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.


ETFs Shine as High Taxes Loom on US Mutual Fund Capital Gains

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations. But if you own a mutual fund in a taxable account, brace yourself: Several funds “have warned active mutual fund investors to expect year-end capital gains distributions equivalent to 20 per cent or more of the net asset value of the fund, according to a Morningstar review published this month.” Regulations require fund managers to distribute all of the fund’s realized capital gains to the investors, who must then pay capital gains taxes on the amount they receive. It also decreases the fund’s net asset value (NAV) by the amount distributed, making it a return of your investment, not a return on your investment. Adding insult to injury, these distributions can stem not only from the day-to-day fund management, but from other investors’ redemptions. Mutual funds can’t meet redemption requests in-kind, so if outflows exceed inflows, the fund manager must liquidate holdings, leaving the remaining investors to foot the bill. Redemptions often follow strong returns, which was the case this year. Exchange-traded funds, however, generally don’t have this problem—even if they are actively managed—since they allow in-kind redemptions. Mind you, we don’t think managed mutual funds—whether they are traditional or exchange-traded—are great options for high-net-worth investors, who can diversify more efficiently with individual stocks. But if you are going the fund route in a taxable account, the potential for a big unexpected bill is something to keep in mind—especially since the distributions come at yearend, leaving little-to-no time to harvest offsetting tax losses.

A Couple Stored IRA Gold at Home. They Owe the IRS More Than $300,000.

MarketMinder’s View: Have you ever been tempted by one of those newsletters or banner ads urging you to buy gold coins in your IRA and store them in your house or a safe-deposit box? Turns out those “home-storage gold IRAs” are illegal. Yes, owning alternative assets, including coins, in an IRA is legal, but: “Savers investing in alternative assets must follow strict rules against self-dealing. Otherwise, they risk disaster. For example, an IRA owner can use account funds to invest in a rental property like a beach house. But if she uses it herself for a week of vacation, that’s a ‘prohibited transaction’ that dissolves the IRA, triggering taxes and perhaps penalties.” In this case, the judge ruled that storing coins at home amounted to “unfettered control” of them and would invite self-dealing. “He clarified what some saw as a gray area and said the law requires independent oversight of investments in coins or bullion by a third-party fiduciary—so it doesn’t allow for storage in a safe at home.” The subsequent dissolution of the IRA, under tax law, was a payout of the coins’ full value, resulting in the astronomical tax bill. The lesson here: Don’t take investment and tax advice from people who aren’t professional investment or tax advisers.

SEC Moves a Step Closer to Delisting Chinese Companies in the US

MarketMinder’s View: Investors have known for nearly a year now that Chinese companies would likely face delisting from US stock exchanges, so it isn’t clear to us why this latest development contributed to negativity, to the extent it actually did. In December 2020, Congress passed a law requiring the delisting of foreign companies that don’t let the Public Company Accounting Oversight Board (PCAOB) inspect their auditors. This requirement has been on the books since 2002 but not enforced against China and Hong Kong, which refuse inspections due to concerns about trade secrets and national security. Last year’s legislation signaled the end of this lax enforcement, and now the SEC has detailed how it will identify the offending companies and the procedure for delisting. Unsurprisingly, it doesn’t entail kicking them out immediately—consistent with the legislation, the ban comes “after three years of non-compliance.” If companies are delisted, that doesn’t mean US shareholders see their stakes go to zero—it means they get shares in the Hong Kong listing. Hong Kong’s market is liquid and globally accessible, just like the US. Between the utter lack of surprise power and the fact that delisting changes very little, we think any market reaction tied to this is purely sentiment-driven.

