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.


Regulators Are Asking the Wrong Questions About ETFs

MarketMinder’s View: This analysis of a recent European Systemic Risk Board (ESRB, “which was created to prevent a repeat of the financial crisis”) report on the European bond ETF space gets pretty technical in spots, but we see a couple straightforward takeaways. First, like many regulators, the ESRB is seemingly fighting the last war: The “systemic risks” that allegedly contributed to 2008 could be miles from the next crisis’s causes. “The study [underlying the ESRB’s report] worries a lot about leveraged and synthetic ETFs, both of which were of greater concern 10 years ago and speak more to issues of protecting retail investors than systemic risks. By the time the ERSB makes up its mind about ETFs, and translates that into effective regulation, it will be attacking 20-year-old problems. In modern financial markets that’s as relevant as regulating ancient Mesopotamian grain trading.” We aren’t here to pick on the ESRB or any other regulator, but they tend to approach markets by asking what could possibly go wrong. In our view, investors should think in terms of probabilities, not possibilities. Speculating over possible outcomes is fine for academic debate, but it isn’t critical for successful long-term investing. For more on misplaced ETF worries, see Fisher Investments Research Manager Pete Michel’s 2/11/2016 article, “Illusions of Bond ETF Liquidity.” 

 

Older Employees Breathe New Life Into Europe’s Labor Market

MarketMinder’s View: For years, financial pundits have fretted aging populations’ supposedly depressive effects on the labor force, productivity and economic growth. Yet the data don’t support that narrative. Per the OECD’s numbers, “Workers aged 55-74 accounted for 85% of employment growth in the eurozone between 2012 and 2018 … The influx of older workers means that the eurozone’s labor force is now 2% larger than before the crisis, defying predictions it would shrink.” While pessimists may argue older workers are staying in the labor force more by necessity than choice, optimists could point out that the nature of modern work is less physically demanding, allowing older workers to contribute for longer. We aren’t here to take a side in the labor debate—most of it is sociology, which doesn’t drive markets—but we do think the data and anecdotes highlighted in this article are compelling counterpoints to fears of weak future growth due to a graying workforce. For more, see our 4/29/2019 piece, “Will Fewer Babies Create Economic Challenges?

China's Economy Grows at Slowest Pace in Nearly 30 Years, But Is the Trade War to Blame?

MarketMinder’s View: While perhaps too sanguine about China’s long-term economic growth prospects—too far out to forecast, in our view—we think this piece offers some helpful perspective on China’s (modestly) slowing GDP growth numbers. “China’s domestic economy is able to power ahead, brushing aside weak exports and concerns about the trade war, because domestic demand has grown big enough to replace exports as the primary engine of economic growth. The service sector now accounts for the biggest share of GDP, and is undergoing rapid and innovative transformations, riding on an expanding urban middle class and cutting-edged digital technologies.” China’s ongoing efforts to offset last year’s crackdown on shadow banking align with this shift: “In the coming months, more credit will become available, skewed toward the private sector at the expense of state-owned enterprises and local governments, with tax cuts supporting household spending. Unlike the past, these stimulus measures are calibrated to grow domestic consumption, not exports.” For more, see our 3/4/2019 article, “China’s Gangbusters Loan Growth.”

Bad Loans in Europe Tumble but They Are Never Fully Gone

MarketMinder’s View: The argument: While eurozone banks’ nonperforming loan (NPL) piles have been shrinking for years, “Rather than selling off the toxic portfolios completely … some banks are still exposed to the loans they are meant to cleanse. … When banks retain exposure to bad loans rather than selling them outright, they have less capital to back fresh lending to the economy.” Perhaps—many eurozone banks, especially those hardest hit by the sovereign debt crisis (e.g., Greece), are still working their way up from the abyss. Yet these are old issues that hold little-to-no surprise power for markets, in our view. Moreover, reality seems far better than appreciated: Loans to the eurozone private sector have risen steadily for over four years, per ECB data—most recently 3.3% y/y in May. A positively sloped eurozone yield curve likely keeps lending humming. That this ghost still lingers makes it easier for reality to beat too-dour expectations—reason to be bullish about eurozone stocks, in our view.

 

US Retail Sales Beat Expectations in June

MarketMinder’s View: “The Commerce Department said on Tuesday retail sales rose 0.4% [m/m] last month as households stepped up purchases of motor vehicles and a variety of other goods. … Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.7% last month after an upwardly revised 0.6% increase in May.” Backward-looking and just one month, but still, nice! We have one small quibble with the point that this report points to strong consumer spending, as retail sales track only a slice of total consumption—they don’t gauge services, which compose the majority of household expenditures. Still, solid data like these against a backdrop of plentiful (and, in our view, overwrought) investor fears—e.g., “weaker business investment, an inventory overhang, a trade war between the United States and China, and softening global growth pressur[ing] the manufacturing sector”—strike us as ingredients in a bullish cocktail. The gap between expectations and reality points to more wall of worry for the bull to climb, in our view.

