring this factor is a big mistake.
|By Ian Talley, The Wall Street Journal, 10/17/2014|
MarketMinder's View: The next time someone tries telling you the myth that foreigners are going to shun our debt or dump our debt or whatever, take a look at the actual data. Despite volatility over time, foreign demand for US debt is running high. How else can you see this more broadly? Interest rates, which are historically low today. Oh, and when they inevitably bring up the risk that foreigners fire sell those assets, ask them to consider two points: 1) Who are they selling to? For every seller, there is a buyer. And 2) It is highly unlikely some foreign nation is going to blow out a huge chunk of their foreign reserves desperately, which would probably cause them to take a loss. That is what we call, “Shooting thyself in thine foot.” (Not sure why we went all olde English, but you get the drift.)
|By Matt Levine, Bloomberg, 10/17/2014|
MarketMinder's View: The SEC has its first high-frequency trading prosecution win, and it seems justifiable to us. But this entertaining article highlights a few really sensible points on its road to wisely concluding, “The lesson here is something like: There are manipulative strategies, and there are good strategies, and it is not easy to tell them apart. You can tell them apart, probably, but you need to understand their purposes first. And dumb e-mails and nicknames can be a big help.” Aside from interesting and humorous, the discussion of a market maker’s role is top notch.
|By Juliet Chung and Vipal Monga, The Wall Street Journal, 10/17/2014|
MarketMinder's View: The ECB’s negative deposit rate was ostensibly put in place to spur lending—which the eurozone could truly use, given trillions worth of bank deleveraging the last few years. But merely penalizing banks for holding excess reserves doesn’t incent lending. It might incent holding something else (like government bonds). And when those plunge to negative short-term rates (likely partly as a result), then those for-profit banks likely just whack consumers, passing on costs in a tried and true capitalist practice. Now, the depositors paying this charge are presently large depositors (above €10 million), hedge funds, large businesses and the like, but their response is worth watching, too. All this highlights the fact that when you tell banks they could be shut if they don’t have big capital in a rather arbitrary stress test—as the ECB has—they will find ways to hold that capital. What banks really need to start lending is for stress tests to conclude and the cloud of regulatory uncertainty to clear.
|By Chiara Vasarri and Andre Tartar, Bloomberg, 10/17/2014|
MarketMinder's View: The lack of structural reforms—specifically regarding employment—has plagued Italy’s economy for some time. This is very early in the process and details still need to be ironed out, but if Italian Prime Minister Matteo Renzi manages to enact even incremental reforms it would be a positive step for Italy. Since most investors currently seem to consider Italy a political and economic quagmire, even modest moves could provide a positive surprise, boosting stocks.
|By Leslie Shaffer, CNBC, 10/17/2014|
MarketMinder's View: A few things here. No one—not even nonvoting FOMC member James Bullard—can forecast the Fed’s moves. And two, there is just so much evidence by now that listening to Fed words about what they may, might or even will do in the future is a complete waste of investors’ time. Fedspeak = marketing spin. For more, see our 10/17/2014 commentary “Did a Fed Waffle Cause Thursday’s Rebound?”
|By Staff, Reuters, 10/17/2014|
MarketMinder's View: After quietly injecting roughly $81 billion into China’s five biggest banks last month, China is adding more stimulus as it continues trying to balance its reform efforts and continued growth to placate the masses. China has been fairly successful at balancing the two thus far, and there are few signs this changes. So long as that is the case, China likely doesn’t see a hard landing. For more, see Joseph Wei’s 8/7/2014 commentary, “China’s Balancing Act.”
|By Brian Sozzi, The Street, 10/17/2014|
MarketMinder's View: Ummmm. It is incredibly unlikely Ebola has any measurable economic impact. It is a tragedy in West Africa and for those impacted elsewhere. But there is just no evidence, ever, of a pandemic causing major economic or market troubles. Citing what retailers did in isolation in the last month doesn’t capture Ebola’s pure impact, because markets generally have been swaying. Citing what they did in February – March 2003, while SARS broke out, also doesn’t tell you anything, because that was also when the US was invading Iraq. Heck, as the article notes, SARS cases popped up through July. Stocks and the economy rose. Finally, as this very article says, no company they contacted referenced any reaction to Ebola. Bird flu. SARS. Even the 1918 Spanish flu didn’t derail growth or the economy. Maybe, just maybe, the Black Plague did. But that was also before capitalism, medicine, hand-washing, the Industrial Revolution and the invention of stock markets.
|By Steve Matthews, Bloomberg, 10/16/2014|
MarketMinder's View: Some have credited St. Louis Fed President James Bullard with stabilizing markets today due to his comments that the Fed should consider holding off on ending its quantitative easing (QE) program—on pace to wrap up at the end of the month. And maybe so, but it is frankly more a sign of investors searching for some hidden meaning in bouncy times than anything else. Here’s why: Bullard isn’t a voting member of the FOMC in 2014. All he can do is pitch Yellen and Co. his plan. And though we’ve said this many times already, it bears repeating: the sooner the QE ends, the better. The Fed’s bond buying flattened the yield curve, disincentivizing banks from lending—and denying small firms access to credit to grow their business. Finally, we are talking about $15 billion in bond buying for effectively one month (November, as Bullard suggested they reconsider in December.) While we would gladly take $15 billion to use at our discretion (moohoohahahahaha!), it is a pittance relative to the economy or markets. (We would also point out that this is anecdotal evidence of why we don’t lend much credence to the Fed’s forward guidance. As we have often said, words aren’t set in stone, and Fed people change their minds.)
|By Richard Barley, The Wall Street Journal , 10/16/2014|
MarketMinder's View: Political instability. A bloated public sector. Stalled reforms. High debt. High unemployment and a cratering economy. That has been the case in Greece for years. Nothing changed when Greece returned to debt markets in April. But we have a few questions about the thesis this is so problematic: One, if Greece manages to exit the ECB/EU/IMF troika bailout, wouldn’t that be a positive sign of improvement? Remember, they said they needed it to keep Greece’s economy from totally imploding. Two, if they don’t exit and instead remain in the IMF’s bailout program, isn’t that the same scenario we’ve had for four long years of bull market? And three, the Fed has been tapering quantitative easing bond purchases all year. The amount by which they’ve increased their balance sheet isn’t set to change—it just won’t increase much. So why does this suddenly matter now? Why not last December, when the taper became reality? And four, if this is such a general problem, why on earth are Spanish yields hovering near record lows? Or Italian? Or Irish? Portugal’s yields are up some, but they’re still only at 3.5%—at this time last year they were at 6.3%. While the region still faces challenges, reality likely exceeds extremely dour sentiment. For more, see our 10/15/2014 commentary, “Return of the Euro Crisis’ Ghosts.”
|By Mohamed A. El-Erian, Bloomberg, 10/16/2014|
MarketMinder's View: In one sense, this is correct—with two weeks to go, October isn’t over yet. But trying to forecast or game short-term volatility is a pointless endeavor for long-term investors. While pundits search for a culprit (like central bankers, hedge fund managers or the time of the year) markets can be volatile for any reason—or none at all! As trying as negative volatility can be, investors would be best served to remain disciplined and tune out the noise. For more, see our 10/10/2014 commentary, “Putting Stocks’ Zigzags in Broader Perspective.”
|By Lorraine Woellert, Bloomberg, 10/16/2014|
MarketMinder's View: During volatile periods, it can be hard to notice any positive news. Here is one such item, an economic data point that beat every single estimate. While it’s only one such data point, it is still worth noting given the sentiment backdrop. Enjoy.
|By Neil Irwin, New York Times, 10/16/2014|
MarketMinder's View: Yes, stocks are forward-looking and do tend to presage future economic movements. But they have never been shown to be tied to the rate of GDP growth or anything associated with wage growth. And besides, if we are to assume markets are now efficiently discounting future economic conditions, then are we to assume the slow economic and wage growth are really such a shock? Those two topics have only dominated headlines for much of the last few years. The reality: While equity markets are forward-looking and efficiently discount widely known information, they can also be very volatile in the short term. They are not perfectly rational. Most small moves have little major “meaning.” Trying to pinpoint why stocks are up or down on any given day, week or month is an exercise in futility. With broader leading indicators, like the Conference Board’s Leading Economic Index, high and rising, the US looks poised to continue growing, providing a solid backdrop for the bull to keep on running.
|By Staff, Dow Jones Newswires, 10/16/2014|
MarketMinder's View: So this is a very narrow gauge of manufacturing in the Philadelphia region, and it isn’t necessarily indicative of broad economic conditions. But we note this still-growing indicator with accelerating new orders because during yesterday’s volatility some noted a similarly narrow gauge’s plunge (the Empire State Survey) was a sign of gloom to come.
|By Andrew Critchlow, The Telegraph, 10/16/2014|
MarketMinder's View: If you ask 17 people for an opinion, you’ll likely get 17 different answers—that’s kind of how humans are. (And central bankers are decidedly human, with all the biases and limitations people have.) And yep, the further from today you go, the less certainty anyone has. So of course average Joe has no hope of forecasting future rate hikes, but that is not terrifying, it has been the case since always and forever. The only new thing is that the Fed now publishes the dot plot of forecasts. Plus, broadly speaking, we don’t need any one class of people—central bankers, politicians, etc.—to solve the biggest problems in the world. Somehow, markets (and the people that compose them) tend to find solutions that work.
|By Simon Kennedy and Greg Quinn, Bloomberg, 10/15/2014|
MarketMinder's View: The media is all over the map in its efforts to find meaning in oil’s sharp downturn. In this episode, folks claim central bankers will struggle to deal with it because it is dis- or deflationary. Which it is! But there is little central bankers are going to be able to do to counter a sentiment-driven move against a backdrop of a market in which supply growth has outstripped demand growth. Also this article from yesterday highlights a contrary theme: Falling oil prices will boost consumption elsewhere. The reality is that neither of these are really quite correct. Spending on oil is spending, and mild, energy-price driven deflation hasn’t be shown by historical evidence to be a drag on growth either.
