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.


To Gauge Concerns About Brexit, Look at British Bonds

MarketMinder’s View: We are of two minds about this piece. On the bright side, it shows UK bond markets aren’t freaked about Brexit and doesn’t imply those markets are wrong. Indeed, if Brexit were a meaningful, forward-looking negative for the UK economy, public finances and capital markets, then gilt yields probably wouldn’t be falling—and would probably be above comparable US Treasury yields, since the US is generally the world’s preferred safe haven in times of crisis. But then it goes on to warn a future rise in gilt yields could signal the chickens are finally coming home to roost. While that is true to an extent, the general sentiment also encourages investors to read into short-term volatility—and potentially react to it. Yet bond markets, like stocks, frequently experience volatility with no tie to fundamentals. It is just noise. It also fails to mention that global developed yields often move together. If UK gilt yields and all other major sovereign yields rise at the same time, that isn’t a statement about UK risks. It is more a statement about global inflation expectations and bond supply and demand. Overall, our view on Brexit is unchanged: Whether the UK ultimately leaves with the current deal, no deal or something else, just getting on with things gives businesses clarity and allows them to finally unleash the plans they’ve written and shelved while waiting for an outcome. We think this falling uncertainty should benefit UK stocks.

Dont Take Your Eyes Off the Yield Curve

MarketMinder’s View: The yield curve has inverted before every US recession in modern history, making it one of the best economic indicators out there. But lately, an increasingly popular school of thought theorizes that this time could be different, arguing quantitative easing remains a drag on long rates. Hence, proponents argue, the yield curve inverts when it otherwise wouldn’t have, rendering an inversion a false read—because it would signal lingering Fed intervention, not forthcoming trauma. We have always had a problem with this line of reasoning, as it views the yield curve as an effect, not a cause. The real reason an inverted yield curve is problematic is because it locks up credit markets as lending becomes unprofitable (banks borrow at short rates and lend at long rates, with the spread representing their potential profit). That creates the funding squeeze that eventually leads to recession. This article doesn’t go there, but it does present an additional counterargument toward the end: “In an Oct. 29 note to clients, Scott Minerd, global chief investment officer at Guggenheim Partners, said that argument is flawed. It fails to recognize that factors such as regulatory changes, including those to money-market mutual funds, and an increase in Treasury issuance have acted in the opposite direction, putting upward pressure on long-term rates. The yield curve, Minerd said, remains as reliable an indicator as ever.” Now, take that with a grain of salt, as those factors are hard to quantify and lack a counterfactual. But it is still an additional reason not to dismiss the yield curve, we think.

Upside Earnings Surprises Have a Downside

MarketMinder’s View: This is chock-full of interesting factoids, but it is also far too focused on short-term market movement. In the grand scheme of things, what does it matter how a stock does in the four days surrounding the company’s earnings announcement? If anything, the fact that beating expectations doesn’t automatically trigger great returns shows how priced in earnings announcements are. This is all just noise, in our view, and we encourage investors not to overthink it.

US Manufacturing Production Increases; Headwinds Growing

MarketMinder’s View: Manufacturing output rose 0.3% m/m in October, helping total industrial production rise 0.1% (mining and utilities output contracted a bit). Much of this commentary dwelled on the 2.8% m/m drop in auto production, arguing steel and aluminum tariffs will further harm output over the foreseeable future. Which is possible, we guess, but we also think it ignores the broader drivers of auto production: supply of and demand for cars for sale. Like, if the market demands cars, automakers won’t just close up shop because of tariffs. Ultimately, they will keep going, either passing the cost to consumers, swallowing it, or cutting costs elsewhere to make up for it. Moreover, tariffs are only one input to steel and aluminum prices. Global supply and demand matter more. What if higher production causes prices to fall, negating the tariff? So, don’t rush to conclusions.

Why the Housing Market Is Slumping Despite a Booming Economy

MarketMinder’s View: We are of two minds about this article. On the one hand, it shows home sales’ recent tumble is a function of supply and demand within the housing market, rather than creeping economic weakness. While it gives mortgage rates rather too much credit, in our view, for reducing home affordability, it does highlight the role low inventory of for-sale homes plays, especially in areas where construction hasn’t come anywhere close to matching demand. Housing starts, which you can look up at the St. Louis Fed, have been weaker during this cycle than the prior five, overall and on average, and are far below their gangbusters pace during last decade’s housing bubble. This leads to tight supply, which boosts prices—but at some point, high prices naturally curb demand. That appears to be where several markets are now. However, this also shows why the piece’s broader thesis—that weak housing could dent the economy—is a largely a bridge too far. Not only is residential real estate just 3.3% of annual GDP, but a primary factor in last decade’s housing crash—namely, runaway supply growth—isn’t present now. Additionally, we don’t think that housing bust would have snowballed into a financial crisis if it weren’t for the mark-to-market accounting rule’s misapplication to illiquid and hard-to-value assets that banks never intended to sell—that rule is what caused some problems in the subprime mortgage market to spiral into a few trillion dollars in exaggerated and unnecessary bank asset writedowns. But we digress. Looking forward, we don’t think any potential continued housing weakness should derail overall growth. For perspective, consider that in Q3 2018, fixed residential investment subtracted -0.16 percentage point from GDP growth—a modest headwind to the 3.5% annualized increase in GDP overall. Whether housing slows further or picks up speed from here, other factors likely continue to play a bigger role in driving the economy.

