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.


Europe Can Impose Tariffs on U.S. in Long-Running Aircraft Battle

MarketMinder’s View: The World Trade Organization ruled Tuesday that the EU is justified in slapping tariffs on $4 billion in US goods tied to tax subsidies Washington state provided to Boeing. This mirrors a ruling last year that permitted the US to tax selected EU goods bound for America due to impermissible subsidies for Airbus. Lots of folks seem to view this through the lens of President Trump’s aggressive posturing on trade and worry that a Transatlantic trade war is set to whack stocks. But in reality, this is the latest development in a 16-year long dispute and, as this article notes, could be a bridge to a negotiated solution. One further sign of that: Over the summer, the US held off on raising the tariff rates on $7.5 billion in EU goods authorized by the Airbus ruling a year ago. Ultimately, this is a very small, narrow decision regardless of the action the EU elects to take. Tariffs on $4 billion in goods aren’t nearly big enough to materially impact the economy. We caution anyone extrapolating it into something much huger than that.

Investors Turn Skeptical of a US Democrat ‘Blue Wave’ Victory

MarketMinder’s View: First, MarketMinder favors no party nor any politician and assesses politics solely for developments’ associated market impact. With that out of the way, this article constitutes the sort of election speculation investors should tune down at this juncture. The theory here is that analysts, based on no actual evidence, believe the Democrats’ chances of taking the Senate have gone down, and with that, so have the chances they will uniformly control the White House and both chambers of the legislature. It goes on to speculate that this is bad for stocks, as it reduces the likelihood of a big fiscal “stimulus” bill passing any time soon. A few things about that: One, we think it is impossible to know who will take the Senate at this point. Two, even if they do take it, the American political system is set up to blunt big bills. Congresspeople and select Senators are up for re-election in 2022 and will be eyeing that as soon as November’s results are clear. If the GOP retains the Senate, there is the possibility of a compromise deal. But we don’t think it is necessary for stocks to keep climbing. As the analysts quoted at the end of this piece put it, “‘… We think it’s important to recognize that a strong macro recovery is already well underway. … ‘Furthermore, this recovery has accelerated without additional fiscal support most (included [sic] ourselves) thought was forthcoming a month ago.’”

Social Security Checks to Get ‘Extremely Low’ COLA Bump in 2021

MarketMinder’s View: The Social Security Administration unveiled the cost of living increase recipients can expect in 2021. It is [drumroll] 1.3%, matching the rise in prices as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. While we are sure many retirees would like a bigger bump, this really shouldn’t be a shock as we have been in a low inflation environment for years. Consider: “Benefits increased by 1.6% in 2020, 2.8% in 2019, 2% in 2018, 0.3 percent in 2017 and 0% in 2016.” Now, of course, one problem with all this is the benefit bump isn’t tied to your cost of living, but rather, an arbitrary index that may not reflect your expenses at all. The article goes on to document as much, noting prescription drug costs as a particular outlier. The talk at the end of the program running out of funds is a bit over the top, in our view, considering these are long-range forecasts that assume zero change in the program’s funding or how they calculate things like these inflation adjustments. Lots of pundits act as if this program is a completely untouchable third rail, but it has been reformed before, could be again and small changes can pack a big impact over time.

Central Banks Haven’t Made a Convincing Case for Digital Currencies

MarketMinder’s View: This is an overall sensible, if somewhat hyperbolic, critique of recent central bank discussions of issuing digital currencies. Central banks, as noted here, claim to see a possible need for e-currencies based on the increased trend toward cashless payments, which COVID has only amplified. But, as noted here, “If the shift to digital payments required digital currencies, why is it already happening via cards and mobile applications?” That is a very good question, in our view, and one that entirely undercuts the need for Fed innovation. We suspect this is much more about trying to do an end run around bitcoin, Facebook’s (currently non-existent) Libra and other cryptocurrencies, which some government officials see as a way to outflank regulation and move assets outside the banking system. Now, we think this article takes the financial stability aspect of e-currencies drying up retail deposits a wee bit too far, but the conclusion it reaches is sensible: “Improving the payments systems that act as the lifeblood of the global economy is a worthy goal. The hype surrounding bitcoin and Facebook’s Libra, however, might be shifting the focus away from real-world problems that need fixing and onto untested solutions looking for a problem to fix.”

