|By John Biers, Yahoo! Finance, 11/28/2014|
MarketMinder's View: Yes, it does seem that OPEC—particularly Saudi Arabia—is a-ok with lower prices in an effort to retain market share. But it remains to be seen if this will come at the expense of shale producers or other producers more reliant on higher costs, some of which are in OPEC. Venezuela, for one, is in a pinch with prices falling far. Meanwhile, increased efficiency in shale has driven the breakeven price for some major US shale fields—like North Dakota’s Bakken—to about $45 per barrel, according to the US Energy Information Administration. And presently low prices are likely to have to show some real staying power to force existing production offline. This probably affects US (and other nations’) production growth, but we think it’s premature to call it a watershed moment. The best aspect of this story? It makes it crystal clear this issue is about fast supply growth—not weak demand.
|By Neil Irwin, The New York Times, 11/28/2014|
MarketMinder's View: This is a good discussion of some statistical reasons not to buy into the “crucial holiday shopping season” rhetoric. “In other words, the gap between what holiday sales will be this season in the best and worst cases is a mere $67 billion. That’s all of about 0.4 percent of our $17.6 trillion economy.” While we wouldn’t necessarily calculate the gap between the worst non-recessionary year’s sales and compare it to the best to come up with the range, that range is illustrative of the historical tendency to overstate the importance of holiday shopping to the economy. Look, good tidings and all, but holiday gifts won’t create a boom or a bust. (Besides, retail sales don’t fully capture services spending. Which is big.)
|By Alessandro Speciale, Bloomberg, 11/28/2014|
MarketMinder's View: Yes, November's flash eurozone consumer price index reading showed inflation slowed to 0.3% y/y. And maybe, just maybe, this will drive ECB head Mario Draghi to expand quantitative easing (QE). But he shouldn’t. There is no evidence QE will boost inflation. It didn’t in Japan from 2001 – 2006, or the US and UK when they were engaged in QE. Japan today has the largest QE program as a percent of GDP and 0.4% core inflation (after removing the impact of the sales tax). Finally, there is zero evidence low inflation is a problem. In fact, deflation has really only been known to be an issue when it is sharp and deep, and even then those issues are more related to the financial panics or central bank errors that caused the deflation. This is particularly true when that low inflation is being dragged down by energy--eurozone core inflation was steady at 0.7% in November.
|By Ambrose Evans-Pritchard, The Telegraph, 11/28/2014|
MarketMinder's View: The thesis here? Stimulus from the ECB, BOJ and People’s Bank of China won’t be enough to offset the liquidity squeeze now that the US has ended quantitative easing (QE)—and that’s even before hiking rates allegedly squeezes credit further. But this all assumes QE has been stimulus, pumping massive amounts of liquidity into the global economy in the first place. To the contrary, there is little evidence it has done any such thing. Consider: The falling commodity prices cited here? That began before QE3 was even announced, in late 2011. Select Emerging Markets’ weakness? Ditto! What has happened is the two major economies who had QE and now ended it—the US and UK—both accelerated after it was over, with loan growth finally picking up. There is much more evidence—and a century of theory—that argues QE was wrongheaded, deflationary policy than inflationary. So to the extent Japan’s QQE and the ECB’s quasi-QE don’t offset the Fed taper, we’d say that’s bullish. China’s rate cut is a horse of a different feather. It is largely ineffectual, but mostly because China’s communist—the party mandates lending quotas.
|By Paul Kiernan and Rogerio Jalmayer, The Wall Street Journal, 11/28/2014|
MarketMinder's View: So Brazil’s technical recession (two quarters of contracting GDP) is now over since Q3 GDP eked out a positive +0.1% q/q print. But there are still significant headwinds remaining, like the fact consumer spending fell. This is also an economy underpinned by the Energy and Materials sectors, which both are dealing with sharply declining commodity prices. Just some things to weigh before you samba over the infectious beat of Brazil’s economy.
|By Scott Grannis, Calafia Beach Pundit Blog, 11/28/2014|
MarketMinder's View: “According to the GDP stats released yesterday, third quarter after-tax corporate profits hit a new nominal high of $1.87 trillion, and a new high relative to GDP of 10.3%.” Wheeeeeeeeeeeeeeeee! Now, this is the Bureau of Economic Analysis’ data, which includes private and public companies. But you can see similarly positive growth in purely public firms too: According to FactSet, with five companies still to report, Q3 S&P 500 earnings and revenue are expected to log 8.0% y/y and 4.0% growth, respectively.
|By Neil Irwin, The New York Times, 11/28/2014|
MarketMinder's View: Those trends are: 1) Cheaper gas and fuel 2) Job growth 3) Americans becoming more confident in the economy 4) Home prices rising at “sustainable rates” and 5) Americans seemingly taking on less debt. So cheaper gas and oil prices can be a plus for some folks, but they are a drag for others, largely offsetting. The real plus in that story is why oil prices are down, which is because supply growth has been surging against a backdrop of positive-but-slower demand growth. The labor market is a late-lagging indicator; confidence gauges are coincident and often aren’t telling of behavior; past home price movement isn’t indicative of future movements, as this article unwittingly illustrates. The last point—that Americans aren’t deleveraging—is a plus, but oddly perceived. It’s really more about how much banks are willing to lend, which is a factor that has improved with the Fed’s tapering—and is a forward-looking plus with QE over. We guess these are still five (of many) pieces of evidence the economy has been doing better than folks thought. We would merely like to point out a few better gauges of where the economy is going: A rising Conference Board US Leading Economic Index, stock prices and corporate profits; healthy corporate balance sheets that are flush with cash; increased lending. We could keep going, but we trust you get the point.
|By Karen Damato, The Wall Street Journal, 11/28/2014|
MarketMinder's View: Well, this is a fun little read with only a couple minor quibbles. In our view, target-date funds (recommended near the end) near totally misperceive investment time horizon, as they tend to hinge on retirement date. But that aside, the rest is grand—particularly the behavioral finance discussion. For more things to be thankful for, see our 11/27/2014 commentary, “Thankful the World Over.”
|By Raymond Zhong, The Wall Street Journal, 11/28/2014|
MarketMinder's View: In our view, this is a pretty dour take on some relatively positive news. Sure, India slowed a bit from Q2, but only by -0.4 percentage point. It also beat expectations and 5.3% y/y growth is nothing to shake an angry fist at. As for the reform discussions, we think Modi has actually been doing a fairly good job thus far in his first six months. But also, reforms won’t immediately translate to gains in GDP growth rates. Mostly, that dour takes like this continue to pop up suggest skepticism remains—and the euphoria we typically see near bull market peaks is still absent.
|By Allan S. Roth, The Wall Street Journal, 11/26/2014|
MarketMinder's View: Some good, some less good here. We’ll start with the less good, because we feel like being Grinchy today: Rebalancing is quite often synonymous with market timing, unless you have a very rigid schedule you stick to. Too many folks think rebalancing means, “This category did really well, so I should sell some of it and plug the proceeds into this other thing.” Which is all a backward-looking, performance-only based decision that doesn’t account for the fact category outperformance can persist for long, long periods. In our view, your foreign versus domestic allocation should really reflect your outlook for various regions. Now then, the non-Grinchy stuff: “The diversification argument is simple. Living in a global economy as we do, I wouldn’t consider limiting my stock buying to only my home state or country, and neither should you. In fact, I’d diversify into interstellar stock markets if I could. The argument that we get enough international exposure by owning U.S. stocks which do business overseas is flawed, and gets me to my second argument, market timing.”
|By Paul Vigna, The Wall Street Journal, 11/26/2014|
MarketMinder's View: Well, maybe it is and maybe it isn’t. However, we feel compelled to point out the obsession over Black Friday and Cyber Monday as indicators of how retail sales will go is amazingly overdone. Public service message: Black Friday and Cyber Monday aren’t meaningful for investors—too myopic—and they aren’t indicative of which way holiday spending goes in total. Which itself is awfully myopic for longer-term investors to consider heavily.
|By Alan Kohler, The Australian, 11/26/2014|
MarketMinder's View: Well, not really. It’s causing low inflation. This article is a totally mixed bag, but it does highlight one common confusion around deflation: the notion it is always bad. It isn’t. Deflation that occurs as a result of a bank panic or monetary policy error probably is (though it usually follows the onset of those factors). Deflation that occurs because of a production surge (a la the industrial revolution) is not at all bad. Today, we have some modestly deflationary monetary policy (not hugely so) in quantitative easing (QE), which discourages lending through flattening the yield curve. But arguably a bigger factor is the massive increase in commodity production, which has flattened prices for oil, iron ore, copper and more. But again, we don’t have deflation today, and with the US ending QE, one major deflationary pressure has been alleviated.
|By Angela Monaghan, The Guardian, 11/26/2014|
MarketMinder's View: For those of you who don’t follow econo-talk closely, here is what’s up: After the crisis, the policymaking “elite” in Britain decided the economy’s problem was it was too reliant on the consumer to sustainably grow. So instead, they promoted a bunch of policy positions and talked about targeting increased exports and business investment, to supposedly put the UK economy on more solid footing. Now, nevermind that UK GDP growth has been among the fastest in the developed world for about two years now, underpinned largely by consumer spending. Instead, consider the general operating thesis here: That exports and business investment, two very volatile economic metrics, are more “sustainable” than consumer spending, which is stable by contrast. Suffice it to say, the logic of this plan has never been exactly clear to us. But also, business investment’s 0.7% dip follows a string of fairly positive quarters, and exports have been weak throughout the UK’s expansion. So we don’t really think this is so unsustainable after all.
|By Michael Santoli, Yahoo! Finance, 11/26/2014|
MarketMinder's View: So the thesis here is that too many market participants are operating on the same, two-pronged theory, so any questioning of that theory results in volatility. The two prongs are 1) slow-but-steady economic growth will continue and 2) central banks will rush to the rescue if there is any sign it won’t. In October’s case, we are told here that the volatility was related to weak eurozone data and a tepid reaction from the ECB. But, umm, that’s like the norm since 2009. The eurozone was in recession for 18 months with higher overnight rates than the US had while it was growing. The bull market continued throughout. Moreover, the notion that central banks have to rescue all of us is actually just backwards. Quantitative easing is a negative, flattening the yield curve, reducing banks’ loan profits. As a result, it isn’t surprising that loan growth was slow before the taper—faster since the taper began. As to the notion a Fed president’s comments may have turned the tide in mid-October, that’s actually evidence the whole episode was merely a correction. Consider: James Bullard, the St. Louis Fed president, doesn’t have a vote on policy at present. His comment alluded to delaying tapering the final $15 billion of monthly bond buying—a tiny amount relative to supply—by one month. Corrections are short, sharp, sentiment-driven moves that start for any reason or no reason, at any time. Their end is equally illogical, which pretty much describes the theory claiming James Bullard is the market’s savior. In our view, October’s market move has all the hallmarks of being a correction, except that it didn’t technically reach the -10% down threshold.
|By James Politi, Financial Times, 11/26/2014|
MarketMinder's View: So a lot remains to happen here before this is enacted, but the plan aims to eliminate the ability of judges to force firms to rehire terminated or laid-off workers. There would still be seniority issues, as workers would receive increased protections based on tenure. It isn’t a huge step for Italy, but a step in the right direction.
|By Joshua M. Brown, The Reformed Broker , 11/26/2014|
MarketMinder's View: Yep, if you sold at an earlier all-time high, these are not the most fun times for you, as the market has strung together a slew of all-time highs recently. If this bull plays out as they typically do, there will come a time when similar market movement will indicate euphoria. At peaks, folks eschewing fundamentals and capitulating based on past returns and the pain of missing out is common. However, that time isn’t today, in our view. As to the data regarding the S&P being persistently above its five-day moving average, that’s not actually indicative of herding behavior, which one would generally associate with bubbles. Want some evidence? Here goes: The table included herein displaying the top nine (also oddly arbitrary) periods in which the S&P consecutively closed above its five-day average. In only one—March 1956’s—did a bear market begin in the subsequent 12 months.
|By Steve Goldstein, MarketWatch, 11/26/2014|
MarketMinder's View: The data here are fine, the interpretation is a wee bit wide of the mark, in our view. For one, that US GDP grew 3.9% in Q3 after Tuesday’s revision doesn’t suggest we have “momentum” which is not a thing economically. (And if we have “momentum,” what’s up with the dour tone in the second half of this article? But we digress.) While it is possible the US economy slows in Q4, the data here aren’t nearly clear enough to know that yet. Jobless claims are more indicative of past conditions than current. Consumer confidence doesn’t indicate consumer behavior. Capital goods orders frequently dip and dive, without indicating very much about our service-sector driven economy. And housing is a teensy slice of the US economy, so whether mortgage rates stay low or not isn’t as relevant as it is made out to be here. But hey, let’s say the economy does slow down. Consider: Stocks don’t need a torrid economy to rise significantly, Exhibit A being the current bull market. What they need is a growing global economy, which seems to be the case today. Finally, with The Conference Board’s Leading Economic Index rising, we’d suggest growth in the US is poised to continue.
|By Jonathan Weisman, The New York Times, 11/26/2014|
MarketMinder's View: Whether it happens in the lame-duck session or shortly thereafter, it is highly likely most of the tax breaks alluded to here are retroactively reinstated. This is what Congress does. This is also what the President does to try to send a message to the incoming Congress, in which the Republicans hold both chambers. Don’t get caught up in the theatrics in DC.
|By Josh Mitchell and Jeffrey Sparshott, The Wall Street Journal, 11/26/2014|
MarketMinder's View: We’re not going to get all “guns-and-butter” on you here and suggest that ISIS is stimulating the US economy as evidenced by the 45.3% m/m increase in defense aircraft spending. Rather, we’d simply suggest putting the reported -0.9% dip in nondefense capital goods spending in a broader context, like this one: “The broader trend suggests demand for long-lasting goods continues to rise as more Americans gain jobs and firms gain confidence to invest. So far this year, orders for durable goods have risen 7.5% compared with 2013. Orders for nondefense capital goods excluding aircraft have climbed 5.4%.” There is a lot of chop in this series, as this chart shows.
