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.
MarketMinder’s View: With one day to spare, Evergrande has avoided technical default on the offshore interest payment it missed September 23, and we think this is a pretty good look at what this does—and doesn’t—mean for the company’s potential collapse and the broader troubles among Chinese property developers. As it notes, while the last-minute payment has lifted sentiment a tad, it doesn’t change the fact that Evergrande has missed other payments over the past month, hasn’t communicated at all about its plans for these and upcoming liabilities, and is still crunched for cash. While it has successfully offloaded some assets, a much-anticipated sale of its property management unit fell through this week, so the likelihood of default remains high. (Markets seem well aware of this fact too, as Evergrande’s stock and bonds are down significantly this year and few investors seem to be cheering today’s news.) Yet what also hasn’t changed, in our view, is that the risk of contagion remains low. As our commentary this week discussed, officials appear to be orchestrating an orderly collapse of Evergrande and other small, distressed developers, while stepping in as needed to support healthier companies and ensure people who pre-bought apartments aren’t left twisting in the wind. Offshore investors might be left holding the bag, but developed-world banks’ exposure is minute. Most importantly for markets globally, the likelihood that this saga sparks the dreaded Chinese hard landing is low, in our view.
MarketMinder’s View: UK retail sales fell -0.2% m/m in September, notching their fifth-straight decline and the titular record. Furniture stores drove the decline, which probably has something to do with supply shortages, while sales at clothing and food shops rose as summer turned to autumn. The article is rather sanguine about the decline, which we find refreshing, and as it points out, some one-off variables were probably at work: “Analysts said that consumers spending their weekends queueing for petrol or hunkering down at home to avoid trips out in the car could have contributed to the sales slump in September.” Pundits also expect holiday shopping to boost sales from here, which, fine, but we always caution against overrating holiday sales whether they are strong or weak. More broadly, we suggest focusing on the level of sales, not the rate of change. As the article’s chart demonstrates, sales are now largely in line with pre-pandemic trends, matching our expectations for developed-world economies overall once the initial reopening boom wears off. It happened in the US, it is happening in the UK, and Continental Europe will probably follow soon enough.
MarketMinder’s View: The title here refers to Japan’s version of “core” inflation, which includes energy but not fuel. It rose 0.1% y/y in September, ending yet another deflationary stretch, as energy costs rose 7.4% y/y, and what interests us most is the surrounding sentiment. Unlike the US and Europe, pundits presume Japanese prices will settle relatively quickly, extending the country’s long-running battle with deflation as wage growth stays stagnant and companies, conscious of Japanese consumers’ tendency to seek out the cheapest alternatives, refrain from passing on costs. We would quibble with some of that reasoning, but it is noteworthy that the entrenched gloom leading people to think Japanese inflation is transitory also prevents pundits from accepting that fast inflation rates in the West are likely to ease sooner rather than later. This is all consistent with a sentiment feature we call the pessimism of disbelief, where sour sentiment leads pundits to interpret all news through a negative lens. That phenomenon isn’t as pervasive today as it tends to be early in a bull market, when pessimism is at its deepest. Yet its lingering presence in certain areas suggests the tug of war between skepticism in some corners of the market and optimism in others continues, which extends the bull markets’ proverbial wall of worry.
MarketMinder’s View: Bitcoin is back at all-time highs, and those who touted it as a potential inflation hedge are shouting victory, arguing it has proven its mettle (never mind its mid-year crash, which coincided with US CPI inflation topping 5% y/y, and the sheer lack of any historical evidence underpinning the claim). This piece nicely shatters that myth, showing that sentiment—not fundamentals—appears to be powering the latest move. First there is the excitement over the new bitcoin futures ETF. Then there is a general aura of capitulation, with speculators ignoring any and all worrisome developments on the crypto front in the belief that prices will only rise. Lastly, there is the good old-fashioned madness of crowds. “A survey by the U.K. Financial Conduct Authority published on Wednesday found that 76% of young people investing in high-risk products felt a sense of competitiveness with friends, family and other acquaintances. A false sense of safety is contributing too — 69% wrongly believed crypto was a regulated asset.” The article then segues into some policy prescriptions, which we are agnostic on as always, but the concluding point is timeless: “What the crypto crowd needs is circumspection.” We would add discipline to that sentence. Regardless of what you are considering buying, whether crypto or a given stock, ask yourself why you are interested. If the reasoning centers on past price movement and a big crowd arguing it will shoot higher, that is a giant warning sign. Your thesis to own anything should rest on a clear-eyed view of the fundamentals.
