MarketMinder

Headlines

Here we analyze a selection of third-party news articles—both those we agree and disagree with.

Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.


Oil’s Swings Reinforce Saudi Arabia’s Key Role in Energy Markets

MarketMinder’s View: This argument presents some notable points about Saudi Arabia’s role in global oil markets, arguing its role as the world’s largest oil exporter renders it more important to global supply—and therefore prices—than the US, which pumps a few million more barrels of crude each day. For example, Saudi Arabia is “the only country with meaningful spare capacity—supply that can be quickly turned on in an emergency” and produces some grades of crude oil with “different densities and other unique characteristics, meaning they could be difficult to replace, particularly for countries that have few other options to access crude.” Yes, while select buyers with unique oil needs and limited options may be more at the mercy of temporary cuts in Saudi output, the global ramifications are more limited. Some of the reasons why are listed here: “Despite Monday’s outsize swings, analysts said plentiful inventories could limit some of the gains until more details are released about the damage in Saudi Arabia.” On that latter point, Saudi Arabia announced today 50% of the lost capacity is back online, and output should be back to normal by the month’s end—better than feared. In our view, this is a reminder to refrain from overrating a couple days’ up-and-down oil price movement. For more, check out yesterday’s commentary, “Oil's Big Jump in Perspective.”

Why the ECB’s Calls for Fiscal Stimulus Are Playing on Deaf Ears

MarketMinder’s View: When the ECB deployed its latest round of (in our view, wrongheaded) monetary “stimulus” last week, outgoing ECB head Mario Draghi used the occasion to pressure European governments to unleash fiscal stimulus. This article touches on why this probably won’t happen—the political will isn’t there for many eurozone member states—but we do think this overstates the need for Europe’s economic powerhouse, Germany, to step in and stimulate. Yes, eurozone growth has slowed recently, and Q2 German GDP contracted. Yet expansions often ebb and flow, and a more in-depth look suggests Germany’s soft patch isn’t as dire as some fear. Despite all the chatter, we don’t think fiscal stimulus is necessary for the eurozone economy to keep growing. That so many think otherwise illustrates how dour sentiment is, especially compared to a not-so-dire reality.

The Fed’s Tail Chasing Problem

MarketMinder’s View: This piece’s thesis: “With all the potential economic threats out there, the Fed worries that staying on hold could be riskier than cutting rates. But the danger is that the Fed is entering a spiral where increasingly remote tail risks will lead it to keep lowering rates until it has next to no rate cuts left to give.” The implication—when recession actually happens, the Fed will be unable to step in to support the economy because it wasted all its firepower battling distant risks. In our view, this provides a useful microcosm of where we are at sentiment-wise: Folks think the Fed needs to respond to any possible risk with a rate cut and then fear it not working. This strikes us as the height of misguided central bank obsessing—a fixation we suspect investors would be better off if they got over. Yes, the Fed could chase its tail into entering a recession with rates at zero. Or it could act more or less sensibly and not cave in to pressure to cut rates every time markets wobble and new risks surface. Or it could do something in between. Fed actions are impossible to predict, so this speculation seems fruitless to us. When it comes to the Fed, we think investors are best off weighing policymakers’ decisions as they happen—and focusing on the yield curve, rather than the absolute level of short rates—and then thinking critically about whether said decisions raise the likelihood of economic problems whacking stocks in the near future.

Trump Says U.S. Reaches Trade Deals With Japan, No Word on Cars

MarketMinder’s View: “Reaches trade deals” may be a stretch, as a signed agreement is still forthcoming and (as this article points out) negotiators must still sort out some differences. But, progress? “U.S. President Donald Trump said on Monday Washington had struck trade agreements with Tokyo … In a letter to the U.S. Congress released by the White House, Trump said that he intends to enter into the agreements on tariff barriers and digital trade ‘in the coming weeks’ and was notifying lawmakers that the tariff deal would be made under a trade law provision allowing the U.S. president to make reciprocal tariff reductions by proclamation.” Japan’s legislature must still ratify any trade deal struck, and it is premature to say this is a given. That said, we see this as more evidence of how the Trump administration utilizes tariffs—as  political and negotiating tools, not entrenched economic policy.