|By Leika Kihara and Stanley White, Reuters, 11/25/2014|
MarketMinder's View: Hey! Breaking news! Japan wants to avoid deflation. But we would suggest the evidence continues to mount that quantitative and qualitative easing (QQE) isn’t a solution. Thus far QQE hasn’t really helped on that front (and it has also been a drag on broad money supply growth). Sure, CPI has ticked up, but that has been largely a function of pricier imports (natural gas and other Energy sources). Removing energy and April’s consumption tax from the equation, inflation remains pretty lackluster. Further, as a byproduct of QQE—the yen has weakened. But that isn’t a net benefit for Japan because it makes imports expensive—taking a toll on businesses and people. (Which the government even acknowledges now.) In our view, adding another Q to QQE would be a questionable move indeed. In related news, it seems BoJ head Haruhiko Kuroda is attempting to start a wage-price spiral (up, we mean) with himself.
|By Brent Kendall, The Wall Street Journal, 11/25/2014|
MarketMinder's View: So this is interesting in the sense that the rules in question were those targeting coal-fired utilities, which some have hyperbolically labeled a “war” on a carbon-based inanimate object which the US is considered the Saudi Arabia of. Whichever way the court rules, though, we would suggest the coal industry faces headwinds unrelated to the EPA. Namely, natural gas, which is super cheap, super plentiful and emits less carbon. In fact, these rules are actually pretty toothless, when you consider the free market has already been trending this way at a faster clip than mandated by the EPA. But, you know, who’s counting?
|By Matt Levine, Bloomberg, 11/25/2014|
MarketMinder's View: A solid article on why you should take sell-side analysts’ buy or sell recommendations with a grain of salt: “An investment bank is primarily an intermediary. To make its money, it needs to convince some people to buy a security, and other people to sell the same security. How can it mean it both ways? The more sincerely and adamantly it believes that people should buy a particular security, the less plausible is its simultaneous belief that other people should sell it.” An inherent conflict of interest exists—it is vital that investors do their own research or hire someone to do it for them, rather than blindly relying on such conflicted recommendations. That was the lesson of the tech bubble, and it’s the same lesson today.
|By Staff, Reuters, 11/25/2014|
MarketMinder's View: Q3 US GDP was revised up from the first estimate—rising at seasonally adjusted annual rate of 3.9% instead of 3.5%, led by consumer spending and business investment. Yippee! But we’d like to remind investors that this figure is subject to more revisions down the road (up or down). And it is still backward-looking. Read: Stocks have already moved on this data. We mean, if you still needed confirmation US economic growth has picked up from this expansion’s historically slow earlier years, here you go. But if you read this website frequently, that’s old news to you.
|By Saabira Chaudhuri and Ryan Tracy, The Wall Street Journal, 11/25/2014|
MarketMinder's View: “The figures [a 4.8% rise in revenues] highlight an increasing willingness to lend on the part of U.S. financial institutions. Loans outstanding rose 4.6% from a year earlier, reflecting broad-based growth in loans to businesses and consumers. Growth was stronger at small banks, generally those with $1 billion in assets or less, increasing 8%.” Also interesting is the graph showing the sharp rise banks’ holdings of US Treasurys, which may partly explain the fall in long rates this year.
|By Allister Heath, The Telegraph, 11/25/2014|
MarketMinder's View: Here are two interesting factoids we find telling: In the US and UK, 76% and 75% of millionaires are self-made. This is not the hereditary wealth of medieval times, and that’s for the best: “It’s pretty simple: a country cannot be successful if its citizens themselves are not rewarded for generating economic growth and creating jobs.”
|By Simon Kennedy, Bloomberg, 11/25/2014|
MarketMinder's View: Wheeeee! More central bank noise for investors may be coming if the ECB starts releasing its meeting minutes, a la the Fed and BoE. But this is more a nuisance than desirable transparency from a central bank, because at the end of the day it’s all just words, words, words. And those words are subject to change.
|By Andrew Lilico, The Telegraph, 11/25/2014|
MarketMinder's View: We agree. The global economy isn’t a fixed pie. As the article sensibly points out, “Much economic growth comes from finding ways to do things we value now but couldn't do in the past. There is no automatic link between rising value and resource scarcity. Second, the faster we deplete resources, the more efficient we become in using what's left. … Third, and most fundamentally, our resources are not confined to what we can find on Earth.”
|By Nick McDonald, The New Zealand Herald, 11/24/2014|
MarketMinder's View: At a high level, we agree with some of the points made here: Many perma-bears have called 42 out of the last two bear markets and 67 of the last five recessions. So take them with a grain of salt. But, that doesn’t mean you should “go with the flow and trade with the market momentum.” That amounts to assuming recent past performance will carry forward—the trend is your friend, so to speak. Follow that logic, and you’ll easily get fooled in and out of stocks repeatedly by markets’ short-term wobbles. Also! This type of article is a relative rarity today, but they are a typical feature of bull market peaks. When making fun of bears becomes a common pastime, the market may be setting you up for a dose of humility.
|By Paul Taylor, Reuters, 11/24/2014|
MarketMinder's View: It’s Europe’s Final Countdown! Just kidding, it’s nothing that dramatic or cool. Rather, the countdown is to an EU meeting in mid-December, where leaders will discuss how to address long-standing issues the Continent has faced for years—particularly in the eurozone. They likely won’t come up with anything substantive, but that’s not as big a negative as portrayed here. Hard as it may be to believe, the eurozone has been sputtering along—it is by no means the global economy’s growth engine, but it also isn’t the dead weight many are making it out to be. Revisiting old ghosts is just a different way to spin false fears—a sign dour sentiment still persists.
|By Liam Halligan, The Telegraph, 11/24/2014|
MarketMinder's View: Why? Because it’s ginormous, and investors will see ginormous QE, think the world economy is on its last legs, and panic. This is far-fetched. We aren’t really sure what else to say about something so entirely speculative and not at all supported by recent history.
|By Buttonwood, The Economist, 11/24/2014|
MarketMinder's View: But if you try sometimes, then you might find you get pension reforms that allow you better choices than annuities no matter what some surveys say. (Sorry, Mick.) Financial freedom, children, it’s just a law away. (Sorry, Mick.) Here is the tough truth: If you seek capital preservation and growth, you won’t get no satisfaction. You can’t! Even with an inflation-linked annuity. Anything telling you otherwise is marketing spin at best. Which this article largely acknowledges. But none of this means the pension reforms are a “dangerous illusion.” If wild horses couldn’t drag you away from an annuity, you can still buy one. If you want an emotional rescue from overly rigid retirement rules, you get one. Stocks’ short-term wobbles might not come with the mental security blanket of an annuity guarantee, but if you have a long time horizon and want to grow your portfolio, time is on your side.
|By A. Gary Shilling, Bloomberg, 11/24/2014|
MarketMinder's View: We so hoped this article would be a five-word piece saying simply, “Because they don’t understand economics.” Alas. In theory, countries deliberately weaken their currency in order to make exports cheaper abroad, goosing growth. In reality, what usually happens is one country weakens their currencies, pundits go nuts with the “Danger, Will Robinson, danger! Currency wars incoming!” and then nothing actually happens. That’s what is happening this time. There is no currency war. Japan weakened its yen to boost exports. Everyone thought Korea and Taiwan would follow suit. They didn’t, and they exported plenty. Japan, meanwhile, did not enter export-led growth heaven. Exports rose in yen, but not in quantity terms, so output wasn’t goosed. Households and businesses were hamstrung by rising import (particularly energy) costs. All are in line with observable history: There is no demonstrable link between currency strength/weakness and exports. Oh, and as for the eurozone, their goal is more to increase the quantity of money, not explicitly target a weaker euro.
|By Jeff Sommer, The New York Times, 11/24/2014|
MarketMinder's View: Though a bunch of historical figures and quotes are tossed around here, just a single counterpoint is offered against the bullishness of government gridlock: Since 1901, the Dow’s annualized return during gridlocked years (4.06%) was slightly less than both the annualized average of all years (6.27%) and years without gridlock (7.88%). So, “based on those numbers, gridlock has been a hindrance for the stock market.” That sweeping conclusion seems a wee bit myopic to us, especially given the Dow’s limitations and market data’s questionable quality in the early 20th century. Verified S&P 500 data paint a somewhat different picture. Since 1926, stocks have a higher frequency of positive annual returns when the President doesn’t control Congress (75.6%) than when he does (70.2%). Average annual returns are a bit lower during gridlock (10.4% vs. 13.3%), but then again, this isn’t about pitting one against the other. It’s about shattering the widely held view that a do-nothing Congress is a negative. The higher frequency of positive returns, coupled with nicely positive average returns, would strongly suggest gridlock is a positive, not a negative. For more, see our 11/6/2014 commentary, “Goldilocks Gridlock.”
|By David Nakamura, The Washington Post, 11/21/2014|
MarketMinder's View: Whether you believe President Obama’s executive order on immigration is the cat’s meow, the worst or somewhere in between, it is a purely sociological thing. It does not alter cyclical economic factors and has no fundamental impact on markets. Markets don’t care about sociology. People care! But markets don’t. (Though, if this move brings more gridlock, markets would like that.)
|By Jason Zweig, The Wall Street Journal, 11/21/2014|
MarketMinder's View: We are pretty darned ambivalent on this piece. On the one hand, yes! Diversify globally! Foreign stocks have taken it on the chin lately, but overall and on average, going global helps broaden your opportunities and manage risk. Chasing heat with a US-only portfolio purely because of recent performance is likely the wrong move. But, on the other hand, the reasons to buy foreign should not include hedging against a US rate hike (something history shows has no history of bearishness). Nor should they include sky-high valuations in the US. Partly because the sky-high valuation here is the wonky 10-year smoothed P/E ratio, which is even less predictive than normal P/Es, and partly because P/Es don’t show you anything but sentiment. The current one-year P/E is right around average, which suggests sentiment hasn’t run away from reality. Again, the reasons to keep some money in foreign now are because heat chasing is bad, and sentiment on foreign stocks is just too dour.
|By David Jolly, The New York Times, 11/21/2014|
MarketMinder's View: Worried about the Japanification of Europe? Well here comes Jedi Master Mario Draghi with another mind trick over the euroland economy and capital markets! Wheeeeeee! Kidding. Actually, we hope this one goes kinda like the last time Super Mario tried to use the Force: He said some words and then announced a program that he never used. Because actually doing something this time would probably mean massive quantitative easing, and that would be bad. It would flatten the yield curve further, whacking lending and boosting bank reserves—which banks must pay to hold at central banks. To get around that, they’ve been charging customers for deposits. So let’s add it up: They’ll lend less and suck money out of the system via deposit fees. That’s DE-flationary, folks! A one-way ticket to the Dark Side. This isn’t the stimulus you’re looking for.
|By Andrew Spicer, The Guardian, 11/21/2014|
MarketMinder's View: Hear ye, hear ye! Bankers are people! Not aliens! Not robots! (We think. But we’re open to the idea of bankerbot.) There. Ethical problem solved. Errrrr…or not. All kidding aside, the notion banking is inherently morally bankrupt is quite wide of the mark. Are there some liars and crooks? Of course. But show us a profession where that isn’t true! To paraphrase legendary investor Lucien Hooper, all professions have “incompetents, crooks and charlatans.” The study here proclaims to show otherwise, but its shortcomings seem fairly obvious—the sample is limited and the methodology bizarre. We aren’t scientists or psychologists, but we are unconvinced any of this is a thing. So that raises the question: Why focus on bankers? Why not make dozens of onerous rule changes in a vain attempt to stamp out criminal activity in all professions? Ooooooh. That’s right. 2008. Anyway, this is a sentiment-driven witch hunt, nothing more. The banking industry is no more prone to greed-driven criminal behavior, and the occasional disruption as a result, than any other. It is no riskier and no more in need of a clean-up. And we suspect our financial system would function more efficiently without all this scrutiny impeding banks’ ability to do their societally beneficial job of channeling savings into investment.
|By Jeremy Warner, The Telegraph, 11/21/2014|
MarketMinder's View: This might be a wee bit optimistic, considering a more realistic timeframe for Chinese liberalization is probably more like 30 years, assuming that remains a priority in future administrations, but philosophically, it’s on target. The entire world would benefit from a more open China with freer trade and freer investment—capital would be allocated more efficiently globally. A win for everyone! Folks often fear China’s ascent, but the implications are vastly positive. (Though, the “and if they don’t” scenario posited at the end is rather too dour, in our view.)
|By Lingling Wei, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Rate cuts aren’t totally magical in China, where the government ultimately controls the quantity of money through loan quotas. But it’s a noteworthy sign of verbal support and might goose sentiment some. Actually, what we find most interesting is the decision to widen the bandwidth between deposit and loan rates—another step toward financial liberalization, which will benefit China far more over time than a dinky rate cut.
|By Mohamed A. El-Erian, Bloomberg, 11/21/2014|
MarketMinder's View: We will happily concede that markets tend to rally when central banks announce big stimulus, because it is factually true. Who knew! That said, there is a yawning gap between a short burst and a sustained, sentiment-driven rally of bubblicious proportions. We haven’t seen that anywhere quantitative easing (QE) or massive monetary loosening was tried. Did stocks rise? Yah, but that’s sort of what happens during a bucking bull market, which manage to run on for over five and a half years even though the US and UK flattened the global yield curve with their QE programs. Companies just found other ways to get financing to boost capex and earnings potential. Yay, capitalism. To see what markets really think of QE, we suggest looking at relative returns. The UK underperformed world stocks during QE there. Japan has underperformed the world (in dollars) since QQE (they had an extra Q for extra oomph) started last April. The US outperformed, but we’d chalk that up to an economy dynamic enough to keep growing (slowly) despite QE. That, to use a horrible cliché, is the exception that proves the rule.