|By Jeff Cox, CNBC, 10/15/2014|
MarketMinder's View: Perhaps volatility will be higher looking forward than the relative calm we’ve seen recently. Perhaps not. Volatility doesn’t predict volatility or directionality. But here is something we can say: The reasons alluded to here as causing this dip are actually just merely widely known, long chewed over concerns that really don’t amount to much. Ebola is not an economic or market issue, pure and simple. But the theory this is driven by the end of QE has big holes. That’s been basically telegraphed for some time, yet the volatility didn’t begin until very recently. Markets—as they did with the end of QE in 2013—move ahead of anticipated events.
|By Joshua M. Brown, The Reformed Broker, 10/15/2014|
MarketMinder's View: We disagree on the importance of the 200-day moving average in the sense that we don’t believe past price movement predicts anything, no matter how charted, blended or averaged. However, we agree there has been a rotation—and that a major part is the narrower breadth of leadership. In our view, though, history shows pretty plainly this is a repeat feature of bull markets that can last for years. To us, also, 2013 wasn’t that unusual. Consider: the period December 1994 – July 1996 saw no corrections, big positive returns and no breaks below the 200-day moving average. After a brief blip under the 200-day moving average, it surged anew all the way through August 1998’s correction. Breadth fell for much of this period. The bull market didn’t end until March 24, 2000, amid euphoria we don’t see today. Enjoy this chart.
|By Thomas Friedman, The New York Times, 10/15/2014|
MarketMinder's View: This is exactly the type of analysis investors should avoid. It looks at recent price movements, sees them through a purely geopolitical lens and draws conclusions there is no actual evidence to support. Syria, noted here as an oil producer, produced 400,000 barrels of oil per day in 2010 (before the civil war). That represents about 4.5% of US daily production. It is down to basically zero now. But the other nations cited here aren’t. Libya is coming back on line of late, adding to supply, not restricting it. Nigeria likewise has increased production. The Saudis ramped up production earlier to offset the crimp from these nations. They just haven’t brought it back down yet. Moreover, this presumes the Saudis are also intentionally targeting many of the other members of OPEC, considering places like Venezuela have little ability to actual ramp output up. We just don’t think it is wise to draw speculative conclusions about market manipulation targeting foreign regimes when in fact the answer may just be the fact is that oil companies and nations take time to alter production. Volatility in oil prices happens on a moment by moment basis. The author is clearly correct that this isn’t good for petrodictators like Venezuela’s Maduro and Russia’s Putin, but frankly, we didn’t need all the speculation about oil tanker foreign policy (foreign policy being enforced at the end of an oil barrel?) to get there.
|By Lukanyo Mnyanda, Bloomberg, 10/15/2014|
MarketMinder's View: Tell us if you’ve heard this one before: A Greek government that just emerged from a confidence vote is at loggerheads with the EU over plans involving the troika’s bailout of the formerly Ottoman nation, and yields are rising as a result. This situation has recurred a host of times over the past few years, none threatening the bull market. By the way, the notion Greek fears have thus far driven up peripheral 10-year yields recently is based on a 10 basis point move in Italian yields and a five basis point move in Spanish yields. Both those are currently at 2.39% and 2.10% respectively. Spain’s low yields are eight basis points above their record low. Fears over Greece seem even more feckless in this, their umpteenth time taking headlines.
|By John Nyaradi, MarketWatch, 10/15/2014|
MarketMinder's View: These supposed signals—the 200-day moving average, an odd breadth measure, CAPE, Tobin’s Q, the so-called Warren Buffett Indicator (market cap to GDP), and falling interest rates—are of questionable value. As is the buy recommendation at the end, which is based on calendar cycles. All in all, we’d suggest merely staying cool amid what appears to either be an official correction or merely some uncomfortable volatility.
|By Unni Krishnan, Bloomberg, 10/15/2014|
MarketMinder's View: If Prime Minister Narendra Modi’s BJP party manages to wrest power from the Congress party at the state level, that could bode well for the implementation of broader reforms. India’s decentralized government structure often stymies government attempts at reform. This aside, Modi has taken some positive steps of late, particularly announcing a plan to grant the Reserve Bank of India further independence and a price-stability mandate. If enacted, that would represent a solidly positive step. Should the state elections go Modi’s way, the backdrop would be set up well for further reforms.
|By Lawrence Lewitinn, Yahoo! Finance, 10/14/2014|
MarketMinder's View: The chart shows the current S&P 500 price level broke through a 200-day average of the S&P 500’s price level. Which is supposedly a technical indicator of more pain to come, like it was in November 2012. Errr. Wait. November 2012 was neither a correction nor the start of a bear, and this “signal” came weeks before a stellar 2013 kicked off. The same happened at near the bottom of the June 2012 sell off. There are others in this bull. All this technical indicator tells us is that stocks are down NOW, not where they’re headed. As for the part on “negative fundamentals”—earnings growth just doesn’t appear to be “unsustainable.” After all, revenues have been driving earnings growth for quite some time (revenues have increased in all but two quarters since Q4 2009). Enjoy this chart instead.
|By Shawn Langlois and Sue Chang, MarketWatch, 10/14/2014|
|By Paul Vigna, The Wall Street Journal, 10/14/2014|
MarketMinder's View: This is revisionist history. The argument here is that the recent volatility is tied to the withdrawal of the Fed’s quantitative easing (QE), which we are told amounted to yanking the punch bowl. Leaving aside that this completely gets backwards what QE actually did, the article fails to explain why low rates during QE meant punch bowl and lower rates today mean we’re all sobering up to a hangover. The point of QE was to lower rates to spur borrowing and boost inflation. (It didn’t—and wouldn’t—work because QE actually flattens the yield curve, stymying loan creation.) But the theory QE tapering—presumed here to be tightening—is responsible for the volatility almost requires higher rates or some sign of increasingly tight conditions, which are absent. To those who get the century of economic theory called, “The Quantity Theory of Money,” it is little surprise there is more evidence of looser credit in recent months. Maybe, just maybe, volatility—rates, stock prices, etc.—is just darn volatile sometimes?
|By Matt Moffett, The Wall Street Journal, 10/14/2014|
MarketMinder's View: Two weeks ago, Spain’s highest court shot down the planned November Catalan independence referendum. The government dare not violate this ruling, as it could result in indictments of officials. So now Catalan Regional President Artur Mas is pledging to move forward with the region’s independence vote by implementing a “revised process.” That revised process basically amounts to a dog-and-pony show and it’s being downplayed by both pro- and anti-independence factions as little more than a glorified opinion poll. They can’t even access voter registration records, held by the government! They don’t know who can legally vote! If the earlier referendum was “nonbinding,” this one is near non-existent.
|By David Wilson, Bloomberg, 10/14/2014|
MarketMinder's View: But the VIX—using options prices to forecast implied S&P 500 volatility over the subsequent 30 days—doesn’t have the best track record of predicting future market returns. And even if it suggests a certain level of market volatility in the next month—it doesn’t tell us the direction (up or down) of that volatility. Further, the VIX is ultra-short-term focused—an unpredictable horizon and a focus that can lead to significant costs if an investor’s timing is off. So we advise to nix the VIX—and stay focused on the long term.
|By Monica Houston-Waesch, MarketWatch, 10/14/2014|
MarketMinder's View: It’s not surprising ZEW Institute’s German economic confidence survey has continued to fall—it reflects how people felt at a specific moment in time about recent economic data and stock market data. Lately, German reads and stock results have been volatile. But like all other confidence surveys, ZEW’s doesn’t predict future market returns or what people will actually do. Confidence, according to ZEW, fell for much of 2012.The MSCI Germany still jumped nearly 30% that year.
|By Shobhana Chandra, Bloomberg, 10/14/2014|
MarketMinder's View: Hey look, we’re bullish despite the recent volatility. And we believe US stocks should perform quite well over the next few quarters at least. And we believe China and eurozone concerns are vastly overblown. But the factors cited here have next to nothing to do with it. These presume all of the following: That unemployment is a leading indicator for consumption; falling gas prices correlate with increasing spending (and we guess, rising with falling?); and low interest rates will spur spending. Consumer spending is simply not a highly variable part of the US economy. None of the factors here insulate us from global risks, the fact those risks are old or false is the reason we think they won’t take down the US.
|By Pedro Nicolaci da Costa, The Wall Street Journal, 10/14/2014|
MarketMinder's View: This seems pretty sensible to us: “The gradual but rising international use of the Chinese yuan is a natural development, given the size of China’s economy and its widespread commercial ties with other nations, John Williams, president of the Federal Reserve Bank of San Francisco, said on Saturday.” But, as mentioned here, the yuan still has a ways to go—it’s lacking “the type of full flexibility required to become more widely used internationally”—considering all of the country’s existing capital controls. In all likelihood, this is a decades-long process, not days, months or even years.
|By E.S. Browning, The Wall Street Journal, 10/13/2014|
MarketMinder's View: If you’re looking for evidence ongoing volatility (probably) isn’t the start of a bear market, here you go. At a true euphoric peak, this piece would be full of analysts screaming “BUYING OPPORTUNITY! STOCKS CAN’T GO DOWN EVER!” Instead, it’s all stocks are 20% overvalued, and we’re in for a crash before the market slowly crawls higher, and the Fed made everything weird, and even if we don’t get a bear market it’ll be ugly. We think this is all rather too dour, mind you, as it overlooks the many strong positives supporting this bull market, but it’s a sentiment indicator nonetheless. Oh, by the way, public service message: Valuations aren’t predictive and other than that wacky CAPE, they aren’t stretched.
|By Paul Krugman, The New York Times, 10/13/2014|
MarketMinder's View: In arguing the world can’t fully recover from the financial crisis without widespread debt forgiveness, this piece overlooks some obvious evidence refuting its claim. Like the fact the US grew its way out of the massive debt pile-on that funded the war effort in the early 1940s. Most of that was never paid off, never forgiven, and compounded over the next 70 years. And we added plenty more debt along the way. But debt-to-GDP is way under the 106% seen in 1946, because debt isn’t inherently an economic drag. It is true slower-than-usual inflation has made it harder for consumers to reduce the relative value of interest payments, but deflationary monetary policy (quantitative easing) has far more to do with that than the continued existence of debt itself.
