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.


Tech Megacaps Are Storming Back to Derail the Stock Rotation

MarketMinder’s View: This article starts off rather myopically, by looking at returns of the biggest Tech stocks against smaller, more value oriented names over the past week. Folks, no trend that short term is telling about anything, and extrapolating is always an error. That said, the balance of the piece dismisses Tech’s recent performance rebound, instead offering the common theory that vaccine rollout means reopening, which will drive more economically sensitive value stocks to outperform. It tries to support this further by arguing that Tech valuations are too high relative to value and set to revert to the mean, and that small value tends to lead over the five-year spans following concentrated market leadership. Yet all of these data are widely known in the industry, and the narrative is—as our 1/25/2021 commentary, “Where the Street Sees Value,” shows—extremely common. Markets are extremely efficient. With these ideas so widely held ideas and most people citing similar data, it suggests the case for value is already reflected in stock prices and unlikely to drive leadership ahead.

Manufacturing Rebound Has Suppliers Struggling to Keep Up

MarketMinder’s View: In the course of documenting shortages of raw materials, supplies, packaging and commodities, this article actually highlights one key way the lockdown-driven contraction differs from normal recessions. Ordinarily, recessions are driven by excess and bloat—exuberant companies expand inventory and supplies on hand in anticipation of unending demand growth. They then have to liquidate the excess and reduce prices, driving losses and, for some, bankruptcy. This time, though, the problem is reversed: Booming goods sales are reverberating through a supply chain hampered by COVID and outages last year. The result is that prices are rising, not falling, along the supply chain. That suggests economic weakness will prove shortlived. This peculiarity is one thing we think stocks anticipated last year in their rapid recovery to all-time highs.

Italy’s Prime Minister Looking to Resign, Then Form New Government: Papers

MarketMinder’s View: After Italian Prime Minister Giuseppe Conte apparently won enough support to remain in power last week—albeit only after former Prime Minister Matteo Renzi’s Viva Italia party abstained from voting—it seems the political twists and turns aren’t over. According to various people familiar with the matter, Conte doesn’t view his minority coalition government as stable and expects it to collapse before long. He reportedly believes this would jeopardize his chances of hanging onto office, so he plans to preempt this, resign and then seek President Sergio Mattarella’s blessing to form a new, centrist government. Hanging over all of this wrangling: Due to a constitutional referendum that passed last year, Parliament’s number of seats will be cut by half in the next election. That injects a ton of uncertainty into electoral politics and likely makes Members of Parliament pretty desperate to avoid a vote for now. So expect a lot of this smoke-filled room, cloak-and-dagger style politicking in Italy this year—but don’t expect much legislative action. January’s battles over the government’s composition show you no one has the clout to pass big bills in Italy. That is good for stocks, as sweeping legislation frustrates businesses’ ability to plan and invest—and it also creates winners and losers.

How Options Trading Could Be Fueling a Stock Market Bubble

MarketMinder’s View: This piece argues record-high options trading (in terms of the number of contracts executed) is fueling the titular bubble. It isn’t just because the percentage of traders speculating on rising prices is at a 20-year high relative to those speculating on falling prices—but because the banks selling those bullish options contracts are hedging their risk by buying positions in the underlying stocks. So in other words, not only do you have more bullish speculators than at any time since the Tech bubble—a sign of sentiment—but you have forced buying underlying all of it, which allegedly boosts prices artificially. Now, we won’t argue this is entirely off base. We think it is indeed fair to say sentiment is warming to levels investors haven’t seen since the Tech boom, considering the bull markets since then ended because something huge walloped them before sentiment completed its normal bull market course from pessimism to euphoria. Now we are seeing the later stages of that progression, and more bullish options traders are one indication of that. However, this isn’t a timing tool—no quantitative indicator of sentiment is, because none can tell you when expectations are too high relative to the likely reality ahead. Fundamental indicators matter, too. Sentiment is only half of the equation. As for banks’ buying to hedge their risks, never forget that there is a seller for every buyer. What matters isn’t who is buying, but how much they are willing to pay and how much sellers are willing to accept. Prices depend on what happens throughout the entire marketplace. With that said, however, there is indeed a risk that volatility could lead to forced selling, which we saw last year when a certain Japanese software company-turned-VC investor had some big options trades go south. But swift pullbacks like that are usually temporary—something you wouldn’t know from reading this article, which gives the false impression that the 2000 – 2002 bear market was as long and deep as it was solely because of the amount of speculation at its peak. There was a whole lot more to it than that, including terrible fundamentals, a recession and market-jarring legislation that passed in 2002.