MarketMinder’s View: US weekly jobless claims notched another pandemic-era low, totaling 290,000 in the week ending October 16, the second-straight week below 300,000. While labor data are late-lagging and won’t reveal the economy’s upcoming direction, this week’s report offers one way to highlight the recovery’s progress. “The four-week moving average for initial claims totaled 319,750. While also a pandemic-era low, the total remains well above the 225,500 in place on March 14, 2020, before the explosion in claims that resulted from a nationwide economic shutdown. Weekly claims peaked at 6.15 million in early April 2020, before a tentative economic reopening that continues but remains incomplete as Covid fears linger. Though the unemployment rate has dropped a full 10 percentage points from the 14.8% peak in April 2020, there are still 5 million fewer Americans at work than before the pandemic.” Another way to think of the progress made: Weekly jobless claims were one of the most widely watched datasets last year, often leading economic coverage, as pundits and economists scoured the numbers for clues in a COVID world. While the report still gets regular coverage, it has steadily faded into the background. In our view, society continues its slow but steady march to a post-pandemic world—worth keeping in mind when headlines fret over the latest COVID development.
MarketMinder’s View: According to this article, the UK economy may be heading into rough waters this winter: COVID cases are rising, growth is slowing, inflation is hot and policymakers are about to remove their support. While that may sound like a perfect storm for market turbulence, we think investors should ask themselves the following question: What here has the potential to negatively shock markets? One, all these developments have traded time atop headlines this year, sapping surprise power. That is why bad news isn’t necessarily bad for markets. In regards to rising COVID cases, we have been living with the virus for close to two years now, and stocks are very familiar with what that looks like. Slowing growth? In our view, that was likely going to be the norm anyway once the reopening-related pop faded—other major economies (e.g., China and the US) showed as much. Today’s elevated inflation rates? We don’t dismiss the headwind in the near term, but prices likely won’t keep soaring indefinitely, as supply bottlenecks eventually ease. Policymakers’ “support?” A lifeline for those who needed it during lockdowns and their immediate aftermath, but the recovery always depended on reopening and a return to normal, in our view. Now, it is always possible new obstacles, including the return of severe COVID lockdowns, arise. But unless that reality is much worse than anticipated, it is unlikely to wallop stocks. That likelihood seems low, considering the government’s COVID contingency plans have been public for months. Plus, based on the tone of this piece and others like it, sentiment about the near-term economic outlook is pretty dour—setting a low base for reality to beat expectations. That is bullish, in our view.
MarketMinder’s View: After 16 months of negotiations, the UK and New Zealand have agreed to a free trade deal. While UK Prime Minister Boris Johnson and New Zealand Prime Minister Jacinda Ardern naturally touted the agreement’s benefits—and industries that have benefited from protectionism (e.g., some UK farming businesses) decried the negatives—the broad economic impact is limited. Total trade (exports plus imports) with New Zealand comprises around 0.2% of UK trade, and removing tariffs on some wine, honey and kiwi fruit isn’t going to turbocharge commerce between the two countries. However, the article posits this deal is part of a longer-term, bigger play for the UK: to be a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free-trade pact involving 11 countries around the Pacific Rim. Post-Brexit, the UK has reached individual trade deals with CPTPP members Japan, Australia and now New Zealand, and it has already formally applied to join the trading bloc, which rivals the EU’s economic size. It remains too early to say if and/or when the UK will gain CPTPP membership, as talks could take months or even years—muting any immediate economic benefits. But we think the UK’s efforts to strengthen trade ties with the rest of the world undercut the notion that UK trade would suffer outside the EU—reality isn’t so black and white.
