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: Today Germany’s central bank, the Bundesbank, said it would continue to “take part in European Central Bank asset purchases after a legal standoff with the country’s constitutional court was resolved.” This formally concludes the short-lived brouhaha in May when Germany’s top court ruled the Bundesbank couldn’t participate in the ECB’s quantitative easing (QE) program unless the ECB could prove the program’s effects on the economy were “proportionate measures for pursuing price stability.” Despite some speculative headlines about the threat to ECB monetary policy and sharp words from both sides, the saga now appears to have wrapped up with more of a whimper than a bang—a reminder for investors that political noise doesn’t automatically translate to action.
MarketMinder’s View: The Institute for Supply Management’s (ISM) July US manufacturing purchasing managers’ index (PMI) rose to 54.2, the highest level in 15 months (readings above 50 indicate expansion) and another example of improving economic data following economic reopenings. We raise this article in particular, though, because it aptly describes one of PMI’s limitations: “Although readings over 50% indicate growth, the index doesn’t measure the actual amount of production or tell how much it has improved. The survey basically asks executives if their businesses are doing better or worse compared to the prior month.” Yep: PMIs are surveys that provide a helpful snapshot of economic conditions, but they lack the detail of “hard data” like GDP. Thus, we find it odd pundits are using the latest PMIs to declare the US economy will take a long time to recover. Backward-looking datasets won’t tell you how long it will take for an economy to reach its prior highs, just like they didn’t predict the sharp plunge due to the COVID-driven economic shutdown. In our view, it is critical to keep in mind what the data do and don’t tell you.
MarketMinder’s View: IHS Markit released July manufacturing purchasing managers’ indexes (PMIs)—surveys that gauge the breadth of expansion or contraction within the manufacturing sector, with readings above 50 indicating growth—for a number of countries around the world. While a few Emerging Markets economies registered contraction (e.g., India and the Philippines), several major economies improved. For example, the eurozone’s manufacturing PMI rose to 51.8 in July from 47.4 in June—its first expansionary reading since January 2019. Similarly, the UK IHS Markit CIPS manufacturing PMI rose to 53.3—a 16-month high—while China’s Caixin/Markit manufacturing PMI rose to 52.8 from 51.2 in June, the third straight month of growth and biggest monthly jump since January 2011. Now, although PMIs are timely, they don’t reveal the magnitude of growth. Also, while these positive data point to the benefits of countries’ reopening, the services sector, where COVID restrictions have been in place for longer, accounts for a greater slice of economic output in most developed economies. Those caveats aside, skepticism about global manufacturing remains abundant as this article shows: “But worries about a second wave of infections may weigh on global demand and business sentiment, keeping any rebound in factory output feeble, some analysts say.” In our view, this is another example of what we call the Pessimism of Disbelief—investors’ tendency to dismiss good news, a normal occurrence in early bull markets. We aren’t dismissing the possibility of a second COVID wave or the headwinds manufacturers face, but stocks don’t need a perfect economic backdrop to recover. Low expectations raise the potential for positive surprise if reality turns out to be better than many think.
MarketMinder’s View: Just because you can do something, doesn’t mean you should. As this article highlights, it is now possible to buy fractional shares of racehorses, the titular mega-expensive luxury handbags, rare books, sports memorabilia and other collectibles. As the article also highlights, there are several complications and drawbacks, including illiquidity, relatively little freedom to trade or cash in, high embedded fees and, in many cases, the impossibility of tracking returns. Last we checked, there is no real-time Birkindex tracking the minute-by-minute ups and downs of hundreds of limited edition handbags. As for racehorses, few ever make it to the track, and fewer still win—but all require ongoing care, boarding, training and general upkeep, which investors are also responsible for. Then there is the little issue of getting your money out: “As with other alternative investments, buyers are restricted from the selling of these fractions until after the lockup period ends. But when the asset itself — the bag or the horse — is sold is determined by the platform, not the individual investors.” Look, if you have the means and will genuinely enjoy owning it, then by all means, splash out on a Birkin bag, Nolan Ryan’s rookie card or a fine bottle of Scotch. But do it for sheer enjoyment, and leave your serious, goal-oriented investing to more traditional, liquid securities with verified performance histories.