Is the Trade War Really Holding China Back?

MarketMinder’s View: This piece makes a compelling case recent Chinese data weakness is largely attributable to an ongoing credit crackdown, not headlines’ favorite bugaboo of US tariffs: “… The macro-level impact of U.S. tariffs on China is tiny. Growth in the country’s exports to its largest trading partner, currently at 13 percent, is on track to record its best rate in 10 years, largely thanks to U.S. strength. … Even without trade barriers, it’s unlikely Chinese exports would grow much faster. If export growth to the U.S. were to hit 20 percent, for instance, that would add just $22 billion to a current GDP of about $13 trillion.  … [Prime Minister Xi Jinping’s] maneuver to sharply curb credit growth so soon after taking control for a second term was a prudent one – and its economic impact far outweighs that of the trade war.” Agreed. For more tariff scaling, see our 9/21/2018 piece, “Tariffs’ Bark Remains Worse Than Their Bite.” And for more on the credit crackdown, see Scott Botterman’s analysis, “Scaling a Wallop Potential: Chinese Shadow Banking.”

Global Leverage, Examined

MarketMinder’s View: Here is a handy corrective to those worried about rising debt—government and household—around the world: “Countries often perceived as economic laggards — most notably the southern Mediterranean countries, such as Italy and Spain — are much less sensitive to rates. For all of its national finger-wagging on fiscal prudence, the average German household spends a larger portion of income on debt servicing than Italy.” Most, including us, don’t question German finances, yet many persist in fretting about Italy, despite its solid finances. Many also think China faces insurmountable debt loads, which some fear will spill over into money printing and currency devaluation, yet “should China’s currency come under pressure, the country has a $3tn mountain of foreign exchange reserves to quell any concerns.” They have been using that pile of reserves to help defend the yuan against a stronger dollar in recent months. More generally, this article tackles problems using debt-to-GDP measures to judge financial wellbeing, noting: “In the arithmetic of the debt-to-GDP calculation, if the denominator is growing faster than the numerator, there’s no problem.” Proper scaling—comparing interest payments to income and debt levels to assets—is necessary to gauge debt sustainability. Debt service for most of the world isn’t onerous and, as further assurance, “If we step back and look at global government assets minus debt, according to HSBC, nearly everyone is on sound footing.”

U.S. Retail Sales Climb More Than Expected Amid Jump in Gas Prices

MarketMinder’s View: Retail sales got off to a strong start in Q4, rising 0.8% m/m (4.6% y/y) in October and beating expectations. While higher gas prices bear some responsibility, as evident in gasoline station sales’ 3.5% m/m rise, “core” sales excluding gas, autos, building materials and food services rose a fine 0.3%. Now, retail sales are just part of overall consumer spending and backward-looking. Hence, October’s results aren’t predictive for forward-looking stocks. However, from a sentiment standpoint, we think rising retail sales should help relieve some fears of economic weakening that have accompanied stocks’ volatility.

Theresa May’s Brexit Deal: What We Know So Far

MarketMinder’s View: So what is in the long awaited (and much anticipated!) deal? In a nutshell, it looks mostly like Brexit in name only, with the UK granting more sovereignty over immigration but otherwise keeping most EU ties intact. In broader brushstrokes, “the whole U.K. will be in a customs union with the EU. There will be no way for the U.K. to unilaterally leave that backstop arrangement. ... Northern Ireland will be more deeply embedded in the EU’s customs union than the rest of the U.K. because it will sign up to the EU’s full customs code ... The U.K. will also sign up to EU single market regulations on good standards and ‘level playing field’ trade commitments. That means the country will stay aligned to European state aid, competition and social and environmental rules. As expected, British finance lost its seamless path to the EU. Instead, its access will be largely in the hands of Brussels officials, who will determine whether there is a regulatory level playing field.” The deal received the blessing of UK Prime Minister Theresa May’s Cabinet late Wednesday, but it is far from certain Parliament will approve it. Brexiteer MPs are voicing their unhappiness with it, and the Democratic Unionist Party, which props up May’s minority government, doesn’t like the two-speed system for Northern Ireland and the rest of the country. So, the widely dreaded “no-deal” exit remains a possibility. Our broader views are unchanged: However the vote goes, just knowing the outcome can help investors get over the uncertainty and get on with life. For more, please see yesterday’s commentary, “A Small Step Toward Brexit Clarity.”