MarketMinder’s View: Please note, MarketMinder is nonpartisan and prefers no politician or political party over another. While one newspaper’s survey of voters’ feelings on Japan’s upcoming general election isn’t necessarily a preview of the outcome, the findings indicate the ruling Liberal Democratic Party’s (LDP) commanding edge in the Diet’s lower house may take a hit. “The LDP previously held 276 seats in the chamber — with 233 constituting a majority out of 465 seats—but it has only about 120 candidates who appear to have the upper hand in single-seat constituencies. More than 40 candidates backed by the ruling party are struggling against a single candidate jointly supported by opposition parties.” To be clear, the LDP still looks likely to win the most seats—and its coalition partner Komeito currently projects to add some seats—so Japan doesn’t seem destined for a wholesale change in government. However, Prime Minister Fumio Kishida likely won’t enjoy the same electoral buffer his recent predecessors had, and if the LDP fails to win a majority, it could severely diminish his political capital and prompt Japan’s infamous revolving door of prime ministers to turn sooner rather than later. Even if he hangs on for a while, a Kishida cabinet will likely struggle to pass major legislation. That has generally been the norm in Japanese politics in recent history and a status quo markets are well familiar with.
MarketMinder’s View: Please note, MarketMinder is politically agnostic, favoring no party or politician anywhere. Our analysis seeks solely to ascertain political developments’ potential market impact. In this case, are the ruling Chinese Communist Party’s (CCP) economic policies sabotaging the country’s economy and markets? Evergrande, power outages and regulatory crackdowns all have ties to government policy, and some worry President Xi Jinping has stunted China’s economic liberalization progress. But as this article explains, there is likely a method to the CCP’s madness. Take China’s current energy woes: “One response to the energy shortage has been a long-overdue deregulation of electricity prices. This has allowed generators to pass on some of the impact of higher coal prices to end users. So it is not true that Mr. Xi’s government is implacably anti-market. Beijing, as it has for decades, will continue relying on a combination of state guidance and market forces: The state sets the direction for investment, with day-to-day outcomes dictated by the market.” Then, on seemingly restrictive Tech regulations, “The internet crackdown is not really about crushing private enterprise: Private companies in many sectors, including tech hardware, are doing just fine. Rather, the crackdown addresses — in a very authoritarian way — the same anxieties about big tech that governments around the world are grappling with: unaccountable power, monopolistic practices, shoddy consumer protection and the tendency of a tech-heavy economy to drive income inequality.” Now, these regulatory announcements have knocked sentiment over the past few months, so we think it is fair to say they have stoked volatility (which can occur for any or no reason). Moreover, it is always possible haphazard government interventions have unintended negative consequences, and it is a risk we monitor for closely. But a closer look at China’s policies suggest they aren’t as heavy-handed as feared, likely leading to a better reality than many expect—a tailwind for Chinese stocks, in our view.
MarketMinder’s View: Per usual, MarketMinder doesn’t make individual security recommendations. Companies specified here serve only to highlight an ongoing, higher-level market process: As analysts pore over backward-looking Q3 earnings results, they also take into account firms’ upcoming expectations—and incorporate those into their own forecasts. That analysis is all part of the widely discussed information forward-looking stocks continually reflect. In this particular case, “Confidence in Europe’s earnings resilience has helped the continent’s bourses recover from a wobble in September with the latest Refinitiv I/B/E/S data showing third quarter profits for the 600 biggest listed European companies are expected to grow 46.7% from the same period in 2020.” Which is great, but what about this quarter, next year and the year after? This is what stock markets, which assess conditions 3 – 30 months ahead, weigh against what is already priced in. Since markets are efficient discounters of information, we think this article errs in its argument that analysts’ latest earnings upgrades and downgrades—based on supply-chain bottlenecks, energy prices, inflation expectations, prospective central bank actions and interest rate moves—drive stocks. Rather, analysts are changing forecasts to reflect issues that stocks have been dealing with for months. Once supposed risks and opportunities are well known—as widely watched analysts’ forecasts are—they lose much of their market-moving surprise power. In our view, stocks are a better leading indicator on the corporate front than any one or group of experts. When in doubt, trust the market.
