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.


China to Ease Debt Rules for State-Led Distressed M&A – Source

MarketMinder’s View: Always take news from unnamed sources with a grain of salt. But if this detailed report is true, and Chinese regulators are suspending the “three red lines” limits on borrowing for state-backed developers who buy private developers’ distressed assets, it is more evidence that officials are acting as needed to backstop the industry and prevent its troubles from ricocheting through the broader economy. This won’t prevent all defaults, as the article documents, which reminds us: MarketMinder does not make individual security recommendations, and those mentioned in the article merely highlight a broader theme. But an orderly process in which companies restructure debt as needed while construction continues—keeping homebuyers and vendors whole—is a largely fine scenario for China’s economy. It should also help shore up sentiment toward Emerging Markets, where fears of a Chinese hard landing can hit hard, and to a lesser extent, the developed world.

The Best Investment for This Coming Crazy Year

MarketMinder’s View: The titular best investment is, wait for it, discipline. Hear, hear! When fearful headlines and market volatility collide, the temptation to act can be overwhelming, but knee-jerk moves rarely prove a net benefit. Moreover, many of the gloomy predictions dotting headlines right now rest on fallacies. For instance, many presume the Fed’s forecasts mean short rates will rise three times this year and are treating this “as a foregone conclusion. It isn’t. Go back to the 1990s and you’ll see that the central bank has sometimes raised or lowered rates in ways that not only have taken markets by surprise, but contradicted the Fed’s own expectations. Investors who overhaul their portfolios based on what the Fed seems likely to do could get stranded if it does something else entirely.” We would add that they also ignore the fact the Fed’s tone shifted pretty dramatically just last year. In March, it expected near-zero fed-funds rates through 2023. So the dot plot’s three projected 2022 rate hikes really suggest its earlier guidance was trash. What is to say the plot now is better, especially with the Fed board facing some turnover? As for broader returns, most analysts see a flattish year, based primarily on the notion that stocks must fall back to earth after three straight years of strong double-digit returns (notwithstanding early 2020’s record-fast bear market). “You’re wrong if you think big gains can never recur after three years in a row. In 1995, the S&P 500 returned 37.5%. In 1996, stocks went up 23.1%. They gained 33.3% in 1997, 28.7% in 1998 and still another 21.1% in 1999. Markets finally crashed in 2000. … But that reckoning came long after many market commentators—including me—had expected.” If you are investing for long-term growth, leaving stocks is one of the biggest risks you can take, and doing so based on flawed presumptions can be a severe setback if your expectations are wrong and stocks rise. Now, the rest of this article is a little too buy-and-hold for our taste, as we do think it can make sense to reduce stock exposure if you identify a bear market before the worst of the downturn arrives. But that is a careful, forward-looking decision based on measured analysis of whether investors broadly are ignoring large risks with a high probability of happening.

The Economic Case for Goldilocks

MarketMinder’s View: While this piece is backward-looking, we think it does a very nice job of explaining where last year’s accelerating inflation came from and why there wasn’t anything the Fed could do about it. Simply, lockdowns and in some cases the virus itself knocked demand for in-person services while heightening demand for physical goods, and global production couldn’t keep up—especially with COVID restrictions overseas affecting factory output and ports. “Econ 101 tells us what should happen in the face of skewed demand and constrained supply: The prices of the things people are scrambling to buy should rise relative to the prices of things people are still shunning. Sure enough, the ratio of the price index for durable goods to that for services has risen substantially, reversing its normal technology-driven downward trend. This relative inflation in the prices of goods as compared with services was unavoidable if we didn’t want to experience crippling shortages — which we did, in fact, avoid: some consumer items have been hard to get, but predictions of a holiday-season ‘shipageddon’ didn’t come true.” The article then explores a counterfactual, in which policymakers try to curb inflation by curbing private demand instead of letting society adjust to higher goods prices, and arrives at the conclusion that the resulting recession probably wouldn’t have been a beneficial tradeoff, which we think is doubly true considering economic downturns don’t normally increase production. They work off excesses, which we don’t have (if we did, we wouldn’t have supply-driven inflation). Counterfactuals are always unknowable, but they are also always worth exploring, and we think doing so is always a worthwhile exercise for investors who are trying to assess policies and their potential unintended consequences. So even if this piece lacks direct market takeaways, we think it is a good example of critical thinking in action.

