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: Here we go again. Value stocks, apparently, are once again destined to lead—this time because the Fed’s talk of tapering its quantitative easing bond purchases is driving long-term interest rates higher, steepening the yield curve and boosting more economically sensitive companies. If this all sounds familiar, it is probably because it is a twist on past reasons cited by value bulls over the last year and a half. First it was reopening spurring a lasting consumer boom. Then it was vaccines doing the same. Value had some brief bursts of outperformance, but it has trailed growth cumulatively since this bull market began in March 2020, and we doubt that changes. While value does normally outperform when yield curves are steep, today’s interest rate environment doesn’t really fit the bill. Even with 10-year Treasury yields’ flirting with 1.5%, the spread between short and long rates remains tiny by historical standards. Also, 1.5% is well off yields’ year-to-date high, and that temporarily steeper yield curve didn’t exactly bring a credit boom. When the Fed tapered and ended its prior quantitative easing program in 2014, markets pre-priced tapering in 2013, driving long rates higher in that year’s second half, but then yields fell as the Fed actually tapered. Now that is only one data point, but it shows a lasting steep yield curve is not at all a given. Also, growth stocks beat value throughout the 2009 – 2020 bull market’s latter years, a big counterpoint to the notion of tapering being mega bullish for value now.
MarketMinder’s View: Please note: This article mentions some individual stocks, so we remind you that MarketMinder doesn’t make individual security recommendations. We present it to highlight a broader point. Durable goods orders rose 1.8% m/m in August, smashing expectations for a 0.6% rise, but much of the headline rise came from volatile aircraft orders’ 78% jump. Excluding aircraft and defense, core capital goods orders rose 0.5% m/m, which this piece characterizes as business investment’s sixth-straight monthly increase. Public service announcement: Core capital goods orders are not synonymous with business investment. They represent only one component, investment in equipment. That was only 41.9% of total investment in 2019, pre-pandemic. The rest consisted of structures (22.9%) and intellectual property products (35.2%). Focusing on equipment overrates manufacturing’s economic importance, which the article falls prey to despite acknowledging the sector’s diminished role. Services represents the vast majority of US economic output, and trends in manufacturing just aren’t a bellwether for services. If they were, then the US would have lapsed into recession when manufacturing went south in the mid-2010s. It didn’t, because services held up fine and pulled the rest along. So yes, August’s results are smashing, groovy, yay durable goods. But they are a very incomplete look at investment and overall economic growth.
MarketMinder’s View: We aren’t inherently against “green” bonds, which countries issue to pay for climate- and environment-related projects (that is the loose definition, anyway—there is no formal international standard). But we do think—as with any fixed income investment—it is important to consider whether you are paying too high a price. The titular pension fund did that and decided it “… was not comfortable with the pricing on Tuesday’s sale, which bookrunner HSBC Holdings Plc said had the largest ‘greenium’ of any high-grade sovereign issue.” “Greenium” refers to green bonds’ overall tendency to fetch higher prices and offer lower yields than their conventional sovereign counterparts. That gap isn’t guaranteed to last. As the fund’s head of sustainable investment explained: “‘It’s really important for everyone to think very carefully about going into some really expensive bonds at the risk of not getting the fair value that you should be.’” Amen! Bond prices, like stock prices, move on supply and demand. As this piece shows, green/ethical bond supply is jumping, which (all else equal) points to high prices being temporary. In our view, it is important for investors to keep a critical eye, do their due diligence and not stop their researching at labels. If, after going through a careful research process, you find a green bond fits your needs and goals, great—but “because it is green” is not a great rationale to buy on its own, in our view.
