Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.
Falling auto sales caused a stir this month, seemingly contributing to investors’ collective freak-out on October 10 and 11. People often presume falling auto sales are a sign of a faltering economy. Cars are a big discretionary purchase, one often made using credit—so, the theory goes, they illustrate demand and consumer confidence, hinting at where growth may go. But this instinct is wrong. Exhibit 1 shows auto sales growth is strongest in the early stages of an expansion—as the economy bounces out of recession. Then, once the initial rebound is over, auto sales frequently decelerate as the economic cycle matures. Typically, sales turn negative during the expansion’s second half and can continue falling a long while before a recession begins. Therefore, falling auto sales aren’t a broad market-timing tool, in our view. We see them more as an ordinary feature of later-stage bull markets like the present.
Figure 1: Auto Sales Growth Tends to Surge Early Cycle and Decelerate Late Cycle
Source: US Bureau of Economic Analysis and FactSet, as of 10/15/2018. 12-month moving average in US auto and light truck sales, January 1970 – September 2018.
US stock buybacks are a hot topic this year, with the media working itself into a tizzy on stories running the gamut from whether buybacks deepen inequality[i] to whether they are the one thing keeping stocks afloat.[ii] At its root, the debate hinges on a widely held belief companies are binging on their own stock. It is pretty unsurprising, then, that when a report[iii] estimated Q2 buybacks doubled records—clocking in at nearly $440 billion—sensationalist headlines surged, too.[iv] There are multiple problems with these theories, but here is a primary one: The numbers overstate reality, giving the impression increased buybacks are a bigger deal than they really are. Taking the time to properly measure and scale buybacks adds needed perspective to the issue.
Measuring Buybacks
Big, eye-catching numbers are the stuff great headlines are made of, but very often, the details prove them overstated. Consider that ~$440 billion Q2 number: It is based on announced buybacks in Q2, not executed buybacks. That may seem semantic, but it isn’t. Companies often announce plans they later cancel—without notice. Further, planned buybacks carry neither an expiration date nor a minimum repurchase amount. So even buybacks firms announce in Q2 aren’t certain to happen in Q2, 2018—or ever.
In this Friday’s not-every-Friday roundup of fun financial news, we bring you a glimpse[i] into the far-flung future to put Sears’ bankruptcy into perspective, the US Treasury’s wacky position on currency manipulation, Los Angeles’s attempt to solve a non-existent problem, more political news from Down Under and our public plea for less jargon everywhere.
Back From the Future
As we sifted through the many discussions of Sears’ slow decline and bankruptcy filing this week, we thought of Montgomery Ward, Service Merchandise, Best Products and all the rest of the 20th century’s late, great catalogue giants. Then we thought of Woolworth’s, Kress and other departed retail behemoths. We thought of Kresge, which later morphed into K-Mart, and smiled before remembering that K-Mart, too, is collateral damage in Sears’ downfall. And we thought of channeling all this nostalgia into a bit on how nothing is forever and even stores with long, storied histories come and go. (See also: Emporium Capwell, Foley’s, Bullocks, Gimbels, Kaufmann’s, Filene’s, I. Magnin and a few hundred others.) Elisabeth spent a few seconds wondering whether we should pair it with her photo of the old Kress building in Charleston or the terrazzo Woolworth’s entryway in Savannah. But then we time-traveled 200 years in the future,[ii] found an interesting news clip and decided to share it instead.