|By Michael P. Regan, Bloomberg, 10/13/2014|
MarketMinder's View: To us, “What is causing market volatility?” is the wrong question. Pullbacks and even corrections (quick drops of -10% or greater) often have no discernible cause. The right question: “Is there an identifiable, fundamental reason stocks should be down and fall further?” If so, that would be a strong indication a bear market is forming—but we don’t see anything like that today. Sentiment is behind economic reality, not ahead of it. Today’s risks are of the years-old, widely discussed variety. It usually takes new, surprising negatives with the power to knock a few trillion off global growth or trade to cause a bear market. Nothing today fits the bill, as far as we can see.
|By Tara Siegel Bernard, The New York Times, 10/13/2014|
MarketMinder's View: We guess this highlights some of the key differences between the suitability standard (the regulatory code for brokers) and the fiduciary standard (the regulatory code for registered investment advisers), and it shows how the industry has created confusion on this front by blurring the line between investment sales and service (like brokers hanging them out as “advisors,” with an “o”). But it is also chock full of misperceptions. Like, it says the fiduciary standard requires advisers to recommend the lowest-cost product—NEWSFLASH: If an adviser believes a high-cost product is best for their client, they can recommend it and be on the right side of the law. It also implies fiduciaries can’t sell shady products like variable annuities, but if an adviser has a reasonable basis to believe, based on their understanding of the industry, that a variable annuity is best for their client, they can recommend it and be on the right side of the law. Also, the fiduciary standard doesn’t guarantee you get advice that truly puts you first. And it doesn’t do anything at all to ensure the adviser knows how to put you first. It merely requires advisers to disclose conflicts of interest. In other words: Full due diligence requires more than asking, “Are you a fiduciary?” (Full disclosure: Our parent company, Fisher Investments, is subject to the fiduciary standard as a Registered Investment Adviser.)
|By Hernando de Soto, The Wall Street Journal, 10/13/2014|
MarketMinder's View: This article is devoid of market impact, but it is a fascinating discussion we thought we’d share either way. Sometimes people call us naïve dreamers for believing economic (and personal) freedom, property rights and capitalism can bring divided third-world countries from darkness into light, but as this firsthand account shows, these dreams have become reality in places like Peru. Whatever your ideology and political leanings, we hope the good statesman’s words here will spark hope: “All too often, the way that Westerners think about the world’s poor closes their eyes to reality on the ground. In the Middle East and North Africa, it turns out, legions of aspiring entrepreneurs are doing everything they can, against long odds, to claw their way into the middle class. And that is true across all of the world’s regions, peoples and faiths. Economic aspirations trump the overhyped ‘cultural gaps’ so often invoked to rationalize inaction. As countries from China to Peru to Botswana have proved in recent years, poor people can adapt quickly when given a framework of modern rules for property and capital. The trick is to start. We must remember that, throughout history, capitalism has been created by those who were once poor. I can tell you firsthand that terrorist leaders are very different from their recruits. The radical leaders whom I encountered in Peru were generally murderous, coldblooded, tactical planners with unwavering ambitions to seize control of the government. Most of their sympathizers and would-be recruits, by contrast, would rather have been legal economic agents, creating better lives for themselves and their families. The best way to end terrorist violence is to make sure that the twisted calls of terrorist leaders fall on deaf ears.”
|By Ben Wright and Peter Spence, The Telegraph, 10/13/2014|
MarketMinder's View: We aren’t gonna lie, we were kinda hoping this would be a chart revealing a huge bacon supply glut, and saying the world economy would be doomed unless we all joined up and ate our way back to normal. (We would happily do our part for the world if this were the case. We also would like to hear what sort of “Heal the World Through Bacon” charity record Bob Geldof would write.) Alas, however, it is a chart of the ECB’s preferred “inflation expectations” gauge, which apparently shows the market believes eurozone inflation will be at—wait for it!—1.8% y/y in five to 10 years. And this somehow indicates the Continent is teetering ever more on the edge of that dismal deflation death trap. A couple of things about this: One, slow inflation isn’t deflation. Two, slow inflation does not automatically beget deflation. Three, the money supply is growing. Four, deflation, should it happen, isn’t a self-fulfilling prophesy. Deflation was a symptom of Japan’s deep economic problems during the last couple decades, not the cause. And five, let’s just see what things look like once the stress tests are done and banks have more freedom to lend again.
|By Mohamed A. El-Erian, Bloomberg, 10/13/2014|
MarketMinder's View: The real challenge? Finding the non-data-mined, unbiased part of this article. We mean, adding up the absolute value of each Dow Jones Industrial Average daily price movement during this month, then comparing the total to the size of the index, and calling it big scary volatility that only the Fed can prevent from turning into a crash? That strikes us as an odd shenanigan at best. Here are some simple truths to help put your mind at ease and overcome this challenge: 1) Markets are always bouncy, and sometimes those bounces are more extreme than others. Perhaps this ends up being one of those extreme bouncy times known as a bull market correction, where stocks quickly drop -10% or more, then bounce much higher. 2) Fed policy has been a negative since 2008 and chased very little (if any) money into stocks. Demand isn’t artificially buoyed by near-zero interest rates or quantitative easing. 3) We don’t need a massive flood of “cash on the sidelines” to enter stocks and push up prices. We just need investors willing to pay more today for a share of future earnings. These could be new investors or folks flipping from one corner of the stock market (maybe small caps) to another (maybe big caps). 4) Commodity markets don’t trade any more rationally than stock markets, and they aren’t leading indicators for the stock market. They’re influenced by their own supply and demand fundamentals, and lately, several commodities are dealing with supply gluts. 5) If the bull market could survive six quarters of shrinking eurozone GDP, it can likely weather this latest wobble.
|By Jeremy Warner, The Telegraph, 10/13/2014|
MarketMinder's View: The “how” here sums up as “by growing anemically and unevenly,” and we’re given all manner of supposed evidence (falling oil prices and volatile stock markets, to name two) to prove it. But here’s the thing: If eurozone GDP could contract for 18 months straight without killing the global expansion or bull market, why should lackluster growth be catastrophic for the world? The MSCI World Index rose 34% during that stretch (Q4 2011 – Q1 2013). Reality exceeded dire expectations then, and we think it does the same looking ahead.
|By Jacob M. Schlesinger, The Wall Street Journal, 10/13/2014|
MarketMinder's View: Resonate, they claim, because Japan is the first “aging” country to reach the crossroads of do we pay down debt now before everyone gets too old, or do we let it ride so we can grow now. This is a false choice. There is no such thing as a “debt-demographics ditch.” Callous as this sounds, social programs aren’t contracts—they’re legislation, and legislation can change. Or Japan can roll back its huge state, putting more economic growth in the hands of its many, many businesses, freeing up state funds for retirement benefits. Or things could happen to render those very long-term demographic forecasts moot. Or Prime Minister Shinzo Abe could finally see his reform agenda through, and Japan could grow its way out of that 220% of GDP debt load. Whatever the outcome, this issue is years to decades away, not a market driver within the foreseeable future—for Japan or any of the countries allegedly watching its next move with bated breath. What matters today is whether debt is affordable. Japan has some of the world’s lowest borrowing costs, and we are fairly certain this isn’t because they hiked the sales tax in April and might do it again next year. Interest rates were rock-bottom well before the sales tax hike entered the conversation.
|By Matt O’Brien, The Washington Post, 10/13/2014|
MarketMinder's View: What austerity? Total government spending is up sharply versus pre-recession levels. And it hasn’t retreated: Those $2.1 trillion in “cuts over the next decade” are cuts to projected spending increases. Spending will still rise, just by less, and if that all hasn’t happened yet then how can it impact growth in the here and now? The government’s contribution to GDP, which doesn’t include transfer payments, is down, but this piece ignores the elephant in the room: What if that just shifted investment opportunities to the private sector? And what if the “multiplier” on private investment is every bit as high—if not higher—than on government investment? If you want a culprit for slow growth during this expansion, we think your ire is better directed at the Fed.
|By Sam Schnechner and Lisa Fleisher, The Wall Street Journal, 10/13/2014|
MarketMinder's View: Ok, let’s all set aside our personal views on the moral rightness or wrongness of companies’ taking advantage of Ireland’s favorable tax provisions, and let’s zero in on what matter for investors—particularly owners of impacted companies’ stock. On the one hand, if the so-called Double Irish goes away as rumored, companies will lose a cash-management strategy and see their tax bills rise, which could dent earnings a wee bit. On the other, if the widely expected three-to-seven year phase-in is reality, they’ll have a long time to plan, and markets will have a long time to digest the change.
|By Jason Zweig, The Wall Street Journal, 10/10/2014|
MarketMinder's View: Prof. Shiller, if you aren’t aware, is half of the braintrust behind the cyclically adjusted P/E ratio, better known as CAPE. CAPE is currently at 26—a level Prof. Shiller theorized was “worrisome” and a sign of “irrational exuberance” in a recent op-ed. And yet: “If only things were that simple, Prof. Shilller says. ‘The market is supposed to estimate the value of earnings,’ he explains, ‘but the value of the earnings depends on people’s perception of what they can sell it again for’ to other investors. So the long-term average is ‘highly psychological,’ he says. ‘You can’t derive what it should be.’ … Today’s level ‘might be high relative to history,’ Prof. Shiller says, ‘but how do we know that history hasn’t changed?’ … Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.” Look, we aren’t trying to play “gotcha!” here. But that even CAPE’s architect waffles over what it means tells you how little use this figure is in forecasting cyclical peaks and troughs. Which sort of makes sense, when you think about it, considering it was initially designed to do the impossible, forecast returns over the next decade—it wasn’t and isn’t ever a timing tool. There are many things to watch in this “wild” (but in reality really normal) market, but CAPE isn’t one of them.