Don’t Panic, Europe. That’s Not Inflation. It’s Just Gas.

MarketMinder’s View: While the headline here is a tad dismissive for our taste, the brief article is a decent, pithy deconstruction of the eurozone’s record-fast December inflation rate. It also shows how, under the hood, there are some indications that the broader price increases outside energy are starting to moderate. For one, while the year-over-year rate accelerated, it was by just 0.1 percentage point, and the month-over-month rate held steady at 0.4%. Energy price increases also continued moderating, from 5.6% m/m in October to 2.9% in November and now just 0.5% in December. While energy prices are volatile—with weather and Russian policy big wild cards this time of year—that suggests the eurozone economy may already have swallowed the worst of it. The increase will stay in the year-over-year calculation for several months more, since that is how math works, but markets are very good at seeing through these distortions: “Though Italian 10-year yields did rise briefly, the impact was fleeting. German bund yields barely flickered, although those are at the highest in nearly three years. The euro was little changed. Nasty inflation is largely priced in.” When in doubt, trust the market.

Mounting Omicron Infections Force Businesses to Scramble, Threatening Economic Recovery

MarketMinder’s View: This article is filled with anecdotes of Omicron-impacted businesses and industries, from restaurants forced to temporarily close during high-revenue periods to manufacturers struggling to find workers. We don’t dismiss those hardships and sympathize with anyone struggling through these winter months. However, society has been living with the virus—and its variants—for nearly two years now. Moreover, there is a very, very big difference between now and winter 2020 (and to a lesser extent late 2020/early 2021) that this article largely glosses over: These businesses are not locked down. They are still allowed to remain open and serve customers. There is a world of difference between a business that is forced to close and one that is open but struggling to stay staffed enough to meet ongoing demand. In our view, early 2020’s short bear market and economic contraction happened because the government decided to place the economy in an artificially induced coma. That just isn’t the case today, which we think is a big reason why stocks largely shrugged off the variant. Omicron and other issues might weigh on sentiment for a while, but overall, the economy and markets likely keep grinding through it. Finally, and this is admittedly nitpicky and technical, but real US GDP and real GDP per capita have exceeded pre-COVID highs since Q2 2021. (Source: Federal Reserve Bank of St. Louis.) That means the recovery alluded to herein three times has been over for roughly half a year. The US is in economic expansion.

US Service Industry Grows More Slowly in December

MarketMinder’s View: The Institute for Supply Management’s services purchasing managers’ index (PMI) registered 62.0 in December, down from November’s all-time high of 69.1. Now, while December’s headline number is well above 50—the level dividing expansion and contraction—some of the underlying components imply a more mixed picture. “The ISM’s inventories index contracted for the seventh straight month, as continued supply chain logjams, along with strong demand, has made it difficult for companies to keep shelves stocked. Prices paid by services organizations for materials and services rose in December for the 55th consecutive month, to its third-highest reading ever of 82.5. Some strengths [sic] in the services sector is the result of those supply chain troubles that are making it harder to meet increased demand. Longer supplier delivery times and rising prices register as strengths for the services sector.” Moreover, PMIs reflect only growth’s breadth, not its magnitude, so we have to wait for “hard” data (e.g., GDP) for a more detailed breakdown of US economic output. Still, 16 of 18 services industries reporting expansion in December signals quite broad-based growth in a segment of the economy that represents about 70% of US GDP.

