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: Note: This piece touches on some political themes, which we urge readers to set aside—bias can blind investors from making sound investment decisions. We found this analysis a mixed bag, and as we get closer to Election Day, it is highly likely similar analyses will fill headlines—from every possible angle. Positively, it highlights some history that flies in the face of conventional wisdom: Markets don’t innately prefer Republicans in power versus Democrats. Similarly, from a high level, we agree with the research cited here: Stocks can do just fine if former Vice President Joe Biden wins in November. Yet this errs, in our view, by focusing too much on personalities and campaign posturing. When it comes to politics, stocks care more about how active the government is and how expectations square with reality. While the next president and Congress remain unknown, history gives us a general idea of how investors will behave—a phenomenon we refer to as the “Perverse Inverse.” Generally, when a Republican wins a presidential election, US stocks typically perform well during the election year, cheered by investors’ perceptions of the Republican’s pro-business reputation. However, that elevated sentiment tends to tee up high expectations—and when the Republican president inevitably moderates or can’t ram through everything promised on the campaign trail, investors are left disappointed, muting returns. The inverse tends to be the case for a Democratic president. Said differently here: “Once the market had gotten over its reflexive distaste for the notion of a Democratic victory, many people were likely to conclude that would not be a disaster for stocks or the economy.” We have no clue who will win in November, but markets have already started digesting the different policy proposals—which helps set those investor expectations.
MarketMinder’s View: Discussions about wills and other estate planning topics aren’t pleasant, but they are important—and having them now can help clear up potential future issues. Many Americans likely know end-of-life planning starts with a will, but that is just one piece of a wider estate plan—a plan for your bank accounts, home, belongings, and perhaps, dependents. Also, “… there are some assets that pass outside of the will, including retirement accounts such as 401(k) plans and individual retirement accounts, as well as life insurance policies. This means the person named as beneficiary on those accounts will generally receive the money no matter what your will says.” Another important consideration: The laws surrounding estate planning vary by state, so make sure you do your due diligence. Read on for more vital differences.
MarketMinder’s View: About a decade ago, the EU considered implementing the Financial Transaction Tax (FTT)—more popularly referred to as the EU’s “Tobin Tax.” The initial terms proposed a tax on financial transactions involving stocks, bonds, currencies and other securities. The proposal met fierce opposition—notably from the UK—and was watered down from an EU-wide measure to one in which 10 members voluntarily participated. Now, Brussels is again considering the FTT as a way to raise funds to meet COVID-related obligations, and with the UK on its way out of the EU, some worry a more ambitious tax may gain support. Yet as this piece notes, we are still a long way from approving a pan-EU Tobin Tax: “Brussels can’t snap its fingers are raise money from 27 countries without their unanimous approval, and so far the current coalition of the willing appears limited to those original 10 supporters. While some holdouts object specifically to very notion of transaction taxes – Swedes still remember the self-harm of their own version in the 1980s – there’s deeper resistance from the likes of Luxembourg, Ireland and the Netherlands against any assault on their low-tax economic models.” As for the suggestions of “better” tax approaches, we don’t opine on potential policy since it lacks immediate market impact. But similar to the FTT, we don’t see the historically slow-moving bloc making any major changes overnight. That said, as a general rule of thumb, taxing something typically leads to getting less of that—and a tax on financial transactions could cause liquidity to dry up—so we aren’t dismissing the potential negatives. However, successful investing is based on probabilities, not possibilities. So while worth monitoring, we doubt these proposals are likely to surprise markets, in our view.
MarketMinder’s View: “The Commerce Department said durable goods orders surged up by 7.3 percent [m/m] in June after skyrocketing by a downwardly revised 15.1 percent in May. The continued increase comes following the nosedive seen in March and April.” Though durable goods orders haven’t returned to pre-pandemic levels, the positive June reading is another data point suggesting the economy continues recovering. Notably, “core” capital goods orders—which many consider a proxy for business investment—rose 3.3% m/m, a second consecutive positive month, albeit a bit short of expectations. A typically volatile monthly report measuring a narrow part of the economy alone doesn’t mean the recession is over, but it is consistent with other data showing the economic benefits of even gradual reopening progress.