U.S. Industrial Production Rebounds Much More Than Expected in August

MarketMinder’s View: Per Fed data, “industrial production climbed by 0.6 percent in August after edging down by a revised 0.1 percent in [July]. … The bigger than expected rebound in production came as manufacturing output rose by 0.5 percent in August, more than reversing the 0.4 percent decrease in July.” We don’t pooh-pooh this positive reading, but in our view, this is more a reminder of how monthly industrial production can be volatile. Case in point: “Mining output [rose] 1.4 percent in August after tumbling by 1.5 percent in July. Output in July had been suppressed by a cutback in oil extraction in the Gulf of Mexico due to Hurricane Barry.” So, good news, but we wouldn’t read too much into the state of heavy industry—particularly in the US’s services-heavy economy.

Oil Prices Spike After Attack on Saudi Facilities but Lasting Disruption Seen Unlikely

MarketMinder’s View: This is a good look at oil markets in light of an attack “on one of Saudi Arabia’s most important oil facilities that could cripple petroleum exports for days or even weeks.” Uncertainty runs high as it remains unclear how long it will be before the crude processing facility that was attacked, which processes about 70% of Saudi crude, will come back online. But should the outage last and oil prices remain elevated, they would remain below last September’s levels—which didn’t trigger global economic trouble. Nor did far higher prices in this bull market’s first five-plus years. As for the potential impact, oil and stocks are separate liquid markets. Stocks have done fine, historically, with rising and falling oil. Meanwhile, thanks to resurging global oil inventories, record-high US production and ample spare capacity among OPEC and other nations, global oil supply should remain more resilient than people seem to fear.

China's Slowdown Deepens; Industrial Output Growth Falls to 17-1/2 Year Low

MarketMinder’s View: China released a slew of August economic data today that mostly missed expectations, leading many to fear this year’s stimulus measures aren’t enough. Industrial production slowed to 4.4% y/y, its slowest rate since February 2002, while retail sales and fixed asset investment also slowed and missed expectations. Yet we don’t view this continued slowdown as evidence fiscal and monetary stimulus are too feeble. Rather, these measures take time to reach the real economy. The acceleration in infrastructure investment suggests fiscal stimulus is finally starting to trickle through, while the benefits of improved corporate financing—evident in recent months’ lending and money supply data—likely follow. We aren’t dismissing tariffs completely as a negative development, but considering they have mostly just added a link to the global supply chain (as evidenced by the bump in Vietnamese imports from China and exports to the US), we think the commentary here probably overstates their effect. Plus, we can’t help but wonder how much of the trouble in Chinese auto sales is tied to governments’ strict traffic-reduction policies, which include capping the number of new autos allowed on the roads. This may be why the national statistics outfit has started reporting retail sales ex. autos, which happened to rise 9.3% y/y in August—a sign consumer demand might be healthier than feared.

Antitrust Can’t Catch Big Tech

MarketMinder’s View: This article spends a lot of time discussing individual securities, and—as always—MarketMinder doesn’t recommend individual securities. We decided to feature this piece anyway because it highlights a broader theme. That theme: why fear of governments’ breaking up big Tech and Tech-like companies is probably overwrought. While 48 states, the Justice Department, the FTC and now the House of Representatives are investigating breaking up big Tech companies, history suggests it is “going to take a very long time to happen, if it happens at all.” Exhibit 1: IBM. The US government dismissed all anti-trust suits against it 14 years after filing the first. AT&T, which (ironically, as a government-mandated monopoly) first faced an anti-trust suit in 1974, settled in 1982, agreeing to break into the so-called Baby Bells. But markets largely put old Ma Bell back together over time. As the article goes on to show, the companies in politicians’ crosshairs could use the years-long investigations to restructure their businesses as necessary to head off regulators. While the regulatory chatter may impact sentiment toward Tech and Tech-like companies at times, overall, we don’t think it is a fundamental negative or reason for investors to avoid the sector. It probably just becomes part of the long-term backdrop.

China Is Pitting the Yuan Against the Dollar. So Far, It’s Not Going to Plan.