US Said to Hold Off on Trump’s Car Tariffs After Trade Meeting

MarketMinder’s View: Citing anonymous people, this article says the Trump administration won’t impose new tariffs on auto imports as previously threatened. This was already broadly expected for European, Canadian and Mexican made cars, since US trade officials had already granted stays, but the news did provide relief for Japanese automakers. The bigger takeaway for investors, in our view, is that all these government trade investigations—under the guise of national security reviews—are primarily negotiation tools. While hardly revelatory at this juncture, it does undermine still-prevalent fears US trade policymakers are pursuing blanket protectionism.

German Economy Goes Into Reverse Gear as Car Industry Struggles

MarketMinder’s View: “The powerful German economy spluttered in the three months to September, as GDP fell 0.2pc. This represented a sharp reversal from growth of 0.5pc in the second quarter and represents the worst spell in more than five years for the eurozone’s largest member. It is also the first contraction in three years.” Before worrying about cracks forming in the global economy’s foundations though, note: “Germany’s output was hit hard by new regulations in the car industry, the effect of which should start to dissipate in the coming months.” As for exports detracting, trade globally stuttered a bit over the summer as countries raced to get ahead of tariffs before they took effect, causing some dislocations in monthly and quarterly data. Even if this trade downtick turns out not to be a blip, the global economy has already weathered a long stretch of falling trade during this expansion. Given total new threatened and enacted tariffs amount to about 0.3% of world GDP, we don’t believe tariffs have the clout to bring a recession and bear market. Rather, German and eurozone growth overall likely keeps chugging along.

Disasters Dent Japan’s GDP in July-Sept

MarketMinder’s View: “The country’s seasonally adjusted gross domestic product in the second quarter of fiscal 2018 fell 0.3 percent from the previous quarter in price-adjusted real terms, according to the preliminary data from the Cabinet Office. ... Personal consumption was dragged down by the disasters, including heavy rains and subsequent flooding and landslides in western regions in July, a pair of powerful typhoons in September, and a massive earthquake that rocked Hokkaido in early September. Exports also fell due to disaster-caused disruptions in production activities and logistics services.” While a cluster of natural disasters seemingly hit Japan’s growth last quarter, they are likely one-offs. Ongoing global growth should continue pulling Japan’s economy along after temporary effects fade, though given domestic headwinds like the BoJ’s counterproductive bond-buying and a lack of economic reform, we don’t necessarily expect Japan to tear up the leaderboard.

UK Inflation Steady at 2.4% in October After Food Price War

MarketMinder’s View: The UK consumer price index rose 2.4% y/y in October, matching September’s rate. Falling food prices offset rising energy prices during the month. Inflation fears have largely subsided from last November, when inflation hit 3.1%, sparking worries about the pound, central bank tightening and consumer spending. But as inflation has cooled, fears have faded. Brexit still looms, but with a deal coming into focus, we think investors have one less worry clouding their view of a sunnier reality.

U.S. Consumer Prices Rise 0.3% in October, in Line With Estimates

MarketMinder’s View: October’s Consumer Price Index (CPI) rose 0.3% m/m, with energy prices driving the gain. “Core” CPI—excluding food and energy prices—rose 0.2% m/m. On a year-over-year basis, “while consumer price growth accelerated to 2.5 percent in October from 2.3 percent in September, the annual rate of core consumer price growth slowed to 2.1 percent from 2.2 percent.” With the recent slide in energy and gasoline prices, though, it wouldn’t surprise us if CPI’s jump were a blip. Moreover, with tame money supply growth and a not-so-steep yield curve, inflation—and investors’ inflation expectations—should remain tame.

Most Banks Left Standards for Business Lending Unchanged in Third Quarter

MarketMinder’s View: As the name implies, the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices—or SLOOS—are often a snooze fest, and this one mostly delivers! “More banks eased standards on commercial and industrial loans than tightened them in the third quarter … Banks that reported easing loan standards in the third quarter cited increased competition from other lenders as a motivating factor. Some also pointed to a more favorable economic outlook and greater tolerance for risk.” Basically, banks are lending and businesses can borrow—a great combination that suggests growth ahead. There were some reports of softer business loan demand, but that was mostly because “customer firms’ cash flow had improved, reducing their need to borrow.” Many overlook the SLOOS, which we admit can be boring, but in this case we think boring is good. This forward-looking indicator provides a glimpse at future loan growth, which is a key source of money supply and fresh capital. To us, this quarterly checkup shows it is functioning normally, without signs of a credit crunch or runaway growth that could risk overheating.