EU Adopts New ‘Traffic Light’ System for Travel; Airlines Slam It as a ‘Failure’

MarketMinder’s View: In a move the European travel and tourism industry had hoped would grant potential visitors clarity about rules, the EU has voted to enact a new, three-tiered “traffic light” system for coding countries based on the incidence of coronavirus. Green countries are those with fewer than 25 cases per 100,000 residents; orange countries are 26 – 50 per 100,000; red countries are above 50. However, while the coding here seems fairly clear, the implications of this are all TBD. While the European Commission said members states “should” not restrict visitation from green countries, it left restrictions on orange and red nations up to national governments. That means quarantines could still be in effect, and there is no provision for testing to avoid that, as some airlines and tourist groups had hoped. Furthermore, considering the virus’s resurgence of late, “Ireland's interim ‘Green List’, which is based on rates of 25 or lower per 100,000, was reduced to zero countries.” This shows that headwinds facing the travel industry are likely to linger.

Bankruptcies Pile Up in North America Energy Sector in Third Quarter: Haynes and Boone

MarketMinder’s View: No shock here. Many smaller Energy firms in the US and Canada were struggling even before the pandemic, and the lockdowns’ hit to fuel demand for things like travel really tightened the vise. These firms also rely on bank loans to keep operations humming and banks have retrenched in the wake of the downturn. “There were 26 new bankruptcy filings from service companies in the third quarter, compared with 11 in the year-ago period, the report notes. The pain is set to worsen as lenders undertake the bi-annual redetermination of how much credit should be available to producers. Available credit is expected to drop 15.7% after the fall redetermination season, a Haynes and Boone survey shows.” Two takeaways from this: One, while more bankruptcies are likely ahead, markets anticipate these developments and move ahead of them. Two, within the Energy sector, financing issues are a key reason we think bigger producers with better access to capital markets are better positioned (in an area likely to be out of favor) than smaller ones.

Coronavirus Stimulus Spending Consensus Eludes Global Leaders

MarketMinder’s View: This piece trumpets a widespread theme in America and abroad: Policymakers must do more to support their economies in the wake of COVID-19-related fallout. In the US, Congress has been mired in negotiations over another stimulus bill. Some seem disappointed by recent developments across the Atlantic, too: “In most of Europe, budget plans for next year include continued stimulus, but on a smaller scale than this year. In July, EU governments agreed in principle on a Europe-wide recovery fund, but some now object to provisions that make access to the fund provisional on meeting EU standards for independence of the judiciary, a free press and other governance practices.” In our view, this inadvertently highlights a key shortcoming of government spending as “stimulus”: The money usually takes a while to reach its intended target (if it gets there at all). That said, neither the US nor eurozone economies require further government assistance to recover, in our view. If government support alone is propping up US consumers, for example, how did retail sales grow in July after some unemployment benefits expired? We don’t ignore the fact that government assistance has aided millions of workers knocked by COVID’s impact, but we also don’t understate what resourceful households and businesses can do without the government’s helping hand.

Biggest US Banks Seen Adding to Reserves for Pain Yet to Come

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations; the ones mentioned in this article represent a broader theme we wish to highlight. That theme: bank health. With several big American banks set to report earnings this week, many commentators are likely to dive deep into executives’ words for any clues about the Financials sector or economy at large. This piece runs through several banking topics of interest, from bad loan provisions (reserves set aside in case of any kind of loan loss) to net interest income. On the former: “The nation’s four biggest lenders probably set aside about another $10 billion for bad loans in the third quarter, according to analysts’ estimates compiled by Bloomberg. ... While the third quarter’s tally is well below the pace of the first half, it means that the banks will not only have covered the losses they’ve seen since the start of the pandemic, but also added almost $50 billion to reserves for future pain.” We don’t think those reserves are necessarily an ominous warning sign, but they do highlight the precautions the biggest banks are taking. Another interesting point shared here: “Even though the yield curve has steepened, meaning the spread between short-term and long-term rates increased, that does little to help banks’ margins because most loans are priced at spreads to Libor or similar short-term benchmarks. Banks are hard-pressed to narrow those spreads when interest rates are low, creating a slow grind on interest income over time.” That is an issue for an industry whose core business is lending, and in our view, it is a big reason why bank stocks—a classic value industry—aren’t in favor today.

