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.


Spain Enters COVID State of Emergency to Much Dismay

MarketMinder’s View: With COVID flaring up across much of Europe, we have been closely watching governments’ responses—specifically in regards to new restrictions. The latest: On Monday, the Spanish minority central government re-imposed a nationwide curfew (with an exception for the Canary Islands) between 11pm and 6am through November 9. The government also plans to seek parliament’s approval to impose a state of emergency for six months, which would “give each region the right to take its own measures to tackle the pandemic, including limiting people’s movements.” While this piece highlights the fierce political debate surrounding these new rules—both opposition parties and some regional authorities are criticizing the restrictions’ length—we found the citizenry’s response more interesting. As one pharmacist interviewed here noted, “They are acquiring a taste for confining people and that could be dangerous. Extending it by six months is an absolute outrage. I see a lot of potential for abuse.” By no means are one person’s comments representative of the majority, but we can fathom a possible scenario in which people become less willing to comply with restrictions—queuing up a harsher government crackdown. That is only a possibility at this point, not a probability, as measures today are overall far less harsh than in the springtime, but it is a development we are monitoring closely.

People Fear a Market Crash More Than They Have in Years

MarketMinder’s View: It barely takes a cursory read to see that the confidence measures underpinning this argument aren’t predictive. They show investor confidence is worse today than in March 2009—the bottom of the 2007 – 2009 bear market—while valuations are higher, supposedly a deadly cocktail. But this compares apples and oranges. We are seven months to the day into a new bull market, which naturally brings higher valuations than you will see at the bottom of a bear market. Not because markets are suddenly overvalued, but because stocks are forward looking and bull markets normally begin while earnings are still falling. Rising stock prices (P) divided by falling earnings (E) means rising P/E ratios. Of course, that is for normal P/E ratios, not the cyclically adjusted version used here, which amounts to an extra backward-looking and bizarrely inflation-adjusted … thing. At any rate, if more people think stocks are overvalued now than they did at the end of the financial crisis’s accompanying bear market, that is just a coincident reaction to past market movement and headlines, in our view. If we took anything away from this article, it is that it shows sentiment is pessimistic, which is typical and bullish at this point in the market cycle, but that is about it.

Euro Zone Economy at Risk of Double-Dip Recession: PMIs

MarketMinder’s View: The eurozone’s flash composite purchasing managers’ index (PMI) for October, which combines manufacturing and services, fell to 49.4—below 50, implying contraction. This piece argues these results are the tip of the iceberg, with the broader eurozone economy poised to contract in Q4 (and potentially beyond) as another wave of COVID flares up and broad lockdowns return. That is within the realm of possibility, but markets move most on probabilities—and surprise. Considering how long people worldwide have discussed a second lockdown, we see very little surprise power unless whatever happens is materially worse than some pretty dour expectations. The incremental new restrictions announced thus far don’t qualify, in our view. Moreover, we aren’t wholly convinced the PMI’s small slip from September’s 50.4 indicates much of anything at this point. PMIs measure how many businesses reported expansion, not how much activity increased. Based on the limited information available in the flash release, Germany still enjoyed broad expansion while France contracted—which makes sense, given divergent COVID policy in these two countries. What matters for markets, in our view, isn’t whether some nations have some restrictions, but whether we see a return of this winter and spring’s severe global lockdowns or something even more draconian. That is a political decision, which defies forecasting. So wait and see, but for now, with most businesses remaining open in most countries, a second global sharp economic downdraft seems unlikely.

Stocks Typically Climb, Regardless of Who’s in the White House

MarketMinder’s View: This is a tour de force in short-termism and correlation without causation. The one place that isn’t short-term—long-term data showing returns don’t much differ depending on whether a single party has uniform control of the White House and Congress—is too broad to mean much. The rest of this focuses on returns between Election Day and Inauguration Day, implying investors can benefit from predicting markets correctly during this very short window. The problem: Volatility can arise at any time, for any or no reason, and markets swing most on sentiment over short periods. That is inherently unpredictable. Beyond that, it seems to imply 2000’s election caused the Tech bubble to implode, which seems a touch removed from reality, considering it started deflating in March 2000, long before “hanging chads” entered the common vernacular. Look, we aren’t dismissing the potential for volatility after Election Day—whether or not the results are delayed—but that isn’t investible. The volatility in 2000 likely stemmed from the surprise factor, which doesn’t exist today. We suggest looking beyond that and remembering that when the dust settles we will have either a re-elected Republican or newly elected Democrat, neither of which is inherently bearish. History suggests the former would bring milder inaugural year returns than the latter, but that is mostly a function of sentiment, and mild isn’t negative. For more, see our 10/20/2020 commentary, “Election Clarity: Possibly a Bit Delayed, but Still Coming Soon.”