The Window to Lift the Debt Limit Is Narrowing, an Influential Think Tank Warns

MarketMinder’s View: There they go again. Congress has resumed dithering over the debt ceiling, and Beltway insiders warn the US could default as soon as December 15 if lawmakers don’t kick the can by then. And by default, they mean: “Dec. 15 is particularly important because the Treasury Department is required to make a $118 billion payment to the Highway Trust Fund. If corporate tax receipts that are due that day come in weak, Treasury could face a cash crunch and the United States would be unable to fully meet all of its obligations like paying out Social Security and funding military paychecks.” Friends, if the government has to give IOUs to Social Security recipients and those who serve our country (which is a huge if, by the way), it won’t be good for those affected. But it also isn’t a default. Default is one thing and one thing only: failure to pay debt interest and principal on time. Hitting the debt ceiling doesn’t make this automatic or even at all likely. The debt ceiling doesn’t affect principal payments, as the Treasury just issues new bonds to repay old ones—which doesn’t increase debt. Monthly tax receipts regularly exceed monthly interest payments, usually by quite a wide margin. The Supreme Court has interpreted the 14th Amendment as requiring the Treasury to honor debt above all other obligations. The Treasury has the legal and technical ability to prioritize interest payments. Missing other non-debt payments means the government picks winners and losers, which adds uncertainty, but the outcome mostly resembles a government shutdown—and no shutdown in history ever caused a recession or bear market. So all this default talk, in our view, is misinformation.

Omicron Could Knock a Fragile Economic Recovery Off Track

MarketMinder’s View: We certainly sympathize with the businesses and households suffering hardship—economic or otherwise—due to COVID. However, from a macroeconomic perspective, we think investors must ask: What exactly is different about Omicron-related setbacks? This piece sensibly acknowledges upfront that a lot about Omicron is unknown right now, but it then worries its negative fallout—particularly on travel—could set back economic recoveries worldwide. However, the journey back to a post-pandemic normal was always going to happen in fits and starts—a messy reality forward-looking markets already recognized. Moreover, while renewed travel restrictions may hurt tourism-heavy industries, others may benefit. As one expert posited here, “… previous spending patterns during the pandemic showed that some money people would otherwise use for travel would instead be spent on dining.” That illustrates a broader point, too, in our view: Society has been living with COVID restrictions and lockdowns for nearly two years now. While the virus’s staying power is frustrating, businesses and individuals have also adjusted to this reality—that is why economic recoveries began even as restrictions lingered. Keep this recent history in mind when warnings arise that a variant poses a unique risk to the global economy. Chances are, it doesn’t.

Covid-19 Made Americans Into Super Savers. Now They’re Hoarding Cash.

MarketMinder’s View: This article raises some interesting points about Americans’ big savings balances. “At the start of the coronavirus pandemic, people began hoarding money for emergencies. The government also issued three rounds of stimulus payments to Americans who qualified. With no end in sight, many Americans kept saving both as a safety measure and as a result of being stuck at home, leading to the highest personal savings rate since World War II. Researchers at the New York Fed say the move happened more mechanically than intentionally. People saved more because they weren’t spending as much, not necessarily because they were actively stockpiling money in their reserves.” As the piece goes on to describe, Americans appear to be sitting on those savings, not spending them. That runs counter to the many projections that households would unleash that cash the first opportunity they got—a view that always seemed overly optimistic to us. However, the conclusion raises some personal finance points worth considering: namely, holding too much cash could be counterproductive, depending on your personal financial circumstances. We think it is reasonable to hold cash in an emergency fund and for any near-term expected expenses, but beyond that, it may make sense to review your financial situation to determine whether you have too much cash relative to your goals, needs and investment time horizon.