Third-Quarter Earnings Season Kicks Off This Week and Results Should Be Much Better Than Expected

MarketMinder’s View: This piece provides a succinct rundown of expectations entering Q3 earnings season. The upshot: As was the case in Q2, analysts now expect Q3 earnings to be stronger than anticipated. Though the numbers remain historically bad, reality has yet to turn out as poorly as initially estimated. That said, many remain dour about Q4 earnings since they are “hostage to the vaccine and reopening story, and to a lesser extent to the election.” In our view, this illustrates how pessimistic sentiment remains today. We agree the reopening story is critical to both Corporate America and the broader economy’s prospects, and if draconian lockdowns return, that would likely panic markets. However, even if restrictions continue weighing on corporate profits in the near future, bull markets don’t require robust earnings growth to rise. Rather, what matters more is how reality squares with expectations, and today, that gap remains sizable.

A Collapse of Global Tax Talks Could Cost $100 Billion, OECD Says

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations; the ones mentioned here represent a broader theme we wish to highlight: global digital taxation. The OECD has been working on updating international tax rules—particularly as they apply to digital commerce—for over a year, and last Friday, nearly 140 countries agreed to keep talking through the middle of next year due to COVID-19 and US political uncertainty. While drawn-out global tax talks aren’t a surprise, the titular warning may grab some eyeballs. According to the OECD’s worst-case scenario, without an international agreement, governments will resort to their own digital services taxes—risking a trade war that “could knock global GDP back by more than 1%.” The OECD also projects that “new rules for digital taxation and a proposed global minimum tax would increase global corporate income tax worldwide by 1.9% to 3.2%, or about $50 billion to $80 billion per year. That could reach $100 billion when including an existing U.S. minimum tax on overseas profits, amounting to 4% of global corporate income tax, the OECD said.” We have a couple of suggestions for how investors should handle these numbers. One, these estimates are hypothetical best guesses. Given all the unknowns, from which rules will go into effect (if any) to how companies will adapt accordingly, nothing here is actionable for investors today, in our view. Two, given how widely discussed and slow-moving these talks have been, little here is likely to sneak up on and shock markets. We aren’t saying a potential new global digital services tax doesn’t matter—it is an issue worth monitoring—but until we get a better idea of what is probable, reacting now seems premature.

Your Cash Earns Zip, Zilch, Nada. Don’t Make It Worse.

MarketMinder’s View: Although this piece goes a little far in the long-term forecasting department, it does make a critical point: If you are chasing yield in your cash emergency fund, you are probably taking steps that don’t align with your goals for that money and could be a big detriment over time. “You could, for instance, buy stock in electric utilities, banks and other financial companies, real-estate investment trusts or master limited partnerships in the energy industry. All offer the promise of high dividend income, often 4% and up. In recent years, especially since the financial crisis of 2008-09, all have been described as ‘bondlike’ by promoters touting their supposed safety. This year has subjected these assets to wholesale slaughter. In the first nine months of 2020, utilities lost 6%, real estate 7%, financials 20% and MLPs 49%, as measured by leading exchange-traded funds that invest in those sectors. (MLPs did a bit better, but not much, by other measures.) The performance numbers include the dividend income these investments distribute. So even after earning big dividends, investors suffered even bigger losses. The income didn’t come with safety; it came at the price of safety.” For tips on how to navigate this environment, see our 9/23/2020 commentary, “How to Think About Your Emergency Cash in a Low-Rate World.”

How to Assess the Risks Before You Invest in a SPAC

MarketMinder’s View: We aren’t inherently against any security (aside from deferred annuities and non-traded REITs, that is), but our opinion of special purpose acquisition companies—aka SPACs or blank check companies—largely matches our view of IPOs: They are quite speculative at the outset, and investing strategies shouldn’t rely on finding the right needle in a haystack. This piece nicely illustrates the risks involved, and quick riches are far from automatic. As with any investment, being aware of all the pros and cons is critical. If you still wish to take a flyer on a SPAC for fun, on the sidelines of a diversified portfolio that is targeting your long-term goals and cash flow needs, then this piece has some good tips on how to evaluate the companies and keep your expectations in check. But always remember successful investing is about achieving market-like returns over time, not quick riches.