MarketMinder’s View: Eurozone GDP shrank -12.1% q/q in Q2, which translates to -40.3% annualized—worse than the US and Germany, which reported yesterday. Spain’s -18.5% q/q drop (-55.8% annualized) was the worst since the country’s civil war in the 1930s, while Italy’s -12.4% drop (-41.0% annualized) put quarterly output back at 1990s output levels. France, the other major country to report, fell -13.8% q/q (-44.8% annualized). These numbers are all historically bad. But as the article notes, the vast majority of the damage occurred in April. In May and June, as eurozone countries reopened to varying degrees (at varying speed), monthly data show output improved. For forward-looking stocks, what matters most right now is that rising COVID caseloads and renewed lockdowns in some cities have dampened expectations. That sets a very low bar for reality to clear. Stocks don’t need GDP to do a perfect V. A recovery that lifts corporate earnings over the next year or three would likely suffice, and thus far there is scant evidence this is unlikely. We don’t dismiss the pain Q2’s results have on people and businesses forced to the economy’s sidelines, but for investors, it is important to look beyond this and think like markets do.
MarketMinder’s View: We have no specific beef with private equity, and beyond deferred annuities and non-traded REITs, we aren’t inherently against any widely available security. But we do quibble with the framing of this argument that stock investors are getting cheated out of big gains by private equity firms that hog all the best opportunities for themselves. “We all know the story. Amalgamated Widgets is trading at $40 a share. Along comes a buyout fund offering $50 or $60 a share. Five years later the buyout fund sells Amalgamated Widgets (rebranded, probably) to someone else for $150 a share. Good for them, bad for us. But if the company was really worth $150 a share, or even just $60 a share, how come the public markets were only able to squeeze $40 in value out of it on their own?” This is vastly oversimplified. For one, focusing on share price is meaningless. Usually, when private equity firms buy a company, they take it private. When they resell it, they generally don’t keep the same share count. Rather, they will use whatever share count lets them offer a price that is attractive to investors and makes it look like they pulled off a huge win. To track the actual return, you would have to compare market cap. Two, many private equity firms specialize in turnaround opportunities. Many are successful, but many also fail. Look at the number of private equity-owned retailers that have gone bankrupt over the years, for example. If you want to calculate private equity’s actual return, you must include attempts that never made it to public markets again. If not, you have a vast survivorship bias that would artificially skew returns higher. To the extent private equity may generate higher returns (again, a questionable assumption), it is compensation for a higher level of risk—which isn’t a match for all long-term investors’ goals. Neither is the lack of liquidity, reporting and regulatory oversight in private investments. Again, we aren’t arguing against private equity. We just think it is important to focus on facts and not skew the argument with emotion or wrongly framed data.
MarketMinder’s View: China’s official manufacturing purchasing managers’ index (PMI) inched up to 51.1 in July, indicating slightly broader expansion, and the services PMI also expanded. “The PMI echoed upbeat readings from other major Asian export nations, with factory production in South Korea jumping at the fastest rate in more than 11 years, and Japan’s output snapping four months of decline. However, analysts caution the recovery could stall amid the resurgence in global infections and as China’s factories deal with disruptions from continuing floods.” We see this as yet another example of a behavioral phenomenon we call the Pessimism of Disbelief: Investors’ tendency to dismiss good news as fleeting. It is normal early in a bull market and usually ends up wide of the mark. We aren’t dismissing the headwinds facing Chinese or other Asian manufacturers. But stocks don’t need a perfect economic backdrop, and no recovery is free of challenges. The Pessimism of Disbelief helps keep expectations super low, raising the potential for positive surprise. A recovery that goes just ok, at this point, would qualify as happy news to most.