UK Trade Deal With Japan Unlocked Brexit Talks, EU Sources Say

MarketMinder’s View: Always take anything attributed to unnamed “sources” with a grain of salt, but if this is true, it is a striking example of things coming full circle and proving a widespread fear false. “‘Level playing field’ guarantees on issues such as subsidy law offered to Tokyo were more robust than the bare minimum on the negotiating table in Brussels, EU sources said. British resistance to engaging in negotiations over the commitments cracked when UK negotiators were confronted with their offer to the Japanese last year. Brussels made clear they wanted stricter and enforceable commitments, citing the proximity of the UK market, its deeper connections to the EU economy and its offer of zero-tariff deal. It insisted the new baseline for talks had to be the Japan offer, which was itself effectively copy-pasted from the EU’s trade deal with Tokyo, which the UK leaves at the end of the transition period and year. ‘The British acceptance of the new baseline unlocked discussions on the issue and pointed the direction of travel for the later talks,’ an EU diplomat said.” The funny thing about this is that the Japan deal was finalized days after the UK’s decision to amend parts of the EU Withdrawal Agreement sparked a backlash, with several observers and EU bigwigs saying the move would torpedo EU trade talks and guarantee no country would sign an agreement with the UK. Finalizing the Japan deal proved that false, and now the Japan deal has triggered the resumption of those same EU trade talks that the UK’s Withdrawal Agreement move supposedly killed. Lesson: Beware hasty conclusions drawn from overblown political events. Whenever politicians draw a line in the sand, they have a funny way of wiping it later.

Britain’s Radical Takeover Ideas Risk Protectionist Misuse

MarketMinder’s View: We don’t disagree that expanding national security restrictions on foreign investment—including adopting the power to retroactively reject foreign acquisitions of UK companies and order divestiture—risks creeping into protectionism. However, the key question for investors is whether these rules would create unique uncertainty in the UK and offset all the attributes that make the country such a hot destination for foreign investment, including its (otherwise) strong property rights, free markets and excellent human capital. We have our doubts. For one, those previous three attributes are among the world’s envy. Two, the US’s rules on foreign investment appear quite similar to what the Brits are considering now, and we don’t see much evidence of this harming US markets. In our view, despite the apparent negatives, this seems like a fear markets have already dealt with.

Pandemic Boom Stocks Don’t Have Earnings to Support Them

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations; any companies mentioned herein are part of a broader theme we wish to discuss. We found this analysis a mixed bag. On the sensible side, it notes the seeming disconnect between rising stock prices and decimated earnings isn’t so bizarre since markets are forward-looking: “The reality is that investors have their eyes fixed firmly on the future, and unless a company was crippled by coronavirus, 2020 can be pretty much ignored as a one-off hit. … Investors are betting that the stock-market winners will emerge from the pandemic even stronger than before.” Yep: Stocks are likely looking ahead to the next 3 – 30 months, and in young bull markets, they are focused on the longer end of that spectrum, in our view. We also agree value stocks aren’t likely to lead for the foreseeable future, though our rationale is different. For one, stocks are currently behaving as if it were a late-stage bull market rather than an early bull market—likely due to the fact that this year’s bear market acted more like a correction than a traditional, longer-lasting downturn that punishes smaller, value firms. Also, conditions supportive of value (e.g., a steep yield curve) are absent. However, on the less-sensible side, this piece attributes too much market-moving power to earnings expectations and well-known potential risks (e.g., potential Tech regulations or change in tax policy, neither of which are assuredly negative for stocks). Besides being forward-looking, stocks are also efficient discounters of widely known information. Future earnings estimates and stories that dominate financial headlines lack the surprise power to spook stocks, in our view.