Government to Pay Two-Thirds of Wages for Firms Forced to Shut Under Fresh Local Lockdown Measures

MarketMinder’s View: Don’t call this stimulus, but we find it noteworthy that this time around, the UK government is putting assistance measures in place before businesses are forced to close in COVID hot spots, rather than scrambling after the fact. Moreover, many of the measures here are retroactive and aimed at helping businesses shut out of prior rounds of assistance. That might help cushion the blow better, potentially making new restrictions less destructive than the first round was (those new restrictions are also more targeted and less extreme). Even this modest change likely amounts to reality going better than expected, which is the foundation of any new bull market.

Finding the Right Path in an Up-and-Down Market

MarketMinder’s View: This echoes a thesis we have seen dozens of times in recent months: Tech is the sole thing leading the market higher since late March, and Tech is tired, so unloved value stocks are about to shine—especially once society reopens and a recovery really gets chugging. We disagree on multiple fronts. For one, while Tech may be driving US outperformance, this bull market is quite broad-based. Before volatility struck in early September, 97% of the MSCI World Index’s 1,600-plus constituents were in positive territory since the March 23 low, with 83% up 20% or more (per FactSet, as of 9/29/2020). Through yesterday’s close, the equal-weighted S&P 500 (which weights each constituent equally, controlling for huge Tech stocks’ clout) was down just -2.7% since February 19’s peak, while the cap-weighted index was up a mild 3.0% (also per FactSet, as of 10/9/2020). So yes, Tech helps, but the broad market is up as well. Now, more cyclical value stocks have underperformed, and we don’t think that is likely to end in the near future. While value does traditionally outperform in a recovery, that generally depends on value suffering through a bear market’s early grind, then getting beaten black and blue during a bear market’s panicky final throes. This year’s bear market didn’t last long enough for that to happen. Plus, value outperformance’s main driver is usually a recovery’s steepening yield curve, which boosts financing for companies with shakier credit ratings. That factor is absent this time, with the Fed reducing long rates (thanks to quantitative easing bond purchases) while short rates are near zero. That flattens the yield curve, which favors high-quality growth stocks that can easily tap corporate bond markets. Value’s time will come, but we suspect it will arrive after the next bear market resets the sentiment and credit cycle.

The Fiscal Federal Reserve

MarketMinder’s View: We are inclined to deduct a few points from this piece for reading too much into Fed head Jerome Powell’s words—in our view, when it comes to assessing central bankers, it is much more useful to watch what they actually do, not try to divine some hidden meaning from what they say. Other central bank chiefs globally have said much the same things as Powell said this week, and rather than implicitly pledging to monetize whatever debt the Treasury issued, they were actually making the simple point that monetary policy alone can’t fix all that ails the economy. To us, it is entirely possible that Powell was simply stating that obvious fact in hopes of heading off criticism about his own institution not doing enough (however deserved or undeserved that criticism may be, which isn’t our point here). But, this whole story illustrates a crucial point about central bankers: Although they take great pains to claim their independence, they are actually quite political—their continued employment over time depends on getting reappointed. So while we are aren’t saying former Vice President Joe Biden is likely to win the election, which is too close to call, we reckon the theory that he is pre-emptively pandering to a potential new boss is spot-on—and he wouldn’t be the first to do so. Now, none of this helps you predict what he will actually do, but Fed heads’ political considerations are a key part of assessing the risk of monetary error.