Biden Wants to Raise Taxes, Yet Many Trump Tax Cuts Are Here to Stay

MarketMinder’s View: The Biden administration is only three days into its term, and it already seems to be moderating from now-President Biden’s early campaign rhetoric and taking cues from his old boss. On the campaign trail, candidate Barack Obama campaigned on ending President Bush’s tax cuts, spurring fear among investors. But President Obama ended up extending and making permanent most of those cuts. Now it appears Biden is taking the same tack and proposing to make many of 2017’s tax changes permanent. Among those he is considering repealing are—wait for it—the cap on state and local tax deductions, which would amount to a new tax cut for many living in California, New York and other high tax states if it were to pass. Now, it is impossible to know today how any of this will go in Congress given the partisan gridlock and deep divides within both parties—something we think this article pays too short of shrift to. But the general effort here does illustrate why basing investment decisions on campaign talk is folly. (Never mind that history shows tax changes have no pre-set market impact to begin with.)

Double-Dip Recession Looms as Third Lockdown Hits Economy Hard

MarketMinder’s View: No sugarcoating here—the latest batch of UK data, which includes January flash purchasing managers’ indexes and December retail sales, ain’t great. The former showed deep contraction in services, and the latter showed disappointingly anemic growth during the holiday shopping season, missing expectations for a big bounce as lockdowns eased temporarily last month. So yes, it seems entirely reasonable to suspect that the strict lockdown reintroduced this month—including school closures—will extend the GDP contraction that began in November and send the UK economy into a true double dip. There is one small silver lining, however: Manufacturing output is still growing, if only a bit, as Brexit thus far hasn’t taken the widely feared toll. Even with higher supplier delivery times, factories are managing. More broadly, considering the UK is one of the world’s best-performing markets this month, it seems pretty clear that stocks are looking beyond the very near term, which seems rational to us. Neither lockdowns nor supply chain hiccups will last forever, and fallout from both isn’t exactly surprising. We suggest investors think like markets and take a similarly longer-term view—toward the UK and world alike.

US Factory Activity Races to More Than 13-1/2-Year High in Early January: IHS Markit

MarketMinder’s View: Largely good news on the US flash purchasing managers’ index front, which showed services and manufacturing growing at a decent clip this month. Manufacturing jumped to 59.1 (readings over 50 indicate expansion), and it wasn’t all from supply chain issues, which have occasionally falsely inflated this index over the past several months. “The IHS Markit survey’s measure of new orders received by factories raced to its highest level since September 2014. The surge in demand reflected both existing and new customers, ‘with some clients reportedly committing to orders previously placed on hold.’” Services, meanwhile, accelerated to 57.5. Overall, it looks like the US economy is benefiting from COVID restrictions being more localized than in European nations, which largely set lockdowns at the national level. Beyond that, we think the reaction to these data is a good snapshot of sentiment today. As the article indicates, there is plenty of cheer, but it is laced with some lingering skepticism—in this case, some inflation jitters tied to respondents’ comments about price pressures. Take that as a sign expectations have room to improve before they become outlandish.

Companies Are Selling Stock at Record Pace to Start the Year

MarketMinder’s View: This is something to keep an eye on, both as it pertains to stock supply and sentiment in general: “Public companies have been taking advantage of a hot stock market by issuing shares at record pace in January. U.S.-listed companies have conducted 57 follow-on stock offerings this year through Wednesday, raising $12.35 billion. Both numbers are records for this point in the year, according to Dealogic data going back to 1995. … The strong start to the year for follow-on stock offerings builds on a record-setting 2020. U.S.-listed companies conducted 862 such offerings last year, raising $257.23 billion, the most in a year by either measure in records dating to 1995, according to Dealogic.” Secondary offerings like this dilute earnings per share, so the fact that they are meeting strong demand shows investors are in a very sunny mood and anticipating strong earnings growth to make up for the watered down EPS in the near term. Given the likelihood of swift earnings growth this year as the economy recovers from lockdowns, perhaps that is a rational enough expectation for now. But if companies continue diluting shareholders at record pace and expectations become too lofty, that will be an indication of euphoria and make it critical to watch for trouble brewing. Again, we aren’t there yet. But stock issuance—and investors’ reaction to it—will be important to watch over the coming months.