MarketMinder’s View: “After years of complaints that there were no rules to determine what constitutes a ‘sustainable’ investment, investors now fret there will soon be too many to navigate easily. More than 30 taxonomies outlining what is and isn’t a green investment are being compiled by governments across Asia, Europe and Latin America, each one reflecting national economic idiosyncrasies that can jar with a global capital market which has seen trillions pour into sustainable funds.” The article goes on to describe the EU and UK’s taxonomical green-investing efforts—set to be ready for next year—while other areas, most notably the US, demur. So, “for those with a global approach, different taxonomies are a headache.” A global body, the International Platform on Sustainable Finance, is attempting to create a shared reference to determine common ground, but “with major economies set on their own proposals, and the United States not planning to introduce any at all, some asset managers are not hopeful for international coordination, even on the basic design features of taxonomies.” For investors interested in environmental, social and governance (ESG) metrics, we think it is critical to be aware of these varying standards as they roll out. The onus will be on individuals to do their own due diligence to ensure their investments align with their personal values. For more on cutting sustainably through the green guesswork, please see our 7/28/2021 commentary, “Clearing the Air in ESG Investing.”
MarketMinder’s View: We think reality is a wee bit more complicated than implied by the titular question. Now, as some of the anecdotes cited here suggest, businesses on both sides of the English Channel have had new Brexit-specific issues to work around, including additional paperwork and compliance costs. That is frustrating, to be sure, but businesses adapt and adjust over time, and the history of capitalism argues against Brexit being an insurmountable obstacle for UK companies. Moreover, international goods trade has faced tough sledding this year for issues beyond an updated trade agreement between the UK and EU: see global developments (e.g., the pandemic, supply bottlenecks, a shortage of drivers, etc.) for more. As the UK’s Office for National Statistics (ONS) noted in its trade release for August, the past two years of trade statistics have been particularly volatile, and tying small movements to any one factor is likely a stretch. Trade may be bumpy now, but in our view, forward-looking markets see beyond near-term headwinds—and we suggest investors follow stocks’ lead. Besides, markets move most on the gap between sentiment and reality, and dim expectations set a low bar for reality to clear, increasing the potential for positive surprise.
MarketMinder’s View: Citing the ever-quotable “people with knowledge of government deliberations,” this article documents the twists and turns in Chinese President Xi Jinping’s rollout of a tax on high-end property and second homes in the mainland—an effort to cool the housing market. The tax, which this piece oddly doesn’t detail, has amounted to an annual level of rates ranging from 0.4% to 1.2% of the assessed value in pilot trials, which is pretty insignificant relative to rates in the developed world. Still, according to the piece, it seems Xi faces opposition from within the party itself. “Some retired senior party members also petitioned against imposing the new tax, saying they themselves couldn’t afford to pay any additional taxes. ‘So many people, including party members, own more than one property,’ said one of the people familiar with the deliberations. ‘The tax proposal is becoming a potential social-stability issue.’” Accordingly, an initial proposal designed to broaden a test of this tax has been scaled back from 30 cities to 10. Now, China isn’t exactly a democracy, so it remains to be seen if the dissention will kill or curtail this proposal. But with the property market under some pressure presently, it wouldn’t surprise us to see Xi pause this plan. That said, we think the notion of this being a major economic risk is overdone. Claiming real estate accounts for “nearly a third of the country’s output” is a stretch that wraps up all construction, furniture sales, and literally anything that may have the slightest overlap with real estate. A more realistic estimate is 10% to 17%, although even the latter is overstated as it includes all construction. When the property market experienced troubles in 2015, Chinese growth slowed, but it didn’t tank.