|By Jeremy Warner, The Telegraph, 10/10/2014|
MarketMinder's View: We are going to set aside all the humanitarian issues here for a moment, because on those grounds, how could anyone disagree with calls for a global response? Our beef here is solely with the thesis that fear of a global pandemic has “deeply negative economic consequences.” Swine flu didn’t cause a recession in 2009. Bird flu fears contributed to a stock market correction in 2006, but markets soon bounced and the economy didn’t retreat. SARS didn’t wreak economic havoc in 2003. The only Asian Flu that rocked markets in 1998 was the metaphorical one (a currency crisis), not the actual one. Even Spanish flu, which caused massive casualties after World War I, did not cause an economic crisis—stocks rose that year, 1918, even though a third of the world’s population perished. We realize this all sounds callous, but facts are facts, and the fact is basing investment decisions on the belief Ebola will derail the world economy is probably unwise.
|By Jack Ewing, The New York Times, 10/10/2014|
MarketMinder's View: Well on the bright side, the last time regulators arbitrarily decided to close a big bank on a Sunday, they didn’t bother sending a save the date card two weeks in advance. We guess this is more courteous? Anyway. While there has been talk that some banks could be wound down for failing these exercises, we don’t think this is enough of a potential negative to derail the bull market. The ECB has stated they will provide failing banks a notice before the results are publicized, allowing them to try to raise added capital early. Also, markets have known about the tests for well over a year. We’ve known nearly as long when the results would hit. Banks have had all that time and more to prepare, considering all the rumors flying around before these tests were official, and they’ve shed a ton of assets. We aren’t saying they’ll all pass, but the likelihood this turns into a Lehman moment is slim to none.
|By Sarah N. Lynch, Reuters, 10/10/2014|
MarketMinder's View: At issue here is the definition of “accredited investor,” which is the qualification necessary for being able to buy hedge funds, private placements and participate in other tricky, complex deals. The current definition is sort of weird—it wraps in anyone with a certain level of income or net worth. Thing is, lots of folks earn high incomes and accumulate wealth through avenues that have nothing to do with investing, like being great at their jobs. Lots of folks with investing savvy don’t meet the income/net worth criteria. It is quite arbitrary, and we agree it seems ripe for a rethink. (We also give two enthusiastic thumbs up to the take here, which you can find about two-thirds of the way down the page.)
|By Matt Levine, Bloomberg, 10/10/2014|
MarketMinder's View: So the head of a firm that is a dressed up version of his former firm, which was busted for insider trading, is giving his employees financial incentives to be extra compliant. That seems weird, considering the law itself should theoretically be an incentive, but to each their own. What really caught our eye here was the parallel drawn with Europe’s belief banker bonuses incentivized risky behavior that caused the financial crisis (their words, paraphrased, not ours). They tried to fix this by capping bonuses at 100% of annual salary. Here is why this is a solution in search of a problem: “People in finance who make a lot of money for their employers get paid a lot of money, and it turns out that a lot of ways to make money for your employer are risky or illegal or ethically challenged. That's not a fact about bonuses or schemes or structures. That's a fact about markets, and about the sorts of people who work in an industry whose subject matter is, after all, money. You could mandate that everyone be paid a fixed annual salary, and then the people who made a lot of money for their employers one year would get big raises the next year, and the monetary incentives to make money would remain. There are margins at which structures can align incentives or reduce the rewards to risk, but the incentives will always be skewed: Your employer can always reward you more for making money than it can punish you for losing it.” In other words: This new compensation scheme will not de-risk the financial system forever and ever, amen.
|By William D. Cohan, The New York Times, 10/10/2014|
MarketMinder's View: Quick question: Were there any bear markets/financial panics before all these brokerage houses went public, beginning in 1970? Why yes! Yes there were! So what does that say of the theory investment bankers are now more greedy than they were before? Greedy bankers make for a great scapegoat, and we have no doubt there were some excesses, but the crisis wasn’t caused by the green-eyed monster rearing its head in a few Wall Street types. It was, as several have been, caused by the unintended consequences of regulation, compounded by the Fed and Treasury’s schizophrenic behavior.
|By Mohamed El-Erian, Bloomberg, 10/10/2014|
MarketMinder's View: Does it really matter? Guessing at the reasoning behind Fed rumblings is a fruitless endeavor. Investors don’t gain anything from trying to read into the latest Fed minutes, and they can’t help you predict Fed decisions. Those are unpredictable by definition, since they are a product of human thinking, bias and feeling. As for the Fed working with other nations to “achieve a better collective outcome,” we don’t really know what that means. Better than what? Is the status quo of a growing global economy where policymakers try to address local issues really so terrible? Seems to us more action would introduce more variables and therefore more risk of things going wrong. We have a hunch the world will be best off if they all just whisper words of wisdom and let it be.
|By John Ficenec, Denise Roland and James Titcomb, The Telegraph, 10/10/2014|
MarketMinder's View: So perhaps this is semantic nitpicking, but we feel compelled to point out that the FTSE 100, according to this article, is 7.81% below its most recent high, which is not yet a correction—defined as a short drop of 10% or more. Beyond that, none of the six charts here are evidence this volatility—which is a global thing—is the start of a bear market. Gold prices, the VIX and oil prices don’t predict stocks. Downturns in the Dow, German stocks and British stocks are not self-fulfilling prophesies or leading indicators for stocks globally. Bull markets usually end one of two ways: Euphoric sentiment gets way out of whack with sinking reality, or some big, bad, unseen thing knocks the world off course. Sentiment today doesn’t see just how bright reality is—a good disconnect, not a bad one. And none of today’s risks meet the big, bad, unseen criteria—they’re all the same widely discussed nonstarters markets have dealt with for this entire bull market.
|By Laura Saunders, The Wall Street Journal, 10/10/2014|
MarketMinder's View: First, news you can use! From this year on, your brokerage firm will send a marked-to-market accounting of all your IRA holdings to Uncle Sam. Second, let’s all take a deep breath, because there are a lot of weird proposals here, but there is also not much chance any of them pass. Gridlock, yay. For instance, proposals to cap IRA contributions once an account hits $3 million will probably go nowhere. Proposals to limit high earners’ contributions probably don’t have a future either. Beyond that, though, this whole endeavor seems myopic and unnecessary. For one, the GAO seems to be ignoring the elephant in the room: 401(k)s have much higher contribution limits, and many folks roll their 401(k) plans into IRAs after they retire or leave their job. That “you need an 18% return to get $5 million in an IRA and that’s like impossible so people much be doing shady things” thesis is flat wrong. Plus, there is no evidence high retirement savings are an economic problem. They’re good for retirees! We want folks to be secure in retirement! And considering tax revenues are already at all-time highs and rising and the deficit is falling, it’s not like there is some ginormous budget gap to fill.
|By Jack Ewing and Alison Smale, The New York Times, 10/10/2014|
MarketMinder's View: On the one hand—and counter to the thesis here—the world doesn’t rely on eurozone demand to fuel growth or “price inflation.” Inflation isn’t a necessity for a growing economy—it is a side effect of a growing money supply. Germany spending a few billion euro on roads doesn’t really impact the supply of dollars. And the world grew fine during six quarters of shrinking eurozone GDP. But on the other hand, an increasingly pro-growth (and pro-market!) shift in European policy isn’t a bad thing. More investment is more investment, ya know?
|By Jason Zweig, The Wall Street Journal, 10/10/2014|
MarketMinder's View: This article is jam-packed with nonsensical analysis hinging on mean reversion and skewed statistical analysis. For the uninitiated, mean reversion is the assumption averages predict future action. But averages result from the components, they do not predict them. So, here are a few examples from this article. If a bull market is longer than average, it must be near its end. If there has been no correction in a couple years, one is “overdue.” If the VIX averages 20, you can expect it to perk up from 19 soon. There are more here. But none of these are so predictive when you look at the underlying components. The last bull had no corrections from 2003 – 2006; the 1990s bull had zero corrections between 1992 and 1998. There weren’t any in the three year bull between 1987 and 1990. The VIX doesn’t predict directionality, and it really isn’t predictive of its own jiggles or stock movements. Finally, one quibble we have with this analysis: “A ride as smooth as 2014’s is profoundly abnormal. As of last night, the S&P 500 had fallen 4.13% from its all-time high closing price of 2011.36 on Sept. 18, 2014. Since 1927 there have been 425 drops of 4% or greater, or one every 75 days, says analyst Jeffrey Yale Rubin of Birinyi Associates, a research firm in Westport, Conn. The average loss in those declines has been 8.9%, and they have lasted an average of 27 days. In the current bull market, which began in March 2009, the average decline has been only 6.8% and has lasted just 19 days.” Yah, but the figures the analyst cites regarding market history include bulls and bears. What if you exclude the bears, when so much of the big negativity takes place?
|By Staff, Jiji Press, 10/10/2014|
MarketMinder's View: Well lookie loo, Shinzo Abe completed an economic reform! But before you hail the Japanese Prime Minister’s progress on the “third arrow” of his Abenomics economic agenda, here is a reality check. What would benefit Japan most is less uncertainty, less government picking winners and losers, freer markets and freer competition. Awarding subsidies and government contracts to firms that promote women does not tick all four of those boxes. Yes, we realize Japan would benefit from bringing more women into the labor force, and incentives do matter! But the methods here don’t do much to improve Japan’s structural backdrop. They simply reinforce the clunky status quo of state-heavy capitalism.
|By Mitch Tuchman, MarketWatch, 10/09/2014|
MarketMinder's View: Listen, fees are worth weighing in investing—there we agree. But we aren’t sure how you come to the blanket conclusion passive is categorically better than active based exclusively on this data. Consider: Most investors will still face these challenges:
Selecting an appropriate asset allocation.
Choosing which category of fund to buy (foreign/domestic/one/many).