MarketMinder’s View: It has now been three years since the IMF designated China’s yuan as an international reserve currency, seemingly opening the door for the fulfillment of investors’ long-running fear of the dollar loosing dominance. As discussed here and here, we thought that fear was always unfounded. This article offers more evidence, as it shows the world has received the yuan with a big fat yawn, more or less. According to data released today from the Bank for International Settlements (BIS), the yuan was “on one side of just 4.3% of foreign exchange trades by turnover world-wide,” basically where it was three years ago. Meanwhile, “88% of the $6.6 trillion in daily foreign-exchange turnover this April still included the U.S. dollar.” As typically happens, the market made its own decisions, apparently deeming Beijing’s tight currency controls as reason to just carry on as normal. This article doesn’t look at foreign exchange reserves—the other big measure of reserve currency dominance—but the latest IMF data show countries have added over $1.39 trillion in dollars to forex reserves since Q3 2016, bringing the dollar’s share to $6.74 trillion while total reserve holdings of yuan amount to just $212.9 billion.

Business Investment to Fall for Three Years Straight Even With a Deal

MarketMinder’s View: Everyone is entitled to their own opinion, and that includes outfits like the British Chambers of Commerce (BCC), which foresees business investment falling “1.5pc in 2019 and 0.1pc in 2020 after last year’s fall of 0.4pc.” That forecast presumes Brexit isn’t of the no-deal variety, and it says recent investment weakness shows “the impact of the political turmoil and lingering unwanted prospect of a no-deal exit.” We don’t quibble with that—political uncertainty often discourages risk-taking, most businesses would prefer a deal to no-deal, and the uncertainty over whether or not there will be a deal is a strong incentive to just wait and see. However, we would encourage readers to consider a possibility that this forecast doesn’t pay heed to: What if simply erasing the uncertainty is good enough to enable businesses to launch the long-term plans they have kept on the shelf throughout the inconclusive talks and Brexit delays? What if knowing the terms of a deal—or knowing for sure there will be no deal—gives businesses just enough clarity on the rules to be able to know how to plan? Investment may not soar, but in our view, it needn’t automatically be negative. That is just one example of a potential positive surprise that investors are seemingly paying short shrift to, illustrating the potential for stocks to feel relief if Brexit, whatever it looks like, doesn’t go as badly as feared.

Recession or Slowdown? Why You Should Care About the Difference

MarketMinder’s View: This is a good-yet-imperfect look at the differences in data, definitions and implications of slowing economic growth (a “slowdown,” in the article’s vernacular) versus recession. Slowdowns, like parts of the global economy are seemingly experiencing now, mean growth continues but just slower. Pockets of the economy can struggle without bringing it all down. Recession, however, means economic activity shrank. For investors, the difference isn’t trivial. Markets usually move in anticipation of economic conditions. Ebbs and flows in growth rates (slowdowns and re-accelerations) have happened frequently in bull markets without ending them—see 2012 and 2015 – 2016 in the current cycle. Which makes sense! Even slower growth provides a broad tailwind for profits and revenues. It may also reset sentiment lower, meaning positive surprise is easier to attain—a bullish factor. Recessions are different. Bear markets usually precede them, pricing in worse conditions for profitability. Stocks also usually start rising before a recession ends, looking ahead to recovery. That being said, we do quibble with this article’s discussion of consumer sentiment leading economic growth. There is little evidence sentiment gauges are anything but concurrent indicators and has little bearing on future economic activity.

How to Factor Fickle Markets Into Your Portfolio

MarketMinder’s View: This piece cites recently shifting fortunes for various “factor-based” strategies—those built around so-called “momentum stocks” (sporting recent high returns) or “value stocks” (allegedly underpriced)—to argue investors should diversify across a range of factor strategies. To that point, we agree—having both a core strategy (based on what you expect to happen) and a counterstrategy (a strategy designed to cushion the impact if you are wrong)—is wise. Performance leadership rotates—the averages cited here belie the fact that, “Sometimes momentum is hot, sometimes value is in vogue. Or stocks with high dividends may be all the rage. Shares that fluctuate less than average, and companies with high, steady profits and low debt, are often the belles of the ball.” But a lot of these categories are fuzzy, which could complicate acting on them exclusively. Moreover, presuming a one-week move is a signal of a major, lasting shift investors should act on is a fallacy, in our view. Countertrends happen often, and since value stocks tend to be more economically sensitive, we suspect they are benefitting from slightly improved economic sentiment. That doesn’t mean value is off the races for the longer run.