Stocks Could Plunge Even if the Economy Booms

MarketMinder’s View: In a sign pockets of skepticism persist, this article ponders the possibility of a bear market erupting during an economic recovery. It starts from a sensible high-level place—the stock market isn’t a reflection of GDP—before posing scenarios where stocks could struggle despite expectations of stronger economic growth this year (e.g., possible corporate tax rate hike or tighter monetary policy). Finally, the analysis cites a handful of past bear markets that began during periods of economic growth (e.g., 1946, 1980 and 2000). In our view, this overcomplicates how markets work. Stocks are leading economic indicators, and they focus primarily on what profits will look like in the next 3 – 30 months, in our view. The 1980 and 2000 bear markets both occurred in advance of US recessions (according to the National Bureau of Economic Research), which undercuts the narrative herein pretty drastically. Most economic data, whether it is GDP or a weekly foot traffic tracker, reflect the past—irrelevant to forward-looking stocks. Moreover, bear markets happen for two reasons: what we refer to as the “wall” (the bull market runs out of wall of worry to climb and investor expectations vastly exceed reality) or the “wallop” (an unforeseen, huge negative destroys trillions of dollars of global GDP). For the former, investor sentiment isn’t blindly euphoric today, in our view, as evidenced by this article. As for the latter, we don’t see any wallops today capable of both wiping out trillions of dollars off GDP and shocking investors—and that surprise factor is key. A wallop is always possible, but successful investing is based on probabilities, not possibilities—and trying to preempt the next bear market could mean missing the bull market gains crucial for building wealth over the long term.

Day-Trader Frenzy for Trendy Stocks Is Defying Decades of Losses

MarketMinder’s View: Given today’s popularity of “thematic” ETFs (i.e., funds focused on a market niche), we found the research cited here interesting: “The authors studied over 1,000 U.S.-listed equity products, tracking both broad-based funds following indexes like the S&P 500 and specialized ETFs tracking sectors and themes. Leveraged, inverse and actively managed funds were not included. The results were striking: A portfolio of these thematic and sector funds lost 3.1% a year on a risk-adjusted basis after fees [between 2000 – 2019]. Poor performance typically kicked in at launch. New ETFs fared even worse, shedding 5% per year.” Usual disclaimer aside—past performance doesn’t predict future returns—thematic products’ struggles don’t shock us. One, concentrating in a narrow corner of the market is risky. The potential payoff may be spectacular, but if you are wrong, the losses can be just as dramatic. Two, as the paper argues, thematic products, “… tend to hold companies surrounded by media hype with a corresponding run-up in the stock price.” But hype isn’t a sound investing thesis, in our view. Sector trends, company management and sound business plans matter more, and you must also consider whether your investment thesis is widely shared and broad expectations are sky-high. Ensure you have fundamental, forward-looking reasons before buying, and remember investing for retirement is a long-term journey, not a get-rich-quick gimmick.

Pension Scam Fears as Three in Four Transfers Subject to Fraud Warning

MarketMinder’s View: Here are a couple of sobering statistics from across the pond: “The number of pension scam alerts skyrocketed in 2020, tripling between January and December. By the end of the year 76pc of all transfers showed at least one warning sign of a potential scam, according to figures from XPS Pensions Group, a consultancy that tracks the pension transfer market. … Official data has shown that victims have lost £31m to pension scammers since 2017. The true figure may be far higher as some will have handed over money to criminals without realising it, regulators said.” While the UK pension system differs from the US’s 401(k)-dominated landscape, the general principles here apply universally: Doing your due diligence and monitoring for potential red flags are critical. For example, whether you are in the US, UK or elsewhere, if a money manager requests taking custody of your assets—i.e., holding them directly under their name or company instead of an account under your name at a reputable third-party financial institution—you should decline. This simple step prevents someone from running off with your funds unexpectedly, leaving you with little recourse. For more, see our still-applicable commentary, “How to Spot Financial Scams—Transatlantic Edition."

When the Fed Tapers, the Market Will Have a Tantrum

MarketMinder’s View: This speculation sandwich highlights a concern that seems likely to linger for a while: What will markets do when the Fed starts reducing (i.e., “tapering”) its quantitative easing (QE) bond purchases? Most think the market reaction will be negative—it is just a matter of how negative. As the conclusion here states, as long as the Fed communicates clearly and transparently, “ … there’s no reason for the tantrum to be unduly damaging. It just will feel bad relative to the quiescent bond market we have experienced since the beginning of the pandemic.” We urge investors to get three points into their bones now before this type of chatter increases. One, markets don’t have preset reactions to any news, “good” or “bad.” Two, speculating about potential volatility is a futile exercise, in our view. Markets can bounce around in the short term for any or no reason. Three, the words of Fed chair Jerome Powell or other Fed officials aren’t a roadmap to future central bank actions, so we don’t recommend guessing what will happen next based on any press conference, meeting notes or interviews. For a recent history refresher, Ben Bernanke’s “taper talk” in May 2013 drove a ton of chatter, yet the bull market kept climbing (stocks actually surged that year), and GDP kept growing. One data point isn’t indicative of much, but we don’t think the titular tantrum is inevitable.