Weekly Jobless Claims Drop to the Lowest Level Since the Pandemic Started in March

MarketMinder’s View: Initial US jobless claims improved to 787,000 in the week ending October 17, notably below expectations of 875,000. However, while the headline number improved, this article nicely highlights how messy reality is. For example, falling jobless claims may signify the expiration of unemployment benefits—and some people may have simply moved over to the Pandemic Unemployment Assistance program. Recipients there, “… increased by 509,828 for the week ended Oct. 3 to 3.3 million. Recipients under that part of the program get an extra 13 weeks of compensation after having exhausted the initial 26 weeks of eligibility.” Another interesting tidbit: California had suspended processing claims—and used a placeholder figure for reporting purposes—until it addressed its fraud protocol. As a result, “The state over the past week reported 158,877 claims, and 176,083 for the prior week, according to data not adjusted for seasonal factors. Those numbers compare to the 225,000 total the state had been using as a placeholder until it resolved the issues with its system, so that helps account for the downward drift to the total for all states.” In our view, this is a useful reminder for investors: High-frequency data are especially noisy, so refrain from drawing sweeping takeaways about the latest numbers.

A Weakening U.S. Dollar Is Still the Preeminent Currency

MarketMinder’s View: Despite all 2020 has thrown at us, some pundits have warned an old false fear—in this case, a weakening US dollar—is the real threat to economic stability. In our view, that worry is vastly overstated, and some of the evidence shared here explains why. Though the dollar has weakened a bit this year, it seems a stretch to call it a crash: “… when evaluating the dollar on a 10-year time horizon, the greenback’s move over the past several months looks less like a crash and more like a simple unwind of the haven flows during the height of the Covid-19 pandemic, combined with a natural weakening given the Federal Reserve’s relatively more aggressive monetary policy response compared with its global central bank peers.” We agree: Investors generally flock to Treasurys during turbulent times—like this winter’s record-fast bear market—and the dollar subsequently weakens as stock markets recover and that flight to safety unwinds. However, the speculation in the second half of this piece suggests the dollar will continue to slide due to US politics. For investors, we suggest not overthinking any of this: Currency swings don’t derail bull markets, as stocks have fared fine during periods of dollar strength and weakness, and they (like stock markets) have no preset reaction to current events. For more, see our 7/31/2020 commentary, “Putting the Greenback’s Recent Slide in Proper Context."

As U.S. Election Odds Narrow, Market Analysts Factor in Higher Risks

MarketMinder’s View: This roundup of presidential election prediction models, from European betting outlets to options market activity, provides examples of what investors shouldn’t focus on when tracking the upcoming US election. For example, betting markets may seem like a sensible indicator to track since they reflect money rather than feelings. Yet the participant pool isn’t particularly robust, meaning the latest data are likely to reflect the biases of a certain segment of the population rather than the voters who will decide the election. Tracking the latest developments in tight Senate races is likely to be more useful for getting a sense of how the election will shake out, in our view.

Peak Oil Is Coming – It’s Just a Question of When

MarketMinder’s View: We share this article not as a commentary on the Energy sector’s near-term prospects or oil’s future in general. Rather, we think the perspective shared here illustrates why long-term forecasts like “peak oil demand” aren’t helpful for investors. For one, as this piece shows, those long-term forecasts run the gamut—how do you know which, if any, is correct? Plus, markets don’t look that far into the future. We think the story of the original peak oil theory, which focused on supply peaking and the industry entering long-term decline, is instructive in why none of this is helpful: “Fifty years ago, BP — then known as British Petroleum and majority state-owned — discovered oil off the coast of Scotland in the once-mighty Forties field with the help of a £370m loan. … The prolific field — which once made the North Sea one of the world’s most important petroleum basins — has pumped over 2.4bn barrels of oil in its lifetime and its current operator Apache believes it could still be producing in 20 years.” Throughout the decades of the North Sea basin’s existence, “peak oil” forecasts have predicted supply would eventually dry up, leading to production’s terminal decline—a development that hasn’t yet come to pass. Indeed, innovations to the sector (e.g., American shale) highlight how resilient production remained. Rather than speculate on the far future, we suggest investors think more about supply and demand fundamentals for the sector in the next 3 – 30 months.

In New 60/40 Portfolio, Riskier Hedges Are Displacing U.S. Debt

MarketMinder’s View: With long-term interest rates globally near or below zero, this article questions the future of the titular portfolio (i.e., 60% allocation to stocks and 40% to bonds) and whether fixed income can effectively hedge against equity market declines. Some of the experts interviewed here doubt bonds can perform that role anymore, and in response, they are “exploring riskier assets -- from options to currencies -- to supplement or fill the role of portfolio protection that U.S. government debt played for decades ... .” However, we disagree with the crux of this argument: that investors should treat bond holdings as a “hedge.” Nor, in our view, is the primary point of holding fixed income securities their yield. Rather, bonds dampen short-term volatility tied to stocks. It isn’t about moving in the opposite direction as stocks—just moving less, whether up or down, overall and on average. Bonds can still do that with interest rates low, and there are ways to manage around the risk of rising rates. Venturing into complicated option strategies or currencies strikes us as unnecessary and can actually increase your portfolio’s risk, which may run counter to the goals and needs that led you to a blended stock and bond strategy in the first place. More broadly, rather than begin with the premise that investors should start with a 60-40 asset allocation, consider first what your individual investment goals, objectives and time horizon are. Those inputs should decide your asset allocation first and foremost, in our view. For more on asset allocations’ role in achieving your financial objectives, please see our 10/7/2020 commentary, “A Mindset Shift for a Low-Yield World.”