MarketMinder’s View: We aren’t as bullish on banks (a classic value industry) as an investment opportunity as this piece is, as we think the market’s current drivers favor other sectors and growth-oriented companies much more. However, this has some good insight from a macroeconomic sense. Since the global financial crisis over a decade ago, conventional wisdom has held that banks are fragile and unlikely to survive another round of trouble. So far, during this recession, banks are disproving that thesis. “The banks, and particularly the big ones, have piled up so much capital and expanded their already-dominant positions since the last crisis that they are more immune to an economic collapse than before. … Banks and their investors point out that so far the banks have continued lending and eased the economic burden for borrowers—unlike the financial crisis, when they froze activity to preserve their own health. Randal Quarles, the Fed’s vice chairman, credited their increased strength in a July speech for helping the government and regulators. ‘This has allowed the banking system to absorb rather than amplify the current macroeconomic shock,’ Mr. Quarles said.” To the extent this helps vanquish the notion of banks as ticking timebombs and returns sentiment toward them to normal, so much the better—not just for banks, but for confidence in the broader economy and markets over time.
MarketMinder’s View: We share this analysis not to speculate about what COVID-19 will look like in the US and Europe as the weather gets colder nor to suggest what is happening in Australia will repeat worldwide. Rather, our point is more high level: The world has been laser-focused on all things COVID—from the economic fallout to the potential impact of future outbreaks—for most of the year. That public discussion saps away surprise power and shapes expectations. Stocks move most on the gap between expectations and reality, and right now, many seem to be anticipating the worst-case scenario (i.e., a return to national lockdowns) to repeat. It is always possible draconian measures return, but to send stocks plunging again, reality would have to be much worse than what people expect right now. In our view, this seems like a classic example of investors “fighting the last war”—that is, believing the last bear market’s cause will trigger the next one, and soon. Such concerns are common in early bull markets as pessimism is prevalent. For more, see our 7/7/2020 commentary, “The Hunt for a Pandemic Repeat Is Already Starting.”
MarketMinder’s View: Today President Trump raised the idea of postponing the November 3 presidential election, citing the coronavirus pandemic. The suggestion predictably caused an uproar among politicians and pundits alike and probably triggered all of investors’ partisan biases, so we first remind you we are politically agnostic. Now, to cut through the noise, here is a succinct explainer of how a postponement would and wouldn’t work: “Article II of the Constitution gives Congress the power to set the date of the presidential election. Since 1845, that day has been every four years on the first Tuesday after the first Monday in November, which in 2020 is Nov. 3. Even if Trump declared a state of emergency due to the coronavirus, he would not be permitted to change the day, legal experts said.” Friendly reminder: Don’t let politics’ “silly season” rile up your emotions and biases, which can lead to investing mistakes.
MarketMinder’s View: With initial jobless claims hitting 1.43 million in the week ending July 25, many US households are still suffering financial troubles due to COVID and lingering business closures in many areas. We don’t diminish those personal hardships. However, for the past two weeks, headlines have dwelled on the rising number of initial jobless claims—with the mitigating factors buried deep in the article. For the second week in a row, the headline increase is due largely to the Labor Department’s seasonal adjustments. Those adjustments account for expected summertime skew (e.g., scheduled auto plant closures), but the novel coronavirus has thrown a wrench into those calculations. Consider: “The Labor Department said its seasonal factors had assumed an unadjusted decline of about 181,000 initial claims; the count fell by about 171,000. That resulted in an increase of 12,000 after the department applied its seasonal adjustment. The data showed initial claims in almost all states fell on an unadjusted basis last week. California -- the most populous state and a hotspot for the virus -- saw a 40,587 decline on an unadjusted basis, while Florida, Georgia, Louisiana and Texas also reported significant drops.” In our view, this is a timely reminder to dig a little deeper.
MarketMinder’s View: The titular fall in Japan’s June retail sales refers to the year-over-year growth rate (-1.2% y/y)—a measure that is typically less volatile but also obscures recent trends. On a month-over-month basis, Japanese retail sales jumped 13.1% in June following May’s 1.9% gain. Considering the country began relaxing its COVID state-of-emergency rules in late May, the latest monthly rebound isn’t a big surprise. It is also consistent with post-lockdown data from other major economies. Given the Japanese economy’s reliance on external demand pre-COVID, a recovery likely relies more on broader global economic growth than domestic consumer spending. Still, signs of pent-up demand worldwide suggest consumers may not be in as poor shape as feared.