MarketMinder’s View: This argues that while stocks and gold may be rallying in tandem now, only gold’s rise will continue. The reason? Sovereign wealth funds, central banks and other institutions—the titular smart money—plan to keep buying gold and reducing their stock holdings. We don’t think this reasoning holds up. For one, stocks don’t care who is buying and selling. They care about overall demand, which encompasses every investor’s eagerness to buy. If the supposed “smart” money were such a key driver, then stocks wouldn’t have risen in past years when sovereign funds reduced stock exposure. Heck, the whole notion of “smart” money, at its root, forgets that institutional investors are people, too, with the same biases and pitfalls as individual investors. If investors like central banks were so vastly more prescient about these assets’ future direction, we sincerely doubt the Bank of England would have sold nearly all its gold in the three years from 1999 – 2002, which was just before gold went on one of its big multi-year booms. This is not an isolated episode, either—not that we are poking fun, just noting that the air of infallibility surrounding these big investors exceeds reality by quite a distance. Even setting all of this aside, markets are forward-looking and discount widely known information. Institutional investors’ stated plans to raise or reduce exposure to various asset classes are quite widely discussed and therefore probably already factored into pricing. Stocks are likely already looking beyond them and should continue moving on the gap between expectations for corporate profits and reality over the next 3 – 30 months, as they pretty much always do.
MarketMinder’s View: IHS Markit’s flash composite PMI for the eurozone jumped to 54.8 in July, beating expectations and, with the first reading over 50 since lockdowns began, returning to growth. Forward-looking new orders also rose. But this being a new bull market, when pessimism reigns, pundits’ reaction was far from positive. Instead, we get claims like this: “Markets are still expecting a V-shaped recovery - as are some economists - but while Friday’s data indicated a bounceback of sorts, it is unlikely to support those views.” Add in the alleged headwinds of too-high unemployment and a too-small recovery package from the EU’s collective budget, and most expect eurozone output to take years to reach pre-pandemic levels. None of this is inherently bad for markets, though. Forecasts are just opinions, and markets price them in quickly—along with the full range of opinions, positive and negative. What matters more is how reality shakes out relative to those expectations. With expectations so low now, economic output doesn’t need to have a perfect V-shaped recovery to provide a positive surprise. Looking back to 2009, the beginning of the prior global bull market, stocks enjoyed a V-shaped recovery while GDP looked more like a Nike swoosh. This is because stocks generally shift focus from the immediate future to the longer end of their 3 – 30 month range as a new bull market begins. They care less about the path to recovery than the eventuality of that recovery—and its positive effect on corporate profits—whenever it arrives. To say stocks must flatline or sink again because GDP won’t recover in a few months is to say this time is different. There is a reason Sir John Templeton called those the four most dangerous words in investing.
MarketMinder’s View: Gold has now passed 2011’s record high, fueling more enthusiasm for the shiny metal. This piece does an excellent job showing why that enthusiasm is juuuuust a bit unwarranted, especially if you are a long-term investor rather than a speculator. For one, this is a very astute observation about gold proponents’ mentality: “Traders and investors who are perennial fans of the yellow metal have a flaw in their thinking, too. They always believe gold is cheap, no matter what, even though they seldom have the same reasons for believing that it’s cheap. That is its own sort of mistake.” Indeed—every asset class has fundamental drivers, making inconsistent reasoning a rather bad sign. In gold’s case, that driver is sentiment, hence why the analyst interviewed here describes it as “fickle.” Its returns have come in short bursts, making perfect timing key to success. As for one of the more popular reasons to hold gold: “Gold is, in fact, a poor hedge against inflation. Accounting for changes in the cost of living, gold has returned an average of minus 0.4% annually since 1980, versus positive annualized returns of 7.9% for U.S. stocks, 6.2% for U.S. bonds and 1.2% for cash, according to [finance] Prof. [Christophe] Spaenjers. Adjusted for inflation, he reckons, gold would still have to rise approximately 52% from this week’s prices to match its level of January 1980. That is when it peaked in inflation-adjusted terms.” If the facts don’t support the thesis, then it is a poor thesis to buy.
MarketMinder’s View: UK retail sales jumped another 13.9% m/m in June, continuing their recovery and inching ever closer to their pre-COVID high as businesses continued reopening. This is especially encouraging news considering many non-essential retailers didn’t reopen until mid-month, suggesting shoppers turned out in droves to unleash pent-up demand once they were able. Meanwhile, IHS Markit’s flash PMIs showed the majority of service and manufacturing firms are again reporting expansion. Good news all around, though stocks have probably already moved on, making the forward-looking claims in this article more significant for investors. Those claims amount to, don’t expect the party to last—not with elevated unemployment, a huge increase in the amount of distressed businesses and COVID-fatigued shoppers preferring online retail to physical shops. We don’t dismiss any of these factors, but there are a couple of important items for investors to keep in mind. One, no recovery has a picture-perfect backdrop—all have hurdles to overcome, with high unemployment a regularly occurring feature early in bull markets. Two, stocks look beyond the immediate future, with the gap between reality and expectations the primary force propelling them. Press coverage like this both reflects and influences mass sentiment, and considering how widespread the arguments in this article are, we think it is fair to say expectations are quite low. Hence, a recovery that inches along in fits and starts would probably qualify as positive surprise. Stocks don’t need perfection. Often just ok is good enough.