The Next Big Risk That Could End the Stock Rally Is Here

MarketMinder’s View: The titular risk? A weak Q2 earnings season—with profits disappointing allegedly lofty expectations. But in our view, one quarter’s earnings aren’t very telling. Analysts have been talking up weak earnings for months, baking them into prices. Investors knew that when markets clocked new highs last week. As for chatter about future uncertainty and tariffs’ impact, we suspect this is corporate America’s gamesmanship. Executives often talk down expectations, lowering the hurdle to clear to beat estimates. Consider: S&P 500 earnings fell -0.3% y/y in Q1 but easily exceeded analysts’ expectations for a -4.2% decline at Q1’s end. We wouldn’t be surprised if Q2 repeats the feat, but backward-looking data likely aren’t make-or-break for stocks.

For Decoding Labor Market, Unemployment Rate May Not Do the Job

MarketMinder’s View: Sure, the unemployment rate isn’t all telling—really never was—and likely doesn’t indicate the labor market’s standing very well. Our major take on this piece, though, is that it places lots of importance on the connection between employment and inflation. But as we show here, that connection doesn’t hold historically because wages don’t drive inflation. Money supply does. Rather, employers factor inflation into wages and compete for workers with real wages. It also fails to acknowledge wage growth reaching a ten year high earlier in 2019.

Spain Risks Repeat Election as Podemos Holds Sanchez Hostage

MarketMinder’s View: “Acting Prime Minister Pedro Sanchez said talks have broken down with Podemos, the key partner he needs to take office for a second time, raising the risk of a repeat election in Spain.” If he can’t secure enough support in next week’s confidence vote—which seems likely given this news—“Spain’s constitutional clock starts the countdown toward a repeat election. The premier would have another two months to win a majority before parliament is dissolved and Spaniards are sent back to the polls again, just as they were in 2016 after the previous year’s election ended in a similar deadlock.” Spain has dealt with extreme gridlock ever since populist parties like Podemos and the centrist Ciudadanos gained prominence during the sovereign debt crisis, and these new groups complicate coalition building. This gridlock may frustrate some, but it also basically locks in years’ worth of bullish labor market reforms Spain enacted after the sovereign debt crisis—a key to supporting growth, in our view. Perhaps that is partly why Spain has grown at an average 3.0% annualized rate since Q1 2015—at the forefront of developed world growth rates. New election or no, gridlock likely remains—and we think Spain’s story suggests that is a-ok.

China Second-Quarter GDP Growth Slows to 27-Year Low as Trade War Bites, More Stimulus Seen

MarketMinder’s View: While the headline may worry some, China’s 6.2% y/y Q2 GDP growth rate met analysts’ expectations and didn’t sway markets much at all. That said, we find the comments here on other data more interesting: “…June industrial production, retail sales and fixed-asset investment data all beat analysts’ forecasts, suggesting that Beijing’s earlier growth-boosting efforts may be starting to have an effect.” June industrial output rose 6.3% y/y as growth accelerated from May’s 5.2%, and June retail sales were the fastest in 15 months at 9.8% y/y. Fixed-asset investment grew at 5.8% for 2019’s first six months, driven by real estate. While this is just one month and we would caution about reading too much into any single data point, it echoes what we have long argued: Chinese policymakers have tools at their disposal to ensure economic—and, hence, social—stability.

How Trump Could Kick off a Currency War

MarketMinder’s View: First, a note: This piece delves into politics, so we remind folks that MarketMinder favors no politician nor any political party. We assess political developments solely for their potential market impact and remind readers political biases can blind, leading to investing errors. Recent tweets by US President Donald Trump have stoked fears his administration will attempt to weaken the US dollar by intervening in foreign exchange markets, aiming to reduce the costs of US exports to foreign consumers—and thereby juice the economy. That said, we think these fears are overrated. Like most politicians, Trump’s words don’t always match his actions. As noted here, he could direct the Treasury to intervene in currency markets to weaken the dollar. But he hasn’t. As this article itself notes, the Treasury’s “Exchange Stabilization Fund is only sitting on about $22 billion … according to Goldman Sachs. … Nearly $5 trillion is traded each day in the foreign exchange market.” That means the administration also can’t control exchange rates on its own—Trump would likely need the Fed to go along. But as many politicians and central bankers have hyped of late, the Fed is independent of the administration. Further, even if it did go along, there isn’t an assurance this policy would weaken the dollar or that a weak dollar would boost economic growth. As Japan’s experience in 2013 and 2014 show, weak currencies aren’t automatic stimulus for exports.