House, Senate Leaders Announce Government Funding Deal as They Race to Avert Shutdown

MarketMinder’s View: Please note, MarketMinder is nonpartisan and prefers no politician or political party over another. We share this article because it is a timely update about the prospect of a government shutdown, which is set to occur at 12:01am on Saturday, December 4, if Congress fails to pass an extension of government funding through February 18. As the article’s first sentence nicely describes: “House and Senate leaders on Thursday announced they had clinched a deal to fund the federal government into next year, even as an intensifying GOP-led revolt over President Biden’s vaccine policies threatened to grind the government to a halt anyway.” Most of the rest of the article dives into the politicking going into the process of approving the bipartisan pact, as some Republican senators are holding up the funding measure in protest of the presidential directive for large employers to require vaccines or implement testing. Whichever side of the debate you fall on, though, this type of politicking isn’t unusual—pols often hold out to the 11th hour (and sometimes even beyond) before finding some sort of compromise. However, even if Congress fails to extend funding by December 4, remember government shutdowns themselves aren’t inherently negative for either the US economy or markets. The rhetoric may be loud, but stocks recognize political theater when it arises—as well as a shutdown’s limited economic impact.

OPEC and Russia Will Pump More Oil in January Despite Price Plunge

MarketMinder’s View: OPEC and its allies—most prominently, Russia—announced they would stick with their previously outlined plan and raise oil production by 400,000 barrels per day (bpd) in January. Politically, the decision likely cools concerns the cartel would retaliate for an American-led, globally coordinated release of strategic reserves, though OPEC+ has reserved the right to make immediate adjustments if they deem it necessary. We understand why OPEC+ announcements get attention, but their influence over global oil supply isn’t as dominant as many perceive. The same goes for governments’ decisions to release oil from their strategic reserves. Those words and moves can impact sentiment, which can drive prices in the short term. But over the longer term, total global supply and demand matter most to oil prices. OPEC+ is a major global oil producer, to be sure, but the cartel isn’t the only game in town—private producers, especially America’s shale industry, matter a lot, too. Unlike OPEC+, American shale producers aren’t subject to a cartel-dictated quota—they act based on market forces, and if recent drilling activity is any indication, higher prices are incentivizing more production, adding to global supply. For more, see our 11/23/2021 commentary, “Why the Strategic Petroleum Reserve Release Isn’t a Game Changer.”

Here Are Must-Know Changes for the 2021 Tax Season

MarketMinder’s View: Although contemplating taxes amid holiday cheer isn’t very fun (in our opinion), here are some changes to be aware of to help lessen tax headaches later. For example, if you haven’t yet, people age 72 and up must make required minimum distributions (RMDs) for 2021 (after Congress waived them last year). Not doing so could incur a hefty penalty, like “if someone needed to take out $50,000 and skipped the distribution, they would owe a penalty of $25,000,” as one financial planner notes. Another potentially helpful tidbit: “Taxpayers eyeing a year-end charitable donation may take advantage of a special write-off for cash gifts in 2021, even if they don’t itemize deductions on their federal tax return. For 2021, single filers may claim a tax break for cash donations up to $300 and married couples may get up to $600, according to the IRS, an extended coronavirus relief measure from 2020.” While not a huge sum, it could add up in a season of giving for the charity of your choice—and take out some of the sting come tax time!

Factories Facing Supply Headaches as Omicron Risks Emerge

MarketMinder’s View: The dour acknowledgement here that manufacturing activity continues expanding globally despite widely publicized obstacles (supply bottlenecks, shortages, higher costs and new COVID variants) says a lot about sentiment, in our view. Despite the Continent’s energy crunch, “IHS Markit’s final manufacturing Purchasing Managers’ Index (PMI) for the euro zone nevertheless nudged up to 58.4 in November from October’s 58.3, shy of an initial 58.6 ‘flash’ estimate but still comfortably above the 50 mark separating growth from contraction.” In Asia, IHS Markit’s manufacturing PMI for China—which focuses on smaller firms—dipped below 50, but that “stood in contrast with those in China’s official PMI on Tuesday that showed manufacturing activity unexpectedly rose in November, albeit at a very modest pace. ... Beyond China, however, factory activity seemed to be on the mend with PMIs showing expansion in countries ranging from Japan, South Korea, India, Vietnam and the Philippines.” We would add manufacturing PMIs for the US and Canada, the latter facing severe disruptions to its largest port, were also strongly positive. Looking at output activity, American and Canadian production sub-indexes rose. PMIs measure only growth’s breadth, not its magnitude, and manufacturing is only a small subset of economic activity for developed economies, but for all the negative attention the sector has received in recent months, it is faring remarkably fine. For investors, better than expected is all bull markets need to run.

