Daily Commentary

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.


Up … or Up in Smoke?

What follows is a discussion of investment issues involving marijuana stocks, given recent state-level legalizations and increased investor attention. We neither endorse nor pass any judgment on the consumption of marijuana or legalization per se.

Recently, a friend and I were roaming the streets of San Francisco when we saw a huge line. It wasn’t for the new iPhone. It wasn’t even for brunch. No, folks were clamoring to enter a retail cannabis shop. Since marijuana became legal in California on January 1, these establishments have been popping up all over.[i] Alongside this, financial media and investors are taking notice. So, considering the budding recreational marijuana industry’s potential growth, should investors inhale opportunities in this space? Or is it a bad trip waiting to happen? In my view, it is more of the latter—the cannabis industry isn’t a pot of gold on the other side of the rainbow.

Before you light up your portfolio with those alluring cannabis-related stocks, consider what you are investing in. Most marijuana-related stocks are tiny, falling in the small-cap to micro-cap range. The Marijuana Index tracks about 350 securities listed in the US and Canada that have “more than 50% of their operations focused on the marijuana industry.” Many of these are penny stocks—low-priced, thinly traded and lightly regulated securities occasionally subject to pump-and-dump schemes.[ii] But even looking at non-penny stocks, these firms are small. Within the US Marijuana Index, only 1 constituent of 17 has a market cap exceeding $1 billion. For comparison, the median market cap of a S&P 500 company is about $20.7 billion. Small cap has its time, but that usually comes early in a bull market. In more mature bulls, we think the biggest, global companies with name recognition and healthy balance sheets are positioned best. There are no big US marijuana-related firms. None can even have full national reach, never mind global.

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A Handy Suggestion for 2018 on Delayed Tax Day

Thanks to IRS glitches, today is tax day! Which makes today the last day for you to discover that you either gave the IRS a free loan, have to fork over a hefty check or nailed your withholdings and broke even. If you are in that last camp, congratulations! And don’t get too comfy, because with the recent tax changes taking effect for the 2018 tax year, your withholdings may be out of whack if you haven’t checked and updated your W-4. We reckon every income tax-paying American would benefit from grabbing their 2017 returns and a couple recent paystubs, heading to the IRS’s website and using the IRS’s Withholding Calculator to get their W-4s in order. Presuming the website works, that is.[i]

If it has been some time since you filled out a W-4, you might think, “well, my dependents and marital status haven’t changed, and I don’t take any credits, so what is there for me to update?” The answer: A lot. W-4s also consider your estimated itemized deductions and other factors, which got a radical makeover in December. Several itemized deductions got the axe, including interest on home equity loans and job-related moving expenses (except for active military). Others, like mortgage interest, property taxes and state and local taxes, got big haircuts. At the same time, the standard deduction was doubled, so itemizing might not make sense anymore for some folks. Considering these changes now—and how they apply to you—can save you a big headache when you tackle your 2018 taxes. Having a good idea today of whether you will itemize deductions next year, and tweaking your withholdings accordingly, can (potentially) spare your wallet. Deductions aren’t the only big changes. The Alternative Minimum Tax threshold got a big bump, while the personal exemption bit the dust. And of course, for many earners, income tax rates fell. Revisiting your W-4 can help you through all of these.

Happily, thanks to the IRS Withholding Calculator, going through your W-4 is a cinch. You will simply need your completed 2017 tax return, a recent paystub or two and a general sense of how much you will spend on medical expenses and interest or give to charity this year. You might also need a good cup of tea or cold beverage. When you are ready, start the simple four-step process. It begins with the basics: your filing status—single, married filing jointly, etc.—and whether anyone else can claim you as a dependent. The next screen is where you will enter your employment status and specify whether you received a scholarship or contributed to a tax-deferred retirement plan (e.g., a 401(k), 403(b) or 457 plan). Don’t include any potential IRA contributions—those come later. This screen will also ask if you contributed to a “cafeteria or other pre-tax plan,” which has nothing to do with your lunchbreak—rather, it refers to pre-tax health care benefits like Health Savings Accounts and Flexible Spending Accounts. This screen also asks about credits, including the Earned Income, Child, and Child and Dependent Care Credits. If you pay for child care or the care of someone who is mentally or physically incapacitated, you may qualify for the latter.