|By Takashi Nakamichi and Mitsuru Obe, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Rightly so. As the numbers here show, it isn’t a net benefit. It boosted export values, but not volumes—gains largely came from currency conversion. Output didn’t get happy. Even worse, the weak yen jacked up import costs—not bueno in an import-reliant island nation that took all its nuclear power plants offline three and a half years ago. That squeezes businesses and households, particularly since wages stayed stagnant. Is it any wonder Japan is in its third recession in five years? For more, see Tuesday’s commentary, “Sinking Fortunes in the Land of the Rising Sun.”
|By Nathaniel Popper, The New York Times, 11/21/2014|
MarketMinder's View: Here is yet another example of the banker-bashing zeitgeist driving new, tougher regulations. This is sort of a running theme in US history. It was JP Morgan’s (and other banks’) squabble with Ferdinand Pecora and other political bigwigs that gave us Glass-Steagall. Have a panic, bash some bankers, make some rules, lather, rinse, repeat. Sometimes the new regulations are helpful, like the trifecta of securities laws in 1933, 1934 and 1940. Sometimes they are just things that fight the last war without much need or common sense, and that is the bucket these new rules seem to fall into. Regulators decided banks need more capital to offset their physical holdings of commodities and financial interest in infrastructure projects. Ooookkkkkkk. Look, we get it, no one wants another 2008, and “safety” is the watchword. But we are also fairly convinced banks’ owning warehouses with lots of metal in them won’t trigger another 2008. Yes, these assets are marked to market on banks’ balance sheets. But also! They’re liquid. We mean, not really, they’re actually metal in solid form, not molten. Financially liquid, priced to the minute in very public places, like the Internets. The prices also move on identifiable, predictable supply and demand factors, unlike the highly illiquid, thinly traded mortgage-backed securities that couldn’t handle mark-to-market in 2008.
|By Alen Mattich, The Wall Street Journal, 11/21/2014|
MarketMinder's View: Call us crazy, but we see little evidence a “currency war” (more boringly known as a “competitive devaluation”) is something anyone really wants to fight. For one, many in Japan are freaked out the yen is too weak, rightly acknowledging the pain it inflicts on businesses and households struggling to pay higher import prices. For two, the dollar and pound strengthened mightily against the yen over the past 23 months, and their economies were the fastest-growing in the developed world. For three, Japan’s closest competitors, Taiwan and Korea, saw trade rise and their economies grow even as the yen weakened. It didn’t hurt them, and they didn’t seem to see a need to devalue, and they are like fine. Armed with these three little nuggets of wisdom, and the argument in this doomsday fairy tale falls apart.
|By Staff, EUbusiness, 11/21/2014|
MarketMinder's View: So that’s nice. The time for fiscal stimulus indeed is when you’re struggling to bounce from recession. And the European Commission might have tucked some nice, pro-growth things in the package they’ll announce next week. But, reality check: It is a €300 billion package. The entire EU economy is about €13.1 trillion. So this is 2.3% of GDP. Kinda small.
|By Lawrence Lewitinn, Yahoo Finance, 11/20/2014|
MarketMinder's View: Full disclosure: We are bullish, largely based on the underappreciated growing global economy and a lack of political interference to zap it. That said, not all bullish arguments are sensible. “This,” in this case, is the fact the S&P 500 has posted double digit returns in three straight years only three times. If this year ended today, the period 2012 – 2014 would be the fourth. However, this is a meaningless statistic, however you slice it, and it incorrectly perceives how to use history in analysis. It is trivia, not analysis, and it has no forward-looking implications at all. None. We’re also wary of folks bullish because, “the trend is their friend.” We’re all for clever wordplay, but that isn’t how we forecast future market conditions. The trend and this trivial point are in the past. The past doesn’t predict future market moves. Now then, it wouldn’t shock us if the forecast levels (2100 and/or 2350) came to pass in 2015. But that is not an earthshattering forecast, considering the high end of that range is really only about 15% higher than the present.
|By Martin Crutsinger, Associated Press, 11/20/2014|
MarketMinder's View: With an October reading of 0.9%, the Conference Board’s Leading Economic Index (LEI) for the US has now risen in eight of the past 10 months. Eight of 10 LEI components rose, and the only negative contribution was from stock prices (average weekly manufacturing hours remained steady). But The Conference Board uses the average daily closing level of the S&P 500 to gauge this, which means that negative reading is entirely due to the brief spate of negativity at the start of the month (the actual index rose in October). Also, for investors, it’s probably best to strip out stocks if you’re trying to forecast stocks. All in all, it’s hard to find much to gripe about in this report—the US looks poised to keep on growing into the new year.
|By Peter Spence, The Telegraph, 11/20/2014|
MarketMinder's View: First of all, we fail to see how October’s purchasing managers’ index (PMI) readings indicate a “serious blow to hope that the recovery would resume towards the end of the year”—we still have a month and a half to go in 2014. Second, PMIs aren’t perfect gauges of economic conditions—they’re surveys telling you how many correspondents said output and demand rose (not the degree to which they rose). Three, calling for doom and gloom because of one country’s manufacturing number seems like cherry-picking. Even if that country is Germany, no single data point tells all about an 18-nation bloc. Four—and most importantly, in our view—composite eurozone PMI showed growth! The reading was 51.4—any reading over 50 indicates expansion. Grew! Not shrank! Dour sentiment is quite prevalent toward the eurozone—more than reality suggests is warranted.
|By Staff, The Economist, 11/20/2014|
MarketMinder's View: “Secular stagnation”—the notion developed countries are doomed to subpar future economic growth because of demographics—became a thing in the late 1930s. Then, folks feared an aging/falling population meant a falling labor force and a population requiring fewer goods. Fewer goods = less output = less economic growth = bad. You might think the 70-plus years of overall growth since would disprove that theory, but those concerns (and some others) have returned lately with gusto, underpinned by the belief aging populations in the US, Europe and Japan will hit consumption, slowing potential growth. In our view, this thesis is as off now as it was then. For one, demographic changes don’t sneak up on anyone—life expectancies have been rising, so more elderly people in the world isn’t going to shock markets or economies. And two, we have faith that innovative capitalists will continue finding ways to increase their future wealth—and the wealth of others—in ways we cannot even imagine today. Maybe you think that’s pie-in-the-sky thinking, but that’s what most people thought in the late ‘30s too. And we wouldn’t so readily downplay the creativity that can currently be found in in Energy, Biotechnology, 3D printing, mobile computing and more. For more, see our 6/24/2014 commentary, “Longer Lives and Other First World Problems.”
|By Matt Egan, CNN Money, 11/20/2014|
MarketMinder's View: Though these are fine signs to look for, the article actually misses the biggest red flag you’re dealing with a rat: They take custody of clients’ assets. Giving a financial professional custody of your money—rather than keeping it in an account in your name at a trusted, third-party custodian—makes it that much easier for him/her/them/it to run off with it for good. It is extremely difficult for a financial professional to make off with cash he/she/they/it can’t get their grubby, thieving hands on. For more, see our 8/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Matthew Boesler, Bloomberg, 11/20/2014|
MarketMinder's View: It is true the Fed cannot directly control long-term interest rates, and it is true the fed-funds target rate exerts some influence over longer-term rates (though we’d be remiss not to mention that Greenspan actually did tighten during the period referenced—he flattened the yield curve). However, the rest of this is really a whole bunch of speculation and searching for meaning in bouncy bond yields this year. It is also an attempt to forecast a rate hike, despite there being little history to suggest this is necessary or a risk. Look, call us crazy, but we are just pretty darn skeptical the US economy—which has grown above its post-war average 3.3% rate in four of the last five quarters—can’t handle a small interest-rate hike from the present 0 – 0.25% rate. The alleged “difficulty” in doing so this time, cited herein, is media hype.
|By Staff, Xinhua, 11/20/2014|
MarketMinder's View: Here are some more targeted stimulus measures to spur Chinese growth. For example, raising the loan-to-deposit ratio gives banks more leeway to lend, and encouraging more private banks aimed at small businesses can provide an incremental boost as China seeks to liberalize its economy. Now, nothing here is going to radically pump up China’s growth rate, but even if gangbusters Chinese growth is a thing of the past, that doesn’t negate China’s still-considerable impact on the global economy.
|By Jeremy Warner, The Telegraph, 11/19/2014|
MarketMinder's View: “It would be nice to think that merely by reforming the way money works we could magic away our economic problems, abolish the credit cycle, tame the bankers and generally cure the world of all known diseases. Yet there is no such thing as a free lunch. The reason we have fractional reserve banking, and a monetary system hedged around with taboos and constraints, is that warts and all, these things basically work. All alternatives are a giant leap in the dark, with likely disastrous consequences to judge by historical precedent.”
|By Matt Levine, Bloomberg, 11/19/2014|
MarketMinder's View: So we share this article mostly because it is great fun, but also because it does sort of highlight how technology’s advance is simultaneously great and terrible for investors. While it’s far off today, we shudder to think of all the behavioral problems that would results from an individual investor fixating on his or her city of stocks, worrying over a string of “rainy” (down) days or other factor. Realistically, greater visibility of markets provided just by the internet and 24-hour TV generate both transparency and promulgate emotional reactions to markets. And that’s only in 2D! For more, see Todd Bliman’s column, “Free to Fail.”
|By Kenneth Roberts, MarketWatch, 11/19/2014|
MarketMinder's View: Well, yeah, these are risks—though the first five all relate to the risk of lost principal. In our view, this too narrowly deals with the issue of risk, which is much broader. What about the risk you outlive your portfolio or don’t earn a sufficient return to reach your goals and objectives? What about the risk you fear the risks outlined here, sell out prematurely, and watch the things you just fearfully sold rise past you? That’s opportunity cost, folks, and it’s a very real risk.
|By Prof. Stephen Bainbridge, Professor Bainbridge Blog, 11/19/2014|
|By Amy Harder and Siobhan Hughes, The Wall Street Journal, 11/19/2014|
MarketMinder's View: In realityland (read: not Washington, D.C.) this isn’t a defeat for Keystone XL at all. You don’t need to pass a law to build a pipeline, you need the State Department to approve it, which the Administration has largely hemmed, hawed and opposed since moment one. This news, therefore, is actually not news at all. Hence, the passage (or non-passage, as it were) of this bill is really only a defeat for its sponsor, Louisiana Senator Mary Landrieu, who was bringing it as a measure to show how active she was on behalf of her constituency (largely pro-oil industry)—campaigning before the pending run-off election for her seat next month. And it remains to be seen if the bill’s defeat really even matters much for her re-election chances, too.
|By Simon Kennedy, Bloomberg, 11/19/2014|
MarketMinder's View: This presumes Japan’s sales-tax hike is responsible for the nation’s weak economy, which ignores the 2011 and 2012 recessions that we are guessing are not related to a tax hike that occurred in April 2013. The actual lesson from all this economic weakness? Japan needs structural reforms Prime Minister Shinzo Abe hasn’t delivered.
|By Editorial Staff, The Wall Street Journal, 11/19/2014|
MarketMinder's View: OK, party people: It’s time to set partisanship aside so you can see the sensible takeaway in this article. Now, for one, ignore the “special interest” angle and the politicized take on economic conditions, which isn’t really very accurate. But rather, the real takeaway here is the sensible viewpoint that Fed leadership and policy shouldn’t be determined based on the whims of the public or elected officials. The Fed is politicized to an extent—it basically cannot help but be somewhat, given its public role and the fact it’s an arm (tentacle?) of government. But we should be extraordinarily wary of efforts that would further subject central bank policy to partisan politics, and that applies regardless of your political affiliation.
|By Mitsuru Obe, The Wall Street Journal, 11/19/2014|
MarketMinder's View: The weak yen, peddled as export stimulus, is really not stimulus at all. Rather, it jacks up the price of imported goods and raw materials, raising energy prices and other input costs for businesses and consumers. Even the major multinationals who might benefit from growing exports aren’t clear-cut winners, in the sense export volumes haven’t increased significantly, and in many cases, whatever gain there is doesn’t fully counteract the rise in input costs.
|By Toko Sekiguchi and George Nishiyama, The Wall Street Journal, 11/18/2014|
MarketMinder's View: Monday, we discussed the possibility of a snap election. And today Japanese Prime Minister Shinzo Abe confirmed it. Not shocking—considering cabinet members alluded to it last week and Japan just fell in recession by one common definition. Abe’s latest move appears to be mostly politics. Absent this move, Abe’s term would expire in September 2015. Should he fail to pull Japan out of its current funk, he would likely face a more difficult election than he does today. Should he win the snap election, by contrast, his term would be extended by two years beyond next September.
|By Aaron Katsman, MarketWatch, 11/18/2014|
MarketMinder's View: The article’s discussion of risk isn’t quite on mark in the sense it largely equates volatility and risk. But the piece still offers a sound discussion of the risks presented by overconfidence. “In referencing researcher Terrence Odean's 1998 study entitled ‘Volume, Volatility, Price, and Profit When All Traders Are Above Average,’ Albert Phung wrote, ‘overconfident investors generally conduct more trades than their less-confident counterparts. Odean found that overconfident investors/traders tend to believe they are better than others at choosing the best stocks and best times to enter/exit a position. Unfortunately, Odean also found that traders that conducted the most trades tended, on average, to receive significantly lower yields than the market.’”
|By Asjylyn Loder, Bloomberg, 11/18/2014|
MarketMinder's View: While many have feared lower oil prices hitting production, it seems US shale drillers are finding ways—relying more heavily on their “prime properties”—to keep production up. Just goes to show drilling is becoming more efficient and technologically advanced, to the point that rig count doesn’t really equal output direction and earlier breakeven prices are likely an inappropriate benchmark today.
|By Danica Kirka, Associated Press, 11/18/2014|
MarketMinder's View: News flash: “Red warning lights” over slowing or stagnant growth have been “flashing” for years. The blinking eurozone light must be blinking less brightly than when it was in recession for 18 months during 2011 and 2012. The China hard landing light must be ready to burn out, too—it has been blinking since 2010. Japan, too, has long struggled to grow. The other Emerging Markets blinky light referenced here is not only an old factor, it’s a false factor—there is no evidence a tidal wave of capital swept into the Emerging Markets nations as a result of low developed-world interest rates, and even less evidence it will devastatingly recede. Meanwhile the bull market has continued to climb higher. These fears—bricks in the wall of worry—aren’t new or surprising enough to knock the bull off course. Plus, the global economy at large is still growing.
|By Matt Levine, Bloomberg, 11/18/2014|
MarketMinder's View: We won’t speak to whether Twitter is a good investment or not. However, the discussion about ratings agencies in general is a good one—showing just how backward looking credit ratings really are: “The thing about ratings is that they are typically a lagging indicator: The market usually knows a company's creditworthiness before the ratings agencies do.”
|By Matthew Lynn, The Telegraph, 11/18/2014|
MarketMinder's View: The heated debate over certain companies supposedly skirting corporate taxes continues, UK-style. Some believe one way to ensure companies pay their “fair share” is by enforcing a “turnover tax”—a set tax on total sales. But as with many government actions that may seem well intended, one must be wary of unintended consequences: “But, in fact, it is a terrible idea. Why? Because a tax based on turnover is a tax on investment. It penalises the companies that hang on to their profits and invest the money in new factories, products or distribution systems. The more we punish them, the less innovation and investment there will be – and that will be bad for everyone.”
|By Jim Brunsden and Nicholas Comfort, Bloomberg, 11/18/2014|
MarketMinder's View: If the standard you apply to regulating banks is, "A whole lot of banks failed in 2008, so clearly (insert practice here) was ‘woefully inadequate,’" then regulators will literally plumb every single practice in the industry. That’s a lot of testing—likely a time and money drain—especially considering we don’t even know what the next crisis will even look like! Further, there is no evidence bank modeling was behind the crisis or even a modest contributor. This just seems like yet another solution in search of a problem.
|By Jeff Macke, Yahoo Finance, 11/18/2014|
MarketMinder's View: This is the 32,093,249,083,249,023,490th* article that seems to think recent performance somehow predicts what’s to come for markets. But past performance (or the volatility) doesn’t dictate future returns. Period.