MarketMinder’s View: As evidenced by the titular sentiment, America’s Q2 GDP report is all but certain to be historically bad. This article lays out experts’ expectations as well as some helpful reminders about how to process the numbers involved. The US reports GDP numbers as annualized rates, which show what the quarterly change would be if it persisted for a year. “This means the main number Thursday will look much worse than reality. A 35% contraction on an annual basis actually means the economy was about 10% smaller in the second quarter than it was in the first quarter. Even so, that would still be far beyond the record quarterly decline on an annual basis -- 10% in the first quarter of 1958, which coincided with a global flu pandemic.” While tomorrow’s report will likely lead headlines—and a sentiment-related swing wouldn’t shock—these data don’t tell anything new to stocks, which moved on from Q2 long ago. As for the concluding discussion regarding how GDP will affect the election, we suggest investors put that speculation to the side. In our view, it remains too early to start handicapping the presidential race as a lot can still change over the next several months—and the economy is but one issue for voters to consider. For more on how to approach historically bad data, please see our 6/30/2020 commentary, “With Q2 Data Coming Soon, Expect Awful.”
MarketMinder’s View: This is a longish look at the state of OPEC, whose influence over global energy markets continues to wane. While interesting, albeit with few investing takeaways, we did think this piece illustrated some of the perils of long-term forecasts. Consider: “In 2007, it [OPEC] forecast world demand would hit 118 million bpd in 2030. By last year, its 2030 forecast had dropped to 108.3 million bpd. Its November report is expected to show another downward revision, one OPEC source says.” Even shorter-term estimates can be very wide of the mark, as the coronavirus has proven this year. “In 2019, the world consumed 99.7 million barrels per day (bpd) - and OPEC was forecasting a rise to 101 million bpd in 2020. But global lockdowns this year that grounded planes and took traffic off the streets, prompted OPEC to slash the 2020 figure to 91 million bpd ...” We aren’t knocking forecasts, as they shape expectations. But they also aren’t crystal balls—important for investors to keep in mind.
MarketMinder’s View: This is a loooooong article that covers a lot of speculative sociological territory. In our view, sociological issues don’t materially alter the economic and political factors affecting stock demand in the next 3 – 30 months, so they shouldn’t influence your investment decision-making. However, we highlight this piece because it reiterates a long-running developed nation concern: How will the US economy expand if fewer workers are around to drive growth (and pay taxes to support programs like Social Security)? The COVID-19 crisis may have exacerbated the issue as well. As one research outfit notes, “... there will be 300,000 to 500,000 fewer children born in the U.S. in 2021 than there would have been absent the crisis, which amounts to a decrease of roughly 10% from 2019. That means the number of babies never born is likely to greatly exceed the number of Americans who’ve died from coronavirus, which is approaching 150,000. The effect on population will be longer-lasting as well: Many of the babies who aren’t being born would have lived into the 22nd century.” Yet demographics aren’t destiny. For one, birth rates aren’t set in stone. They could pick up again. Plus, the world may look very different five years from now, let alone five decades from now, whether due to technological advances and/or immigration shifts. Demographics also move at a glacial pace and are widely discussed—unlikely to surprise markets. For more on why we wouldn’t fret a baby bust, please see our 4/29/2019 commentary, “Will Fewer Babies Create Economic Challenges?”
MarketMinder’s View: Please note MarketMinder is politically agnostic, favoring no party or politician, and we assess politics solely for their potential market impact—or lack thereof. Additionally, MarketMinder doesn’t make individual security recommendations—the companies mentioned here only highlight a broader theme we wish to explore. First, we urge investors to refrain from presuming a Democratic sweep of the White House and Congress is likely. Though the polls may have former Vice President Joe Biden leading President Trump right now, a lot can change in the presidential race, to say nothing of congressional races—and national polls don’t do a great job predicting the Electoral College. Second, the suggestion here that certain stock sectors prefer one party over another is also off. Stocks care about policy, not personality, and while different proposals are starting to garner attention, that doesn’t mean they will become law if the proponent wins. Presidents struggle to pass signature issues even if they have a majority in Congress due to all the horse-trading and political capital required to turn campaign promises into real laws. Widely hyped legislation usually gets watered down. Moreover, markets digest all widely known information—and that includes opinions on whether a President Biden or President Trump would be better for different sectors. By the time Election Day arrives, stock prices will likely already reflect those positive and negative expectations.