CEOs and Insiders Sell a Record $69 Billion of Their Stock, and the Year Isn’t Over Yet

MarketMinder’s View: As this article references specific companies, please note MarketMinder doesn’t make individual security recommendations. They serve only to illustrate a broader point: CEOs and company insiders’ motivations for selling stock have little bearing on share price movements. As the article details, executives are mostly cashing in for tax planning and diversification purposes, “And most of the stocks were sold as part of prescheduled selling plans, known as 10b5-1 programs.” This year’s record amounts of insider selling are also due partly to a handful of corporate titans, some who live in areas about to raise taxes on stock sales. For example, “Starting Jan. 1, the state of Washington will impose a 7% tax on capital gains over $250,000.” Others may also be eyeing prospective tax increases as “The House has proposed a new 5% surtax on income over $10 million and 8% on income over $25 million.” In our view, this shows how insider selling is mostly an individual decision, not a market driver or indicator.

China to Close Loophole Used by Tech Firms for Foreign IPOs

MarketMinder’s View: This article describes Chinese regulators’ prospective plans—yet to be finalized or implemented—that would ban Chinese companies from going public, raising funds and listing in foreign markets through so-called variable interest entity (VIE) structures. As described here, “The structure allows a Chinese firm to transfer profits to an offshore entity -- registered in places like the Cayman Islands or British Virgin Islands -- with shares that foreign investors can then own.” While the ban wouldn’t be retroactive, “Companies currently listed in the U.S. and Hong Kong that use VIEs would need to make adjustments so their ownership structures are more transparent in regulatory reviews, especially in sectors off limits for foreign investment, the people said. It’s unclear if that would mean a revamp of shareholders or, more drastically, a delisting of the most sensitive firms -- moves that could revive fears of a decoupling between China and the U.S. in areas like technology. Details of the proposed rules are still being discussed and could change.” That last sentence is key, in our view. While sweeping regulatory change could introduce uncertainty, nothing appears set yet. The finalized details could be draconian, but they may also end up more benign than feared. China could take further steps to rein in domestic companies’ offshore listings, but this has been part of the regulatory backdrop for years, as questions about VIEs’ legal status have lingered since one company pioneered the practice in 2000—it is a risk currently listed VIEs are already very familiar with. Still, we think developments in this space bear monitoring for any potential unintended consequences that could arise.

Omicron and the Fed Might Finally Kill This Bull Market

MarketMinder’s View: It is possible the titular sentiment comes to pass, but we have our doubts. The reason: Bull markets climb a wall of worry, and they don’t usually die amid widespread pessimism. Counterintuitively, bull markets thrive when fears are rampant, as that implies low expectations, setting a low bar for reality to clear. As this piece notes, “All of a sudden, investors are once again worried about the virus — and whether it will derail the economic recovery and change plans the Federal Reserve has to start winding down its stimulus programs.” Whether Delta or Omicron, though, stocks have been overcoming variant concerns all year—and are up nicely for it. What matters less is the variant itself and more governments’ reactions to outbreaks, as lockdowns are the true economic negative. While COVID restrictions defy prediction, we see little evidence today that they are about to return or negatively shock markets as they did in early 2020. Then as well, “[Fed head Jerome] Powell said in testimony on Capitol Hill Tuesday that it’s time to ‘retire’ the word ‘transitory’ when it comes to describing inflation. He also suggested the Fed could speed up plans to pull back on — or taper — the bond purchases that have helped keep long-term rates low.” But this has been an unfounded fear all year as well. Plus, he suggested retiring “transitory” not because the Fed’s view changed, but because he deemed the word unclear. That so many still fret the threat suggests that despite some evidence of greed and froth in markets this year, fear remains present, too—a sign sentiment isn’t overextended either way, in our view.