*Maybe a little bit of an exaggeration—but, if so, not by much. The Internet is big!
|By Max Ehrenfreund, The Washington Post, 11/17/2014|
MarketMinder's View: So here is the argument that lower gas prices are bad because they show a dearth of demand in the global economy. Which would be possible if demand weren’t rising (see 2009 for example), but it is. Just not as fast as supply. Also, the analogy here between oil price movements and the performance of a certain NFL franchise with a controversial name makes no sense. Demand for those tickets is falling because the team hasn’t performed well, not because the size of the stadium is growing faster than demand for tickets at said stadium.
|By Bob Veres, Financial Planning , 11/17/2014|
MarketMinder's View: In our view, clarifying roles, i.e. via clear job titles like “broker” for employees of a brokerage firm that sells products versus “adviser” for registered investment advisers would be a plus. But as for the rest, it’s a lot of stuff we agree with in principle. However, the fiduciary standard as it exists now does not actually ensure the folks practicing it act on such high-minded principles. The best way to make sure your financial professional is keeping your best interests in mind is to look at what they’re actually doing: What are their values? How does their philosophy, structure, business model, etc. put your needs first? What are their resources and what is their experience? Believing that all you have to do to right the wrongs in this industry and improve advice is slap a fiduciary rule on providers is the height of naivety. If a financial professional is a crook and/or a schlep, they’ll be a crook and/or a schlep regardless of the rule.
|By Lisa A. Rickard, The Wall Street Journal, 11/17/2014|
MarketMinder's View: This is an interesting debate worth following for investors. As we reported here last June, a court case in Delaware—where many large, publicly traded US firms are incorporated—resulted in firms being allowed to add a “loser-pays” provision to corporate bylaws, which would require the loser of a lawsuit to pay all court costs. The legislature is considering passing a bill that would ban this. This matters for stockholders because of the prevalence of securities class-action lawsuits filed against public companies—many of which seem frivolous. This could radically alter the playing field for filing class action suits, which could be a plus for corporations in the sense their legal costs could fall. On the other hand, proponents argue it would be a minus for investors in the sense these lawsuits police corporate directors’ behavior. That being said, it seems odd to us that “lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” We simply do not buy that all those are examples of beneficial lawsuits. Perhaps this provision goes too far, but it seems to us some reining in is overdue.
|By Jonathan Clements, The Wall Street Journal, 11/17/2014|
MarketMinder's View: The thesis: A 25% decline would put stocks more in line with reality and boost the outlook for the next decade’s returns (!). So let’s have a bear market now with an eye toward bringing the cyclically adjusted price to earnings ratio (CAPE) down? Folks, there is no predicting returns a decade out—using CAPE or any other measure—and even if you could know that, you’d be better off analyzing the cycles along the way (which most often haven’t been a decade long). And besides, CAPE—a comparison of 10 years’ worth of bizarrely inflation adjusted earnings to stock prices—is high today in part because of the 2008-2009 recession’s impact on earnings. This all presumes a certain degree of mathematical rationalism to market returns a decade away. That’s theory, but not reality. The economic data here are skewed too. Labor market improvements follow GDP, which follows stocks. GDP growth rates, too, don’t correlate one-to-one with stock market returns because GDP is a quirky government stat that oddly accounts for things like imports negatively. Stocks aren’t a quirky government stat.
|By Eric Morath, The Wall Street Journal, 11/17/2014|
MarketMinder's View: Seems to us this is heavily influenced by the Energy industry—manufacturing grew, while mining and utility output fell. Falling oil and gas prices weigh on the measure of production and could disincent future production growth, assuming they show staying power. But at this point, we’d suggest drawing big conclusions is premature, which makes a lot of this report overly dour.
|By Michael Heath, Bloomberg, 11/17/2014|
MarketMinder's View: China and Australia are already big trade partners, particularly in the mineral resources and energy fields. But they are now signaling their intent to free up additional trade. Assuming the deal is inked and passes, 85% of goods shipped to China from Australia will be tariff-free (with that number increasing to 95% upon full implementation). This deal also incrementally opens the door to services exports to China, which deepens the Sino-Aussie trade relationship in a significant, if mostly symbolic at this point, way.
|By Ambrose Evans-Pritchard, The Telegraph, 11/17/2014|
MarketMinder's View: Far be it from us to suggest that whenever you see a nation labeled the “Sick Man of Europe” you should be skeptical, but the last few have been rather wide of the mark. Belgium is no different. A recent GDP calculation revision—one designed to factor in illicit trades common in Amsterdam—is responsible for reducing GDP and inflating debt a wee bit. But here is the thing. No country has ever defaulted because of their debt-to-GDP ratio. They have defaulted because they can’t make interest and principal payments on debt, which is usually signaled by the market demanding much higher interest rates from the issuer. Belgium’s 10-year bond rates were 1.06% on November 16, their lowest point in the last seven years. That is the opposite of a debt-doom scenario. (Oh, and we’ll take the market’s opinion of this over Fitch’s any day. The raters are not reliable.) Finally, we demand a study proving that higher Math and Science scores translate to better cyclical economic performance. We’ve never seen them and we don’t believe the logic behind theorizing the two are related is very sensible.
|By Li Anne Wong, CNBC, 11/17/2014|
MarketMinder's View: Japan’s economy shrank -0.4% q/q (-1.6% annualized) widely missing the expected +0.5% q/q growth—leaving the Land of the Rising Sun in a technical recession (by one common definition). This is likely a bit of a shocker for those who thought Arrows One and Two of Prime Minister Shinzo Abe’s “Three Arrow” economic revitalization plan—fiscal and monetary stimulus—would spur Japan’s economy to growth, even after the sales tax hike last April. This leads many to suggest Abe will delay the second increase in the national sales tax, planned for April 2015. And that is possible. But while the sales tax hike likely did greatly heighten pressure on Japan’s economy, it isn’t the root cause of Japan’s overall weakness. That is largely due to structural economic factors—rigid labor markets, protectionism and other offshoots from Japan’s quasi-mercantilist economic structure. Delaying the sales tax alone won’t fix those factors. Only Arrow Three—structural reforms—will get that done. Abe hasn’t fired that one much yet.
|By Allan Sloan, The Washington Post, 11/14/2014|
MarketMinder's View: Here is our little secret, which is as old as the hills: There is no such thing as Wall Street versus Main Street. Wall Street and Main Street usually work together, for each other’s benefit. We realize we probably sound a bit high on sunshine and lemonade when we say this, but we’ve seen it for years. Let’s look at both of the issues myopically eviscerated in this article, corporate spinoffs and inversion deals. Think about why companies spin-off business units: Usually, it’s because they realize management at the top of a diversified conglomerate is stretched too thin, and the different segments of the business aren’t run effectively or to their full potential. The goal is to spin them off so they’re more efficient, providing better (and probably cheaper) goods and services to—you guessed it—Main Street! As for inversion deals, where US companies buy a smaller foreign competitor to get a new corporate address and avoid double taxation on international earnings, there are some tradeoffs, as this piece notes. But when a business is able to reduce its overhead, it can better serve customers. Finally, polls have long shown that more than half of Americans either directly or indirectly own stocks, so even to the extent this benefits the business, it also benefits the stockholders. Some of those people may live on Main Street (or Elm or First or … you get the point). Please do yourself a favor and don’t get suckered into this false conflict.
|By Chuck Jaffe, MarketWatch, 11/14/2014|
MarketMinder's View: As this shows, people really like to brag. When you hear fellow investors brag about their killer trades, and it sounds like they’re racking up the wins, it can be tempting to chase heat to keep up. The fear of missing out is real, and it can lead to dangerous trading decisions—and way more risk than is necessary to reach your goals. The lesson and advice here are timeless: “Worry about your own portfolio and whether it is reaching your goals, not about how someone else—with different resources, needs and risk tolerance—is reaching theirs, no matter how much they talk about it.”
|By Andrew Critchlow, The Telegraph, 11/14/2014|
MarketMinder's View: Oh dear. Ok so the logic is this: Oil prices are down, and there is some high-yield corporate debt in the Energy sector, and a guy estimates the default rate could be 30% if oil falls below $60/barrel, and that spike in defaults could trigger panic in the broader high-yield corporate bond market, and poof! It’s 2008 again. Unless Opec props prices. We won’t speculate on that one—you can’t game a disparate cartel with multiple competing interests that decides things behind closed doors. Regardless, the risk of this chain reaction unfolding as outlined looks small. Maybe some Energy debt does default, but the issue is sector-specific. Investors might well realize lower energy prices strengthen balance sheets in other sectors, which would limit the risk of contagion. Plus, we don’t have mark-to-mark accounting today, so any trouble wouldn’t ripple through the financial system the way subprime did in 2008. Mark-to-market is why $300 billion in likely loan losses turned into $1.8 trillion in largely unnecessary writedowns.
|By John Cochrane, The Wall Street Journal, 11/14/2014|
MarketMinder's View: We couldn't agree with this more. Slight deflation isn't a leading indicator of economic woe. "Hence the zero-bound worry. When interest rates hit zero and the Fed can’t move the broom handle any more, the top of the broom must topple into deflation. Except we hit the zero bound, and almost nothing happened. Maybe the economy isn’t so inherently unstable and in need of constant guidance after all. Bottom line? Relax. Every few months we hear a new 'biggest economic problem' from which our 'policy makers' must save us. Wait for the next one."
|By Mohamed A. El-Erian, Bloomberg, 11/14/2014|
MarketMinder's View: If the eurozone’s 18-month contraction didn’t end the global expansion, we fail to see how sluggish growth would. This piece tries to support its thesis with seven points, but they don’t hold water. 1) If every reporting country except Italy and Cyprus grew, the eurozone isn’t “sputtering.” 2) Prices are rising, not falling, and even if they were falling, deflation does not have the impact described here. 3) The impact of existing sanctions amounts to a few billion euro. Together, the current 18 eurozone countries exported over €3.1 trillion in 2013. 4) We don’t know what a “growth deficit” is. We suspect it’s high-falutin’ industry jargon having something to do with potential GDP, which isn’t real. But really, we don’t know, so, pass. 5) Actually, what they need is to create a better backdrop for banks to lend more, but headwinds are fading. 6) The world economy doesn’t have a fixed amount of growth the economic elves grant every year. One country cannot “steal” another’s growth. Sorry. And anyway, if the weak yen hasn’t helped Japan, why would a stronger yen hurt Japan and weak euro benefit euroland? 7) See point 1.
|By Editorial Board, The New York Times, 11/14/2014|
MarketMinder's View: Well, here is the thing: The link between interest rates and inflation is a whole lot weaker than this article gives credit to. What you really have to look to is whether monetary policy is choking growth or not, and even if the Fed does hike, that seems unlikely. But also, this gives much too much credit to Fedspeak, which isn't and has never been predictive. Finally, we struggle see the logic in the statement that, "financial firms that cater to bondholders" would want a rate hike. Why would they want to boost their funding costs? Why would they want existing bondholders to take a hit? Finally, why are financial firms catering to their lenders? They actually cater to their owners, which are stockholders.
|By Staff, EUbusiness, 11/14/2014|
MarketMinder's View: Well this is darned cool. Not much market impact, but still, cool! Estonia is launching a new program to allow anyone in the world to become an “e-resident,” without mucking up their home-country citizenship, so they can set up an online shop in the EU with minimal administrative burdens. Estonian officials believe this will make their country the world’s online gateway to the EU’s single market, and while only time will tell if they’re correct, the opportunity is pretty big. What can we say—we just love seeing former Soviet States get creative with free markets.
|By Ben Leubsdorf, The Wall Street Journal, 11/14/2014|
MarketMinder's View: Well lookie-loo. Actually, what’s funny here is the headline number was hurt by lower gas prices, since gasoline sales, ya know, are included in it. Excluding gas prices, retail sales rose 0.5%, which is nice. But it’s all largely meaningless. Low gas prices just shift spending from one category to another. As far as GDP is concerned, spending is spending.