MarketMinder’s View: This article sensibly argues that despite the euro’s gains against the dollar this year, the latter will remain the world’s reserve currency. Since this unofficial status stems largely from the official sector’s foreign currency reserves, data from central banks help put the fear to bed: “Global central banks have about $11 trillion of reserves, according to the International Monetary Fund. More than 60% is in dollars, amounting to $6.8 trillion, compared with about 20% in euros, 6% in yen and less than 5% in pounds. Moreover, a survey of more than 50 central banks published last week by Invesco Ltd. showed increasing dollar appetite in the coming year.” Now, a couple quibbles: The dollar’s decline versus a broad basket of currencies since March 23—not coincidentally, the bear market low—follows a spike from March 3. This is a common trajectory during bear markets, when panicked investors first flee to safe havens, then sell some of those haven holdings as panic partially subsides. Moreover, the dollar’s ups and downs have little to do with its reserve currency status. Second, zoom out some, and the euro’s rise versus the dollar in the last two months and year to date looks like fairly ordinary short-term currency fluctuation. Third, America gains nothing from the dollar’s reserve currency status, so losing it to the euro (or any other currency) would just be symbolic anyway. For more on reserve currency worries, see our 10/16/2017 commentary, “No, IMFcoin Won’t Rule Them All.”
MarketMinder’s View: “The European Central Bank extended a de facto ban on banks returning capital to shareholders [from October to January] and urged them to show restraint on bonuses after the coronavirus outbreak.” The rationale, per the chair of the ECB’s bank supervision unit, is “to ask banks to focus their capital resources on lending and loss absorption.” Yet the ECB also acknowledged “the euro-area banking sector can withstand the pandemic-induced stress,” which suggests to us the impetus for the ban on bank share buybacks and dividend payouts may have been more political than economic. Central banks, like governments, want to give the impression of helping shore up the financial system and economy. Given most eurozone banks are well-capitalized, we think the main lesson for investors here is that dividends aren’t set in stone—especially when regulators view suspending them as a viable policy tool. For more, see our 5/7/2020 commentary, “COVID-19 Highlights the Perils of Relying on Dividends for Cash Flow.”
MarketMinder’s View: “Transforming” may be a little exaggerated, but “adding valuable liquidity” would be apt, in our view. “The innovation, known as portfolio trading, involves bundling several bonds into a single package to trade. Once unwieldy and time-consuming, tech innovation is rapidly turning it mainstream. More significantly, the strategy may have earned its stripes during the coronavirus-linked market mayhem. During volatile times, trading in corporate bonds and other risky assets can dry up, forcing sellers to slash prices. But market participants have reported several instances when even debt from stricken hospitality and travel firms, packaged into bond portfolios, smoothly changed hands. … Technology has allowed the trend to gather speed by computerising a process that previously relied on spreadsheets and manually inputting data.” The upshot: A faster, cheaper and simpler method of trading traditionally illiquid bonds. While this may not be actionable information for most investors, innovations that improve market functioning and boost liquidity are a plus in our book.
MarketMinder’s View: In non-economic news, here is a cheery story of a Brit who won The Telegraph’s weekly “Fantasy Fund Manager” contest—beating 12,500 other contenders—after “taking a stab in the dark by going all in on mining stocks” chiefly because of their recent past performance, which is generally not a wise long-term thesis to buy something. In the very short term, though, almost anything can seemingly “work.” But instead of letting the cool £100 prize and bragging rights go to his head, the winner displayed a level of humility and self-awareness we think all investors would benefit from imitating—especially after experiencing a short-term investing success. “‘There was no logic behind the decision other than jumping on stocks that seemed to be doing well. Really, I have no idea what I am doing,’ he said. … Mr Iscan has not always had much success in real-world investing. … He put his mixed track record down to his tendency to be too emotional when investing. ‘If something goes up by 5pc I want to sell it, if it goes down by 20pc I want to buy more. I don’t think I am the best investor,’ he said.” Perhaps so—but in our view, Mr. Iscan’s ability and willingness to honestly acknowledge his (extremely common) investing struggles puts him ahead of many.