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Across the Great (Sentiment) Divide

A recent spate of soft data releases suggests February and March weren’t kind to the UK and German economies. This isn’t noteworthy in and of itself—not every month can be a winner—and given we are midway through April, it may seem like old news. But deeper digging reveals a useful nugget for investors. While both countries fared about the same, headlines amplified Germany’s struggles—dubbing them a downturn in the making. Meanwhile, they downplayed the UK’s, waving off “the blip.” In our view, these divergent receptions highlight the fact sentiment towards the eurozone has significant room to improve—bullish for stocks there.

The data similarities are striking. UK February manufacturing output fell while overall industrial production managed a 0.1% m/m rise—but only because nasty weather drove up utility output. Both measures declined for Germany. UK and German February construction activity contracted. So did February trade in both countries—exports as well as imports, which represent domestic demand. German retail sales fell in February. UK retail sales rose, but the sample cut off at February 24, before one of the worst winter storms in generations struck late in the month. That delayed retail gloom until March, where preliminary data from the British Retail Consortium show sales turning south. Lastly, Germany’s March composite Purchasing Managers’ Index (PMI) remained in expansionary territory but slipped from February. The UK’s March services PMI did the same, while the manufacturing PMI inched up.

Yet while the UK and German growth pictures look largely the same, media interpretations differed wildly. Coverage in the UK noted broad weakness for February and March, but the analysis and interpretation was sanguine. Instead of projecting weakness ahead, they largely blamed the weather and wrote it off as skewed. For example, in response to the underwhelming industrial production, manufacturing and construction figures, an economist for a manufacturing trade group said the report “looks more like a temporary wobble than a turn for the worse.”

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Counterproductive Cash Cushions

Cash beat stocks and bonds in Q1, which has some saying it deserves greater emphasis in your portfolio: Keep some cash, they argue, to both cushion the blow when markets tumble and give you firepower to buy on the dips. Sensible as this might seem on the surface, we think it raises some tricky questions, like: If you buy on the dip, when and how do you raise a new cash cushion for the next pullback? Is this just market-timing by another name? Pick it apart, and we think it becomes clear the biggest beneficiaries are the brokers collecting commissions from all this cushion-stuffing and dip-buying.

The “volatility cushion” argument overrates the impact of short-term wobbles on an investor’s long-term returns. While sitting through turbulence isn’t fun and wanting to avoid (or lessen) its impact is natural, corrections and pullbacks don’t prevent disciplined long-term, growth-oriented investors from reaching their goals. US stocks’ roughly 10% long-term annualized returns since 1926 include not only 13 bear markets, but also scores of lesser zigzags along the way.[i] As Exhibit 1 shows, stocks have never had a negative return over any 30-year rolling period during this window (based on month-end values). Rather, the lowest return was 7.5% annualized, from August 1929 to August 1959.

Exhibit 1: Stock Returns Diverge Less With Time

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The Trouble With Long-Term Budget Projections

The US Treasury building soaking in a sunny day (and your tax dollars). Photo by steinphoto/iStock by Getty Images.

After the CBO released its latest exercise in straight-line math yesterday, projecting $1 trillion annual federal budget deficits two years ahead of schedule, we have seen a rash of debt-related fears—most centering on the risk to the US economy when interest rates rise. We think “if” is more reasonable than “when,” in that prior sentence, as interest rates aren’t certain to soar, but such nuance is often lost in fearful headlines. Particularly when the CBO pencils in average interest rates on US debt rising from 2.0% last year to 3.4% by 2028. That, according to the forecast, would send interest payments from 8% of total federal revenues last year to 16% in 2022 and beyond. Now, we don’t think endlessly piling on debt is a fantastic idea. But we think investors should keep a cool head when it comes to these budget forecasts.

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Jobs Marched on in March

Stocks fell Friday amid talk of escalating trade tensions between China and the US. The BLS seemed to add to the bad news, reporting US nonfarm payroll employment rose by just 103,000 in March—short of expectations for 185,000 and the smallest gain in six months. Some even argued trade worries may have affected hiring decisions. But wait! Two days earlier, another closely watched employment report said hiring was “rip-roaring” in March as the private sector added 241,000 jobs. So which is right and which is wrong? In our view, there is no clear answer. Rather, this difference highlights why investors should consult a broad swath of data when assessing the state of the economy rather than rely on a single econometric as all-telling. 