|By Floyd Norris, The New York Times, 11/14/2014|
MarketMinder's View: There are two key omissions from this article, which we feel compelled to point out. One, it wasn’t really regulatory shortcomings that drove Hungarians to get mortgages from foreign banks. A lot of it had to do with a lack of confidence in Hungary’s financial system, including weak institutions and monetary instability. Two, the reason this is a problem is because Orban forced the central bank to drive down interests despite rising inflation, ultimately devaluing Hungary’s forint. This is a manmade problem, not a regulatory lapse, and Hungarians were caught in the crossfire.
|By Danielle Trubow, Bloomberg, 11/14/2014|
MarketMinder's View: Public service message: Consumer sentiment, like unemployment, is a dangerous, misleading statistic for investors to follow. It doesn't lead spending, and it tends to follow stocks rather than lead them. This should tell you everything you need to know about the gauge: "A stronger labor market, cheaper fuel costs, and near-record stock prices are brightening consumers’ spirits as the busiest time of the year for retailers gets under way." None of those are predictive.
|By Staff, EUbusiness, 11/14/2014|
MarketMinder's View: And Greece grew, too! As did most of the periphery, except Italy (no surprise), helping the full eurozone grow 0.2% q/q. The most interesting angle here, in our view, is sentiment-related. The general consensus seems to be that while growth in the periphery is nice, it isn’t enough to power the eurozone without bigger contributions from Germany and France. Mind you, these are the same countries folks feared would singlehandedly tank the entire currency bloc just three weeks ago. Looks like sentiment is morphing from deep pessimism to plain old skepticism?
|By Paul R. La Monica, CNN Money, 11/13/2014|
MarketMinder's View: This “fear-and-greed gauge” (which runs on a scale from zero to 100) swung from 2 (extreme fear) just a month ago to 65 (rather greedy) now. And consider: The publisher notes the same gauge registered a 12 reading on September 17, 2008—the first trading session after Lehman failed. And a 28 on March 9, 2009, the global bear market low. Suffice it to say we hear from a few investors and just flat out don’t buy those readings one bit. Nor do we think it’s fair to suggest folks were more scared a month ago than during the Financial Panic. That seems like revisionist history to us. But the reason this gauge is so bizarrely misleading is it doesn’t measure sentiment at all. It tallies put/call volume (assuming call volume = greedy, put = fearful, though there is a buyer and a seller for every security), a bunch of backward-looking price stuff like “momentum” and the number of 52-week highs, the VIX and the spread of stock returns versus Treasurys (of undetermined maturity). Most of these have nothing to do with sentiment. Folks, take it from us: Don’t believe this gauge accurately measures greed and fear.
|By David Evans, Bloomberg, 11/13/2014|
MarketMinder's View: As you read through this story, take note of the red flags: Questionable custody of assets. A complex strategy investors don’t seem to have understood. Promises of unreasonably high returns with no downside risk. Publishing their results themselves, like Bernard L. Madoff Securities’ statement generation department. There are more. And the victims aren’t exactly folks you might think of as the common dupe—they range from doctors to support managers. Learn from the lessons these unfortunate investors fell victim to. For more, see our 08/15/2014 commentary, “Crooks’ Common Threads: Three Red Flags to Watch Out For.”
|By Ben Carlson, A Wealth of Common Sense, 11/13/2014|
MarketMinder's View: While parts of this are a little overly simplistic, like the fact you can “improve your returns” by “buying low after there’s been a market crash,” overall we find this piece a sensible reminder of a few points: First, in showing the improved best/worst period returns for 10-year versus five-year rolling periods, it provides a useful reminder that the frequency of loss and subpar outcomes declines with longer holding periods. Second, it provides a nice counter to the mean reversion argument that stocks must fall simply because they’ve been up recently: “Based on this historical data, investors aren’t doomed to experience poor market returns going forward just because we’ve had solid performance in the recent past. Obviously, everything is circumstantial with the markets so anything is possible. That’s part of what makes investing so interesting and frustrating all at the same time. You can’t predict the future with any precision by looking exclusively at past data. There’s a caveat for every rule and market data point.”
|By James Shotter, Financial Times, 11/13/2014|
MarketMinder's View: On November 30, Swiss voters will decide if the Swiss National Bank (SNB) will be required to hold at least 20% of its assets in gold, never sell it and store it all domestically. While proponents believe this will keep the SNB from importing ECB monetary policy as its own, the SNB argues this initiative dashes its flexibility and impinges on its independence. While we aren’t suggesting the SNB’s policies—including the exchange-rate floor with the euro—are totally sensible, we find the notion of subjecting monetary policy to the whims of the public more concerning. Look, we aren’t saying central bankers are perfect—far from it—but politicizing monetary policy can have dire unintended consequences. The SNB isn’t big enough to overturn a bull—it’s more the general zeitgeist here we find troublesome. Finally, on a tangential note, this is very unlikely to put a floor under gold prices.
|By Nelson D. Schwartz, Clifford Krauss and Dionne Searcey, The New York Times, 11/13/2014|
MarketMinder's View: On a high level, we agree lower oil prices create winners and losers: Some folks will have a wee bit more discretionary cash to spend on fun stuff rather than gas, and some energy firms’ profits may get squeezed. But overall, we think this piece vastly overstates the economic benefits of cheaper gas. Even though it’s more than two-thirds of GDP, consumer spending is pretty stable and doesn’t fluctuate enough to make a huge difference in overall economic growth. Besides, spending is spending, whether it’s at your local gas station or favorite small business. This may merely shift consumers’ targets some. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Matt Levine, Bloomberg, 11/13/2014|
MarketMinder's View: An interesting discussion given recent news that banks were settling foreign-exchange rigging suits to the tune of $4.3 billion: There is evidence only one bank made money doing this, and only $99,000. We aren’t suggesting they didn’t make more or intend to cheat and make more, just pointing out rigging may not be as easy as some portray it.
|By David Evans, Bloomberg, 11/13/2014|
MarketMinder's View: Another article on foreign exchange, and a very interesting one at that. “Most retail currency investors lose money most of the time, according to the industry’s own data. Reports to clients by the two biggest publicly traded over-the-counter forex companies -- FXCM Inc. (FXCM) and Gain Capital Holdings Inc. -- show that, on average, 68 percent of investors had a net loss from trading in each of the past four quarters. These kinds of losses make for investor churn.” The reason for these issues? Forex is basically a short-term game that’s zero sum in the long run. Short-term investing strategies in most things tend to have far lower success rates. It is unsurprising to see that’s true here. By the way, in liquid, efficient markets, learning to trade the same way as thousands of others doesn’t present a repeatable advantage. To the extent the tactic worked, it will become discounted by the market nearly immediately.
|By Staff, The Economist, 11/13/2014|
MarketMinder's View: While we totally agree M&A is a cyclical business and at times the executive suite may be a bit drunk with greed, we would suggest that time isn’t now—and it actually wasn’t in 2007, either. (FAS 157 and the government’s haphazard actions truncated the bull market before it reached a euphoric point then.) In 1999, you would have seen the bubble better by analyzing the quality of M&A that was consummated—like the AOL/Time Warner deal. Also, by analyzing the impact on equity supply. Cash mergers contract equity supply (bullish, since it would require less demand to push prices up). Stock mergers don’t. The deals being made today are primarily financed by cash and debt, not stock issuances, and are more quality than slop—not what we saw near the Tech bubble peak.
|By Robin Harding, Financial Times, 11/13/2014|
MarketMinder's View: Newsflash: The current global expansion has continued despite a eurozone recession and Japan being, well, Japan. Also, suggesting the US economy is moving ahead because the government took the “right” steps while the eurozone took the “wrong” ones is bizarre. We actually implemented some austerity over the last few years and grew. They didn’t and didn’t. Besides, the eurozone is growing right now, not shrinking. Finally, while structural reforms in the eurozone and Japan would likely do more than fiscal and monetary measures to impact long-term economic growth, they aren’t integral for the world to move forward either. Seems to us Mr. Lew is more reflecting dour sentiment than the more middling reality.
|By Alan Tovey, Independent.ie, 11/13/2014|
MarketMinder's View: The loss of ten million jobs over 20 years (500,000 a year) to “robots” sounds daunting and may inspire some to raise an axe to the closest computer server. Technology will displace some folks—both winners and losers will emerge, with certain lines of work likely eliminated in full. But this focuses only on the downside: We can’t yet account for all the new jobs and opportunities that have yet to be created because of robots. After all, folks had the same fears when the sewing machine was invented. And the car! So before bemoaning a future doom that hasn’t happened yet, we suggest having faith in human creativity. Jobs are created and destroyed, but overall the world is better off because technology advanced.
|By Mark Schoeff, Jr., InvestmentNews, 11/12/2014|
MarketMinder's View: So to bring you up to speed in case you don’t follow the debate over investment advice regulation closely, there are two standards of care in the investment industry: The suitability standard and the fiduciary standard. The former applies to brokers and insurance agents, and it states that products/services sold must be appropriate for the client. The fiduciary standard—which many argue is a higher level of care—requires disclosure of potential conflicts of interest and requires the adviser to reasonably believe they are putting their clients’ interests first. For roughly the last four years, the SEC and other regulators have been considering whether to apply the fiduciary standard across the entire industry, a study mandated by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act. Now SEC head Mary Jo White says she’ll state the agency’s position by year end. However, we’ve long since made our view known: Rules don’t govern actions and the quality of advice. Whether held to the fiduciary or suitability standard, values, resources, experience and expertise matter much more than a rule ever could. Arguing otherwise is to suggest you could transform an unethical, unintelligent, inexperienced broker into the world’s greatest adviser simply by shifting a few words around in Washington, D.C. If you buy that, some unethical person probably has a bridge or a variable annuity to sell you.
|By Anna Shiryaevskaya, Bloomberg, 11/12/2014|
MarketMinder's View: …in 2040!*
*Assuming this long-range forecast even proves accurate!
|By Dan Kadlec, Time, 11/12/2014|
MarketMinder's View: So, yes, if you are over 70 ½ years old and own an IRA, you are required to pull out a certain sum determined by your age and account value each year (creatively called a Required Minimum Distribution, RMD). And we are sure many folks haven’t taken their RMD yet, so you know, if this is you, you should probably be thinking about this. But let’s not overstate the case. There are seven weeks to go to fulfill this requirement (unless you just turned 70 ½ in 2014—then there are 20 weeks, as the deadline for newly 70 ½ year-olds is April 1, and you can probably safely skip reading this article). But you know, you should have this on your radar and plan to take care of it because as this article rightly but hyperbolically reminds, the penalties are HUGE! #TheMoreYouKnow.
|By Simon Kennedy, Bloomberg, 11/12/2014|
MarketMinder's View: The ratio between two commodities (Copper/Brent Crude) isn’t a forward-looking indicator of the economy, and Dr. Copper has long since had his? her? its? Economics PhD revoked. Let’s just say there is a reason commodity prices were removed from the Leading Economic Index long ago. Recent history also debunks this thesis. The ratio of Copper/Brent Crude fell from 2010 through June 2014, roughly when oil price volatility picked up. The economy grew the whole time. Copper prices have fallen since late 2010 and the economy hasn’t—it has grown. The reason both prices are down is supply growth is outstripping demand growth following a cycle of massive investment in mining.
|By Staff, Reuters, 11/12/2014|
MarketMinder's View: Could the structural reforms opening Mexico’s Energy and Financials sectors to more competition and foreign investment be bungled in implementation, creating a cyclical negative for their economy? Yes. Could the Fed make a significant monetary policy error, crashing Mexico’s economy and financial markets? Yes. But neither of these are probable, and in fact, both Mexico advancing reform and the Fed ending quantitative easing are probable positives, not negatives!
|By Diana Choyleva, Financial Times, 11/12/2014|
MarketMinder's View: We agree more quantitative easing and a weaker yen will not fix what ails Japan’s economy. They will increase energy costs and the prices of intermediate goods, which isn’t a plus for Japanese firms and consumers. But claiming this will trigger a currency war—nations enacting tit-for-tat devaluation to seek an edge in export competitiveness—misses that point too. But it also begs the question: Why would a currency war happen now? None of this is terribly new, and many politicians in Japan see issues with further yen weakness.
|By Lawrence Lewitinn, Yahoo Finance, 11/12/2014|
MarketMinder's View: The “greatest fear,” as far as we can intuit, is that the VIX is too low because there isn’t enough fear. Which is oddly self-debunking? But also, this operates on two notions (that both rhyme): When the VIX is high, it’s time to buy—especially if the trend is your friend. But VIX and trends are all just past, and investing on backward-looking factors is likely to go south fast. Trends turn, and a seemingly high VIX can still fly!
|By Jeff Eaglesham and Rob Barry, The Wall Street Journal, 11/12/2014|
MarketMinder's View: We didn’t really need investigative reporting to discover that brokers cluster where the money is—that’s true whether they are on the up-and-up or not. For the same reason, it’s unsurprising they target older folks, because they tend to have more money. Ultimately, no amount of targeted regulation or regulators eliminates all wrongdoing. Ultimately, it will be up to you to ensure the person you’ve found is aboveboard. So please, folks: Take our advice. Check out brokers on the Financial Industry Regulatory Authority (FINRA’s) Broker Check tool before investing with them. Also, check out Registered Investment Advisers here on the SEC’s webpage. Make sure you understand products peddled and think about the claims being made. Do they offer you a land of pure milk and honey? Do they try to scare you into buying a product? Those are red flags and you would be well served to take note. Listen, you might manage to skate through unscathed if you deal with an unethical or unqualified adviser—but you certainly would if you avoid them altogether.
|By Staff, The Yomiuri Shimbun, 11/12/2014|
MarketMinder's View: Japanese Prime Minister Shinzo Abe is set to meet with the head of his coalition partner, New Komeito, ahead of his planned “economic review” to determine whether to enact the second two percentage point jump in the nation’s sales tax rate in as many years next April. Abe is said to be leaning toward postponing the tax and holding snap elections to serve as a referendum—quite the gambit for a Japanese prime minister, given the nation’s propensity to rotate leaders often.