$32 Million Stolen From Cryptocurrency Exchange in Latest Hack

MarketMinder’s View: We aren’t expressly pro- or anti-cryptocurrency, but we do think investing in this space carries a number of risks. This story is a reminder of the industry’s security issues: “Japanese cryptocurrency exchange Bitpoint suspended all services after losing about 3.5 billion yen ($32 million) in a hack that involved Ripple and other cryptocurrencies… The funds were stolen from a hot wallet that contained five cryptocurrencies including Bitcoin and Bitcoin Cash.” Ouch! While unsavory characters exist in every space, protections in the crypto space aren’t as strong as in other markets. Another reason why we think better opportunities exist for long-term, growth-oriented investors.

The Bull Market Won't Die of Old Age. But This Could Kill It

MarketMinder’s View: This piece carries some political bias, so in that spirit, a reminder: Markets are politically agnostic, and so is our analysis here on MarketMinder. Believing one politician or political party is inherently superior for stocks is a form of bias, which can blind from sound investing decision-making. On that note, we agree with the first titular point—that age won’t kill the bull market. The rest of the article, however, argues Washington may hold the key to the bull market’s demise—whether it is the Trump administration’s tariff policy, the fading benefits from the 2017 tax reform, the debt ceiling and/or government shutdown, or ineffective monetary policy via the Fed. We think all of these concerns are off—and you can read more detailed analyses here, here, here and here—because it assumes political developments alone drive stocks. This vastly overstates policymakers’ influence over markets, which are more a reflection of the private sector. With economic growth likely to chug along both here in the US and abroad, we believe the bull still has room to rise higher—even if political fireworks dominate headlines.

Eurozone Factory Output Jumped in May

MarketMinder’s View: Here is some good economic data news to end the week: “The European Union's statistics agency Friday said industrial production in the 19 countries that use the euro was 0.9% higher than in April, a surprisingly large rise. The increase in output was driven by the production of consumer goods, and led by France, which saw a 2.1% rise from the previous month.” With folks fretting over weakening European manufacturing data for months, this stronger-than-expected report is a nice surprise. While we don’t want to make too much about one data point in a choppy trend—backward-looking data can be volatile month to month—it is a noteworthy report and, if this bounce continues, it could help buoy dour sentiment. From a higher level, though, industrial production reflects just a small segment of eurozone GDP—its growth (or contraction) doesn’t determine the economy’s direction. The services sector, which has remained quietly expansionary, matters more. One final note: Many pundits pondered whether May’s positive report would influence the ECB’s future monetary policy. Trying to game how central bankers will interpret and act on future information is a futile exercise, in our view—we suggest watching their actions, not speculating over their words.


China's US Imports Plunge by 31 Percent Amid Tariff War

MarketMinder’s View: China’s June “imports of U.S. goods fell 31.4% from a year earlier to $9.4 billion, while exports to the American market declined 7.8% to $39.3 billion, customs data showed Friday.” While that sounds scary, flagging US-China bilateral trade doesn’t paint the full picture. Yes, trade between the world’s two largest economies has weakened ever since the US started hiking tariffs on China last year—and China retaliated in kind. Considering tariffs are a tax on trade, this is a minor negative, full stop. But the US-China trade tussle doesn’t mean trade ceased. We have lots of evidence, both empirical and anecdotal, that companies have adjusted to dodge tariffs, from US firms finding legal workarounds to Chinese exporters redirecting traffic to Vietnam. The titular tariff war may knock sentiment, but its damage isn’t as vast as many fear. We don’t see that changing any time soon—regardless of the progress of US-China trade talks. For more, see our 6/27/2019 commentary, “More Reasons to Doubt the Alleged Trade War’s Bite.”

Trump Administration Drops Plan to Curb Drug Rebates

MarketMinder’s View: Drug price reform has been one of US politicians’ favorite talking points, stirring investor fears the government may introduce major, market-roiling change to the Health Care industry. While rhetoric gets hot, reality tends to be less extreme. Case in point: After a January proposal to curb rebates drug companies give middlemen in Medicare, the Trump administration is dropping the plan. “The decision reflects months of tension between the White House and the Department of Health and Human Services over the proposal, which also spurred a backlash from pharmacy-benefit managers that administer prescription-drug programs. It was a centerpiece of President Trump’s blueprint to lower drug costs.” Now, we doubt this is the end of the idea. But in our view, this is a timely reminder that whether you cheer or fear a given politician’s policy stance and plan, proposals don’t yield inevitable results. This is especially true now in a gridlocked Congress with elections looming next year. Politicians have incentives to talk big but refrain from rocking the boat and upsetting voters. For more on this topic, see Fisher Investments Research Analyst Charles Dornbush’s column, “Pharma Vs. PBMs: Inside the US Government’s Drug Price Reform Debate.”