While both the BLS’ Employment Situation Summary and the ADP’s National Employment Report track employment, their approaches differ. The BLS surveys employers nationwide, reaching about 149,000 businesses and government agencies. ADP focuses on the private sector and uses live payroll data. Both approaches have pros and cons. The BLS’ survey is more comprehensive, but it’s also subject to more revisions, and surveys aren’t airtight. Its initial report often gets updated—sometimes significantly—and the margin of error is large. ADP’s data are less volatile and typically have smaller revisions, but the firm serves only about 20% of the US private sector, and its client base’s sectoral makeup isn’t perfectly in line with the broader economy, forcing statisticians to do some scrubbing. Moreover, neither report counts all workers, missing folks like private household workers or unpaid family workers.[i] So while both provide a snapshot of the employment situation, neither is all-encompassing.

While the March difference between the two reports seems big, it isn’t uncommon. Just last month, the BLS’ payroll survey said February nonfarm payroll employment climbed by 326,000 jobs compared to the ADP’s 246,000 gain. Exhibit 1 shows the monthly change in payrolls for both the BLS and ADP since January 2016. Sometimes they are close, but sometimes they aren’t.

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To Weigh the US – China Trade Tiff, Avoid Extrapolation

When this correction began at January’s end, fears centered around wage growth, higher inflation and rising long-term interest rates. Though the upticks were small, many believed they were only the beginning of big surges, bringing trouble for stocks.[i] US – China tariffs have now taken center stage, but the pattern is the same: Plenty fear they are the “first shots” in what will become a full-blown trade war—a Smoot-Hawley redux choking off global trade, tanking the economy and ushering in a bear market. In our view, however, there is little evidence suggesting these doomsday scenarios are likely. Extrapolating worrisome short-term trends into future catastrophes is tempting—and common—in corrections when emotions run high, but we believe it is a poor basis for weighing market risks.

At first blush, new tariffs seem to be coming thick and fast. US levies on imported steel and aluminum took effect March 23, with China one of just a couple major suppliers not to receive an exemption. China responded on Monday, April 2, implementing retaliatory tariffs on about $3 billion worth of US imports. Then on Tuesday the Trump administration unveiled a list of 1300 Chinese goods, worth about $50 billion annually, that may be subject to a 25% tariff. China responded on Wednesday, announcing its own list of $50 billion worth of imports from the US that could be subject to 25% tariffs. And just when it seemed like both sides were ready to call it even, President Trump asked his trade rep to ponder tariffs on another $100 billion worth of imports from China, which is already vaguely promising a “major response.” Right on cue, US stocks tumbled -1% in the first 90 minutes of Friday morning trading.[ii]

If you see this and think, “Gulp, this looks like a trade war,” well, you would be right—in principle. Tit-for-tat is how these things start, and Thursday’s news does look like escalation. Yet “war” seems like too big a word for what we are dealing with at present. This is much more a “spat.” Media phrasing seems to be inflating investors’ estimate of the tariffs’ impact. Many articles refer to “$50 billion in tariffs,” implying each country would pay $50 billion in additional duties. Not so—the tariffs apply to about $50 billion worth of each country’s imports. This isn’t just semantics: Math says a 25% tariff on $50 billion worth of goods amounts to $12.5 billion. The president’s consideration of “$100 billion of additional tariffs” would seem to be similarly inaccurate—and overstated—shorthand. Rather, we’re likely talking about 25% of $100 billion, or $25 billion, added to the $12.5 announced earlier. $37.5 billion in tariff payments amounts to 0.2% of the $19.4 trillion US economy.[iii] Or 0.05% of the $80 trillion global economy.[iv] Add in China’s announcement to date and this would be marginally larger, but you are still talking about a fraction of a percentage point.

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The Great White House Turnover Sideshow

Editors’ note: Our political commentary is non-partisan by design, and we believe political bias is a dangerous investing error. We prefer no party, politician or ideology and assess political developments solely for their potential market impact.