Solid U.S. Retail Sales Ease Economic Growth Concerns

MarketMinder’s View: August US retail sales rose 0.4% m/m, beating expectations and marking six straight positive months—the longest streak since June 2017. Many pundits, including some cited here, proclaimed the report is further evidence of US consumers holding up the expansion. While we don’t pooh-pooh the growthy numbers and generally optimistic reaction—rational, in our view—we also remind investors of retail sales’ limitations. For one, retail sales don’t include services spending, which represents the lion’s share of total personal consumption. Two, while consumer spending comprises a majority of total US economic output, it isn’t a leading indicator or swing factor. Consumer spending doesn’t fluctuate terribly much, even during recessions, so focusing on a limited portion of that economic segment isn’t all-telling.

Who Can Go Lower? Japan Considers Deeper Negative Rates After ECB Cut

MarketMinder’s View: We have no particular foresight on what Japan’s central bank—the Bank of Japan (BoJ)—will or won’t do. But according to “people familiar with the bank’s thinking”—which we would take with heaps of salt—if the BoJ cuts rates further negative, “it would look for ways to avoid sharp declines at the longer end of the yield curve ... The goal is to keep an upward slope from low short-term rates to higher long-term rates, which makes it easier for life insurers and pension funds to make investment returns.” That is all true and a beneficial goal—which is why we think the best medicine for Japan would be to end asset purchases and stop reducing long rates. Selling assets to raise long rates and steepen the yield curve further would likely help even more. Alas, for now, Japan seems to be stuck with incremental action. This hearkens back to the BoJ’s attempts at yield curve control (YCC). Knowing negative rates tax Japanese financial institutions—and discourage lending—the BoJ de facto (stealth) tapered its quantitative easing asset purchases, allowing long-term rates to drift higher. For investors though, the upshot—whether the BoJ fiddles with more YCC or not—isn’t too different. While central bank attempts at “stimulus” appear unnecessarily confusing and counterproductive, they are also largely overrated and not the big market drivers so many make them out to be.

What People Say About the Economy Can Set Off a Recession

MarketMinder’s View: This article’s thesis posits “popular narratives” have the power to influence people’s decision-making, which can have major consequences. Thus, if a particularly dour narrative becomes prevalent, people may end up believing it, and the fear becomes reality. The example cited here: During 2008’s Financial Crisis, politicians made allusions to the Great Depression, headlines picked up on it, the general public started reading about it, and this “Great Depression” narrative exploded into a big recession and bear market. We think this argument is off, as feelings alone can’t spawn a recession. In our view, the last recession stemmed from an ill-advised accounting rule (FAS 157) that forced banks to take unnecessary balance sheet writedowns that amounted to trillions of dollars—light years above their eventual related loan losses. Those exaggerated paper losses wrecked bank capital, freezing liquidity and producing the wallop powerful enough to kill the economic expansion and bull market, and the government’s haphazard response turned the crisis into a full-fledged panic. The key point: Negative feedback loops of feelings didn’t eventually lead to an economic contraction. Rather, the recession had an identifiable fundamental (albeit overlooked, in our view) cause. While sentiment is a major stock demand driver—especially in the short term—we don’t think the public discourse and feelings about it are powerful enough to override the economic cycle.

Fade the Donald, Don’t Trade the Donald

MarketMinder’s View: One big bank’s analysts created an index that attempted to track President Donald Trump’s tweets’ market impact. As headlines trumpeted the findings, we thought this nugget was most telling: “Don’t abandon fundamentals to become a full-time Trump tweet watcher though—the returns for the 90th and 10th percentile by number of daily tweets were a modest -0.09% and 0.05%, respectively.” Trading on tweets is a myopic practice, in our view—a mistake for long-term investors. Plus, stocks are so efficient that by the time you see the tweet and are able to navigate to your broker’s website, log in and make a trade, the market will have already moved on. We recommend tuning it out and relaxing with your morning covfefe instead.