Australia’s Economy Contracts but Offers Hope of Rebound

MarketMinder’s View: In the Land Down Under, “Gross domestic product fell 1.9 per cent from July to September compared with the previous quarter, the third-largest quarter-on-quarter decline on record, after lockdowns to contain the Delta coronavirus variant weakened demand. But the fall, which followed four consecutive quarters of growth, beat expectations of a 2.7 per cent contraction forecast by economists polled by Reuters. ... Official data from the Australian Bureau of Statistics showed growth in the third quarter was mainly attributable to exports and government spending.” Beyond Q3 data being ancient, markets know the lockdown two-step by now—and the related contraction isn’t a surprise, considering Q3 coincides with winter flu season in the Southern Hemisphere. The new Omicron variant may delay reopening, but early Q4 economic data already indicate a rebound in store with restrictions that have lifted. That said, catch-up growth shouldn’t surprise either, as markets are familiar with that movie, too. Instead, we think stocks are focused on what lies ahead in the next 3 – 30 months, as Australia and the rest of the developed world continues moving towards a post-COVID normal.

UK Energy Watchdog Promises Tougher Stress Tests for Suppliers

MarketMinder’s View: After a string of utility firm failures in recent weeks led the British government to bail out a few, UK energy regulatory body Ofgem is proposing rule changes to prevent similar fallout in the future. Their ideas are a throwback to the financial regulatory proposals that followed 2008’s financial crisis: Stress tests and bigger capital cushions. As Ofgem boss Jonathan Brearley put it, “‘We do need a retail sector that is able to handle shocks like this in the future,’ he said. ‘In my mind that means making sure we have a very sharp focus on capital adequacy, but also the rules in place as to what you do when someone breaches those rules.’” But this near-completely overlooks the causes of the current issues among energy suppliers: Retail electricity prices are capped, so firms lack the ability to pass costs on to customers. Those caps mean price signals—which normally would lead customers to curtail power use while encouraging suppliers to ramp up production and invest in future output—aren’t functioning well. This is the chief issue and proximate cause of the problems here. It is why a five-fold spike in gas prices caused so many to fail. If you boost capital requirements, you might get more stability. But you likely also get a less profitable sector, which further discourages investment in future production, compounding the supply issues the country now faces.

Powell Warns Elevated Inflation Justifies Faster Reduction of Bond Purchases

MarketMinder’s View: Pundits are making a big deal out of Fed head Jerome Powell’s testimony to the Senate Banking Committee this morning, in which he seemed to endorse reducing the bank’s $120 billion in monthly quantitative easing bond purchases by more than the currently slated $15 billion pace (a faster “taper” in the vernacular). Powell tied this to ongoing elevated inflation, which he said could persist for a while given extant supply chain disruptions. But here is the rub: Tapering QE is unlikely to cool off inflation pressures, in our view. For one, it is disinflationary or deflationary policy. Buying bonds lowers long-term interest rates, narrowing the gap between them and short rates. Banks borrow short term to fund long-term loans, so that gap is a proxy for their loan profits. QE shrinks it, dissuading lending—and, since lending is a key input to money supply, this is the opposite of inflationary. Furthermore, given the Fed’s own commentary—that supply chain issues are a key input to inflation presently—it is totally unclear the bank has any ability to counteract pressures. Consider: If the Fed tapers slowly or quickly, does that have any influence on semiconductor supply? What about raw materials? Used cars? The answer to all these is “no,” in our view, which highlights the fecklessness of this debate.