Britons Buying From EU Websites Hit With £100 Customs Bills

MarketMinder’s View: Similar to Continental shoppers, some UK consumers have received an unexpected bill—including import duties, value-added taxes (VAT) and administrative fees—for items purchased through EU websites. As this article notes, while some companies (e.g., a huge multinational named after South America’s largest river) collect the VAT on retailers’ behalf, smaller firms that sell directly to consumers are still learning and adjusting to the new post-Brexit rules. That process has been a bit bumpy, resulting in cases of couriers showing up at people’s doorsteps with customs invoices amounting to 50% of the purchased goods. We empathize with the shoppers, businesses and delivery services navigating the new framework—additional paperwork and unexpected fees put a bee in our bonnet, too. However, the concern that, “The new rules have put thousands of specialist online businesses at risk as consumers on both sides of the Channel balk at having to pay the hefty import fees,” is a mite overstated, in our view. We don’t think short-term bumps will derail retail, trade or business between the UK and EU over the longer term—people find ways to adjust. Besides, in business, one firm’s problem is another one’s opportunity. We wouldn’t be surprised if some payment tech firm (or thereabouts) unveils a fix for this in rather short order.

Analysis: Europe Inc Earnings in No Man’s Land Between Recession and Recovery

MarketMinder’s View: Q4 earnings season is underway, and in Europe, “… companies listed on the STOXX 600 are expected to report 26% earnings drop in the fourth quarter, almost two percentage points worse than the fall recorded in the previous three months, according to Refinitiv I/B/E/S data.” Yet most analysts see this downturn as a momentary blip, and “… optimism is based on the anticipation of a massive rebound in European corporate profits, culminating in an expected 81% growth in the April to June period compared with the 2020 quarter at the height of the first COVID-19 wave. Even forecasts for the first quarter of 2021, which has started with lockdowns still in place, point to an almost 44% jump as factories continue to work and consumers keep spending.” That Q2 2021 forecast looks especially dramatic, but keep in mind the math involved in year-over-year comparisons—Europe’s winter and spring lockdowns last year decimated Q2 2020 profits and the base comparison for Q2 2021. Similar math applies to Q1, although lockdowns took effect later in Q1 2020. Now, forecasts are merely opinions, not guaranteed outcomes, but sunnier longer-term earnings expectations for 2021 are both rational and another sign of warming sentiment taking hold, in our view. We think rising recovery optimism should provide global stocks a tailwind as the year rolls on.

Americans Aren’t Draining Their Retirement Funds in the Pandemic

MarketMinder’s View: Congress’s first COVID relief bill allowed Americans to tap certain retirement accounts without penalty—and some in the financial industry projected as many as 50% of 401(k) participants would raid their accounts. Reality didn’t play out that way: “In 2020, Fidelity Investments, the nation’s largest 401(k) provider, said 1.6 million people, or 6.3% of eligible participants in plans it administers, took some money out. Fidelity and many other 401(k) record-keepers reported that although the number of people taking Covid-19-related withdrawals continued to grow in the final three months of 2020, the rate of increase was modest and largely in line with what occurred in earlier months, even as the option to take a penalty-free withdrawal ended on Dec. 31.” This article points out the unemployment crisis disproportionately hit lower-income workers who are least likely to have a 401(k) plan. We acknowledge there may be some truth to that claim, but we also think the fewer-than-expected withdrawals are an unconventional sign many people’s personal finances are a lot healthier than feared, overall and on average. Coupled with other data, including a personal savings rate well above pre-pandemic levels, and US households appear in better shape than many would expect following a major economic contraction.

Filibuster Rule Snarls Senate Power-Sharing Deal

MarketMinder’s View: As always, MarketMinder’s political commentary is intentionally nonpartisan, and we prefer neither party nor any politician. We evaluate political developments solely for their potential market impact. With the Senate split 50-50, party leaders are negotiating a power-sharing arrangement to run the chamber. This article shows where talks stand now and what both sides seek—and in our view, the discussions highlight the difficulty Democrats face in passing legislation despite their technical majority. For example, though some Democrats want to eliminate the filibuster, others are wary of setting a new precedent. Moreover, even if the Democrats agreed to change the filibuster rule, “The organizing resolution for the new Senate can be filibustered, because it is debatable under Senate rules. That means Mr. Schumer would need 60 votes to push forward, and he is unlikely to overcome that hurdle if Mr. McConnell is opposed.” The latter half of this piece spills a lot of pixels over the possibility of an impeachment trial of former President Donald Trump, but whether you think a Senate trial should or shouldn’t happen, it is another issue taking up lawmakers’ time and energy. We don’t know how power-sharing negotiations will resolve, but the current impasse previews how legislatively (in)active the 117th Congress will likely be, in our view. Nothing of much consequence is likely to become law without bipartisan support. It is possible Congress passes a major piece of legislation that spooks markets, but the probability looks low right now—a positive for stocks.