Most passive fund companies offer groupthink strategies for the first one, which are often questionable at best. Failure at any one of those three points is likely to carry a price tag orders of magnitude higher than a slightly higher management fee. Finally, the mathematics at the end of this about charging exclusively for gains are skewed and wrong. Passive funds do the same thing, friend. And there is a reason: You aren’t just managing the gains, they are the result of a manager’s work. And a question: If the broad market falls 25% in a given year and you fall 5%, should the manager earn nothing? All this basically presumes investors in funds are more irrational than other consumers and buy despite a lack of value. Capitalism argues otherwise. For more on this topic, see Elisabeth Dellinger’s 02/18/2014 column, “You Get What You Pay For.”
|By Mike Dorning, Bloomberg, 10/09/2014|
MarketMinder's View: So how is it “official?” Simple! The Philly Fed created an index that basically scrapes a few major, long-lasting newspapers for headlines involving contentious political debate, on the assumption this is Very Bad for the economy and stocks. But those data points would never tell you how much rancor there is. They tell you only what the media chose to report on most frequently. Now, we aren’t journalists, but we are betting that few thought eyeballs would be grabbed by headlines proclaiming that Republicans and Democrats sat around a campfire and sang Kumbaya yesterday. The degree of rancor is always and everywhere subject to interpretation and not quantifiable. For example, the claim that one party’s policies crucify the American middle class on a “cross of gold” seems harsh to us. That happened during the rancorous gold and silver standard debate and was the statement of legendary politician W.J. Bryan. Look, we could do without the rancor, too—but the gridlock that probably has something to do with it is actually great for stocks and the economy. After all, we’ve had growth and a strong bull market while politicians have fought since 2010’s midterms. For more, consider our own Amanda Williams’ commentary from 10/11/2011, “It’s (Not Really Much) Different This Time.”
|By Joe Deaux and Laura Clarke, Bloomberg, 10/09/2014|
MarketMinder's View: It is perplexing people are making such a big deal over a four-day gold rally—especially considering just last week gold’s price came within a couple bucks of its current golden bear market low. Seems to us this wee bit of a bounce is less significant than the three-plus year and over 35% bear market (it dates to 9/06/2011) immediately preceding it, which the tail end of the article incorrectly dates and pays short shrift to. By the way, that three-year period began when virtually no one was discussing a short-term rate hike by the Fed, and was in fact during the time Operation Twist, QE3 and QE-infinity were launched. So maybe some skepticism is warranted about the thesis this pop is driven by the Fed holding off on hiking rates.
|By Greg Robb, MarketWatch, 10/09/2014|
MarketMinder's View: In the minutes from its September meeting, the Fed noted a handful of concerns, but the media seems to be latching onto one: the strong dollar hurting exports. Yes, a strong dollar makes exports marginally expensive—and some believe that can take a toll on globalized firms’ overseas business or profits. But it also means cheaper imports, and in the globalized economy, few companies produce goods from start to finish with domestic-only inputs. But bigger picture, and as we show here, there isn’t a clear relationship between dollar strength and trade. There is a much more clear relationship between global economic growth and trade, and the global and US economies will be fine, strong dollar or no. As for all the Fed forward guidance chatter surrounding rate hike timing—we’d suggest not reading too much into that. It’s all just words, words, words—actions speak much louder.
|By Staff, Associated Press, 10/09/2014|
MarketMinder's View: More evidence suggesting Ireland’s recovery continues—it plans to repay its bailout loans ahead of schedule. Why, you ask? Well, because the IMF charges 4.99% on the bailout money, a rate that looks like usury compared the 1.63% Ireland just sold 10-year debt for on the market. Back in 2011, when the acute fear of a chain of national defaults leading to a sudden splintering of the euro was widespread, Ireland paid sky-high rates (around 15%). The change here is impressive.
|By Eleanor Warnock, The Wall Street Journal, 10/09/2014|
MarketMinder's View: Maybe. But rather than a dour piece, this illustrates how sentiment is actually still rather lofty in Japan: A majority of forecasters who do see recession believe it’ll just be a blip—and in no time Japan’s economy will pick back up. But the Conference Board’s Leading Economic Index for Japan has been falling for some time and structural reforms don’t appear to be progressing. And a big factor is another sales tax hike is scheduled for 2015, but Abe is waffling on whether to implement it. From an investor’s perspective, you’d rather have clarity than indecision, even if the clarity is to implement the hike. For more on this topic, see our 08/14/2014 commentary, “Into the Abenomics Abyss?”
|By David Lawder, Reuters, 10/09/2014|
MarketMinder's View: So two points to consider here. One: The official budget report comes out tomorrow, and the CBO is projecting the deficit continued to fall in 2014. Spending ticked up a little, but rising tax revenues account for the drop. The second point is this: One month ago, the CBO projected a $506 billion deficit this year. So in a two-month forecast, they were 4% off. Extrapolate that degree of error out over the CBO’s longer forecasts and you probably see they don’t have the best track record in the forecasting department. For more on this topic, see our 09/12/2014 commentary, “A Surplus of Fun Factoids About the Federal Deficit!”
|By Brian Blackstone, The Wall Street Journal, 10/09/2014|
MarketMinder's View: So it seems the ECB is determined. But ramping up a quantitative easing(ish) program probably won’t do the trick. There is no actual evidence quantitative easing (QE) is actually inflationary. Instead, it seems QE reduces loan growth, in turn, dampening inflation. QE weighs on long-term interest rates, which likely reduce banks’ incentive to lend because they profit off the spread between short- and long-term rates. This ultimately constricts money supply growth. The US and UK experienced this. Plus, Japan’s 2001-2006 round of QE also didn’t materially increase inflation.
|By Mohamed A. El-Erian, Bloomberg, 10/08/2014|
MarketMinder's View: This gives the global economic “policy elite” far too much credit. Only in a command economy, like China’s used to be, would this be the case. And even if it were the case, the likelihood a supranational organization would help is close to zero. There is no evidence the IMF has done much of anything to spur economic growth, ever. But even if you disagree and presume the IMF can help, let us translate the recommendations here from jargon to English for you. According to this, the IMF should:
1) Argue for stimulus and debt writeoffs because having bond holders take losses (like Greece in 2012) and doing more of the same thing that happened in 2009 is clearly right.
2) Stimulus! Build roads!
3) This doesn’t mean anything. Firms aren’t web-savvy enough? Selfies threaten the global economy? We disagree.
4) Adding more Emerging Markets to the World Bank and IMF is fine, but ineffectual.
5) Boosting awareness of slow growth. We’d argue people are overly aware of it. They don’t even realize the IMF is forecasting accelerating growth and that the US grew at an above-average clip in three of the last four quarters.
So no, neither the IMF nor the ideas shared here can save the global economy. And that’s ok! Because the economy doesn’t need saving. It’s growing.
|By Oliver Renick, Bloomberg, 10/08/2014|
MarketMinder's View: We would usually not provide you such a myopic article, but there is an occasion for everything, we guess. The "lowest since August" is a 3.8% decline from a record high. For the record, there have been 63 days in bull markets with a single-day drop exceeding that. Moreover, tying it to widely known, rehashed bunk like the IMF's assertion low interest rates raise the risk of bubbles misperceives how markets work. And eurozone fears? Really? That's so 2011. Also, and here is why we are providing you with this, really: "It really was a risk-off day...." What a bunch of meaningless industry jargon. Shouldn't it, if we're being totally literal, have been a volatility “risk-on” day?
|By Larry Zimpleman, The Wall Street Journal, 10/08/2014|
MarketMinder's View: Yes, but most folks have been arguing this very position since 2009—“The New Normal,” for example. Yet stocks have annualized 21% in this bull market, matching bull markets’ historical average. This is not to say returns will be in line with the average over the next 20-30 years. That is unknowable. It is to say that if you can afford to save more early, you should regardless of your return expectation. It is better to over-save than under. Also, as an aside, “Save More!” is a big, fat wealth manager cliché. We’d argue there is a second step: Identify where you have flexibility in your expenses in detail. If returns turn out weak, cut discretionary expenditures. But of course, before you do that, Save More!
|By Clifford Krauss, The New York Times, 10/08/2014|
MarketMinder's View: Well, this goes a bit too far in suggesting the loading of the first tanker to ship US oil produced in the lower 48 is a gamechanger. It is a step in the right direction—permitting exports of US crude—but only a step. However, the article is also a very interesting update on the issues involved with permitting oil shipments. For our take on this, see our 06/27/2014 commentary, “A Slightly Refined, But Still Crude Export Ban.”
|By Simon Kennedy, Bloomberg, 10/08/2014|
MarketMinder's View: This is another one of those articles that credits the Fed for stock returns, in this case going back to the notion that bad news was at one time good news because, yippeee!, we'd get more monetary "stimulus." But now, with US quantitative easing winding down, the theory is bad news is back to being bad news. However, it is more realistic to note that not all news over the past five years was bad. Maybe, just maybe, it was the positive news on the corporate profits, revenues, economic growth and more that drove it? Maybe, just maybe, stocks saw through things like the three-month slowdown in hiring referenced here—realized it is all backward-looking, late-lagging and still reflected growth—yawned, and moved on?
|By Aaron M. Kessler, The New York Times, 10/08/2014|
MarketMinder's View: This is an excellent read on the trial itself and one offering some insight into the issues with the government’s haphazard, unpredictable response to 2008’s financial crisis. They eschewed practices that have historically worked to head off crises, instead, as former NY Fed head and Treasury Secretary Tim Geithner put it, “We were operating outside of the boundaries of established precedent.”
|By Szu Ping Chan, The Telegraph, 10/08/2014|
MarketMinder's View: Let’s cut right to the chase: The IMF here is warning that tighter monetary policy—a one percentage point rise in rates—would drive $3.8 trillion in unrealized losses on debt held by shadow banks, and that this could create a crisis. But the issues with this analysis are two-fold: 1) If the shadow banks don’t blow out of the positions, they may not take any losses. And 2) Interest rates rose by more than one percentage point last year. Was there a crisis? If so, we didn’t notice it amid the world economy growing and world stocks rising 27%.