The Fed Hasn’t Caught Omicron Yet

MarketMinder’s View: Have Fed Chair Jerome Powell and other Fed officials updated their views on Omicron? As this piece notes, the Fed’s December meeting minutes, released to the public yesterday, suggested the variant’s late-November emergence didn’t much change their thoughts about the path of the economic recovery. But that meeting, on December 14 – 15, occurred before US Omicron case counts spiked, causing mass absences at businesses nationwide. Has Omicron’s surge altered the Fed’s outlook and put the onus back on supporting economic growth rather than taming inflation? Maybe! Should investors spend much time wondering how? We don’t think so. Nor do we think Omicron’s spread is anywhere near the economic risk implied here, given the biggest economic negative was always the lockdowns in response to the virus, not the virus itself. Moreover, the Fed and other central banks get a ton of attention because many pundits overrate monetary policy’s economic impact. But the economy is much too big and complex for a rate hike here or a cut there to turn the tide toward growth or contraction, and it isn’t like rate hikes are inherently bad and cuts inherently good anyway. Whether or not the Fed hikes in the near term, we think there is a sufficient gap between short and long rates to prevent the yield curve from inverting. So delaying a rate hike in response to Omicron or anything else probably doesn’t mean much, particularly with inflation stemming from supply—rather than monetary—factors, in our view. For more, see yesterday’s commentary, “Amid Early-Year Fed Fretting, Stay Cool.”

German Industrial Orders Bounce Back on Strong Foreign Demand

MarketMinder’s View: For those looking for a palate cleanser from inflation and COVID stats, here is some positive, albeit backward-looking, data: German factory orders fared better than expected in November, rising 3.7% m/m after October’s -5.8% drop. “The rise was driven by a surge in foreign demand for capital and intermediate goods, with orders from other euro zone countries jumping 13.1% and bookings from clients outside the single currency bloc up 5%. … In contrast to previous months, orders for large-ticket items such as planes did not have a big impact on the headline figure in November. Excluding this special factor, industrial orders rose 3.8% on the month, the ministry said.” As always, don’t read too much into any single month of data, especially since November’s numbers won’t fully reflect potential Omicron-related fallout, and supply chain issues may mean these orders take longer to fill. In other words, the old saw about today’s orders being tomorrow’s production may not apply so much here. Still, these figures do point to solid demand beyond Germany’s borders as last year wound down, suggesting rising costs aren’t discouraging businesses from investing in new capital equipment.

US Becomes World’s Top LNG Exporter for First Time Ever

MarketMinder’s View: “A shale gas revolution, coupled with billions of dollars of investments in liquefaction facilities, transformed the U.S. from a net LNG [liquefied natural gas] importer to a top exporter in less than a decade. Gas production has surged by roughly 70% from 2010 and the nation is expected to have the world’s largest export capacity by the end of 2022 once Venture Global LNG’s Calcasieu Pass terminal comes online.” As the article acknowledges, the US’s lead may not last as other major LNG exporters, including Qatar and Australia, are planning their own expansions. But whoever claims the mantle of the world’s top LNG exporter is mere trivia, in our view. The more important takeaway: For those fretting about today’s elevated electricity and heating costs, we think this is a clear, straightforward illustration of market forces in action and producers responding to price signals.