MarketMinder’s View: Not only does this offer good advice, but it is also chock full of excellent rock lyric puns, which we r-e-s-p-e-c-t. Recently, the big US guitar makers have begun offering fractional shares in prototype axes designed by rock stars like Slash and other virtuosos. Demand is off the charts, as these securities intersect with young speculators’ new pandemic hobbies and the ongoing digital collectable fad. Whether or not they genuinely believe small digital stakes are even better than the real thing, they seem to be falling for the artificial scarcity ascribed to these “prototypes,” which leads to bizarre things like brand new guitars fetching prices that rival some sought-after vintage instruments. The mania is stretching beyond these fractional shares to the vintage market, where “… the ‘vintage’ label has expanded to include the notoriously shoddy guitars made in the 1970s,” helping prices of said shoddy guitars go vertical. We feel the same way about guitars as we do all collectibles: Buy them if you want, but know what you are buying and do your research on whether the price reflects the true value—and do it because it’s only rock ‘n roll and you like it, not because you expect them to deliver big returns. But that doesn’t extend to fractional shares in said collectibles, because really, what is the point if you don’t get to have them on hand to enjoy physically? Plus, as this piece illustrates, you may well be buying near a peak, making it exceedingly difficult to get back in (the) black if the mania ends and prices crash.
MarketMinder’s View: Completing its slow-moving crackdown on Bitcoin, the People’s Bank of China (PBOC) declared all business activities related to cryptocurrencies illegal—including the facilitation of cryptocurrency transactions by offshore companies. Time will tell how foreign crypto exchanges respond to the threat of extraterritorial reach, but at least on paper, this closes cryptocurrencies’ last window in China. Most observers have long expected this, given the government has been slow-rolling a ban for years—and cracking down recently on perceived societal ills. Oh, and it is also launching its own digital currency, so banning private-sector competition seemed to us like a foregone conclusion. Hence, we don’t think this offers investors any new insight into Chinese policy. Mostly, we think it just highlights the regulatory risks surrounding cryptocurrencies as governments globally push toward new rules. Buyer beware, as always.
MarketMinder’s View: According to the Bipartisan Policy Center, the Treasury will exhaust its cash reserves between October 15 and November 4, leaving it with only incoming revenues to pay the bills. As with most coverage, this piece presumes that would be catastrophic and the US “could default on its debt,” which is a misperception we will continue correcting for as long as we need to. As we showed this week, revenues have far exceeded interest payments in each month during the last fiscal year—and basically in all of recent memory. So simple math and facts render default exceedingly unlikely. “The Bipartisan Policy Center notes that the Treasury could try to prioritize payments, which essentially means paying some bills and not others. It could also choose to delay all bills and then make payments once enough revenue had been received to cover the payments due for an entire day.” That includes prioritizing interest payments above all others, as per the 14th Amendment, prior court rulings and Treasury Department statements from past administrations. Yes, picking winners and losers among the rest of the Treasury’s accounts payable may raise some hackles, but the notion that this “would probably shake up markets” ignores how similar it would be, in practice, to a government shutdown. No shutdown in history has caused a recession or bear market. Plus, surprises move markets most, and this issue has received heaps of attention for months, sapping its shock value. That doesn’t rule out short-term volatility, which can arise for any or no reason, but the long-term impact is likely nil.
MarketMinder’s View: This piece offers some useful, high-level investing reminders inspired by the stories dominating headlines recently: the travails of China’s largest property developer, China Evergrande Group, and the UK’s energy crunch. As always, MarketMinder doesn’t make individual security recommendations, and the companies herein merely illustrate broader points worth highlighting. For example, one of the subplots from the Evergrande episode is the company’s reach beyond residential real estate, as many domestic investors have exposure to the developer through debt investments known as wealth management products (WMPs). These WMPs offered an alleged secure yield of nearly 12%. But as observed here, “... if someone came to me with a ‘safe and secure’ 11.5pc return then alarm bells would ring loud and clear. In a low-yield world, that kind of return is only achievable with a commensurate level of risk.” Yup—if something sounds too good to be true, it usually is. As for a high-level takeaway from the UK’s energy troubles, “The first investment lesson it provides is the importance of thinking carefully through what could go wrong rather than focusing exclusively on what you hope could go right. The seven-fold expansion of the UK’s retail energy suppliers in the decade to 2017 was the product of an overabundance of the opposite kind of wishful thinking. There was always a fundamental flaw in a market in which retail prices were capped but wholesale prices were not.” Just as history confirms price controls don’t work as intended (despite politicians’ seeming belief otherwise), we think investors benefit from using the past to set realistic expectations. Hoping “this time is different” is not a sound philosophy for either policymaking or retirement planning, in our view.