Why Central Banks Want to Create Their Own Digital Currencies Like Bitcoin

MarketMinder’s View: For all the hoopla surrounding digital currencies, little is all that revolutionary since central banks are mainly looking at what is already available. The “digital currencies” central banks want to roll out are less like private cryptocurrencies like bitcoin and more like public versions of electronic payment systems in use today. This article provides some helpful background information about why central banks are looking into this space and potential benefits and drawbacks. Currently, “Behind the scenes, most financial transactions—whether using a credit card, sending money to a relative, or buying something online—involve settling payments over a patchwork of systems. ... The payment is ultimately routed through banks, who sort and settle the transactions, and typically collect fees from merchants for offering the service. That means money can take two or three days to move between accounts.” Under some proposals, a central bank could transfer funds directly into someone’s digital wallet—a faster process—though some worry about the potential privacy issues. That said, even if the Fed pursues some sort of digital currency, it isn’t likely to be a sea change some warn. For more on why newfangled digital currencies are less than meets the eye, please see our 10/15/2020 commentary, “The Facts and Fiction of Fedcoin.”

How Reliable Is a Millennium of Macroeconomic Data?

MarketMinder’s View: We think financial and economic history is a great guide (not to mention tons of fun to read about and study). Though history doesn’t repeat perfectly, it does provide perspective on what is probable—critical to long-term investing success. That said, history has its limits—especially on the economic data front, which this article discusses in regards to a measure of English GDP going back to 1086. “Even if you put to one side the question marks over whether measurement of the variables is accurate, you run into the issue that some of the concepts only came into being relatively recently. In her history of GDP, Diane Coyle writes that the concept was introduced in the 1940s (though there were forerunners dating back to the 18th century). So how can we possibly have readings dating back centuries earlier? The Bank of England partly gets around the problem by using measures of sectoral production for the period from 1270 to 1870 ... The Bank does, however, purport to have a measure of English GDP dating back to 1086. We are somewhat dismissive of this given that, from what we can discern from the data itself, ‘growth’ wasn’t really a thing that economies did to any great degree in the centuries before the industrial era.” Yep: Just because a number comes from an official source doesn’t exclude it from scrutiny—a good lesson for investors to keep in mind.

Coronavirus Digest: Ireland Goes Back Into Lockdown

MarketMinder’s View: This roundup discusses some of the COVID restrictions governments around the world have put in place recently, and Ireland’s is among the most notable. Starting tomorrow and lasting at least six weeks, Ireland’s “non-essential retail businesses will be shut while bars and restaurants will be restricted to a takeaway service. ... making Ireland the first EU nation to return to the severe lockdown restrictions imposed in March.” This is a reversal from policy earlier in the month, when the Irish government made headlines for choosing not to impose tougher measures. In our view, this is a reminder that political decisions—like implementing COVID rules—can’t be forecast. Now, this doesn’t mean the rest of Europe will follow suit, let alone the world. But developments here remain worth monitoring closely, in our view.

Tech’s Influence Over Markets Eclipses Dot-Com Bubble Peak

MarketMinder’s View: This article’s basic thesis is that US markets are frothy, as Tech and Tech-like stocks gobble up more and more of the S&P 500’s market capitalization, anecdotes of retail investors trading Tech stocks abound and valuations swell. The basic evidence that supports the title: “Internet stocks,” which we take to mean the Tech sector (28.1% of S&P 500 market cap, per FactSet) plus the Consumer Discretionary sector’s Internet & Direct Marketing Industry (5.3%) and the Communication Services sector’s Interactive Media and Services Industry (5.5%), now constitute nearly 40% of the index, topping 1999’s record 37%. But as the article notes, the comparison has some significant problems. Back then, the Tech sector was filled with myriad profitless firms that had no realistic path from bleeding cash to turning a profit. Now? “Analysts estimate the tech sector’s share of S&P 500 corporate profits could reach about 36% this year, FactSet data show.” Moreover, these firms are plowing free cash back into their businesses to finance future growth. We are not in a scenario, in our view, where investors are making a highly speculative investment that hinges on pie-in-the-sky hopes of a future where oodles of clicks may eventually bring profits and economic growth continues forever. Today’s sentiment is a whole heckuva lot more cautious and skeptical, as this article demonstrates.