Great Stock Rotation Has Legs, Wall Street Pros Say

MarketMinder’s View: The alleged titular rotation: “With the Treasury market this week signaling growing confidence on the business cycle even as the Omicron variant spreads, U.S. 10-year real yields rose to -0.98% Tuesday as the nominal benchmark hit 1.65%, its highest level in almost six weeks. Right on cue, the tech-heavy Nasdaq 100 fell 1.4%, while a Wells Fargo basket of software-heavy stocks is already down 6% this week and a basket of companies vulnerable to the virus fallout is up 5%. The upshot: The first week of 2022 trading has laid bare long-standing fears that rising bond yields are the Achilles’ heel of richly valued companies—fueling one of the biggest market rotations in years.” So, given the recent uptick in rates, is the long-anticipated, but long-delayed, rotation from growth to value stocks finally underway? We don’t think you should hold your breath. One, we have heard this song before: When 10-year Treasury yields rose from 1.23% at the start of August to 1.68% in late October, there was no Great Rotation to speak of. Pundits claimed rates’ move higher then would spell (growthy) Tech’s doom, which didn’t pan out. Growth (and large Tech) handily outperformed value. Yes, there have been value countertrends during this bull market. Sometimes they have even coincided with rising yields (and economic optimism). But there is no set relationship—bonds and stocks have different drivers. Don’t overrate rates’ influence on stock market leadership. Instead, we think growth is likely to lead value because, though this bull market is young on paper, it has an old soul, with characteristics mirroring a late-cycle environment. In a maturing bull, investors gravitate towards large, high-quality, liquid names with strong gross profit margins and earnings prospects that aren’t tethered to economic growth rates. That has been the case throughout this bull market, and interest rates don’t change that. Moreover, when the consensus expects something, it is usually priced in—and markets often do something else.

How to Get in on the Real Estate Boom Without Actually Buying a House

MarketMinder’s View: As always, MarketMinder doesn’t make individual security recommendations. Ones this article mentions are purely for illustrative purposes to highlight a broader theme: While many experts tout real estate as a way to diversify your portfolio, it is critical to be aware of the details, especially given the myriad investment options. First, we have no problem with owning REITs (except non-traded ones, which we think you should avoid). REITs can offer diversification benefits, particularly in their growth-oriented areas. What we take more issue with are so-called crowdfunding companies prominently featured here, “which pool smaller amounts of money from a large group of investors to put toward properties.” But what are you actually buying? The article indicates a portfolio of rental and commercial properties, but that may not necessarily be the case. As highlighted here, one fund contains “real estate debt and equity, as well as debt from the art, maritime and legal industries, among others.” The article also notes, “investors need to be aware of fees and the period of time you have to wait to get your initial investment back.” If investments come with lock-up periods, we suggest scrutinizing the fine print to know what you are getting into—and the conditions (and potential costs) for getting out. We aren’t against investing in real estate, but we caution investors against treating it as a one-stop blend of price appreciation and steady income—real estate prices can and do fall, all assets have risk, and there is no silver bullet.

Post-Brexit Customs Chaos Fails to Materialize

MarketMinder’s View: In today’s episode of Reality Faring Better Than Feared, we go to the UK’s borders, where widely feared trade chaos tied to new 2022 regulations have yet to materialize. “Full customs import declarations are now needed for items at the time they enter Great Britain. Importers must also prove goods can qualify for tariff-free entry by meeting rules of origin arrangements that specify how much of a product must be made within the EU. Importers must give authorities advance warning over animal and plant products, while EU hauliers have to be given authorisation for entry into the UK. The smooth start suggests that warnings of disruption by trade experts may have been overblown.” Now, other experts quoted here think trade hiccups may still arise, which is always possible. But businesses have a knack for adapting, whether it is to new rules or changes in the economic environment—a big reason why we thought dire forecasts about Brexit’s impact on UK – EU commerce were (and remain) off base.

Stocks Surge Even as Bond Yields Spike. Huh?