Stashing Cash in a Low Interest Rate World

MarketMinder’s View: Many Americans wonder where to put their savings in today’s low-yield world since most stable-value options—think savings accounts and certificates of deposit (CDs)—offer next to no return. In response, as this piece notes, some savers are putting their cash in higher-yielding fixed-income exchange-traded funds (ETFs) or fixed annuities. Yet this approach means subjecting your savings to liquidity and/or volatility risk, which runs counter to a cash reserve’s purpose (read: emergency fund). One example: “Another issue: Fixed-income ETFs can trade out of sync with their underlying assets, as happened earlier this year. That means an investor looking to sell during market turmoil might have to accept a discount to the actual value of the debt that makes up the fund.” If you are willing to take on additional risk with savings funds, you may have too much cash on hand relative to your needs and long-term goals—and reviewing your total financial situation may make sense. For more, see our 9/23/2020 commentary, “How to Think About Your Emergency Cash in a Low-Rate World."

Can the UK and EU Finally Net That Trade Deal?

MarketMinder’s View: For those interested in the nitty-gritty of UK-EU trade negotiations, this rundown is for you. For all the harsh rhetoric and dire warnings, both sides aren’t terribly far apart on a deal. They remain hung-up on a couple well-known issues including fishing rights—and the delay is likely more negotiation tactic than irreconcilable differences. As noted here, “Mr Barnier was told to stick to his mandate to ‘uphold’ current levels of fishing access for EU fleets and to maintain the linkage between a deal on fish and a wider trade deal, according to those familiar with the conversation. This is not because EU fishing states are unaware that they will have to make concessions in the end, just that they see no point in doing so now — recalling that a satisfactory fishing deal was always meant, in their minds, to be linked to a free trade agreement. They argue that Mr Barnier should use that leverage, given that nearly 70 per cent of UK-landed fish is sold in the EU.” The article then notes how some EU officials expect talks to go to the 11th hour before both sides reach a deal—and how risky this strategy is if the UK doesn’t play ball. We wouldn’t be surprised if the drama picked up in the next week, but even if talks don’t yield a new trade agreement, we don’t think a no-deal Brexit is the bugaboo so many fear—especially considering how widely discussed it has been.

Hydrogen’s Dirty Little Secret

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations; rather, this article touches on a broader theme we wish to highlight: Always dig beyond the marketing. Renewable energy sources receive a lot of attention for their environmental, economic and even investment potential. Yet while proponents often focus on the long-term promise—e.g., hydrogen in a fuel-cell vehicle doesn’t produce emissions—reality tends to be a bit messier. In the case of hydrogen, “There are currently plans for more than 60 gigawatts of green hydrogen production globally, but less than half will be available by 2035, say researchers at Rystad Energy. Making the gas currently generates more carbon emissions globally than the airline industry, according to Bank of America.” Said another way, hydrogen seems like it has a long way to go to become economically and environmentally sustainable. This doesn’t mean we think this space (or any other renewable energy source for that matter) has no future. Rather, from an investing perspective, we are skeptical anyone can determine renewable energy’s winners and losers today. The answer may not be clear for years—or even decades. For more, see Elisabeth Dellinger’s 9/24/2020 column, “What California’s Electric Vehicle Mandate Teaches Investors About Chasing Riches in Renewables."

Europe’s Driving Recovery Stalls With Virus Restrictions Growing

MarketMinder’s View: As the nifty charts here illustrate, motorway traffic in three of the eurozone’s largest economies has slowed a bit recently, as has vehicle use in the UK. The article attributes the slump to renewed government restrictions in response to rising COVID cases—which seems likely. Yet we also wonder if moderating vehicle traffic is related to people returning to work—in many cases, working from home—following end-of-summer vacations (in which more people drove to their destination instead of flying, as the article notes). In our view, this is yet another reason to take high-frequency datasets with a healthy dash of salt—their noisiness makes it difficult to draw any clear-cut conclusions. For more, see our 9/30/2020 commentary, “The Real Limits of Real-Time Data.”

More French Cities Set to Close Bars as COVID-19 Infections Spike

MarketMinder’s View: With Lyon joining Paris and Marseille in closing its bars for two weeks due to rising COVID cases, France’s three biggest cities have now gone on the country’s “maximum coronavirus alert level.” As worrisome as that sounds, this remains consistent with the French government’s approach of implementing targeted lockdowns rather than a broad, nationwide one. We aren’t saying the latter is off the table, as restriction orders are political choices that can’t be forecast. But we must weigh these decisions in real time—and also consider what is going on around the world—rather than speculate about possibilities.