Want to Profit From a Trade War? There’s a Fund for That

MarketMinder’s View: Friendly reminder: MarketMinder doesn’t recommend individual securities. Any mentioned herein simply illustrate a broader theme we wish to highlight. That theme: The investment universe is huge, with offerings seemingly expanding by the day. That isn’t always and everywhere a positive for investors, though, because crafting hot products that fit en vogue niches is one of the ways Wall Street finds consistent demand for narrow and/or questionable strategies. Consider the titular fund, which “…tracks 120 companies, focusing on the strength of their intellectual property and ties to ‘government patronage,’ which the managers expect to insulate those shares from international trade battles.” Besides methodology questions, we think this kind of investment approach is inherently backward-looking since it focuses on what noisy headlines are saying—information markets have already priced in. Rather than investing based on what everyone is talking about—the current fad—we believe investors must look forward and avoid Wall Street’s incredible ability to churn out products where it perceives high demand. Instead, maintain a well-diversified portfolio that doesn’t hinge on one faddy factor like whether or not the “trade war” gets worse.

France Approves Digital Tax on American Tech Giants, Defying US Trade Threat

MarketMinder’s View: Despite the spin this is related to US-EU trade tensions, France’s digital tax isn’t exactly a new development—and it is the kind of squabble that happens all the time in the global economy, like when the Obama administration and EU argued over unpaid Tech taxes in 2016. Its origins go back to March 2018, when the European Commission first proposed a digital tax, largely aimed at Tech giants (most of which are American). Though the EU version failed to lift off, France picked up the baton by announcing its own digital tax late last year. With France’s Senate approval, a 3% duty will apply to a number of major Tech companies’ French revenues. France’s finance minister has projected the tax would raise up to $565 million a year—dinky relative to these firms’ overall revenues and rapid growth, assuming they even manage to collect this sum. More broadly, it wouldn’t shock us if politicians both in the US and Europe use this tax to pressure the other side in trade talks—see the Trump administration’s fondness of using tariffs to negotiate. In our view, this seems more like political posturing than a sign national governments are about to launch aggressive tax crackdowns. Though developments are worth following, this levy isn’t likely to roil the global Tech scene.

No, That’s Not the Government Calling Threatening to ‘Suspend’ Your Social Security Number.

MarketMinder’s View: “If you get a call threatening to ‘suspend’ your Social Security number for alleged illegal activity or a unpaid tax bill just hang up. It’s a scam—every single time.” Sage advice. Read on for more about the variations of this Social Security scheme, along with some helpful tips on how to protect yourself. For more on this topic, see our 3/4/2019 commentary, “Scam Alert: Social Security Robocalls.”

Mnuchin Urges Congress to Raise Debt Ceiling Before August Recess

MarketMinder’s View: Remember back in May when the White House and congressional leaders were optimistic about getting a two-year budget deal done well before a September government shutdown deadline? Surprise, surprise, talks have reached a stalemate, and Treasury Secretary Steven Mnuchin is talking to top Democrats and Republicans, trying to make headway. All sides claim they want to get something done but won’t give in to the other’s demands. Or, more simply, Beltway politics as usual. We don’t think investors need to fret over any of this noise, though. Whether Washington reaches a deal before its August recess or drags its feet to September (or beyond, if they decide to kick the can), the upshot is the same: Neither government shutdowns nor debt ceiling showdowns have derailed the US expansion or bull market. We don’t see that changing this time, either.

Fed Chairman Hints Strongly That a Rate Cut Is Coming

MarketMinder’s View: It seems many are getting their hopes up for a rate cut after Fed head Jerome Powell’s congressional testimony today. In it, he said: “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook.” But we would be wary extrapolating that—or any Fed statement—to a month-end rate cut. The Fed is notoriously “data dependent,” which in practice means its words don’t guarantee action. Moreover, a rate cut isn’t really needed, in our view. Despite the yield curve inversion, credit is flowing fine and supporting US growth, and a rate cut here might merely cancel out some of the interest rate arbitrage fueling US lending. A rate cut might help sentiment, but any stock market swing (in either direction) in response to what the Fed does or doesn’t do is just plain old volatility, not anything to fear or celebrate. For more, please see our 6/5/2019 commentary, “No, the Fed Doesn’t Need to Cut Rates, but ...