Canada Gross Domestic Product Beats Expectations

MarketMinder’s View: Canadian Q3 GDP jumped 5.4% annualized, recovering after a downwardly revised -3.4% Q2 contraction. There aren’t very many market takeaways from this beyond the basic pandemic economic truism that lockdowns are bad for growth and reopenings are good, considering this pretty much explains the trajectory over the last two quarters. That being said, perhaps that very reminder is useful today, considering the global panic over the Omicron variant. Unless we see widespread restrictions on economic activity, the fundamental effect on the economy is likely negligible—and there is little sign of draconian measures returning globally. Even beyond this, though, it is worth noting that Canadian stocks are up bigtime this year, with 10 of 11 sectors positive, despite a down Q3 when lockdowns eased. (Source: FactSet.) That suggests this lockdown-and-reopening pattern is, at least to some extent, too widely known to affect markets materially.

Are Hedge Fund ‘Bubble’ Bets Naughty or Nice?

MarketMinder’s View: European carbon emissions credits are up dramatically in price this year on the EU’s exchange, a development that (unsurprisingly) has some big emitters and politicians blaming “speculators” and calling for action to cap costs. This article is a pretty even-handed look at the subject, which notes that rising prices—whether tied to hedge fund speculation or other causes, like Europe’s shift to fossil fuels amid wind power shortages this summer and fall—are part and parcel of any functioning market. You can’t create a market with prices that fluctuate in either direction, sending signals to consumers and producers, then proceed to interfere with that when it does something politicians consider an anathema and expect that market to have any iota of credibility going forward. Besides, the entire idea of a carbon market was to tie increased costs to emissions—so this seems like a case of EU officials getting what they wanted and then reacting negatively to it. At any rate, there isn’t a sign of vast carbon market intervention now, and there are relatively few macroeconomic or stock market effects from this beyond the proximate impact on Utilities and—perhaps—a slight uptick in consumers’ energy costs. But the debate is perhaps worth watching for nerds who are interested in market functioning.

Magdalena Andersson: Sweden’s First Female PM Returns After Resignation

MarketMinder’s View: Last Wednesday, Magdalena Andersson became Sweden’s first female prime minister—and became the country’s first female former prime minister hours later when her budget proposal didn’t pass and the Green Party left the minority governing coalition. Now she is back at the helm after “winning” a confidence vote for a one-party minority government. We used scare quotes because the final vote was 101 for, 75 abstaining and 173 against—and all it takes to win a confidence vote in Sweden is to avoid having a majority of lawmakers vote against. So this looks like yet another exceedingly fragile government that will rely on abstentions and smaller parties to get anything passed—a recipe for gridlock. It may lack staying power, too, considering the budget still looms and the next election is less than a year away. In other words, the likelihood of major legislation that could rattle markets seems low, which is emblematic of the bullish gridlock that spans the developed world right now.

Black Friday Rout Shows Danger of Margin Borrowing

MarketMinder’s View: This is a mish-mash of interesting observations and flawed deductions, but it does illustrate a couple of key points. The first half is an internally contradictory discussion of margin debt. On the one hand, it argues rising use of leverage renders stocks’ big rally since the bear market’s low on March 23, 2020 “fragile,” with Friday’s sharp pullback supposedly proof. On the other, it points out that margin use as a percentage of market cap is actually below average and the recent increase isn’t all that huge. Sooooo … which is it? “The use of leverage by younger investors is especially concerning, the Federal Reserve said in its latest Financial Stability Report. It said younger individual investors have much higher leverage ratios, leaving them more vulnerable to margin calls and other setbacks when prices fall.” The implication: Young folks who started dabbling in stocks on Robinhood during lockdown are responsible for stocks’ big returns, and when margin calls knock them, their forced selling could knock markets. We have said from the start that headlines are overrating new(ish) retail investors’ influence on returns, and this seems like a prime example. According to its latest filings, Robinhood has only $95 billion in assets under custody, which is a tiny drop in the ocean compared to the MSCI World Index’s more than $60 trillion market capitalization. Volatility can arise for any or no reason, and forced selling can amplify it, but the Robinhood crowd is probably too small to move the needle on that front.