Following the Fed’s September 26 decision to raise the effective federal funds rate, President Trump has repeatedly expressed displeasure at the Fed’s allegedly “loco” rate hike decisions. Some worry even if Trump doesn’t have the authority or desire to fire Fed chair Jerome “J-Money” Powell,[i] “sustained pressure” might spur Fed members to either cave or assert their authority via aggressive tightening. However, minutes released Wednesday from the Fed’s September meeting don’t imply presidential rhetoric is factoring into Fed decisions.[ii]
Last Wednesday, amid market turbulence, the president opined to reporters, “I think the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy.”[iii] This week, President Trump alluded to the Fed as “my biggest threat,” noting, “I’m not happy with what [J-Money] is doing, because it’s going too fast.”[iv] (“It” refers to the pace of interest rate hikes.) While both remarks came well after the hike, they spurred fears Powell—a Trump appointee—might soon feel he should follow his appointer’s lead. Others fret Powell won’t be able to “justify tightening credit … when inflation is tame, especially in the face of presidential criticism.”[v]
Another camp fears Trump’s comments will have the opposite effect. Per one economist and ex-Fedster, Trump’s critiques might “stiffen [Fed members] backs on a close call. Many members of the FOMC will not want to see newspaper stories saying they caved to Trump.”[vi] Ergo, more rate hikes, and sooner! Either way, Fed decisions wouldn’t be as impartial and independent—which monetary policy ought to be, to the extent that is possible.[vii]
As Italy’s new budget preoccupied investors in recent days, debt fears took a turn, with Italian banks entering the spotlight. Many believe Italy’s banks—holding Italian debt—are at risk. If the government’s finances get shaky, many fear, it could doom banks downstream. In our view, fears about Italy’s debt are clouding investors’ views of Italian banks and seem off the mark to us. As we showed here recently, Italy’s public finances are stronger than most give them credit for, and a “Quitaly” of Italy leaving the euro looks highly unlikely. Moreover, strip away debt fears and Italian bank fundamentals look fine—setting up bullish upside.
Italian bonds and banks aren’t inextricably linked. During Europe’s debt crisis, governments were on the hook for bailing out their banks, while banks held home-country sovereign bonds exposed to government credit risks—the dreaded “doom loop.” Some governments had to borrow heavily to bail out the banks, risking their own solvency—like Ireland. But spiraling banking and government failures depended on insolvent financial institutions and a depleted Treasury unable to borrow on the open market without sending debt costs to unsustainable levels. In Italy (and the rest of the eurozone outside maybe Greece), neither is the case today.
Italian banks don’t need bailouts anymore—they are cleaning up their books. As Exhibit 1 shows, while Italian banks’ non-performing loans (NPLs) are still above pre-crisis levels and higher than some other major eurozone members’, they have made big strides in reducing problem loans over the past couple years. Moreover, Italy’s biggest banks are in better shape than Exhibit 1 implies. Most bad assets are concentrated in smaller banks. Megabanks’ bad asset disposals are much further along. Italian banks’ capital ratios are also high and rising. (Exhibit 2) This means they can likely absorb substantial losses before being subject to ECB bail-in rules. There is more to do, but Italy’s banks are far along the road to recovery, and the biggest are on sound financial footing.
The tech world is abuzz with exciting news about 5G—a pending upgrade to wireless capabilities many hope will leave today’s mobile tech in the dust. Italy just auctioned off a big chunk of 5G wireless spectrum to phone companies operating there.[i] A major US phone company just started rolling out limited 5G capabilities in four cities.[ii] But those who aren’t steeped in this field may wonder: What is 5G technology—and what are its possible implications for the economy and stocks?
First, the basics. The “G” in 5G stands for “Generation,” while the number refers to successive generations, differentiated by capability. Each “G” introduces new minimum performance standards—such as speed and responsiveness—and (more importantly) relies on new technologies incompatible with devices built around the previous generation. The transition from 1G (analog cellular—powerful enough to transmit voice but not much else), to 2G (digital cellular—voice and text), to vastly superior 3G (digital voice, text and data), to 4G (way more data) took several decades. Along the way, these advancements spurred many previously unfathomable innovations and transformed how people around the world live and work. The party continues with 5G, which is expected to increase speed, reduce data transfer delays and enable “smart” technology that brings a much more functional Internet of Things with far broader capabilities closer to an everyday reality.
The 5G hype stems from three main ways it improves on 4G. First, it is faster. Lower-end projections for 5G are for download speeds 4 times faster than 4G, with higher-end estimates reaching 100 times. The latter would permit downloads of full-length HD movies in mere seconds. More complicated but equally impressive, 5G could allow phones to offload their most data- and memory-intensive computing tasks to the network—thus allowing phones to house only the minimal hardware necessary to complete simple tasks.
The second 5G advantage is its superior responsiveness. One of 5G’s most promising features is its low “latency”—a measure of how long it takes data to travel between two points on a network. While this sounds like the same thing as “speed,” it isn’t. Speed is about how rapidly a network can transmit data once it has received a request from a phone, computer or other connected device. Latency is about how long it takes for the network to process requests to send and receive that data. One way you experience latency is when trying to video chat on a slow connection. Slicing or eliminating it could usher in a new era of genuine real-time communication between devices.