MarketMinder’s View: This article discusses a handful of stocks, so please keep in mind that MarketMinder doesn’t make individual security recommendations. We highlight it to illustrate a broader point: That although sentiment has cooled some from earlier this year, optimism remains the dominant sentiment today. To us, this is a key sign this bull market is late stage, not early, despite its short lifespan. This article illustrates this by documenting burgeoning CEO confidence that has driven Wall Street fees from IPOs, M&A deals, spinoffs and other corporate actions to record annual levels—with three months still to go this year. As one analyst quote here put it, “Volatility is historically the biggest hurdle to dealmaking, he said, so analysts are watching the stock market closely.” We would phrase that somewhat differently: The huge volatility that typically comes around shifts from bear markets to bull markets is the biggest hurdle to dealmaking, hence why relatively few transactions normally take place in early bull markets, when prices are still relatively low. After all, if you are a private company looking to go public—or a firm seeking to sell itself to another—you want the price environment to generally be high and calm. Not low and rocky.
MarketMinder’s View: With quite a few metrics pointing to slower US economic growth and elevated inflation, “stagflation”—defined here as periods when inflation exceeds real GDP growth rates—is on the tip of many pundits’ tongues. This article is a good look at the subject, though, offering some useful insights. “It turns out that in the near term, inflation has exceeded real growth as often as the other way around. The growth-to-inflation ratio has dipped below 1 about half the time over rolling annual periods since 1947, counted quarterly. So it’s not at all uncommon for inflation to run hotter than real growth for a time. Importantly, it doesn’t mean inflation will exceed real growth going forward. The historical correlation between the growth-to-inflation ratio from one quarter to the next is weak (0.32), and there’s no correlation from one year to the next (0.06).” It goes on to note that there are five episodes in which inflation outpaced growth for a rolling five-year period, and only one (the late 1960s) eventually evolved into a very stagflationary environment—an evolution that took years. All that suggests to us that thinking a 1970s-redux is in store today is a very hasty assumption to make.
MarketMinder’s View: This article dives into partisan politics, so please keep in mind that MarketMinder favors no politician nor any party. Our interest is solely in the potential economic and market impact of policies and legislation—like the multi-trillion dollar reconciliation bill discussed here—or lack thereof. This article is a deep dive into some of the intraparty divides that presently hamper passage of this legislation, which would require unanimity among Democratic senators to pass. It seems Senator Joe Manchin, from fossil fuel-rich West Virginia, isn’t on board with some of the clean energy proposals included in drafts of the legislation, seeing it as penalizing his constituents. But “Progressives led by Sens. Sheldon Whitehouse (D-R.I.), Ed Markey (D-Mass.) and Jeff Merkley (D-Ore.) have warned for months they would not support a massive budget reconciliation package if it did not include bold reforms to cut carbon emissions. ‘At the end of the day, we’re going to have a deal and it’s going to be good enough on climate or it won’t go,’ Whitehouse said last month.” As noted herein, Manchin is also calling into question the Halloween deadline to strike a deal set by House Speaker Nancy Pelosi. All this suggests an agreement on legislation isn’t at hand and, in our view, the longer it takes to pass this bill, the greater the likelihood it is watered down. If things continue this way, any reconciliation bill could be a shell of itself when (and if) it passes. This is gridlock and, whether you love or loathe the legislation, it mitigates large shifts that could stoke uncertainty and create winners and losers, roiling stocks.
MarketMinder’s View: Alright friends, let us all take a deep breath and remember stocks—like MarketMinder—are politically agnostic. They don’t prefer any political party nor any politician, and neither do we. Plus, as this piece demonstrates, politicians’ rhetoric frequently doesn’t match their actions, so basing investment decisions on it is generally not the way to go, whether that rhetoric leads you to think American socialism looms or not. Political bias is also one of investors’ biggest blind spots. So tune down your emotions and focus on this argument’s salient logic, as it is a dynamite explanation of how markets and a gridlocked political system work. Regarding the former: “Markets are relentless processors of information. Markets anticipate. They’re a look into the future. This is important because socialism is all about shared misery. About decline. If [President Joe] Biden were in the process of foisting socialism on us, it’s undeniably true that U.S. equity markets would not just be collapsing, but they would have already collapsed. Massively. In ways that would make the 1987 correction (22.5%) seem meek by comparison. Except that stocks are up since Biden entered office.” As for the latter, with so much division within his party, Biden has a large incentive to placate all factions. Right now, that looks like pandering verbally with progressives while negotiating privately with moderates to water down legislation. The party’s tiny edge in both chambers of Congress “explains why Biden’s rhetoric can be so ridiculous, so coddling of the socialist-leaning in the base. It can be precisely because Biden won’t achieve passage of what he talks about. All of this presumably helps explain optimistic equity markets. Talk is talk. If not backed by legislative action, it lacks meaning. Biden’s ability to talk like a socialist is directly related to his inability to govern like one.” High spending, as the article then explains, isn’t socialism. Whatever your political preferences, it is important to set feelings aside when assessing stocks’ political drivers and focus on policy and probabilities, not distant possibilities.
