Market Analysis

A Glance Around the Web

Watch what they do!

At 8:30 AM Eastern time Friday, the University of Michigan’s consumer sentiment index data were released, showing consumers felt the worst since 1980. Which you might think would be a bad thing, except a half hour earlier the US Commerce Department announced July retail sales grew a big 8.5% y/y (meeting estimates). Actions speak louder than words. Also, May and June US retail sales were each revised up—now reflecting 7.9% and 8.3% y/y growth, respectively. In other words, while consumers have been less optimistic for two of the last three months, year-over-year retail sales sequentially accelerated in May (April’s figure was 7.2%), June and July. As is quite common, folks are saying (and feeling) one thing and doing another.

From the annals of ineffective government policy...

Thursday, as expected, France, Spain, Italy and Belgium announced they’re imposing bans on short sales, mostly of Financials stocks. As the European Securities and Markets Authority (ESMA) said, “While short-selling can be a valid trading strategy, when used in combination with spreading false rumors this is clearly abusive.”

The media’s take on this is predictably all over the place. Some presume this is a clear positive for the stocks directly impacted, while others claim it’s negative (removing a hedging tool, or a sign of negatives—noting short-sale bans in 2008).

But short-sale bans are mostly just ineffective altogether. A ban on shorting stocks does not remove all tools to hedge or speculate—market participants could just shift to derivatives, like put options or others. Additionally, many large multinational firms are listed on multiple exchanges. And if, for example, a French bank were also listed on a US exchange, players could just short the American version. So a ban that isn’t broad and global is unlikely to have a material effect for good or ill. For those who tie short-selling bans to 2008, consider for a moment: Germany and France banned some shorting during 2010’s correction as well—to little ill effect (and stocks were nicely positive in 2010). And South Korea has had a ban on shorting Financials stocks ever since 2008. Again, no major ill effect.

ESMA is right—rumors have run wild in Europe lately. But it seems to us the real motivation for banning short sales is the “do something”so frequently prevalent in government. Speculators and short sellers can theoretically increase negativity, but the effect is frequently overstated by politicians—essentially, scapegoating to score points with voters.

When is a downgrade not a downgrade?

Apparently, when it saves taxpayers nearly $650 million. As we’ve pointed out, contrary to widespread concerns interest rates would rise in the wake of S&P’s US downgrade last week, rates have actually fallen. Now, another positive has surfaced: Treasury bond auctions have saved US taxpayers $647 million in interest payments over the life of securities auctioned this week. How is that? The Treasury Department paid a record-low average yield of 2.13% on 3-, 10- and 30-year debt at auction this week in the face of near-record demand. Which sounds like a pretty strong statement investors (both global and domestic) aren’t particularly concerned about longer-term US economic health. Not only that, but now they’re helping us save money to boot.

Fighting fears

Among the prevalent fears this year (and last) has been China—in various iterations, including that it would surpass the US as a global economic power, that the yuan would supplant the dollar as global reserve currency and that its currency was kept weak and export prices artificially low, harming American manufacturers. But recently, the San Francisco Fed produced a report indicating the latter fear’s largely unfounded. In fact, boiling it all down, only roughly 1.9% of US household consumption is of goods “made in China.” Largely because even goods imported from China consist of 55% US-produced services—which in turn means a good portion of prices paid for Chinese goods still goes to US producers.

Not only does this mean concerns about cheap Chinese imports squeezing out American manufacturers are largely overblown, it also means calls for China to allow the yuan to appreciate would likely not help American manufacturers as supporters think. In fact, it could hurt those who produce intermediate goods used in Chinese final products. If nothing else, this demonstrates clearly the global marketplace is incredibly complex. And those who try to boil it down into simple “us versus them” arguments of one flavor or another are frequently oversimplifying.

Fears and rumors have been running rampant globally of late—easy to see in our detailing of the four above. When one is quelled or dispelled, it seemingly morphs into a new one. In the US, that’s the debt ceiling turned deficit turned downgrade turned slow economy (with a side of China xenophobia). In Europe, it’s the peripheral concerns turned France concerns turned bank concerns with a side of short-selling concerns. There are real negatives in the world today (as there always are). In our view, they continue to not be sufficient to override existing positives. This parade of morphing concerns and the near-utter disregard of positives is to us a classic characteristic of a market correction period.

In other news, MarketMinder’s managing editor Lara Hoffmans has a new Forbes blog. Here’s a link to her page—enjoy.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.