|By Matt Levine, Bloomberg, 11/12/2014|
MarketMinder's View: Reason #11,213,456,878.9 that efforts aiming to de-risk the financial system—especially efforts based on a near-complete misdiagnosis of 2008's causes—raise as many issues as they resolve. "It's interesting to think about how those designations would interact with the TLAC proposals. Is bank debt too risky for big insurers and asset managers to hold? Are insurers and asset managers too important to hold bank debt? If so, that would be a little weird. Someone has to ultimately bear this risk of bank failures. You need a sink, somewhere, for financial-system risk. That's an important job, and whoever does it is going to be important. But you can't protect them from the consequences of the job. Bearing those consequences is the job." For more on this topic, see Tuesday’s commentary, “Mark Carney Wants Big Banks to Save More—In Bullet Points!”
|By Phil Gramm and Michael Solon, The Wall Street Journal, 11/12/2014|
MarketMinder's View: The debate over income inequality is nearly entirely political—not an economic or market force, as some suggest. Statistical snafus like those detailed here are a key reason that is true. If you want to measure inequality, you must adjust for differences in household/employment structure, the system of benefits the country offers and the tax code—you can't count capital gains as income, because they are a function of wealth. As documented here, when you adjust just pieces of that, you reach different conclusions than those who warn inequality is a pox on our economic households. You must also account for the fact folks at certain income strata aren't the same! Mobility matters, arguably much more than income level. Look, whatever your political opinion of this, join us in wishing for some sensibly constructed data to argue over, at bare minimum.
|By Binyamin Applebaum, The New York Times, 11/11/2014|
MarketMinder's View: We would say the following regardless of which groups were pressing the Fed to be more “democratic” and cow to their interests: Politicizing monetary policy is a recipe for disaster. You don’t want to live in a place where the central bank cuts rates to squeeze out more growth before an election even if inflation is rising. A politically independent, objective Fed is far less likely to do harm. As is one staffed by people who most understand how monetary conditions affect the economy.
|By Mark Gilbert, Bloomberg, 11/11/2014|
MarketMinder's View: Actually, it is fairly normal for cost-cutting to drive earnings earlier in an expansion, when firms are still reeling from the downturn. Revenues become a more significant driver later on. Hence why comparing eurozone companies’ sales growth to US companies’ largely compares apples to oranges. Plus, it’s not like eurozone revenues aren’t growing for eurozone companies. They are—it’s just that earnings are growing faster. Seems right in line for a region growing slowly and hamstrung by weak bank lending.
|By Gregor Stuart Hunter, The Wall Street Journal, 11/11/2014|
MarketMinder's View: On November 17, China’s long-awaited “through train” is leaving the station. Choo-choo! This amusingly named program will allow foreign investors to buy Chinese domestic stocks (known as A-shares) through Hong Kong’s exchange. Overall, it’s another key step toward more open capital markets in the Middle Kingdom. But we’d suggest not rushing in blindly on the assumption more buyers means more demand and sky-high Chinese markets. As this shows, a few obstacles remain (e.g., fraud, investing caps, “lack of clarity in areas like capital-gains taxes and some controls placed on trading,” etc.). China does contain plenty of opportunities for investors focusing on Emerging Markets, but full analysis of political and economic conditions—and how they square with sentiment—is vital (as it is in any country).
|By Susie Poppick, Money, 11/11/2014|
MarketMinder's View: Yep: “As usual, [Monday’s new record high] was cause for skeptics to raise concerns that we are in the midst of a market bubble. But the headline numbers obscure a simple point: Record market highs are not unusual during a bull market—at all.” However, we do want to point out one thing: Stock valuations, overall and on average, are not “at or near historic highs.” One-year trailing and forward P/Es are about average. The wonky cyclically adjusted P/E ratio is elevated, but that means nothing—see this for why.
|By Bob Davis, The Wall Street Journal, 11/11/2014|
MarketMinder's View: While China and the US have some specifics to hammer out before the trade-pact is finalized (it will become official once all parties approve it at the negotiations in Geneva), agreeing to remove tariffs on things like “next-generation” semiconductors and MRI machines will likely be a win for all involved in the long term. Consumers should benefit too—more and cheaper choices—and stocks have long loved freer trade.
|By Joseph Adinolfi, MarketWatch, 11/11/2014|
MarketMinder's View: “The yen’s rapid depreciation, which has accelerated since the Bank of Japan announced a surprise expansion of its bond-buying program a week and a half ago, could help the island country’s economy by boosting exports and making it cheaper for Japan to pay down its sovereign debt.” We saw similar claims in early 2013, the first time the BoJ expanded its bond-buying program, and that big boost hasn’t come yet. A falling yen hasn’t really been a net benefit for Japan. It made fuel imports more expensive—weighing on both people and businesses. Plus, very few Japanese products are made solely with local parts and resources—a weaker yen makes the foreign inputs more expensive! As for Japan’s debt—yes, it’s quite large (but it’s still relatively manageable). But we believe Japan would benefit far more from economic reforms that boost long-term growth (and, by extension, tax revenues!) than implementing another sales tax hike.
|By Data Team, The Economist, 11/11/2014|
MarketMinder's View: We don’t think it’s a coincidence that Fed policy statements used more and bigger words as the Fed’s balance sheet swelled. Fedspeak—that unintelligible dialect full of riddles and hedging—was an effort at obfuscation since Alan Greenspan perfected the art of “mumbling with great incoherence” (as he put it) in the 1980s. It takes a lot of words to obfuscate quantitative easing (QE), the zero interest rate policy (ZIRP) and all the other acronyms. We’d suggest not reading into any of it.
|By Matthew Fassnacht, The Christian Science Monitor, 11/11/2014|
MarketMinder's View: Or other myths about holiday retail sales being wonderfully bullish, which this piece also guts. More people seem to believe in the Santa Claus Rally than believe in St. Nick himself, but the market phenomenon is as fake as its namesake. (Sorry, kiddies.) So why does it persist? We can blame our brains for that. Some find instances where markets boomed during that period and assume the pattern will hold true forever. But these observations have no predictive power—past performance doesn’t dictate future returns. Others try to ascribe fundamental causes, forgetting markets discount those widely known opinions and expectations. Plus, whether stocks have a jolly December shouldn’t matter much for long-term investors—longer-term trends matter far more.
|By Eric Rosenbaum, CNBC, 11/10/2014|
MarketMinder's View: This is largely a collection of market mythology and flawed advice. 1) Buying and holding—and rebalancing periodically—with zero regard for the market cycle is often a dead-end. While the S&P 500 has annualized about 10% since 1926 despite 13 bear markets along the way, we believe bear markets are identifiable and possible to navigate. 2) “Don’t keep your winners” is as flawed as “let your profits run.” The decision to hold or sell is nuanced and shouldn’t be based on past performance or backward-looking factors. 3) There is NO such thing as safe stocks. Any stock could go to zero under the right circumstances. This is the risk equity investors accept. 4) We fail to see how incrementally selling out of a rising market and buying into a falling one is a money maker. 5) Technology is cool and all, but what about behavioral errors? The emotional temptations to chase heat, panic, buy high, sell low, and weave in and out of stocks are where the real danger lurks. That is always hard and never easy.
|By Chuck Jaffe, MarketWatch, 11/10/2014|
MarketMinder's View: Correct. If sentiment were a self-fulfilling prophesy, bull markets would never end. Neither would bear markets. There also isn’t a magic, quantifiable, identifiable trigger point where sentiment gets too high or too low. And as this shows, there is no predictable or inverse relationship between sentiment surveys and ensuing market behavior. Our tip: Acting on feelings is indeed dangerous, but don’t ignore sentiment. It is a market driver. But not in a vacuum. What matters more is how sentiment squares with fundamental reality and what’s likely to happen six to 18 months or so out—are expectations too high or too low? (Incidentally, we think they’re too low.)
|By Staff, The Telegraph, 11/10/2014|
MarketMinder's View: Feel free to peruse the slides, but if you want to cut right to the chase, they are: Chile, Maurituis, The Philippines, Russia, Mexico, Indonesia, Sri Lanka, Pakistan, Argentina and Zambia. And the slides come with your very own how-to guide if you want to chase heat. We aren’t recommending for or against any of these countries, but we would humbly suggest trailing 14-year returns and the widely known information accompanying these photos should not be the basis of a buy decision. These are the sorts of pieces investors will have to contend more and more with as the bull market climbs on—staying grounded and avoiding the temptation to extrapolate the past forward is vital.
|By Graham Ruddick, The Telegraph, 11/10/2014|
MarketMinder's View: We noted with fond amusement last year that the Brits had imported Black Friday, and this year, it looks set to be even bigger! But on both sides of the Atlantic, holiday sales are more than just Black Friday, and total sales are more than just the holidays. It is a fun tradition (as long as no one gets hurt), and who doesn’t love a good discount! But it’s also just one day. The more you know!
|By Staff, The American Interest, 11/10/2014|
MarketMinder's View: Well, to some extent, but not for the reason cited here. The benefit isn’t that we send fewer dollars overseas to import oil and “a lot of the money that would have otherwise gone overseas will be spent instead on US-produced goods and services.” NEWSFLASH: When foreigners sell us oil, they usually turn right around and spend or invest those dollars here. Anything saying otherwise is wrongheaded protectionist rhetoric. The real reason they are sort of a boon to some people is they reduce manufacturers’ (and other businesses’) input costs, boosting margins and allowing them to invest more. But they also create losers—namely, Energy firms, who have harder times staying profitable when prices are down. As this piece highlights, pinched margins shouldn’t prompt firms to take shale projects offline in the foreseeable future—firms have economies of scale, and they think long-term. But better investing opportunities might lie in other sectors. For more, see our 10/29/2014 commentary, “Falling Oil Prices: Consumers’ Boon, Producers’ Bust?”
|By Dan Strumpf and Saumya Vaishampayan, The Wall Street Journal, 11/10/2014|
MarketMinder's View: Folks have bemoaned supposedly weak revenue growth for years, all the while claiming earnings come solely from cost-cutting, and firms are already too lean to cut back more. Yet revenues have grown all the while. They’re at all-time highs and still growing. The slow growth rate is mostly just math—the year-over-year comparisons are getting harder to beat. It’s all totally normal for a maturing bull market. As for stock buybacks, they aren’t inflating earnings. They boost earnings-per-share because they shrink the denominator, but the numerator—total net income—is what it is. And it’s growing.
|By Staff, The Yomiuri Shimbun, 11/10/2014|
MarketMinder's View: It might be about to get even more interesting in Japan, as some Liberal Democratic Party insiders say Prime Minster Shinzo Abe will probably call a snap election if he decides to delay the sales tax hike. And the election would effectively be a referendum on his Abenomics—particularly economic reforms. The goal? Getting voters to provide a firm mandate for that mythical third arrow, so he can have more clout against all the entrenched interests. But it could also result in another turn of Japan’s revolving door. It’s all very speculative at this point, but we don’t see either outcome making reform a whole lot likelier in the foreseeable future.
|By Neil Irwin, The New York Times, 11/07/2014|
MarketMinder's View: Yes, well, we don’t really materially disagree with the factoids included here, and most of this is a whole lot of nothing for investors. But there is one point here we want to highlight because it is dead-on wrong about what these data mean: “The labor market — and the economy more generally — has gained momentum as 2014 has progressed, judging from the readings of the job market. The latest numbers do not point to any acceleration of the trend, but neither do they point to deceleration. Rather, they reinforce what we thought we knew, and can give a bit of solace to anyone who interpreted a burst of financial market volatility last month as a sign that the economy was heading for the rocks.” (Italics are ours.) They do no such thing. While we agree the economy isn’t “heading for the rocks,” a late-lagging indicator (unemployment) cannot help you interpret forward-looking markets. There is a big logical disconnect there, and a dangerous one for investors to fall prey to as this bull market matures.
|By Ben White, CNBC, 11/07/2014|
MarketMinder's View: Hopefully! Here is a poem.
Midterm elections bring America political stalemate,
Government won’t accomplish much in Obama’s years seven and eight!
But rather than fear,
We think you should cheer!
That’s right—we’re suggesting you celebrate,
Because for stocks gridlock is great.