In this podcast, Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on recent US political developments and how they may impact capital markets.
Time stamps:
00:45 – Brett Kavanaugh confirmation
02:30 – Do you know something that others don’t?
05:10 – US midterm elections
06:35 – Two potential forms of gridlock
07:20 – 87% miracle
10:30 – Gridlock’s impact on stocks
14:40 – Does the 87% miracle affect global stocks?
16:00 – Parting advice from Ken
US/China trade tensions are back in the news, with each side reiterating tariff threats. The US has threatened to tax basically all Chinese imports, and China has responded in kind. But from China’s perspective, there is just one problem: It imported just under $130 billion worth of merchandise from America last year, complicating like-for-like retaliation if America taxes all $505 billion in Chinese imports.[i] Hence, China has threatened to add non-tariff measures to its retaliatory arsenal. This could take a number of forms, including using its regulatory clout to torpedo big mergers involving US firms and making it harder to do business there. But some observers think China could choose another option: dumping its US Treasury holdings in an effort to sink the US economy. Trying to ascertain what politicians will do is sheer guesswork, and we won’t try. However, there are some key reasons why dumping Treasurys wouldn’t benefit China. Further, even if China did sell a chunk of its holdings, it likely wouldn’t damage America’s economy as much as some think.
The logic behind China dumping debt to hurt the US is that it would send long-term interest rates soaring, potentially even causing a debt crisis as bond payments mushroom. We will get to why that isn’t likely momentarily. For now, consider the reverse: China suddenly liquidating all its US bond holdings would be tantamount to economic suicide.
The country’s vast Treasury holdings are a function of its exchange rate policy. Officials manage the yuan’s movements against a trade-weighted basket of currencies, keeping fluctuations small and gradual. If China dumped all its Treasurys in one go, the yuan would likely skyrocket as the government converted the proceeds to its home currency. This is problematic for an export-heavy economy. If its currency spikes, one of two things likely happens. Exporters raise prices overseas, potentially driving away customers and sinking sales, or they keep prices steady, swallowing a big loss on currency conversions. Either would be a rather large negative.
This week’s volatility made us wonder whether readers would have interest in an installment of Random Musings, leading us to debate if this was the week we would prove this not-weekly column isn’t actually weekly. But in the end, we decided to move forward based on this thought: Maybe readers have been bombarded with gloomy headlines dwelling on the week’s volatility and need a respite (and perhaps a bit of a therapeutic laugh). A palate cleanser, if you will. If true, please, by all means, sally forth. We hope you enjoy. If not, check out our other coverage, which shares Fisher Investments’ view of recent volatility.
North Korea’s Most Well-Fed Man Shows Why Tariffs Aren’t Economic Poison
In case you missed it, The Wall Street Journal ran a delightful piece this week showing the, um, clever ways firms in the US and China are skirting tariffs. Turns out, it is pretty easy to remove “Made in China” labels and change the product code to something that isn’t covered by tariffs. Why pay a tariff on steel plates from China when you can get tariff-free “turbine parts” from Malaysia? You probably have to pay some broker a fee, but their markup is likely a lot lower than a 25% tariff.
Usually, we use the “Headlines” space for commentary on individual articles, but today, we saw one so great and timely we thought it deserved prime real estate, especially with market volatility continuing.
If you haven’t followed Ken Fisher’s writings over the years, you may not be aware of his fondness for Rudyard Kipling’s poem “If”—a fondness your friendly MarketMinder editors share. Though Kipling conceived “If” as a life manual for his son, it is also something of a manual for investors. As Ken once wrote in Forbes: “Google it and you will see that it is a poem about self-control and stoicism. If I feel uneasy, I think about ‘If.’ It’s … great for investors, parents, teens and CEOs. I certainly try to apply its principles to my stock picking. ‘If’ discipline is the cornerstone of a sound investment strategy.”
And so it is! We can think of no better advice for surviving market volatility than “keep your head when all about you are losing theirs.” Sometimes, success requires you to “force your heart and nerve and sinew to serve your turn long after they are gone.” Back in March 2009, at the financial crisis’s depths, “hold on when there is nothing in you except the Will which says to them: ‘Hold on,’” was a small beacon of hope.