MarketMinder’s View: This piece argues the common theme that rising interest rates—like 10-year Treasury yields’ 0.12 percentage point pop up yesterday and their move from 0.92% to 1.69% since the end of 2020—should be trouble for stocks. It bases this on the notion that, “Rising rates are supposed to be a bad sign for stocks. In theory, higher yields for the 10-year US Treasury should make it more expensive to get mortgages and other types of consumer and business loans. Spiking bond yields are also often associated with higher inflation — a big problem for consumers lately — and they are rising now amid concerns that the Federal Reserve will jack up short-term interest rates to keep surging prices in check. That’s also not a welcome sign for stocks.” Here is the thing: History doesn’t show this theory is actually true. As we wrote ahead of the Fed’s first fed-funds rate hike in the last bull market (which occurred in December 2015), there is no evidence of initial rate hikes in a tightening cycle causing a bear market. When the Fed hiked later that year, no bear market ensued. As for 10-year yields, their weekly correlation with the S&P 500 is positive 0.33 over the past 20 years. (Source: FactSet.) Since 1.00 means identical movement and -1.00 exact opposite, that suggests stocks and bond yields tend to rise and fall together somewhat more often than not. Now, 0.33 isn’t super strong—but it shows you this notion of rising yields being auto-bad for stocks is bunk of the first order.

U.S. Manufacturing Gauge Falls While Price Pressures Ease

MarketMinder’s View: The Institute for Supply Management’s December US Manufacturing Purchasing Managers’ Index (PMI) ticked down from 61.1 in November to 58.7. Given readings above 50 mean more firms reported expansion than contraction, this still shows broad-based growth in American manufacturing. Actually, the decline is even more bullish than that. One big contributor to the downtick: “The group’s gauges of supplier deliveries and prices paid for materials — while still elevated — both fell to their lowest levels in more than a year. Improved delivery times and slower gains in input prices typically indicate softer demand. However, the latest declines suggest capacity constraints are beginning to loosen. That’s welcome progress for manufacturers who have struggled to keep up with demand because of materials shortages, hiring challenges and transportation bottlenecks.” Actually, ISM’s prices paid gauge is now at 68.2, almost 24 points lower than June’s 92.1. Inventories are actually improving, too. This suggests the ability to meet future demand should improve. Meanwhile, customer inventories have improved somewhat but remain very low at 31.7, while order backlogs and new orders remain high. That all suggests America’s manufacturing sector, while not a huge contributor to overall economic growth, is seeing fundamental supply and demand conditions remain strong—and come into better balance.

Private Equity Lines Up for Coal ‘Bonanza’ Left by Public Miners

MarketMinder’s View: If there is value to be found in an asset—no matter how dirty and derided it is—someone will try to unlock it. This article is Exhibit A, detailing the fact that publicly traded miners are exiting metallurgical coal mines, which are being snapped up by steel firms and private equity. Consider this when you hear folks talk about fossil fuel resources’ values plunging off a cliff tied to long-range moves to lower emissions. We aren’t arguing the merits of either side of this issue, just pointing out the reality.

Retirees Need to Keep This Much Cash, Advisors Say

MarketMinder’s View: We are going to do you a favor here and save you a click: The titular question isn’t actually answered here. Instead, it explores what it presumes is a thorny debate between advisers who counsel clients to carry up to three years’ expenses in cash and those who argue you shouldn’t carry anywhere near that amount, especially given the currently elevated inflation rate. The latter argues US consumer prices rising at 6.8% y/y and low-low interest rates on savings accounts erode your cash’s purchasing power. The former says you need cash in case there is a downturn. In our view, neither of these camps is exactly right. For one, you don’t hold an emergency fund of cash to generate a return, so whatever inflation and interest rates are doing isn’t all that relevant. That is doubly true because inflation metrics like that 6.8% y/y figure are backward looking. As we wrote recently, positioning for that now is driving while staring solely at the rearview mirror. As for the size of emergency fund holdings? Three years’ cash seems excessive to us, as this will water your returns down—potentially significantly. In our view, it is more sensible to carry anywhere from 3 – 12 months of cash as an emergency reserve and identify areas of flexibility in your expenses in advance in case you really need to slash in a downturn.