OK, so Keats we aren’t. But our point is that in a competitive capitalist economy, you don’t need government meddling around with rules and laws to generate economic growth. You’re better off with them out of the way! Sidelined! Laws rejiggering property rights, rewriting regulation and more aren’t plusses, they’re more often minuses. Gridlock prevents this. The absence of a negative is positive for stocks, which is why markets tend to rise in 86.4% of midterm Q4s and the subsequent Q1 and Q2. While the matching frequency of positivity is coincidental, that this is much higher than the typical quarter’s 67.8% isn’t. For more, see our 11/06/2014 commentary, “Goldilocks Gridlock.”
|By Morgan Housel, The Wall Street Journal, 11/07/2014|
MarketMinder's View: This is a fair illustration of the fact GDP doesn’t relate to future market returns, but all the math and number crunching is really very unnecessary because attempting to relate GDP to future market returns fails the logic test. GDP isn’t the economy. It’s a fair-yet-still-quirky government statistic about the economy, and it’s backward-looking by nature. Stocks, on the other hand, are forward-looking and are not a fair-yet-quirky government statistic. When you buy a stock, you do so on the presumption the company has a future and a future you want to be a part of. These are really two ships sailing past one another in the night. But also! The theory valuations are more useful—especially the heavily flawed Shiller PE—is equally faulty. Again, it’s backward-looking, and also earnings result from economic conditions. At the depths of a profit-destroying recession, P/Es typically soar (see: 2009). But that’s also a great time to buy, so you know, not predictive. Finally, the notion you need to forecast stocks out 10 years in order to successfully employ an active approach is just plain silly. No one can see out that far, but all you really need to do is relate sentiment to reality and project that over the next 12 – 18 months. Easy? No. Impossible? Nope.
|By Michael Batnick, Yahoo! Finance, 11/07/2014|
MarketMinder's View: An interesting post regarding the resiliency of markets generally. Now, we aren’t sure why the focus is on small-cap stocks in point #4, as stocks (foreign, domestic, big, small, etc.) generally outperform bonds over long periods. But that’s a minor quibble in an otherwise enjoyable article. This—this!—is also why all those gambling analogies about investing in stocks are flat wrong. When you invest for the long term in equities, you win far more often than you lose.
|By Michelle Jamrisko, Bloomberg, 11/07/2014|
MarketMinder's View: Jobs are up, and that's a good thing. The 5.8% unemployment rate—a flawed measure—matches the long-term average of this flawed measure! Hooray! (And that average holds whether you are talking about periods of recession or expansion. We checked.) But really, this is a plus in the sense unemployment is a personal tragedy for those affected. What it does not do, and should not do, is affect our outlook for the US economy or world economy. Unemployment—rising or falling—is a late-lagging indicator. You cannot formulate an outlook based on such factors. Hence, you should chuck all the talk herein attempting to discern meaning regarding future consumer spending.
|By Mark Gilbert, Bloomberg, 11/07/2014|
MarketMinder's View: Here are two basic economics lessons for all the ivory tower folks in regulatory or policy-setting positions the world over: 1) Private businesses (including, but not limited to, banks) are extremely flexible and very good at finding ways to avoid increased costs. 2) Whether it is imposed by elected officials or appointed ones, a charge from government is basically a tax, and when you tax something, you tend to get less of it. So let’s apply these to the ECB’s negative interest rates. Since their imposition (ostensibly designed to increase bank lending rather than hoarding excess reserves), banks have bought government debt with excess reserves, avoiding the negative rate. Second, they are passing the costs on to large depositors, so the ECB is indirectly taxing European savers. The net effect will likely be less excess reserves held in cash and less big depositors keeping big balances.
|By Jeremy Warner, The Telegraph , 11/07/2014|
MarketMinder's View: The title is bizarre here, which we encourage you to disregard, as the article says little about going up—it’s about the reverse, social mobility in a downward direction. And it is a sensible take on that, with a few minor quibbles (the quasi-luddite technology concerns about the destruction of white collar jobs, for example, or the fears of this all generating political instability). Rather, we suggest you focus more on parts like this passage: “If your father is a FTSE 100 chief executive, you are most unlikely to achieve the same social status, or indeed income, as he did, however much money is poured into your education, if only because these positions are rarities. You will therefore count as someone who in the Oxford study falls down the social scale. This type of downward social mobility is neither here nor there, and certainly nothing for policymakers to worry about. And it turns out that downward mobility is indeed more pronounced the higher up the social scale your parents happen to be.”
|By James B. Stewart, The New York Times, 11/07/2014|
MarketMinder's View: So this is a very interesting discussion of the issue of solvency vs. liquidity in a financial crisis. The Fed can (by tradition and law) lend emergency funds only to a solvent-but-illiquid bank. Officials claim Lehman was insolvent while Bear solvent in 2008, justifying their decisions. But many analysts—including some at the NY Fed—have dissented with this view. This is part of the problem FAS 157 presented: If all banks are judged on the fire-sale value of all illiquid assets, determining who is or isn’t solvent is going to be nearly impossible. Here is a smart quote from a guy: “Hal S. Scott, a professor at Harvard Law School and the author of ‘The Global Financial Crisis,’ says the bottom line is, ‘Solvent is pretty much whatever the Fed says it is.’ He added: ‘I have a lot of sympathy for what Geithner was trying to say. It’s difficult in the middle of a run or a panic to determine whether something is insolvent, because you don’t know how to value the assets. At the end of the day, it’s an art, not science. The issue of how does a lender of last resort determine whether an institution is, or isn’t, solvent has been one of the most difficult problems for a very long time.’” For more, see our commentary, “Independent for a Reason.”
|By Alen Mattich, The Wall Street Journal, 11/07/2014|
MarketMinder's View: Well, let’s be clear: Emerging Markets as a category haven’t done very well in total and cumulatively since 2011. This isn’t really new, and the lackluster returns for the last four years are certainly not tied to dollar strength or Fed policy, as both the changes cited herein are new. What’s more, we have seen no serious analysis suggesting Russia’s issues are due to the potential that the Fed would hike rates. That thesis is only believable if you ignore Ukraine, sanctions, oil price weakness and more. But above and beyond ignoring the broader trend and a couple of the year’s major news stories, the bigger issue we take with this thesis is the presumption that Emerging Markets are all subject to the same factors. These countries have huge differences from one to another, and that is likely behind performance differences this year. Also, why not mention China and India in this piece? We have a hunch it’s because they didn’t fit the argument.
|By Peter Eavis, The New York Times, 11/06/2014|
MarketMinder's View: On the one hand, we can understand why folks care about what central bankers say—these folks determine monetary policy, after all. That’s important! But on the other hand, putting too much stock into what one person says doesn’t make a whole lot of sense to us. Even though Janet Yellen, Mario Draghi and Haruhiko Kuroda are the ones most folks follow, they’re also just a single vote from an entire committee—they can’t act unilaterally. Central bankers also flub and slip on their words, or that type of thing. And given central bankers are human beings (we think), they can always change their mind—so reading too much into their words, words, words rather than their actions doesn’t seem to be a wise use of time. Whether on or off script, central banker-speak’s value is frequently overinflated by the media.
|By Staff, Reuters, 11/06/2014|
MarketMinder's View: Here it is folks, your nearly daily China-hard-landing-fear story. Yes, much of October’s data suggest slower growth—though we’re pretty sure most countries would be ecstatic with export and import readings of 10.6% y/y and 5.5% y/y, respectively. Yes, government officials may continue implementing targeted stimulus measures here and there to push growth along. But let’s look at the bigger picture. Chinese officials projected growth around 7.5 % for 2014. From 2011-2013, Chinese GDP grew 9.2%, 7.8% and 7.7%, respectively. Folks, China’s economy has been slowing for a while now—and that’s ok! It still contributes a ton to the global economy. Chances China comes crashing down due to the commonly offered theories (e.g., shadow banking, housing bubble, credit bubble) are slim.
|By Joshua M. Brown, The Reformed Broker, 11/06/2014|
MarketMinder's View: We agree with the general thrust of this piece. Studies have shown asset allocation—your portfolio’s mix of stocks, bonds and other investments—determines as much as 90% of your portfolio’s return. That’s a lot! But we would toss in one more important caveat here: Dealing with sharp short-term volatility is the price to pay for stocks’ long-term returns. Most investors believe they can handle the ride, but their actions suggest otherwise—there is nothing easy about investing. For more, see our 11/04/2014 commentary, “Taking Stock of That Great October Buying Opportunity.”
|By Jonathan Soble, The New York Times, 11/06/2014|
MarketMinder's View: This piece illustrates why we’re skeptical about the effectiveness of Japan’s “quantitative and qualitative easing” (QQE) policy. Ultimately, the BoJ’s program selects winners and losers—it is no panacea for economic growth. Yes, a weaker yen means cheaper exports, which can boost export activity for some businesses. But on the flipside, more expensive imports cancel those gains to an extent—and considering Japan imports most of its energy, this headwind affects just about everyone in the country. The actual fixes are far harder. For example, one analyst cited herein describes how Japan’s protective employment practices cause wages to stagnate—only real structural change, like labor reform, can solve this. This is why we think sustained Japanese outperformance is unlikely in the here and now. Abe is still chasing the easy button, but even in Japan, there isn’t any such thing as a free lunch. For more, see our 11/03/2014 commentary, “Another Sentiment-Driven Rally for Japan.”
|By Simon Kennedy, Bloomberg, 11/06/2014|
MarketMinder's View: So here the argument is that even though Japan and the eurozone are boosting bond buying by an amount that would offset the Fed’s taper, the Fed is super special so their taper will outweigh other central banks’ quantitative easing (QE). And perhaps that’s right—after all, US rates do have a global influence that likely exceeds Japan and the eurozone’s! (Though we quibble with the eurozone calculation because there is no clear announcement to speak of there.) However, the big misperception with this theory is the presumption that is bad for stocks. There isn’t any actual evidence QE stimulated the economy or markets, and both the UK and US economies sped up after QE tapering was on the horizon.
|By Matthew Boesler, Bloomberg, 11/06/2014|
MarketMinder's View: The worry is premature monetary tightening could knock the US expansion off track. While it’s true inappropriate central bank policy can create big problems—misguided Fed decisions tightened money supply and greatly contributed to the recessions of the 1930s—those conditions aren’t present today, and in our view, this concern is overwrought. The end of quantitative easing wasn’t tightening (as loan growth has accelerated this year) and rate hikes alone have no history of being either an automatic good or bad for markets or the economy. The 1937 angle to this is really just dressing up these long-in-the-tooth fears.
|By Summer Said, Keyal Vyas and Sarah Kent, The Wall Street Journal, 11/06/2014|
MarketMinder's View: Falling oil prices seem to be exposing some fractures in the Organization of the Petroleum Exporting Countries (OPEC). Over the past few years, global (and particularly non-OPEC) supply has grown far faster than demand, pressuring prices. Lately, the pace has picked up, as Saudi officials have slashed prices and maintained output in an effort to keep or win market share. All this has sent OPEC countries dependent on higher prices—like Venezuela—scrambling. While there is no direct market takeaway in the here and now, how this situation develops—and potentially impacts global Energy markets—is worth following.
|By J.D. Harrison, The Washington Post, 11/05/2014|
MarketMinder's View: The “what it doesn’t mean” section seems largely realistic—major overhauls like an Affordable Care Act repeal probably aren’t in the cards (you are free to “huzzah” or “boo” as you wish), but the US/EU free trade deal just saw its chances improve. The “what it does mean” section, however, is full of things the GOP likely can’t do. (You are free to “huzzah” or “boo” as you wish.) They might want to overhaul the tax and immigration codes, they might try, and they might even pass something, but they don’t have the seats to override the President’s veto. We say the following with no bias and no party preference: Gridlock is good and prevents legislation creating winners and losers. Markets like this, even if people don’t.
|By James Titcomb, The Telegraph, 11/05/2014|
MarketMinder's View: So let’s think this through. We’ve already seen how eurozone banks are parking their spare cash at other central banks (the BoE and Fed) and in government bonds to avoid the ECB’s negative deposit rate instead of lending a ton more. Then some started slapping deposit charges on big corporate clients. Now some are making retail customers—normal savers—pay to keep their money in the bank. So on the one hand, they aren’t lending more. On the other, customers have incrementally less money, which reduces the overall money supply. Seems a bit deflationary, no?
|By Frank Paré, Time, 11/05/2014|
MarketMinder's View: What we take from this wise piece is the following: As a wise woman used to say over and over, “Clarity is a social matter.” It doesn’t matter if the language your adviser uses is clear to them, or if they use fancy charts to really WOW you. Your adviser should be able to clearly state how that information relates to your goals and objectives. What’s more, and this is not addressed here outright but is tangentially related and vital, they should be able to explain how their strategy works in similarly clear, easy to understand language.
|By Peter Eavis, The New York Times, 11/05/2014|
MarketMinder's View: We’re starting to wonder if the Fed and its regulatory kin want banks to lend to anyone ever. First they squash the yield curve with quantitative easing, making lending less profitable and discouraging banks from extending traditional loans to supposedly riskier borrowers, like smaller firms with less-flush balance sheets. Then banks find a way to lend to some of these firms anyway by acting as the middle man between firms and hedge funds, who ultimately own the loan—but need the banks to arrange the deal since hedge funds are generally not in the business of direct corporate financing. Now regulators are saying “ooooo, no, you can’t do that, because 2008!” Except last we checked, an abundance of these so-called leveraged loans didn’t cause the crisis. Leveraged loans were written down in 2008, like everything else, but the real culprit was mark-to-market accounting, which required the funds that planned to hold these loans to maturity to value them at whatever they could get in a firesale tomorrow. Funds today don’t have to mark long-term assets to hypothetical firesale. Banks and firms have simply found a creative, market-oriented solution to a problem created by Fed policy. (And if regulators crack down on this, we suspect banks will create another solution, because businesses in need of profits are usually innovative, and there is clearly demand for credit.)
|By Thomas J. Brakke, The Research Puzzle, 11/05/2014|
MarketMinder's View: Hear ye, hear ye: Volatility isn’t risk. Volatility is quantifiable. Risk isn’t. When you see “risk” labeling an axis on a chart claiming to show the tradeoff between risk and return of a given security or asset class, you should be highly skeptical and perhaps back away slowly, because you cannot put a number on risk. Measures like beta and standard deviation tell you how much an investment has moved in the short term. They do not measure the risk of absolute total loss, the risk that this investment will not achieve your long-term goals, or any other life-impacting issue. (They are also backward-looking.) These charts simply illustrate the tradeoff between expected short-term volatility and long-term return. Important! But not risk. (Those of you who have a bit of time to kill and would like to read more might enjoy clicking on the blog post’s first link.)
|By Keren Tumulty, The Washington Post, 11/05/2014|
MarketMinder's View: Looking for a deep analysis of what Congress likely can and can’t do over the next two years and why? This article is for you! Possible: incremental measures like infrastructure improvement, trade deals and the Keystone XL oil pipeline. Nigh-on-impossible: anything big. (Goes-without-saying probable: raising the debt ceiling next year.) Why? Gridlock, obviously, along with the fact a lot of these cats are already in 2016 campaign mode. All indicators point to a government that can’t do anything radical to spook markets for two years. (But they will probably grandstand and bicker a lot, on both sides of the aisle, because that is what politicians do.)
|By Jennifer Ryan, Bloomberg , 11/05/2014|
MarketMinder's View: Calling output at 56.2 and new orders at 58.3 a "slump" is a wee bit wide of the mark. Yes, they are slower than September's. But both those figures are solidly expansionary in this, the UK's dominant economic segment reflecting roughly 80% of GDP.