|By William Horobin, MarketWatch, 10/08/2014|
MarketMinder's View: Hey, look, annualized growth of 0.8% isn’t exactly grand, but it also isn’t the nearly as gloomy as the common sentiment toward the eurozone.
|By Lu Wang, Bloomberg, 10/08/2014|
MarketMinder's View: Quick question: When have either the Fed or the IMF spotted a bubble before it burst? The answer to this question—"Why, never!"—is why we share the skepticism of the financial pros interviewed in this piece.
|By Liyan Qi, MarketWatch, 10/08/2014|
MarketMinder's View: Yes, it did edge lower. But to 53.5, which is still indicative of growth in China’s largest economic segment. Still no hard landing in these data, despite the gloomy interpretation of some.
|By Matthew J. Belvedere, CNBC, 10/08/2014|
MarketMinder's View: The idea of a bear market “checklist” is ridiculous. All of these are open to interpretation, all are shades of gray—not black and white. But we also watched the video and it gets even worse! A correction checklist! Which is: China hard landing fears; geopolitics; Europe; corporate profits (we guess weakening, though the pundit didn’t say); average hourly earnings (We guess stay flattish? Pundit didn’t say); Venezuela (!?!?!) and Puerto Rico; and … wait for it … Ebola. This tick-box approach to money management won’t work, not in forecasting bears and certainly not in forecasting corrections (which is impossible).
|By Sarah Halzack, The Washington Post, 10/07/2014|
MarketMinder's View: Maybe! But if so, it won’t be because of low gas prices and a so-called wealth effect from rising stocks. The wealth effect is a myth, and gas prices just aren’t a significant driver of much of anything. Not that we’re all Debbie Downer on the US or anything—we’re bullish!—but this argument is sunny for the wrong reasons, in our view.
|By Jon Sindreu and Jason Douglas, The Wall Street Journal, 10/07/2014|
MarketMinder's View: UK factory output slowed to +0.1% m/m, tied largely to a drop in auto production as export orders fell and plants stayed closed longer than usual for maintenance—a combination of normal data variability and seasonality. This isn’t evidence the UK is “overly dependent on domestic” demand or super vulnerable to Russian sanctions and slow eurozone growth. Though the second half of this article does highlight many of the UK’s bright spots.
|By Jeremy Warner, The Telegraph, 10/07/2014|
MarketMinder's View: And they are (according to the IMF): 1) Regional conflicts and protests 2) Conflict in Ukraine or Iraq hurting oil production and sensing prices spiraling 3) A Chinese hard landing, like really this time 4) Rate hikes and the potential for a “disorderly unwind” of quantitative easing (QE) 5) A eurozone deflation/doom spiral, or lost decade 6) Permadecline in technological advancement 7) High public and private debt 8) Markets are ignoring risk 9) Housing bubbles 10) Aging populations. To those, we say: 1) History. 2) Even if oil production in Iraq or wherever (um, Ukraine? No.) falls, the US and Saudis are pumping like crazy. 3) China has its fair share of imbalances, but they’ve been slowly tackling them for four years now. 4) History shows rate hikes aren’t bearish, and neither the Fed nor BoE has plans to unwind their balance sheets tomorrow. 5) Deflation is a) not happening in the eurozone and b) not a self-fulfilling prophesy. 6) Please see the shale boom, advances in robotics and continued progress in microprocessing to see why this is a false fear. 7) Debt doesn’t deter growth. Consumers and businesses get a pretty good return on debt, actually. 8) Maybe stocks are up because earnings and economic reality are up? 9) Even if there are housing bubbles in a couple Emerging Markets economies, can this really whack a few trillion off global growth? 10) Demographic trends are not cyclical economic or market drivers.
|By Andrew Mayeda, Bloomberg, 10/07/2014|
MarketMinder's View: Did anyone else notice that everyone is fussing over what amounts to a forecast for faster global growth? Sure, it’s slower than the initial projection, but when has the IMF not revised down its forecasts? And when has any of that mattered for stocks, which look to much more useful factors than the forecasts of one bureaucratic think tank?
|By Mohamed A. El-Erian, Bloomberg, 10/07/2014|
MarketMinder's View: So there are some good points here, like the fact Emerging Markets aren’t nearly as bad off as mass sentiment suggests. And they indeed aren’t “regressing to the old crisis-prone world of old.” And yes, all India, Brazil, China and Russia have all taken steps back policywise or only slowly inched toward reform—and for China, at least, future reality appears quite likely to exceed expectations. We can’t quite say the same for India, where expectations for the new government are sky-high. Brazil, maybe, but let’s talk after the election. More broadly though, we’d just like to add a public service announcement: There are 19 other official Emerging Markets, each with their own opportunities (or risks)—investors shouldn’t categorically embrace or shun EM as a bloc (or assume they’re all Fed-dependent, a topic for another day). It isn’t that simple. For more, see our 10/06/2014 commentary, “Taiwan Is Not Greece, and Other Reasons to View Emerging Markets Individually.”
|By Jonathan Clements, The Wall Street Journal, 10/06/2014|
MarketMinder's View: Well it depends on what you mean by “stock selloff.” If you see rampant euphoria amid deteriorating fundamentals or a big bad nobody else sees—harbingers of a bear market—then yes, it makes sense to prepare mentally and tactically to adjust your portfolio. In our view, those conditions don’t currently exist. However, if you’re planning for a sharp, sentiment-driven 10-20% decline in the market—a correction—it makes little sense to try and sidestep it, since corrections can end about as soon as they begin and can’t be timed with any reliability. Other than bear markets, we suggest your personal goals and objectives drive your portfolio allocation—planning for pullbacks can mean missing the powerful upside of bull markets and reducing compound growth. That, after all, is why you invest. Not missing downside. Here is one more thing. The article states, “But if you fear you’ll panic and sell, it’s much better to panic and sell today, while the S&P 500 remains only modestly below its all-time high.” Why on earth are you letting panic, fear or any other emotion govern your investments? That, friends, is a recipe for financial disaster. If this is you, please take the following actions:
Log off your brokerage account.
Turn off the financial media (online, TV or other).
Consider getting professional help.
|By Chana R. Schoenberger, The Wall Street Journal, 10/06/2014|
MarketMinder's View: Not at all. As this piece highlights, a couple of really bad years (e.g. 1929—it says 1927 in the article, but there was no crash of ’27, that crash was in ’29—1987 and 2008) have given October a scary reputation, but the average return since 1928 is positive and stocks have risen in nearly 60% of Octobers. That’s not to say October is bullish—it’s just a thing. The calendar isn’t a market input. Making investment decisions based on seasonal adages—from “Sell in May” to “financial hurricane season”—can lead to expensive opportunity costs for long-term investors. However, one quibble: This piece neglects to apply the “past performance” axiom for its point about the VIX, the so-called “volatility index.” October’s historically high VIX readings don’t mean anything for markets looking ahead either, especially given the VIX’s poor forecasting record.
|By Lu Wang and Callie Bost, Bloomberg, 10/06/2014|
MarketMinder's View: While it’s true that buybacks have been high and rising, this isn’t correct math. Most buybacks are debt-funded, as firms play the spread between their earnings yield and low interest costs. Also, supply and demand for stocks are the ultimate drivers of prices. Buybacks reduce share supply on the market, meaning less demand for stocks is needed to make prices rise. They also increase shareowners’ stake in future earnings, the principal attraction of an equity in the first place. Finally, business investment is at a record-high, so companies are investing in growth and expansion. This bull market, contrary to the theme in this piece, is driven by underappreciated economic growth, gridlocked governments and increasingly optimistic investor sentiment, to name a few. For more, see our 09/17/2014 commentary, “A Buyback Boost?”
|By Matt Egan, CNN Money, 10/06/2014|
MarketMinder's View: This is just packed with fallacies. First, it presumes quantitative easing (QE) charged up the bull, making investors euphorically drunk and blind to risks. But for one, there are few signs of euphoria anywhere. Valuations—other than the heavily flawed CAPE—are middling. People aren’t ignoring risks or volatility. Like this article does, they are trumping up historically normal or small swings and looking for causes. Also, it is not as though investors aren’t aware QE is ending. It has been on this course for the better part of a year and talked up since May 2013. It isn’t as though stocks are likely waking up, shocked to find out October follows September, and shocked even more to see that the Fed has publicly announced $10 billion less in additional bond buying in all seven meetings since last December. Stocks move before expected events, not after. And as we’ve highlighted before, QE hasn’t been a big boost to stocks or the economy. By flattening the yield curve, QE disincentivized banks from lending—an economic sedative, not a stimulant. Ever since the taper was officially announced last December, loan growth has been improving—more fuel to the US’ economic expansion.
|By Staff, Reuters, 10/06/2014|
MarketMinder's View: Here is more evidence for why the Fed should not consult any administrative branch of the government—decisions get politicized. Former Treasury Secretary Henry Paulson stated that the government wanted to avoid creating moral hazard and that the terms of AIG’s bailout were meant to be harsh, since AIG was a “symbol for all that is bad on Wall Street.” And the people were really mad with Wall Street during the crash! So he hit them hard. When it came to Citigroup? Then Paulson wanted to punch short sellers, not deal harshly with another symbol. However well intended, this isn’t a basis for good policy. The government shouldn’t act arbitrarily for a few poll points, but hey, they’re politicians and they live for the now. This mentality is what added to the confusion and uncertainty, worsening the 2008 Financial Crisis. For more, see our 10/01/2014 commentary, “Independent for a Reason.”
|By Staff, The Economist, 10/06/2014|
MarketMinder's View: Brazil held the first round of its presidential election this past Sunday, with incumbent Dilma Rousseff’s taking first place as expected. However, Party of Brazilian Social Democracy (PSDB) candidate Aécio Neves surprisingly beat Socialist candidate Marina Silva for second by a wide margin—a big surprise, considering Silva was projected to beat Rousseff in a run-off election as recently as a month ago. Brazilian markets have been tracking the race closely, and even though Rousseff remains favored to beat Neves in the run-off set for October 26, we bet that continues.