MarketMinder’s View: This piece argues that with many schools not reopening in the fall, “children’s inability to be in class regularly will translate into lost work and income for many families, cutting into their ability to spend. But the longer they can’t, the more it will translate into lost opportunities that will affect the economic well-being of the country for years to come.” We don’t dismiss the hardship confronting millions of families, especially those headed by single parents. The sociological ramifications, which show women’s careers feel a disproportionate impact from this, are also discouraging. Yet none of this means stocks’ recovery can’t continue. Strip away the unique and heart-tugging aspects of this development, and it is just a twist on age-old jobless recovery fears—a hallmark of pretty much every new bull market. All recoveries have their challenges. But stocks are an investment in publicly traded companies’ long-term profitability, and as businesses find ways to adapt to the current situation—whether by expanding working from home capabilities or on-site childcare—they should be able to continue marching onward and lifting shareholders’ returns. Moreover, the discussion of school closures’ impact on working parents has dominated the discourse for months. It is a known factor to stocks. Markets have seen the analyses and decided the recovery should be able to continue anyway. Trust them.
MarketMinder’s View: Despite US economic data’s recent improvement, headlines continue warning troubles lurk around the corner—especially with COVID cases rising in Florida, Texas and California. That bias colors this article’s coverage of the jobless claims report for the week ending July 18, in which initial claims hit 1.42 million. Apparently a weekly uptick of 109,000 is “the clearest sign yet of a pause in the economic recovery as coronavirus cases surge in much of the country and force businesses to close their doors once again.” We aren’t as convinced. No doubt these unemployment data suggest many people are suffering financial hardship from COVID’s economic fallout—and we don’t dismiss the human reality. However, as the article later explains, “One caveat is that the headline figure was inflated by seasonal adjustments. The Labor Department said its seasonal factors had assumed an unadjusted decline of about 247,000 initial claims; the count fell by about 142,000. That resulted in an increase of more than 100,000 after the department applied its seasonal adjustment.” In other words, the seasonal adjustment accounts for much of that titular rise. As an analyst here describes, the Labor Department does this because of automakers’ annual summertime shutdowns—which didn’t happen this year due to COVID. These kinds of nuances don’t mean the labor market is actually doing better than appreciated, but they do illustrate why broad claims about the state of the economy deserve scrutiny. Looking under the hood can provide some important perspective.
MarketMinder’s View: Backward-looking data say little to nothing about the future, but the latest numbers from the Bank for International Settlements—the bank for central banks—confirm an underappreciated sentiment, in our view: When times get tough, the rest of the world wants American dollars. Claims on the US official sector (composed of banks’ holdings of Treasury securities and deposits with the Fed) by non-US banks skyrocketed in Q1: “In total, such claims rose $564.49 billion in the first three months of the year. That accounted for more than half of the growth in claims on governments and central banks everywhere in the world. It was also larger than any quarterly increase in bank claims on the official sector globally ever recorded.” We highlight these figures because predictions about the demise of the USD have been en vogue recently, whether due to the ascent of China and/or recent developments with the EU’s bond issuance. Note, we aren’t saying the yuan or the euro will forever be in the dollar’s shadow—their share of global foreign exchange reserves has edged up over the years. But America still possesses the deepest, most liquid markets in the world—a status unlikely to change any time soon, which isn’t lost on other central banks. As pithily concluded here, “In the moment where it really mattered, the U.S. was the only real destination for support for global banks. During the first quarter of the year—and March in particular—it seems to have played that role more than ever before.” In the timeframe stocks care about—the next 3 – 30 months or so—the USD’s primacy isn’t likely to slip away (not that it is a stock market driver, but it might give investors one less thing to fear).