MarketMinder’s View: At the start of the year, many experts anticipated a surge in consumer spending. The reason: Households had amassed a war chest of savings due to pandemic living, and thanks to vaccine rollouts, they would be able to unleash pent-up demand—powering the start of a new “Roaring Twenties”-type decade of growth. We had our doubts about that thesis at the time, and with nearly three-fourths of the year now complete, the data seem to support our view. As this article notes, “The amount of cash and cash equivalents on household balance sheets rose to $16.5 trillion in the second quarter, from $16.3 trillion in the first quarter and $12.7 trillion at the end of 2019. It is a reflection of both how much people reduced spending, particularly in the early stages of the pandemic, and the substantial relief that the federal government has provided.” Based on our research, just because households and businesses have a big cash cushion doesn’t mean they will run it down to pre-pandemic levels. They may maintain those savings based on financial lessons learned from the pandemic, as described nicely here: “So Americans have ample means to spend, but that isn’t the same as willingness. If anything, the recent experience with the Delta variant—which hit the country just as many people thought that a return to normality beckoned— has given people a new appreciation for having a financial buffer.” Note, US consumer spending looks fine today, and we expect it will revert to its pre-pandemic trends. But that isn’t the same as a swelling wave of spending to come—worth keeping in mind when setting expectations about growth ahead, especially considering most consumer spending goes to non-discretionary goods and services and isn’t too sensitive to changes in demand. That is a big reason consumer spending usually doesn’t fluctuate a whole lot.
MarketMinder’s View: Please note, MarketMinder is nonpartisan and favors no politician nor party over another. Democrats and Republicans alike have passed good and bad policies from an economic perspective, so when it comes to investing, we urge readers to put aside their personal biases and focus less on what pols say and more on what they do. In that spirit, we thought this analysis did a bang-up job explaining how the debt ceiling is more about Beltway politicking and maneuvering than an actual threat to America’s creditworthiness. “If Republican senators vote to increase the debt limit, they will have to explain to their supporters why they are making it easier for Democrats to accomplish their budget goals and failing to capitalize on its political downsides. Some of them may have to worry more about losing their next primary, too. … The political incentives for Republicans line up pretty strongly against cooperating in what they know needs to be done. That’s the problem with having a debt limit on the books in the first place: It regularly creates situations in which politicians [in both parties] don’t have an individual interest in helping the country avoid harm.” Now, we quibble with the conclusion that “debt-limit game-playing” could lead to a default—that concern is a mite overstated since the Treasury can easily make bond interest payments and refinance maturing bonds while debt is at the ceiling, considering monthly tax revenues more than cover monthly interest payments. However, the broad point holds: Dire debt ceiling rhetoric is all about politics, and we think investors should feel free to tune down that noise. For more, see our recent commentary, “Debunking Yellen’s Yellin’ About the Debt Ceiling.”
MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations—any companies mentioned herein simply illustrate a broader theme we wish to highlight. That theme: Prices are always and everywhere a signal, and higher prices incentivize production. In the case of oil, higher prices have prompted American shale producers to ramp up output. Yet as this article shows, smaller, private firms—not the marquee oil companies—are leading the production increase. “The anticipated output gains come as US oil prices hover at about $70 a barrel, which makes most shale wells profitable to drill. But many of the largest producers have promised their shareholders they will cap spending on growth after racking up huge losses during a decade-long drilling binge. Private companies, by contrast, have led the rise in the number of rigs drilling for oil and gas in the US this year, which has more than doubled from this time last year. … ‘The privates are not on board with this whole capital discipline thing. For them, this is their window,’ [IHS Markit analyst Raoul] LeBlanc said. ‘They’re thinking, “here’s my chance and I’m going to take advantage of it” because they see it as maybe their last, best chance.’” While small, privately held US oil firms alone aren’t a huge swing factor in the global oil picture, their production is one reason why global oil supply likely remains roughly in balance with demand looking ahead. That suggests oil prices stay range bound around current levels—arguing for a selective approach when investing in the Energy sector. Where we disagree with this article is in the implication that the major oil companies’ reduced investments automatically point to weak returns—Energy companies’ earnings are sensitive to oil prices, not production volumes, and we think the sector continues to be important from a diversification standpoint. For more, see last month’s commentary, “Energy’s Early Spurt Sputters.”
MarketMinder’s View: IHS Markit’s eurozone flash composite purchasing managers’ index (PMI) registered 56.1 in September, and while the widely watched business survey still exceeded 50 by a fair margin, implying broad-based expansion, it missed expectations of 58.5 and dipped from August’s 59.0, sparking some gloom. Many pundits attributed the weakness to Delta variant-related restrictions and ongoing supply shortages, arguing these headwinds will slow the recovery for the foreseeable future. We acknowledge those developments could have weighed on business activity, though PMIs indicate only the breadth of growth, not its magnitude—so we think it is a stretch to conclude broad eurozone economic output is weakening, as some research outfits here posit. That said, slowing growth isn’t a negative for stocks. For one, the reasons are well-known: COVID and supply bottlenecks are perhaps the two most widely discussed stories in financial headlines this year. In our view, forward-looking stocks have long since digested their economic impact and moved on. Two, we long thought growth—not just in the eurozone but across the global economy in general—was likely to slow following a reopening-related pop. Now, those reopening plans haven’t been uniform or smooth, but the eurozone seems to be following China and America’s trajectory—and in our view, that means a return to pre-pandemic, slower-growth trends. To us, the latest PMI data seem like further evidence those trends are taking hold, while sentiment toward them indicates there is plenty of room left in this bull market’s wall of worry.
MarketMinder’s View: While far from an exact science, financial headlines and investor surveys can reflect the general tenor of markets’ prevailing mood. In this case, it seems the wall of worry still has some way to go. Based on a poll of about 400 financial experts, “More than three-quarters of the respondents said now is a time to be very conservative in the stock market when asked what kind of market risk they are willing to accept for themselves and their clients.” We caution against doing the exact opposite of the crowd—rather, we suggest just looking at things differently. In our experience, when fear is prevalent, we find it often pays to remain disciplined versus giving in to fear. Two reasons why: 1) When the experts highlight the same concerns, those fears are likely priced in. Markets, efficient discounters of widely known information, probably aren’t missing the big, broadly discussed negatives everyone is worried about. 2) Forward-looking stocks move most on the gap between reality and expectations. An outcome must be substantially worse than already anticipated to derail stocks. Negative developments can always knock sentiment in the short term, but if reality just turns out better than feared, markets can move higher in relief as uncertainty fades. Now, widespread fretting doesn’t rule out market risks—e.g., a surprising wallop wiping out trillions of dollars of global GDP could shock stocks (see last year’s global lockdown with any questions). But it does generally mitigate their shock power, generally necessary to create a bear market. Short-term volatility is always possible for any or no reason, but that is entirely unpredictable and, in our view, not a call to action.