This Researcher Studied 400,000 Knitters and Discovered What Turns a Hobby Into a Business

MarketMinder’s View: Knitting—and the social networks surrounding it—may be niche, but upon closer inspection it can craft wider lessons for investors. What has the most influence over hobby knitters’ decisions to become hired stitch slingers? Their social connections. Folks in offline social knitting clubs “were 25 percent more likely than otherwise identical knitters to take the plunge into entrepreneurship. This is true even when correcting for geography, experience, skill level and productivity.” Moreover, “the effect was strongest among those who were already the most skilled knitters,” implying that those with the most talent and connections—providing valuable feedback—were most likely to make the leap. To us, understanding how “human capital and social capital are accumulated and deployed,” as the paper describes, is key for business success, but it also underscores why markets’ evaluating businesses—investing—is more art than science. While it is easy to focus on the numbers, assessing human and social capital—and how they are woven together—are just as important. More often than not, markets take all that in and spin it into greater wealth for long-term investors.

Let’s Not Forget—Bernie Madoff Was a Fiduciary

MarketMinder’s View: Indeed—the man whose name is synonymous with “Ponzi scheme” was legally obligated to always act in his clients’ best interests. This didn’t stop him from stealing their money. As this article argues, various proposals to update and expand the fiduciary rule likely wouldn’t help either. Nor, in our view, is any regulation or law a replacement for the due diligence investors must conduct themselves. What could help prevent bad actors from helping themselves to clients’ money? A big one: holding client assets at a third-party custodian—preferably one unaffiliated with the adviser. As noted here, “Madoff didn’t have a custodian. Client funds were deposited in his own bank account and used for personal as well as corporate purposes. Fraudulent statements, showing fictitious asset values and investment returns, were sent directly by Madoff to his clients.” This is why “Advisers take custody of clients’ assets” was Red Flag #1 in our 8/14/2014 article, “Crooks' Common Threads: Three Red Flags to Watch Out For.” 

What if You Retire at a Stock Market Peak?

MarketMinder’s View: The answer to the titular question: It depends! While it might seem counterintuitive, bear markets don’t necessarily doom investors’ portfolios. US stocks’ annualized return of 10.0% from 1926 – 2017 (per Global Financial Data) includes bear markets and uncomfortable bull market corrections. Now, we do think that if investors see a bear market—a fundamentally driven, extended downturn of -20% or more—forming, changing your asset allocation could make sense and add value. However, as the numbers here show, bears needn’t derail folks from reaching their goals as long as they fully participate in bull markets. Also important to remember: “This example shows why financial and investment planning is a process and not an event. Investors need to be thoughtful about how they spend down their portfolio but that process extends beyond a spreadsheet.” Yup: While numbers provide helpful broad context, always keep your goals, objectives, time horizon and particular life circumstances in mind. Those factors should have the biggest influence in how you are invested. 

A Century On, There Are Lessons for Today’s Investors

MarketMinder’s View: This piece imagines someone “surveying a world in ruins” in November 1918. The post-WWI outlook was bleak—yet a rapid economic (and market) recovery awaited. Now, investors shouldn’t use the data here as evidence bullets are bullish. Rather, we think this article does a good job using history to reinforce capital markets’ resiliency, as described in the three takeaways: “The scale of value creation in the best periods of growth massively outweighs the damage wreaked during the worst episodes.” Second, “If you only invest when it feels like the sensible thing to do, your experience will be massively worse than the long-run data suggests. The long-term history of the stock market is truly the ‘Triumph of the Optimists.’” Lastly, “Beneath the global averages, there lurk big variations in performance that only diversification can mitigate. Invest for at least 17 years in America and you have been guaranteed a positive return since 1900. But in France, Germany or Japan you could have gone as long as 55 years and remained underwater.”

Capex Spending Is Booming, but Pace of Growth Is Slowing

MarketMinder’s View: “Capital-expenditure spending in the third quarter is on track to reach $172 billion, Credit Suisse estimates. … That’s up about 13% from the previous year when looking at the same 500 [US] companies. The increase, though, marks a slide from the more than 20% growth posted in the first and second quarters of the year when spending climbed to nearly $166 billion and $178 billion, respectively.” This is … fine? A mild slowdown to the third-fastest capex growth rate in almost seven years—trailing only Q1 and Q2 of this year—suggests to us American firms are still investing in a big way. Some of this may stem from last year’s corporate tax changes—the effect of which we think many overstate for good or ill—as well as some outsized contributions from select sectors (e.g., Energy). Still, while Q3 capex spending is just one backward-looking data point, it is also part of a broader trend of overall growth. These data, combined with the dour reception, reflect a stronger-than-appreciated expansion. This is bullish, in our view.