U.S. Recession Indicators Haven’t Made Up Their Minds

MarketMinder’s View: With weak growth fears rampant today, many pundits are poring over the most recent US data to decipher whether a recession looms. While we understand the desire to figure out the economy’s direction, we think this article is off the mark in a few ways. First, most economic data (including many of the indicators here) are backward looking, so they tell you only where the economy has been—not where it is going. Second, several of the datasets cited here—e.g., for the housing market or manufacturing—aren’t representative of the services-driven US economy. Third, even the indicator cited here historically associated with recessions (i.e., an inverted yield curve) is a poor timing tool. We aren’t saying investors should ignore these data, but recognize their limits. By the time they are all “flashing” trouble, a recession may already be underway. More relevant for investors today, recent weak data—especially overseas—aren’t reason to exit markets. Bull markets can climb during slowdowns, and unless you see reason to turn bearish, staying bullish about stocks is sensible, in our view.

Trump Announces Delay on Next China Tariff Hike Until Oct. 15

MarketMinder’s View: After China announced tariff exemptions for a select number of US imports, President Trump announced that as a “gesture of good will,” the US would delay implementation of a scheduled tariff increase from October 1 to October 15. For those of you scoring at home, China’s exempting 16 items from retaliatory tariffs for a year is good for a two-week reprieve on a US tariff hike. Folks, this is as incremental as it gets, and in our view, a reminder tariffs are more political theater and negotiation tools than serious economic policy. For more, see our 7/2/2019 commentary, “G-20 Yields More Evidence Trump’s Tariffs Aren’t All About Trade.”

Why No Deal Doesn’t Mean No Deals

MarketMinder’s View: First, this analysis carries some political biases, particularly towards the end. Remember, dear MarketMinder reader, that when it comes to your investment portfolio, putting those feelings and preferences aside is critical—stocks are politically agnostic, and no political party (whether in the US or UK) is inherently better or worse for markets. We highlight this piece because it gets down to the brass tacks of why a “no-deal” Brexit isn’t likely to be the economic doomsday so many fear: Not only are businesses and regulators prepared for myriad situations, but no deal doesn’t mean the economy and day-to-day life come to a grinding halt. Trade-wise, WTO rules would go into effect—not free of hiccups, but UK commerce wouldn’t cease. Though folks focus on the worst-case scenarios, positive outcomes are possible, too. As noted here, “For a start, the failure to sign a comprehensive Withdrawal Agreement under Article 50 would not preclude a series of independent mini-deals. These could be formal bilateral agreements to continue cooperating in areas such as policing and security. Or they could be informal reciprocal offers, where one side expresses a willingness to maintain the status quo as long as the other does the same. A good example of the latter is the agreement, effectively a mini-deal, to keep planes flying.” We don’t know Brexit’s final act—though the sooner it comes, the better, in our view—but it isn’t necessarily going to be a tragedy, contrary to what many pundits say.

Boris Johnson’s Suspension of Parliament Is Unlawful, Scottish Court Rules

MarketMinder’s View: Scotland’s highest court—Edinburgh’s Court of Session—today ruled “that the purpose of the Prime Minister’s move [proroguing, or suspending, legislative activity] was to unlawfully ‘stymie’ Parliament. The unanimous decision Wednesday by a panel of Edinburgh appeal judges will set up a showdown in the U.K. Supreme Court, which will take up the issue next week.” Constitutional crisis chatter is now swirling, and this article claims “even greater confusion ahead” before Brexit’s currently scheduled Halloween deadline. Though headlines remain apoplectic, we don’t think much has fundamentally changed: Brexit uncertainty persists alongside volatile UK politics. While developments seem to change daily, our view remains the same: The sooner politicians reach some sort of resolution—no-deal or not—the better for businesses and investors. All the Brexit uncertainty has weighed on sentiment and firms’ willingness to spend, lest the rules change. The clarity that arrives when Brexit eventually occurs should unleash pent-up demand and investment—a potentially powerful tonic for UK (and, to a lesser extent, European) markets. Until then, don’t let all the noise dissuade you from owning stocks—especially since reality isn’t nearly as poor as widely perceived.