Value Stocks ‘Worst for 100 Years’

MarketMinder’s View: We don’t really think there are good data illustrating the divide in returns between growth and value stocks going back to World War I, and we don’t think strategists cleanly divide the market into growth and value halves—that isn’t how the labeling works. (Stocks are assigned a growth or value factor, which means some are part growth and part value, and it is not a 50/50 split.) But overall, we agree with a whole lot of this. Value stocks, currently out of favor, are unlikely to lead unless and until the yield curve steepens due to long rates rising. While this doesn’t look likely any time soon, “…these trends go in long waves. Growth was the place to be in the late 1990s. Value in the early 2000s. Growth was hot in the early 1970s. It did disastrously for the next decade. And so on. These trends can go on for a decade or more — before doing a 180.” So why hang on to lagging value stocks like banks, Energy firms or Industrials now? “They’re a diversifier. They may go up when the rest of your portfolio goes down. They are, he adds, very likely to do relatively better if interest rates rise.”

Reports of Shale’s Death Were Greatly Exaggerated

MarketMinder’s View: On its way to making a broader point, this article delves into a couple of mergers and acquisitions announced or rumored to be underway in recent days in the oil patch. So with that, we remind you that MarketMinder doesn’t make individual security recommendations and the broader point is what we are highlighting here. That point: While so many presumed the one-two punch of lockdown-squashed demand and OPEC+ moves to increase supply would crush America’s shale oil industry, “All the evidence of late is that there’s life in the oil patch yet. Production from Texas’s Permian Basin in September was 4.49 million barrels a day. That’s down from a peak of 4.9 million in March, to be sure, but higher than in any month prior to September 2019….” Moreover, as noted herein, the acquisitions taking place suggest financial pressure is low on larger firms and quite high on smaller ones, leading to consolidation that may actually make the overall industry more stable. Many people talk like oil and Energy stocks are destined for history’s dustbin, but it looks more like a temporary industry downturn to us—the likes of which we have seen many times in many industries over the years.

Welsh ‘Firebreak’ Sends Recovery Hopes Up in Smoke

MarketMinder’s View: With COVID flare ups occurring across much of Europe, we are closely monitoring the re-imposition of restrictions on business activity. Yesterday, one of the harsher measures implemented since the spring was unveiled in Wales: Starting Friday evening, there will be a 16-day ban on non-essential business activity, renewing measures taken in the spring. However, though the Welsh measures resemble the springtime’s—and may have a deleterious effect on businesses, workers and consumers there—they affect a much smaller swath of the UK economy at large. As this notes, “In the context of the wider UK economy, the shuttering of Wales will have little effect. The principality has a population of 3.1m – around a third of the size of London – and accounts for just 3.4pc of overall gross domestic product, or around £75bn. … If Welsh output were to fall by 10pc in the next fortnight, that would translate into just 0.3 percentage points shaved off national output over the period, and a de minimis effect on the quarterly figures. Just 195,000 jobs in Wales were put into the Government furlough as of July 31.” The lesson: Monitoring lockdowns is important, but rationally scaling them is critical.

EU Makes Bond Market History With Record $275 Bln Demand for SURE Issue – Bankers

MarketMinder’s View: After the EU unveiled a plan to issue joint debt in May—and passed the budget making that a reality in July—many have speculated that EU debt would draw significant interest in the bond market. Few foresaw quite this level, though, as investors bid for over €233 billion ($275 billion) in the first sale of the collective bonds to support the region’s temporary “Support to mitigate Unemployment Risks in an Emergency” (SURE) fund. Given that the EU sold only €17 billion in bonds, this equates to an astronomical 13.7 bid-to-cover ratio and yields right around zero percent on 10- and 20-year issues. (For some perspective, strong demand at a sovereign bond auction would typically be in the 3 or 4 bid-to-cover range.) They could have, but didn’t, fill the entire slated €100 billion fund twice over just today! At any rate, this shows there is ample demand for high-quality sovereign debt, seemingly more than sufficient to gobble up the large amount of issuance needed to fund various coronavirus response strategies worldwide.