|By Caelainn Barr and Theo Francis, The Wall Street Journal, 11/05/2014|
MarketMinder's View: Well that’s fun. Ireland announced a while ago it would end the “Double Irish” provision allowing firms to do some funky maneuvering to avoid royalty payments on intellectual property. But the legislation killing the Double Irish also eliminates—wait for it—corporate taxes on intellectual property! They’re just swapping a complex, internationally derided structure for a streamlined, transparent one. Firms won’t lose this benefit after all. (Assuming it passes and the EU doesn’t sue and all that jazz.)
|By Ben Martin, The Telegraph, 11/05/2014|
MarketMinder's View: So here’s the thing about the EU’s forthcoming crackdown on so-called dark pools (really just private stock exchanges) and calls for the US to do the same: Maybe just maybe it isn’t entirely necessary? As the London Exchange’s move shows, the public exchanges really want to stay in business and maintain market share, and they’re ready and willing to innovate and beat the dark pools at their own game to do so. Our hunch: Let the market deal with this, and you get a wave of innovation that makes stock trading even cheaper and easier than ever before. Which is sort of a win for everyone!
|By Victoria McGrane, The Wall Street Journal, 11/05/2014|
MarketMinder's View: So it’s official: A bank can’t buy another bank if the transaction would leave them with over 10% of the US banking system’s aggregate liabilities (deposits and the like). Old news, been a long time coming, doesn’t prevent banks from growing that big or bigger on their own, and doesn’t force big banks to shrink. But! Here’s a question: Will the Fed go totally hardline on this rule the next time they need big solvent banks to buy failing banks during a crisis? The rule grants an exception in these circumstances, so we’re optimistic, but it’s something to keep in mind the next time things look ugly, whenever that may be. On the bright side, it’s encouraging to see the Fed added that exception, as it suggests they don’t totally plan on chucking the traditional crisis management playbook. Also, it suggests they’re aware they haven’t ended bank failures forever and ever, amen. Points for realism!
|By Mark Gilbert, Bloomberg, 11/05/2014|
MarketMinder's View: Well, actually, both the ECB and BoJ need a refresher on the quantity of money theory, if you asked us. Boosting central bank balance sheets and bank reserves doesn’t boost the economy. The economic boost comes from increasing the quantity of money. In fractional reserve banking systems like the eurozone and Japan, banks increase the quantity of money by lending. When central banks buy long-term bonds, they reduce long-term rates and flatten the yield curve, reducing lending, the quantity of money and overall growth. Massive quantitative easing can’t fix all that ails Japan and/or euroland.
|By Josh Boak, Associated Press, 11/04/2014|
MarketMinder's View: A widening deficit due to falling exports isn’t the best news. But we wouldn’t draw too much about the health of the US economy based on any one month. Further, attributing the reading to a strong dollar—supposedly making exports less attractive abroad—seems premature at best. Most economists agree currency valuation changes do not have an immediate impact on export orders, usually logged months in advance. They also do not have a direct, one-to-one effect, as exports can and have risen while the dollar strengthens. To us, the real story in this report is the influence of oil prices and volumes shipped: More than half of US exports’ decline was petroleum (refined products, fuel oil, etc.) products, and non-petroleum imports hit a record high. Price volatility is a key issue to consider in interpreting these data. With that said, imports also shouldn’t be viewed as a negative or a “drag on growth”—they indicate healthy domestic demand.
|By Yoshiaki Nohara, Toshiro Hasegawa and Kana Nishizawa, Bloomberg, 11/04/2014|
MarketMinder's View: Japan’s Government Pension Investment Fund (GPIF) recently announced an allocation shift—less bonds, more stocks. That means they’ll probably have to buy around $86 billion worth of Japanese stocks and $115 billion in global stocks outside Japan—big numbers! But will these purchases ripple markets? Let’s scale: The Japanese purchases only amount to 2.75% of Japan’s investable market, and the purchases outside Japan amount to a (whopping!) 0.33% of the MSCI World ex-Japan’s investable universe—tiny in the grand scheme of things. For more, see our 11/3/2014 commentary, “Another Sentiment-Driven Rally for Japan.”
|By Jon Stein, CNBC, 11/04/2014|
MarketMinder's View: The 4% rule was never exactly intended to be precise investment advice, which can be delivered only by a professional who has deeply explored the needs and finances of their client. Now, as noted here, if you base your entire retirement plan on one 20-year period of historical investment results, you are taking an enormous risk. Yet no rational professional with any expertise would do this, when they can easily use a Monte Carlo simulator that combines thousands of different results and tests your withdrawal rate over that span. The key is, as it has always been: Know where you stand; know where you need to go; know what you can trim expense-wise if you have to. Those three steps are much more significant than any “rule” or guideline. Here is some far more useful counsel, in our view.
|By Stan Haithcock, MarketWatch, 11/04/2014|
MarketMinder's View: We encourage investors to perform thorough due-diligence on every investment product and adviser they’re considering—we wouldn’t tell anyone to blindly hate any product without checking the facts first. That said, facts are in short supply in this piece, which amounts to annuity marketing spin, above all else. The words here all amount to opinions about annuities and off-base analogies designed to give potential buyers the warm fuzzies. They have little bearing in reality, and many don’t apply to the variable and equity-indexed annuities usually peddled to long-term investors. We humbly suggest anyone considering an annuity cast a wider net—maybe look at the pieces FINRA and the SEC have published exposing variable annuities’ drawbacks and conflicts of interest. It is true all annuities aren’t created equal—our beef is mostly with variable and equity indexed annuities. But again, facts—not opinions—should be the basis of your investing decisions. In our view, the annuity industry wouldn’t have such a hard time with all this if they would just explicitly and clearly define upfront all the fees and features in a pamphlet that isn’t 100 pages long and packed with legalese. Our quibble isn’t that these products should exist, but rather, that the information about them should be clear and accurate enough to let potential annuity owners decide for themselves. Before you argue it already is, please take a gander at the thickness of a typical variable annuity prospectus.
|By John Melloy, CNBC, 11/04/2014|
MarketMinder's View: We are big fans of getting the markets’ opinion of events, but this is going much too far: “An equal-weighted portfolio of the stocks that represent the purest plays on a Republican-controlled Congress—like natural gas shipping, for-profit education and medical devices—is up 23 percent in 12 months, the timeframe in which investors began to place bets on this election. Meanwhile, a portfolio of the stocks made up of Democratic pure plays—like solar energy and hospitals—is up just 9 percent over the last 12 months. The S&P 500 is up 16 percent over the same period.” That is correlation, but the causation is lacking—if the Republicans take both the Senate and House, there will still be gridlock because they can’t force the President to sign laws. It also is overly precise to claim 12-months is THE EXACT timeframe in which investors placed “bets” on the outcome of this election. Finally, investors don’t place bets—speculators do that. The stock market, as measured by the S&P 500, pays out in 72% of rolling 12-month periods—show us a casino that does that and we’ll show you a casino stock to sell short.
|By Michael P. Regan, Bloomberg, 11/04/2014|
MarketMinder's View: The V-shaped stock charts under such intense scrutiny here are those headscratching wiggles from October that seem to have really flummoxed some technical analysts. But there is little reason to go break out the scalpels, beakers and forceps because these charts tell us only what happened in the past, not what’s to come. Markets are not like the physical sciences, where studying a graph of what happened will yield perfect lessons for the future. We would also suggest the claim, “Sharp breaks in trend followed by sharp rebounds is not healthy,” overlooks how sentiment-driven moves both begin and end.
|By Andrea Ferrero, The Economist, 11/04/2014|
MarketMinder's View: We’d argue the main lesson the ECB should learn is that quantitative easing (QE) wasn’t very effective in the US. Yep, QE lowered long-term interest rates. As a result, it lowered loan profits, which are often tied directly to the spread between short-term interest rates (funding costs) and long-term interest received, and money supply growth was slow—far from inflationary or stimulative. Since banks typically like to make money on loans they extend, this dampened loan supply. Is there a counterfactual for this? Nope. But there is more than a century of historical evidence and theory supporting the predictive quality of the yield curve. With that said, will QE really help the eurozone?
|By Staff, The Yomiuri Shimbun, 11/04/2014|
MarketMinder's View: So 26 years from now Japan’s growth may turn negative, according to a policy think tank—a long-term forecast which you could be forgiven for thinking is near-complete speculation. But it is also speculation on a factor—demographics—that changes and shifts too slowly on balance to materially impact markets or economies. Besides, there are myriad policy shifts, technological innovations, societal changes, etc., that could morph between now and then, alleviating the issue near totally. We would humbly suggest Japan has other issues much more significant to both the here-and-now and the long term: like an outdated labor code, trade protections, conglomerate-dominated corporate sector and more. Those issues are key, though we would not be surprised if Abe pays nothing more than lip service to fixing them.
|By Staff, EUbusiness, 11/04/2014|
MarketMinder's View: France. Italy. Recession. Deflation. And the list goes on. These fears have long been chewed over—hard to see how the European Commission citing a bunch of old fears is really the titular “New Blow to Recovery.” Seems to us like it’s “More of the Same for the Eurozone.” Oh and this is all a forecast revision! Because the prior forecast was wrong! So maybe this one proves to be, too? It’s odd, but we find ourselves agreeing with the unnamed French finance ministry source who said the EU figures were, “purely theoretical” and “meant nothing.”
|By Mohamed A. El-Erian, Bloomberg, 11/03/2014|
MarketMinder's View: The good? The S&P 500 and Dow rebounded from their October dips—even setting new record highs. Yayyyyyy! The bad? Stocks bounced only because some earnings news was good, investors apparently bought on the dips, there was lots of cash on the sidelines, and Japan hit its quantitative easy button again. Meanwhile, oil is still down and bonds are still up, so we are supposed to avoid getting too comfy, because economic fundamentals don’t warrant big gains. Look, this is all just another take on the “slow growth was good enough for five and a half years but isn’t any longer” meme we’ve seen around the Internets these last few weeks. We don’t buy into any of it. Stocks and GDP don’t have a 1:1 relationship. Heck, neither do stocks and earnings! P/E multiples usually expand as bulls mature and investors gain confidence. Stocks have never needed rip-roaring growth. Just a reality that outpaces expectations, which is what we have today.
|By E.S. Browning, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Could Vladimir Putin, rate hike fears and high P/Es kill the Santa Claus rally this year? Um, who knows? Three-month stretches are impossible to predict with any certainty. That said, this is really a false choice. The Santa Claus rally isn’t any less mythological than the January effect, Sell in May, the September Swoon or any other seasonal adage. Nor are the long-feared “events” any likelier to have an actual impact on markets and economic growth today than they have been for the last several years. Maybe we get some sentiment-driven wobbles over any of these or some other thing, maybe we don’t. We’d suggest looking longer term than three months and looking at fundamentals, not fears: The world is growing, a gridlocked US Congress likely can’t rewrite property rights or otherwise scare the heck out of stocks, and most investors don’t fully appreciate either of those things.
|By David Kaufman, Financial Post, 11/03/2014|
MarketMinder's View: This makes some sensible points about short-term volatility’s fleeting nature, but its advice falls short in our view. It encourages investors to let their emotional comfort with volatility be the primary determinant of their asset allocation, and it suggests everyone keep a hedge of “alternative allocations” to help them sleep at night. Personal comfort is a fine thing to consider, but we think your long-term goals and time horizon should be the first, largest considerations. Figure out what you need and want your money to do for you over time, identify the long-term returns you need to get there, and then consider the tradeoffs between long-term growth and short-term volatility. If you let your comfort with volatility be the guiding force, without any thought of your actual goals, you could run a very real risk of running out of money too soon if you need your portfolio to fund living expenses.
|By Staff, Reuters, 11/03/2014|
MarketMinder's View: ISM’s manufacturing Purchasing Managers’ Index jumped to 59.0 in October from September’s 56.6, trouncing expectations. Order backlogs (up six percentage points to 53.0) and forward-looking new orders (up 5.8 percentage points to 65.8) led growth. Though just one month, it’s another sign the US expansion continued last month, and it runs counter to the latest round of slowdown fears.
|By Paul Krugman, The New York Times, 11/03/2014|
MarketMinder's View: Who gives the best economic advice: Economists, with their knowledge of theory, or business leaders, with their real-world experience and savvy? This piece votes “economists” all the way, claiming business people who said quantitative easing (QE) would devalue the dollar and cause hyperinflation were clearly wrong, and the economists who knew better were clearly right. And hey, that’s one way to look at it. But here’s another: QE was based on demand-side economic theory—make credit cheaper so folks will be more eager to borrow—but in reality, loan growth was the weakest in post-War history. Why? Banks kept supply tight. QE shrank the spread between short and long rates, shrinking banks’ potential profits and making them less eager to lend. We can’t know why the economists in charge of the Fed (and BoE) missed this, but we do know business people are generally more prone to consider things like profit motive and how that impacts businesses’ actions. That isn’t to say one group is better than the other! Just that there are two sides to every debate, and a lot of this stuff is a matter of opinion.
|By Ambrose Evans-Pritchard, The Telegraph, 11/03/2014|
MarketMinder's View: This piece puts UK home prices in perspective, countering the still-widespread belief UK housing is back in bubble territory. For example, real home prices (adjusted for inflation) are still 35% below their 2007 peak. Most of the price increases are concentrated in London, where only 14% of England’s population resides. The UK doesn’t have a housing bubble. It has a severe supply shortage in London.
|By Jason Zweig, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Master Limited Partnerships (MLP) have their time and place, but we’d suggest looking beyond those eye-popping yields and weighing all the pros and cons. MLPs are essentially a very narrow play on US energy markets with a different tax treatment than stocks. Comparing stocks’ earnings and dividend yields to MLPs’ isn’t the best way to gauge which is best. With stocks, total return matters more. So do diversification, flexibility, Uncle Sam and many others.
|By Matt Moffett, The Wall Street Journal, 11/03/2014|
MarketMinder's View: Even if the Constitutional Court doesn't block Catalonia's planned November 9 "vote" on independence, it doesn't much matter: This is a non-binding, unofficial vote that most acknowledge is more opinion poll than referendum. For more, see our 10/15/2014 commentary, “Return of the Euro Crisis’ Ghosts.”