|By Alessandro Speciale, Bloomberg, 10/06/2014|
MarketMinder's View: Germany’s August factory orders fell -5.7% m/m (-1.3% y/y)—off analysts’ expectations of -2.5% m/m, 2.6% y/y—prompting concerns of weakness in the eurozone’s largest economy. This isn’t a great report—the year-over-year trend is now negative—but the number shouldn’t be cause for alarm either. Core orders were down a more mild -2.5% m/m and July’s reading was one of the largest month-over-month gains since 2009. In fact, if you combine them, two-month rolling order growth is still positive, albeit not robustly so. Given investors’ increasingly dour views towards the eurozone, meh-ish economic growth likely exceeds most expectations.
|By Ylan Q. Mui, The Washington Post, 10/03/2014|
MarketMinder's View: Here is everything you wanted to know about September’s jobs report: numbers, analysts’ interpretations, interest rate guessing, political implications and all the rest, in 928 words and one chart. We’d suggest glossing over the analysts’ parsing and speculating and instead gleaning four simple takeaways. 1) This is nice confirmation of the economy’s recent strength. 2) Because it’s just confirmation of past growth, improving unemployment doesn’t predict stocks. 3) Unemployment doesn’t drive inflation. 4) Nothing in todays’ report tells you when the Fed will hike rates.
|By Allister Heath, The Telegraph, 10/03/2014|
MarketMinder's View: Ladies and gentlemen, your supposed reasons: Slow eurozone growth, rate hike jitters, China slowdown, EU parliamentary infighting over the new European Commission nominees, the West’s airstrikes on ISIS, Ebola and signs of slowing UK growth. Not to be dismissive or anything, but this really looks a lot like all the same widely discussed negatives that have persisted throughout this bull market. Save for the rate hike thingy, but you can swap in end of quantitative easing fears from 2011, 2012 and 2013, because Fed tightening fears are Fed tightening fears. And you can swap Ebola for swine flu in 2009. And ISIS for the Arab Spring, Libya, Egypt, Syria and Ukraine/Russia at various points during the bull. Now, it is entirely possible any or all of these could be impacting sentiment right now, and that can impact stocks. It is also entirely possible this is just normal causeless volatility. Either way, none of these issues—as a single thing or all together—is big enough or surprising enough to end the bull market. Little negatives can chip and growth and sentiment, but it takes a few trillion worth of surprising negatives to knock a bull market off course, and these do not fit the bill.
|By Elizabeth Campbell and Lorraine Woellert, Bloomberg, 10/03/2014|
MarketMinder's View: Or maybe the banks are getting him back for shrinking their net interest margins—profits—with quantitative easing! Ha! Err…kidding. Actually, what’s perplexing here is our former Fed head’s quickness to blame this very anecdotal evidence of tight credit on banks’ response to regulations. Like it’s their fault the feds smacked them with tighter rules, higher capital requirements and arbitrary stress tests. And he entirely ignores the impact of the yield curve—the spread between long and short-term interest rates—which directly impacts banks’ loan profits. If the cost and risk of refinancing a loan to Gentle Ben isn’t worth the revenue over time, banks won’t do it. His theory here is actually quite a microcosm of the problem with his actions while at the helm of the Fed.
|By Benoît Faucon and Summer Said, The Wall Street Journal, 10/03/2014|
MarketMinder's View: There are a few ways investors can look at this fascinating read about oil’s recent slip and some fracturing within OPEC. There is the obvious, which is that OPEC’s ability to manipulate prices is not what it was in the 1970s, whether that’s due to discord or the shale boom. There is also the less obvious: Folks always fret Middle Eastern conflict and strife as a huge potential negative on oil production and supply—and a trigger for a price shock. The ISIS situation, for example, was supposed to send prices skyrocketing, according to headlines over the summer. Yet as this shows, oil production happens all over the world, and prices are determined globally. And unilateral decisions by one nation—in this case Saudi Arabia—to keep output high and break with price manipulation can more than offset risks in other localized areas.
|By Neil Irwin, The New York Times, 10/03/2014|
MarketMinder's View: Setting aside our differences with some of the qualitative statements about the economy, this is one of the most informative, concise post-mortems on September 2008 that we’ve seen in a while. Sure, it excludes key historical evidence like the Fed transcripts from the day after Lehman’s bailout, which pretty much confirm their decision to deny funding was deliberate, unnecessary and arbitrary, but other than that! This shows just how inconsistent the Treasury and Fed’s bail-them-out-but-let-those-cats-fail-and-oh-hey-we-should-nationalize-that-one decisions were. And it sums up the impact: “… policy makers were reluctant to lay out in advance some framework of what institutions would be rescued and which weren’t, viewing strategic ambiguity as their friend. They didn’t want to pre-commit. That added to the uncertainty of a difficult time, and with hindsight some clearer sense of the rules of the game when the financial system is under stress might make the consequences less severe.” (Though, we think they can probably unhedge that last sentence.)
|By Staff, Associated Press, 10/03/2014|
MarketMinder's View: As usual, we suggest you skip past the trade deficit, which does not, in fact, “[subtract] from economic growth because it usually means that foreign companies sell more in this country while US producers see fewer sales in overseas markets.” Look instead to total trade—exports plus imports—since imports are a gauge of demand. And you will find exports rose to an all-time high, and imports rose too, all of which is dandy (though backward-looking). Also fun, you can see the shale boom’s continued, um, boom! in gangbusters petroleum exports and dwindling imports (a simple function of rising domestic production). And more fun: That all-time high in exports happened even though exports to Russia fell another -10.4% m/m (-20.1% y/y) as sanctions bit harder. Put that in your pipe and smoke it, Mr. Putin!
|By Scott Hamilton, Bloomberg , 10/03/2014|
MarketMinder's View: Well, before you buy this whole "recovery isn't assured," "losing momentum" theme, consider: A PMI reading of 58.7 is still strong. And new orders rose, which is the closest thing to a forward-looking indicator under the headline PMI level.
|By Ambrose Evans-Pritchard, The Telegraph, 10/03/2014|
MarketMinder's View: There really aren’t any investor takeaways here, considering the likelihood Hong Kong’s pro-democracy protests significantly impact Chinese growth, economic policy or overall political stability is basically nil. But it is a ripping-good read, full of interesting political insight, and very well researched. If you’re curious about the political machinations at work right now, this is your source. Enjoy.
|By A. Gary Shilling, Bloomberg, 10/03/2014|
MarketMinder's View: Here are the remaining alleged five warning flags promised in part one of this two-part series yesterday, which you can scroll down to see our take on. As for these, shall we again go one-by-one? Alrighty then!
1) We’ve had four years of slowing Chinese growth and three years of broad Emerging Markets underperformance. We’ve been fine. We don’t see any reason it should be different today—not with the facts on the ground near-identical to 2010, 2011, 2012 and 2013.
2) Currency moves are largely zero sum for global investors and multinational corporations. Strengthening currency means imported components are cheaper and exports pricier. Weakening currency means exports are cheaper but costlier to produce if you’re importing parts. It all just offsets, and none of it has historically driven markets.
3) Calling high buybacks in 2007 a sign of the peak assumes that bull ended in a haze of euphoria and ignores how it was truncated by the destructive impact of FAS 157 on bank balance sheets. It also ignores buybacks’ impact on stock supply, which is a positive.
4) Dividends are not a market driver.
5) The success of a few IPOs here and there—particularly in companies as big and established as Alibaba—isn’t a sign of euphoria. The real sign would be if all the IPOs were low-quality and no one saw it—the sort of made-for-IPO-not-long-term-profits companies everyone jumped on irrationally in 2000. Most of today’s IPOs aren’t of that flavor.
|By Staff, Bloomberg News , 10/03/2014|
MarketMinder's View: This headline is sort of wrong in the sense that while the number fell, China’s services gauge showed slower growth, not an actual decline in output. Services are also growing faster than manufacturing, and they’re the largest segment of China’s economy, so overall this shows the world’s second-biggest economy is doing better than most of the crash-obsessed media commentary would imply.
|By Paul J. Davies, The Wall Street Journal, 10/03/2014|
MarketMinder's View: Our views here are pretty simple. More new banks means more competition, and competition is good. Don’t get yourself down by seeing it as a mortgage supply glut that starves businesses of credit. Because for all we know, challenger banks like these—along with a steeper yield curve—could free up the bigger banks to finally fill the void in business lending. You never know! But in short this is an overall positive development for the UK economy.
|By A. Gary Shilling, Bloomberg, 10/02/2014|
MarketMinder's View: Let’s lower the four flags raised here.
1) Price-to-earnings (P/Es) ratios give you a rough sketch of what sentiment is like—they have no predictive value of where stocks will go in the future. And that’s normal P/Es! The CAPE is worth even less, considering it averages earnings over a decade, which is very backward looking.
2) Stocks don’t need gangbusters economic growth to keep rising. They move the most on the gap between sentiment and reality, and with many folks still doubtful of the global economy’s strength (see headlines about the eurozone and China and this very “flag”), slow, uneven growth is likely better than many expect.
3) Cost cutting isn’t the reason businesses are profitable—both earnings and revenues have kept on growing, and given business investment recently hit a new high and balance sheets are flush with cash, companies look poised to keep growing in the near future. Besides, margins are near record-highs today. What’s to say they stocks can’t move higher with lower profit margins? Nothing! They’ve done it in every bull on record, because this is, you know, the highest they’ve been. (It is also weird to worry about highly profitable businesses if you are an investor.)