MarketMinder’s View: According to FactSet, economists expected September industrial production to rise 0.2%, so the -1.3% drop was quite a large surprise. The Fed attributed almost half of the decline to Hurricane Ida, which disrupted oil and gas production on the Gulf Coast. The other main headwind was the semiconductor shortage, which knocked -7.2% off auto production—responsible for over half of manufacturing’s -0.8% decline. While a negative month isn’t great, the causes are widely known. Investors have been grappling with supply chain issues for months now. Plus, manufacturing is only about 19% of US GDP—services generates the vast majority of output and is relatively insulated from the global logistics snarl. So, in our view, nothing here suggests stocks’ economic fundamentals weakened overnight.
MarketMinder’s View: Song publication rights have become one of the hottest alternative assets in the investment universe, and as this article details, there are some indicators that froth is forming. Private equity shops are splashing billions on legacy artists’ and modern hitmakers’ back catalogues, on the thesis that future streaming revenues will be a permanent moneymaker. After all, if you buy a record or CD, the royalty holder gets a one-time payment. They make the same amount whether you listen once or thousands of times. But on streaming services, they get a tiny bit for every time you play the song. Streaming services “may not pay a fortune every time you listen to a track, but they do pay something, and when you start to multiply all those fractions of a cent by a few billion it turns into a sizeable cheque.” That is a fine enough thesis to own publishing rights, but the question is: Does it justify the premiums catalogues are commanding right now? Or do prices already reflect this, leaving limited upside? This article offers two pieces of evidence supporting the latter. One, the switch from CDs to streaming “is a one-off transition,” and a widely known one at that. Two, “prices are soaring out of control, and rich buyers are bidding up the prices. Every deal is bigger than the last one. Neil Young’s catalogue fetched a reported $150m. Bob Dylan, as smart a manager of his own career as he is a brilliant songwriter, sold his catalogue for $300m because he may well have realised it was far more than it was really worth.” In our view, that last point makes this analogous to IPOs. While people often mistakenly see them as an entry point to big riches, the early investors have incentives to sell at the highest possible price the market will bear. That is why you often see IPO booms near market peaks, as investment banks try to capitalize on euphoria. Jumping on bandwagons isn’t a great investment strategy.
MarketMinder’s View: Here is a real-time lesson in markets’ efficiency and tendency to move ahead of widely expected events. In this case, Bank of England (BoE) Governor Andrew Bailey all but told people to expect a rate hike within the next few months. “‘Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,’ Bailey said on Sunday during an online panel discussion organised by the Group of 30 consultative group. ‘And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act,’ he said. ‘But of course that action comes in our monetary policy meetings.’” While markets can move for any or no reason and reading into short-term volatility is mostly a fruitless exercise, we doubt it is a coincidence that UK bond yields rose across a range of maturities on Monday. When markets see a high likelihood of something happening in the foreseeable future, they don’t wait for it to happen—they incorporate it into prices in real time. Now, that isn’t to say that whenever the BoE does hike rates there won’t be further volatility on the day—that isn’t predictable. But it does show surprise power is basically nil at this point. Additionally, for the moment, with long rates rising alongside expectations for a rate hike, the likelihood of said rate hike inverting the yield curve is incrementally lower. While folks always debate the timing and appropriateness of a hike, inverting the curve is the chief potential error to watch for where rate hikes are concerned, in our view.