MarketMinder’s View: South Korea’s Q2 GDP fell -3.3% q/q, worse than expectations and the steepest quarterly contraction since 1998. Exports plunged -16.6% q/q—a major headwind for the export-heavy economy—but on a positive note, private consumption rose 1.4%, perhaps bolstered by government cash handouts. Economists believe the worst of South Korea’s decline may have passed, and while the country’s reopening progress leads some developed economies, its growth also relies heavily on foreign demand. The global economy is still a ways off from pre-pandemic levels of activity, which may weigh on South Korea’s near-term economic prospects. That said, we highlight this story so readers can start preparing themselves for a slew of headlines mimicking the titular sentiment. German, French and American Q2 GDP reports will be out next week, and historically bad figures are all but assured. However, in our view, they will also be old news for forward-looking stocks—an important point for investors to keep in mind. For more, see our 6/30/2020 commentary, “With Q2 Data Coming Soon, Expect Awful.”
MarketMinder’s View: In the US, financial headlines have spilled oodles of pixels discussing the role of new, largely younger investors in what we believe is a new bull market that began in late March. This narrative doesn’t seem as prominent overseas, probably in large part because the trading app Robinhood hasn’t launched across the Atlantic, but the data from a couple of UK online investing firms suggest the trend isn’t strictly an American phenomenon. “The firm [IG Group] said it attracted 96,900 new customers over the financial year, while the number of active customer traders rose 34% to 239,600. It helped the trading platform, which makes most of its income from transaction fees, record a 36% rise in net trading revenue to £649m.” Similar to the US, the UK figures sound big on an absolute basis, but they are difficult to put in context without more historical data. Also, the opening line here that “Small investors have been spending lockdown taking punts on volatile stock markets …” plays up the perception that ignorant individuals are making reckless decisions and treating investing like gambling. It is possible some are—and those stories tend to get the most attention—but it is equally possible others are educating themselves about investing and participating in capital markets for the first time. Though this isn’t likely to have a major near-term market impact, more investors learning about the magic of markets—and gaining valuable investing experience—is a positive, in our view. For more, see Christopher Wong’s column, “Have Markets Gone Young, Wild and Free?”
MarketMinder’s View: This analysis wades into some political waters and longer-term speculation (e.g., the future of EU-China trade relations), which we suggest readers put aside. More relevant, in our view: the level-headed argument that a failure to reach a UK-EU trade deal this year wouldn’t be a disaster. As noted here, “Under current world trade rules, the main long-term gain from doing a bilateral FTA is the ability to set lower barriers to the FTA partner than to other countries – for example, if we wanted to keep US or Japanese products out of Britain but let in EU ones. The UK, however, has a tradition of having low import barriers overall.” Indeed—the UK announced at the end of May what post-Brexit trade would look like through its Global Tariff (UKGT) regime, and overall, tariffs are lower. These terms will apply to the EU if both parties can’t agree on a new trade agreement. Now, it is possible these summertime warnings are a negotiating tactic ahead of autumn talks, but even if those discussions fall through, businesses in the UK and the EU know the landscape come January 1, 2021. That clarity is a positive, in our view. For more, see our 5/26/2020 commentary, “The UK’s Post-Brexit Plan Undercuts Protectionism Fears.”
MarketMinder’s View: It seems doubts abound about China’s 3.2% y/y Q2 GDP growth—which we recently covered—as many question the official methodology underlying the calculation and, in particular, its inflation adjustment. As raised here, “The consulting firm [Oxford Economics] notes that, unlike the U.S. and Germany, which use more precise inflation indexes to adjust industrial growth in their national accounts, China relies on its producer-price index. It is strongly influenced by heavy industry and commodity prices. That could create problems if, for example, steel and coal prices fall substantially but more profitable, fast-growing sectors such as electronics or pharmaceuticals don’t see their prices change as much.” Along with other eyebrow-raising data like falling fixed asset investment and surging inventories, the article concludes Chinese growth may be shaky—especially if personal consumption doesn’t return. While we understand the skepticism, this isn’t a new issue—experts have long voiced doubts about the accuracy of Chinese data. Markets are aware of those concerns, so we don’t think this issue has much surprise power. For investors, we think this is a reminder to maintain a healthy skepticism towards any dataset, whether from the Chinese government or a private developed-world research firm. All data have limitations, and most will tell you what just happened—not relevant for forward-looking stocks.
MarketMinder’s View: While this article highlights an academic argument alleging index-fund investments’ popularity creates worse-run companies, we believe it illustrates the misperceptions surrounding stock buybacks. The study in question posits “companies with high passive ownership are less monitored,” letting management engage in “opportunistic” behavior—that is, stock buybacks—that allegedly emphasizes short-term stock price performance at the expense of long-term investors’ interests. Yet this relies on the faulty presumption that stock buybacks are always bad and capital expenditures and investment are always positive. In our view, reality isn’t so rigidly simplistic. Business investment isn’t automatically the best use of a company’s resources, and if businesses return cash via a stock buyback, shareholders can use that capital as they see fit. Once you see buybacks aren’t a ticking timebomb, that titular danger fizzles out, in our view. For more, see our 7/23/2018 commentary, “Busting Buyback Myths.”