Chaos! Turmoil! The Apprentice: White House Edition! That is the popular characterization of the Trump administration following a string of high-profile departures. Ever since the S&P 500 opened lower the morning after now-former National Economic Council director Gary Cohn announced his resignation, some headlines have tried to draw a connection between White House turnover and markets, arguing a supposed brain drain and policy uncertainty threatened the US economy and stocks. Yet, as often happens during market corrections, reality appears much more benign than headlines suggest. Not only is high White House turnover not very unusual, but it also shouldn’t imperil the bull market or expansion—if anything, the distraction should add to gridlock, which limits legislative uncertainty.

Before delving into the personalities at hand, a little context is in order. For that we turn to Brookings Institute research on turnover, which they define as the firing, resignation or promotion of senior White House staff—those with keywords like “chief,” “director,” “assistant to the president” and “deputy assistant to the president” in their title. As a result, it excludes cabinet secretaries, but it is still fairly illustrative. According to their analysis, the 34% turnover rate during President Trump’s first year is higher than any of the previous five administrations (as far back as the study goes). Yet when widening the sample beyond year one, President Trump’s turnover is lower than President Reagan’s second year and President Obama’s third. So the timing of the turnover is earlier than his predecessors but the scope isn’t unprecedented.

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Beware False Prophets Peddling False Profits

Move over, Jim Bakker: There’s (potentially) a new (alleged) criminal pastor in town. The SEC and Justice Department have just charged a Houston megachurch pastor and his business partner, a “financial planner” with priors, for bilking elderly folks out of $3.4 million by selling them pre-Revolutionary Chinese bonds, which they pledged to eventually resell for profit. Both men maintain their innocence, and it is up to the civil and criminal courts to do their thing. But with this case earning several headlines, it seems like a good time to remind investors of one key trick criminals often use: affinity marketing. Or if you prefer less jargon, targeting a specific group of investors with whom they might claim a special relationship—think a church group, senior center, ethnic community or neighborhood. While not every financial professional targeting these groups is up to something dirty, it is crucial for investors to be stay vigilant and not trust someone because of their occupation or social connections alone.

Here, courtesy of the SEC’s announcement, are the details of this case:

The SEC's complaint alleges that, in 2013 and 2014, Kirbyjon Caldwell, Senior Pastor at Windsor Village United Methodist Church in Houston, and Gregory Alan Smith, a self-described financial planner who the Financial Industry Regulatory Authority has barred from the broker-dealer business since 2010, targeted vulnerable and elderly investors with false assurances that the bonds—collectible memorabilia with no meaningful investment value—were worth millions of dollars.  Caldwell and Smith raised at least $3.4 million from 29 mostly elderly investors, some of whom liquidated their annuities to invest in this scheme. Caldwell and Smith are alleged to have taken approximately $1.8 million of investor funds to pay for personal expenses, including mortgage payments in the case of Caldwell and luxury automobiles in the case of Smith. Offshore individuals received most of the remaining funds.

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Chart(s) of the Day: 'Support' Has No Evidentiary Support

As we perused the coverage of Monday’s volatility, we noticed a common observation: The S&P 500 crossed below its 200-day moving average, a popular technical indicator. As the thinking goes, during a bull market, the 200-day average is the “support” level. As long as the index stays above it, good times lie in store. And if it crosses below? The rally is allegedly losing momentum, so look out. While Tuesday’s 1.3% rise put the index back above that allegedly magical level, we still feel obliged to issue a public service announcement: The 200-day moving average has no predictive power.[i] Past returns do not predict the future, and there is a slew of false signals.

The following charts show the S&P 500 and its 200-day average during this and the prior two market cycles. As you will see, while the index did cross below the 200-day average near the start of the prior bear market, it also did so several times during each bull market. Even on those occasions when deeper corrections ensued, stocks rebounded quickly, with the corrections ending before the index crossed back above the 200-day line. Quite simply, this is a terrible timing tool.

As we’ve written before, using technical analysis alone amounts to driving while looking solely in the rearview mirror. No matter how hard you stare at what just happened, it won’t tell you what is to come. During corrections, sentiment swings can knock stocks for no good reason. Those wobbles aren’t predictive, and they are unrelated to the fundamental features stocks weigh over the longer term. But looking at a chart won’t tell you any of that. It will probably just hoodwink your brain into seeking patterns. To paraphrase a certain apocryphal Freudism: Sometimes a line is just a line. The 200-day moving average is just a line.

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