4) The Fed first alluded to tapering back in May 2013. It actually started tapering at the beginning of this year. Yet the bull has marched on. The end of quantitative easing isn’t a surprise to anyone—the market has long digested the news and looked ahead for a while now.
|By Jack Ewing, The New York Times, 10/02/2014|
MarketMinder's View: The ECB’s September announcement of a program to buy eurozone asset-backed securities (ABS) and covered bonds—which some have called quantitative easing—didn’t include two pretty significant details: the program’s size and duration. Now we know something about the duration: Draghi said the program will be launched in mid-October and run for two years. And in that period, it will aim to buy a still-unannounced amount of eurozone ABS and covered bonds (including some issued by Greek and Cypriot firms, as many had speculated). But a big mitigating factor here is these markets aren’t that big, which may mean the ECB buys a very small amount of this debt on a relatively long time-table, limiting any impact (positive or negative). In our view, though, disappointment over the announcement is largely misplaced. The issues weighing on eurozone lending and inflation are more tied to regulatory considerations like stress tests and efforts to increase capital. For more, see our 09/08/2014 commentary, “ECB’s Latest Move Spurs Currency War Chatter.”
|By Steven Russolillo, The Wall Street Journal, 10/02/2014|
MarketMinder's View: There is one sensible part of this: “The Russell 2000 (in this bull market) has been 4.5 times as volatile as the S&P 500 and 10% declines in small stocks do not necessarily lead to a corresponding decline in the S&P 500.” True. But the rest ignores a key fact: Small cap lagged on the way up in Q4 2013. And they’ve trailed in two of the three subsequent quarters. Leadership has been choppy, but this is what a rotation tends to look like. So, while we aren’t suggesting bad times are ahead for small caps, we are suggesting it’s entirely possible they trail bigger and mega caps. That is a phenomenon that has repeated itself in many historical cycles. Oooo! Here is one other, behavioral lesson about this: Lots of folks think they’ll wait for a correction to hit before they get in. Then the media tells them, “The worst likely isn’t over,” and they don’t do it. After all, it usually isn’t a correction investors fret, but that the correction (or other downdraft) is a bear. It is unlikely that fear evaporates at a correction’s deepest points.
|By Jonnelle Marte, The Washington Post, 10/02/2014|
MarketMinder's View: “Stocks ended the quarter pretty much right where they started. But it was a white-knuckled roller coaster ride getting there.” Buuuuuuuuuuuuuuuuuut. The volatility seen in Q3 was not high by historical standards, so is this the most boring roller coaster ever? Like a miniature coaster, with muted dips and dives? And peaks as high as the mountains in Florida? Experienced investors know volatility when they see it, and we bet many snorted at the opening of this piece. This mixed take puts a bit too much emphasis on making portfolio decisions based on volatility and widely known factors that haven’t much slowed the bull all year. Now, there is a time to get out of stocks. But in our view, it’s when you notice deteriorating economic fundamentals or some other big bad looming few others else see. Otherwise, portfolio decisions should be made based on your personal goals and objectives. Deciding to take some money out of the market because of geopolitics or the possibility the Fed hikes rates soon is akin to market timing—not a winning strategy for long-term investors.
|By Clive Crook, Bloomberg, 10/02/2014|
MarketMinder's View: So by “inflation panic,” this means the US and UK central banks could prematurely freak out over inflation—misinterpreting what we are told are is a disconnect between headline unemployment (which implies not much labor market slack) and other labor market indicators that look more slacky and are therefore apparently “right.” And their early freakout would mean an early rate hike and thus an early end to the expansion. A couple issues here. One, the wage/price spiral theory this all rests on was pretty widely debunked over 40 years ago. Two, even if the US and UK were to hike tomorrow, there is no reason this has to be negative. History shows the first rate hike in a tightening cycle isn’t inherently bad for economies and stocks.
|By Staff, CNBC, 10/01/2014|
MarketMinder's View: We are typing this at 10:29 AM Pacific Daylight Time on October 1, 2014. This article was posted 23 minutes earlier, according to CNBC. That means it hit the wires exactly 3 hours and 36 minutes into October’s trading. Could this be any more myopic? Yes, yes it could! But … why? Oh! And four of the five preceding first-day-of-October declines (assuming the close is, in fact, lower) were in 2005, 2006, 2009 and 2011. None of these preceded a bear. In fact, that 2011 point would’ve been at about the bottom of a correction! (The S&P 500 Price Index rose 10.8% that month.) Since 1928, the S&P has risen in 58% of Octobers. Seems to us most of its reputed negativity ties to 1929, 1932, 1987 and 2008, which were indeed terrible, but not caused by the calendar.
|By Jeffry Bartash, MarketWatch, 10/01/2014|
MarketMinder's View: “US manufacturing companies grew at slower but still rapid pace in September, a survey of executives found.”
|By Kenneth Corbin, Financial Planning, 10/01/2014|
MarketMinder's View: This is a very interesting and quite sensible piece discussing one factor at the heart of 2008’s financial crisis: How to prevent a run on a non-bank financial? Granting them access to the discount window could provide nonbanks liquidity to meet current obligations, and, as noted here, “Panics result from runs on short-term financial liabilities, and in our modern financial system runs no longer just occur on bank deposits.” The Fed was created to serve as lender of last resort to address runs on bank deposits, and it seems to us this time-tested tool could add value for more modern bank funding markets, too. On a semi-related note, here is Matt Klein discussing the difference between insolvency and illiquidity. What we take from this is that the proper strategy for heading off crises is to 1) eliminate procyclical regulation like FAS 157’s fair-value accounting and 2) broadly provide liquidity via the discount window to banks and nonbanks so the question of solvency vs. liquidity never arises, eliminating the risk political decisions are made.
|By Esteban Duarte, Bloomberg, 10/01/2014|
MarketMinder's View: This. Is. Noise. Consider: While he announced the cancellation of the region’s independence vote after Spain’s highest court shot it down as unconstitutional, Catalan Regional President Artur Mas claims he will do something. Something completely undefined even in the broadest brushstrokes. Which we can all claim, but we doubt it carries the force of the Spanish constitution. Just sayin', watch what they do, not what they say.
|By Joshua M. Brown, The Reformed Broker, 10/01/2014|
MarketMinder's View: So the candlestick charting and technical analysis in here regarding the Russell 2000 and S&P 400 Mid Cap Indexes breaking through their 200-day moving averages in a downward direction is really only a reflection of past performance—not predictive of a broader downturn approaching. It’s a nifty looking graph, we guess, but all it speaks to is the narrowing market breadth and the ongoing rotation from small to bigger in 2014, as we alluded to in our 09/25/2014 commentary, “Ken Fisher: ‘Nothing Is Better—Stocks Are Stocks.’ Even Small Caps.” While we aren’t suggesting small- and mid-cap stocks fall from here, it is worth noting there is a historical tendency for them to trail much bigger stocks later in bull markets, as new converts to optimism tend not to seek out micro-cap South Korean biotechnology firms. Rather than another shoe dropping, we’d suggest this is more likely another leg of the bull starting.
|By Simon Kennedy, Bloomberg, 10/01/2014|
MarketMinder's View: There is some sense here, mostly in that if the Fed stops talking down the economy, sentiment may improve. However, the whole article seems to be (another!) operating on the premise firms aren't investing in expansion, which disregards the recent growth pickup underpinned by rising (and record-high!) business investment. (Q1 2014's weather-driven dip notwithstanding.)
|By Michael S. Derby, The Wall Street Journal, 10/01/2014|
MarketMinder's View: The fed funds target rate is currently in a bandwidth of 0-0.25%, but effectively the Fed manages this through the use of its new reverse repo facility as the floor. But the floor seems to maybe have a trap door too, in the sense the Fed voluntarily capped daily reverse repos at $300 billion and if demand tops that it could drive rates below the floor (currently 0.05%). That is what happened here, but we don’t really think it’s that significant. For one, the $300 billion limit is totally arbitrary, something that Yellen and Co. basically pulled out of thin air a month or two ago. They could just pull a bigger number out of thin air, if needed.
|By Staff, NPR, 10/01/2014|
MarketMinder's View: Now, to be clear: This is not a statement about Sen. Elizabeth Warren, and always remember that we favor neither party, as both of them do wacky things from time to time. Our aim is solely to analyze proposed legislative or regulatory changes based on facts, not ideology, and assess potential market impact. And based on facts, with due respect, we believe this Senator’s portrayal of 2008 and her resulting recommendations are wide of the mark. We think the overwhelming weight of evidence shows the crisis was not caused by a lack of regulation or regulators not acting strictly enough. While some banks may have gone to excesses, the reality is actual loan losses are very small relative to the trillions FAS 157 (an accounting rule implemented in November 2007) required them to write down unnecessarily. Combine that with the folks over at the Treasury and the Fed getting creative in crisis management, and what you create is a panic based on unpredictable regulator moves. Arbitrary actions contributed to 2008’s panic. So the recommendation regulators act more strictly in a manner inconsistent with the basic framework of the law is a recipe for arbitrary judgments that are by definition extralegal. Governments acting in an arbitrary manner outside the law is not a recipe for a safer financial system and markets.
|By Ansuya Harjani, CNBC, 10/01/2014|
MarketMinder's View: SPOILER ALERT: The market in question is Japan’s stock market. COLD WATER ALERT: Not to rain on the parade, but the reasons cited herein are either wrongly perceived (weak yen, which is neither a plus nor a minus; Abenomics’* “slow progress”) or baked into existing expectations (pension reform, which so many Japanalysts talk up). In our view, this article basically illustrates the fact that investor sentiment regarding Japan—yes, among pros, too—remains too high. For Japan’s markets to outperform, we believe the Abe administration must make much more headway toward enacting structural reforms. That, and there is still uncertainty surrounding whether or not Abe will go forward with sales tax hike part deux.
*By Abenomics, we presume they mean The Third Arrow structural reforms we are referring to as well. The difference is that “slow progress” is actually more like “no meaningful progress” beyond a long-term, incremental corporate tax reduction and a couple of other window-dressing moves. Nothing on liberalizing trade. No progress on major labor market and agricultural subsidy reforms. Keiretsu reform is also lacking. They haven’t even passed legislation permitting casinos to boost tourism, one of Abe’s first Third Arrow proposals.