MarketMinder’s View: Here is a nifty primer on some financial terms some readers may be less familiar with, including the titular “enterprise value,” “operating profits” and “free cash flow yield.” While knowing these concepts’ definitions may help you navigate the business page of your favorite financial publication, successful investing doesn’t require knowing a new language. For example, if you use the “Peg ratio”—which divides a company’s price-to-earnings ratio by its annual percentage growth rate—to decide whether to buy or sell a stock, you are using backward-looking information to determine a future price. In our view, that is a mistake since stocks are forward-looking. We encourage readers to educate themselves as they wish, but you don’t need to memorize a financial dictionary to reach your long-term investment goals and objectives, either.
MarketMinder’s View: The big news out of Europe this week has been the titular rescue fund, with many observers weighing in on the market, economic and even political implications. Many believe this is a euro bond in all but name—and that argument is presented here, too—but that seems dubious considering the issuer is the European Commission (EC), a quasi-governmental organization, and the European Union (EU) hasn’t become a federalized fiscal transfer union like the US. That discussion aside, this article provides some helpful background on how the pending plan could affect global bond markets if it comes to fruition. As noted here, the EC has already issued EU bonds, but the market is tiny at just €51 billion with €10 billion maturing next year. But it surmises: “Annual issuance is in line to increase by 150 billion euros or more, roughly equivalent to a large European country’s needs. Moreover, with the euro zone’s benchmark debt yields in deeply negative territory — investors pay about 44 basis points for the privilege of lending to Germany for a decade — the premium offered by EU bonds gives bondholders some relief, albeit still at yields below zero. And the new pandemic bond issues might well offer positive yields given their vastly bigger size and the need to keep them attractive.” Given today’s voracious demand for high-quality assets—see Germany’s negative sovereign debt yields and Austria’s 100-year bond—investors will likely welcome another option, although note that we aren’t opining on these securities as an investment choice. Mostly, we think this is just an interesting capital markets development. For more, see yesterday’s commentary, “Unpacking the EU’s New COVID Fiscal Response.”
MarketMinder’s View: Here is some good news from America’s northern neighbor: “Canadian retail sales have rebounded sharply after historic declines in March and April, with vendors making up almost all of their pandemic losses, Statistics Canada reported Tuesday. Receipts rose 19 per cent in May, the agency said in its first full release for the month. June looks to have recorded another strong gain, with a flash estimate predicting another 25 per cent increase. Sales last month were at 100% of February levels, according to Bloomberg calculations.” A couple of caveats: Canadian consumer spending still plunged in Q2 overall, and an economist quoted here notes “enormous government income-support programs” may be supporting spending, “which could fade in the second half of the year.” Fade from May – June’s torrid growth rate? Sure. But unless COVID lockdowns return with a vengeance in Canada and/or globally, we think a gradual and uneven return to spending normalcy is much more likely. Moreover, since most seemingly question whether spending recoveries globally have legs in light of expiring stimulus and still-present COVID outbreaks, this outcome would likely be a positive surprise, supporting stocks.
MarketMinder’s View: This article has some politicized parts to it, which we encourage you to set aside. At its core, this is a straightforward discussion of how the EU’s efforts to tax US Tech giants took a hit after an EU court blocked regulators’ attempts to force Ireland to collect more taxes from a certain Cupertino-based company whose name rhymes with Scrapple. Moreover, it correctly notes that this debate is much more political than one involving Tech firms’ profitability. “The argument now is the politicians shouting that we should be getting that tax …. This is what all the talk of digital services taxes and so on is about—not who is getting away tax-free, but who gets to spend that tax money, local politicos or foreign ones? … It also makes no difference to the corporations. The US tax system, as with nearly all others, charges a tax bill on foreign profits of whatever the amount should be minus foreign taxes already paid. So, charging a tax in Europe just reduces the US tax bill, without changing the total tax bill at all.” We never thought EU taxes were a big threat to US Tech behemoths’ bottom lines, but this explains why digital and other non-US taxes on US companies are largely political battlefields, not economic threats. Now, the part unaddressed in this piece is the tariff threats related to this debate from both sides of the Atlantic. But even these threats to date are quite small and unlikely to cause material economic harm, in our view.