Spain Rejects Brussels’ Plan to Classify Nuclear Power and Natural Gas as Green Energy

MarketMinder’s View: The EU’s new taxonomy aims to define what types of technologies will qualify as “green investments” going forward. Yet despite the rules emerging in December—and the EU clarifying yesterday that nuclear and natural gas would qualify as green fuels for utilities through 2045—it seems the debate over these fuel sources is still in flux. To wit: “‘Including both in the green taxonomy represents an erroneous signal for the financial markets and does not provide the necessary clarity to focus capital flows towards the decarbonized, resilient and sustainable economy foreseen in the European Green Deal,’ said [Spain’s Ministry for the Ecological Transition].” This is, of course, perhaps the most substantive decision to be made under the taxonomy, as the recent trials and tribulations in Europe’s power market show. However, we think some perspective is in order: The taxonomy itself is very unlikely to materially affect capital flows in a meaningful way in the next 3 – 30 months, which is what stocks tend to track most closely. Hence, even impacts on Utilities stocks seem very limited, no matter which way this debate winds up.

Economic Forecasting and the Goldberg Variations

MarketMinder’s View: Even if we weren’t anti-analogyites, we would have problems with comparing economic forecasts to Rube Goldberg machines. The chains of events that underlie economic forecasts—including those documented in this article—are usually linear, while Rube Goldberg contraptions rest on far-fetched twists and turns that defy basic logic. So, fun, but we don’t award points. We do, however, think the broader discussion illustrates a crucial point: Forecasts are opinions, not blueprints. For investors, they are useful not as predictors, but as a snapshot of sentiment and economic expectations. Official forecasts are widely known and likely priced in by now. What will influence returns over the coming year is how reality evolves and differs from these base cases.

Euro Zone Factory Growth Stayed Strong in Dec as Supply Issues Eased – PMI

MarketMinder’s View: The headline findings here are largely in line with the flash readings for December manufacturing, which showed growth remaining broad-based. The final eurozone manufacturing PMI’s 58.0 matched the flash estimate and far exceeded 50, the line between growth and contraction. But the final release has more detail on the PMI’s components, and those details are encouraging—they show inventories building, suggesting companies are moving slowly past the supply chain crisis. In our view, even this early incremental improvement points to bottlenecks easing over the next several months, which should help the inflation rate slow sooner than many expect right now. Now, we realize inflation is an increasingly political issue today. Ours isn’t an ideological statement—just one about the gap between reality and sentiment on the issue, based on the economic data discussed herein.

The Stock Market Is Too Narrowly Focused

MarketMinder’s View: This piece observes that the 10 largest stocks in the S&P 500 account for 30% of the index’s market cap and were responsible for nearly 30% of its return last year, then warns this narrowing market breadth spells trouble if the largest stocks hit tough sledding. As always, MarketMinder does not make individual security recommendations, and those mentioned herein are just part of the broader argument we wish to address. For one thing, the evidence is scattershot and does nothing to prove bad returns follow periods like this. The article cites research showing that when companies grow to be among the S&P 500’s 10 largest, they outperform by an average of 10% a year in the decade beforehand but lag by 1.5% a year in the decade afterward. In addition to potentially confusing percent and percentage points, this doesn’t prove the thesis—if these companies lag by a small amount over a decade, it says nothing about how the broad market does, when market cycles turn or anything else remotely useful to investors trying to position portfolios now. The next bit of evidence contrasts the high number of US stocks making 52-week lows with the S&P 500 closing 2020 at record highs, but that 52-week low figure comes from Wilshire 5000 constituents—not just those in the S&P 500. Then it turns to another study showing similarly narrow market breadth preceded “below-average” returns—but below-average doesn’t mean negative. Look, our research shows market breadth—which we define as the percentage of index constituents outperforming the index itself—regularly narrows as bull markets mature. But there is no magic trigger point where narrow breadth indicates a bear market is underway. All it means is that large-cap growth stocks tend to outperform late in the cycle, as investors seek out high quality and lower economic sensitivity. So if you want to argue we are late in this market cycle, we agree! But that is a statement about broad portfolio positioning, not market timing. Lastly, regarding the whole notion of rising interest rates threatening Tech and growth stocks, see our recent takedown here.