Yellen: Biden Administration Will “Take on China’s Abusive, Unfair, and Illegal Practices”

MarketMinder’s View: As geopolitical issues can be politically charged—especially when it comes to China—we stress MarketMinder doesn’t take political sides; we look at policy matters simply to determine its market impact, if any. In her Senate confirmation hearing, former Fed Chair and now Treasury Secretary nominee Janet Yellen took a notably strident stance against China’s alleged trade behavior: “‘We need to take on China’s abusive, unfair, and illegal practices. China’s undercutting American companies by dumping products, erecting trade barriers, and giving illegal subsidies to corporations,’ Yellen said Tuesday. ‘It’s been stealing intellectual property and engaging in practices that give it an unfair technological advantage, including forced technology transfers.’ Yellen’s comments indicate that the Biden administration will likely continue the Trump's tough stance against Beijing in select areas.” Now, tough talk doesn’t necessarily translate into actions—much less ones big enough to knock global markets. Our point here is that those expecting the Biden administration to take a radically different stance than its predecessor may be disappointed. Remember that no party or politician behaves in a preset manner and thinking otherwise is a form of bias—blinding in investing.

When Investors Forget Fundamentals, the Market Is Broken

MarketMinder’s View: This article highlights the observation that, thus far in 2021, US market leadership has been determined by share price, with lower-priced firms categorically outperforming higher-priced ones. That means penny stocks—those that persistently trade below $5 per share and are generally not listed on any exchange—are leading, while firms with higher per-share prices are lagging. The piece argues that because share price tells you nothing about the firm—which is more or less correct—that this is a sign of irrationality. We guess we can see that point, but considering we are a whopping 10 trading days into 2021 as we type, it seems quite premature to draw conclusions about any performance trend in 2021. To be sure, investors are more optimistic today than they were a few months ago, but a lot of that looks pretty rational to us when you consider the world stocks are looking ahead to. For more, see our 1/14/2021 commentary, “A Sketch to Illustrate What Stocks See Ahead.”

Factbox: Biden Plans to Reverse Trump Policies During First Days in Office

MarketMinder’s View: First, a disclaimer: MarketMinder favors no politician nor any political party, assessing politics solely for their influence on stocks. To that end, this is sort of a basic rundown in bullet-point form of President-elect Joe Biden’s policy priorities as he takes the White House on Wednesday. It documents the fact Biden plans a raft of Executive Orders reversing those issued under President Trump—like re-entering the Paris Climate Accord, canceling the Keystone XL pipeline’s permit and various immigration-related measures—which isn’t a shock to anyone considering many of Trump’s actions reversed his predecessor, President Barack Obama’s. These are very predictable, minor actions unlikely to shock stocks. Moreover, the thing with Executive Actions is that they are limited to interpreting existing law, not creating new. That limits their reach greatly—which is another reason why the initial implementation and reversal of these actions is highly unlikely to impact markets much. As for legislation, it seems Biden will prioritize another COVID fiscal package most of all. But even this may prove difficult to enact. The Democrats have tiny edges in both chambers of Congress, and divides are already emerging between Biden’s moderate camp and the party’s further-left wing on issues like student debt forgiveness. We suspect that, as the year unfolds, politics will quiet significantly, assuaging a major source of fear over the last year-plus—a tailwind for stocks.

Chinese Economy Grew While Japan, Europe and US Struggled with Covid-19

MarketMinder’s View: This is a pretty “just the facts, ma’am” article covering China’s Q4 2020 GDP release, which showed growth accelerated to 6.5% y/y in the quarter, powered by exports and recovering domestic demand. Much of the coverage surrounding this news—and this article has a little of it—seemingly hinges on comparisons to the West, arguing coronavirus response is a swing factor. We think it is a little more realistic to note that coronavirus timing is the key. It hit China first, of course, which led them to both start and lift lockdowns sooner than the West. Hence, we think it best serves as a preview of what to expect as lockdowns ebb globally. Moreover, think what you will of China’s government and leadership, but growth in the second-largest economy globally boosts demand, and that is good for stocks.