MarketMinder’s View: Please note, MarketMinder is nonpartisan, preferring no party, politician or policy. We assess political developments only for their potential market impact, if any. So on those grounds, if you were wondering about the status of the Biden administration and Congress’s multi-trillion dollar infrastructure and budget initiatives, here is a decent rundown: “Top Democrats are seeking middle ground between the party’s moderates and progressives, who are at odds over the size and scope of the $3.5 trillion package encompassing most of Biden’s domestic agenda. With the future of his tax-and-spending plan and a separate infrastructure bill riding on party unity, leaders are seeking to lower expectations among House progressives, warning that the hefty price tag could be cut to meet moderates’ demands.” Whether you cheer or fear these bills, negotiations and compromises are watering them down, and we think the end result—if either or even both pass—will likely be less impactful than many first expected. With little likely to surprise markets materially as gridlock (intraparty, partisan and procedural) dampens Congress’s ability to pass major legislative change, we think stocks should be fine whatever the outcome. For more background on these measures, please see our 8/10/2021 commentary, “On the Big Bipartisan Breakthrough.”
MarketMinder’s View: Here is one way businesses are adapting to labor shortages, either due to talent mismatches or aging workforces: robots. “In US and European warehouses, the boom in online shopping during the pandemic has accelerated the switch to automated systems and robots, which can cope more quickly and efficiently with increasingly complex orders as demand for next-day delivery rises and bottlenecks in the supply chain cause disruptions. Globally, warehouses are expected to invest $36 [billion] in automation this year, up 20 per cent on 2020. Combined investment this year and last has jumped $1.6 [billion] against pre-pandemic forecasts, according to research group Interact Analysis. ‘In the 1980s, the main reason for investing in automation was to reduce labour costs. Now for almost half the clients, their primary reason is labour availability. I talk to people every day and this is their biggest concern,’ said Dwight Klappich, vice-president of research at Gartner, the advisory group.” As the article goes on to describe, robots aren’t a cure-all or overnight fix—they have high upfront costs and energy needs, plus they can even exacerbate some labor pressures, e.g., for robot technicians. But we think the steady trend in robot adoption shows that economic bottlenecks aren’t forever—they are (eventually) surmountable. They also show why demographic extrapolation doesn’t solely drive economic development. Simply, businesses and people innovate to find solutions to both near-term and longer-term problems. Now, that process can create winners and losers, and we don’t diminish the setbacks for those displaced economically by the changes. But from an investing perspective, we think it is worthwhile to keep these types of developments in mind whenever warnings about stagnation arise.
MarketMinder’s View: “Foreign investors cannot get enough US government debt ... Overseas buyers snapped up more than a quarter of the $41bn of 10-year notes on offer in August, the highest percentage in three years. At the equivalent auction in July, foreign investors took 16 per cent. At the two-year auction in August, investors bought 22 per cent, the highest since December 2019.” The article also notes buying by China and Japan—the two biggest foreign holders of Treasurys—has been particularly strong. Robust non-US demand is one factor keeping “prices high and yields low, even as economic data has improved and inflation has risen, and in spite of the flood of new debt from the US government — a net issuance of $4.3tn last year and $884.8bn through August this year, according to the Securities Industry and Financial Markets Association.” We would also add foreign Treasury holdings now stand at record highs. (Source: Treasury International Capital System.) That said, we don’t think the titular description, which the article explores, is quite right. Yes, global Treasury demand undermines concerns related to the Fed slowing asset purchases via its quantitative easing program (i.e., taper), but non-US investors’ buying isn’t a “prop.” For one, domestic investors remain the primary source of Treasury demand as the auction numbers cited here show. Moreover, lower (and in some cases, negative) non-US developed market yields have been a long-standing feature of the global economy, boosting higher-yielding Treasurys’ attractiveness internationally—which limit a sustained rise in rates, in our view. We think the primary takeaway is much more high-level: The US offers the deepest, most liquid capital markets around, and that won’t change whenever a taper happens.
MarketMinder’s View: As the upfront summation goes: “Britain sold 10 billion pounds of its first ‘green’ government bond on Tuesday after attracting over 100 billion pounds ($137 billion) of demand from investors, a record high that shows the clamour for assets that can be marketed as good for the planet.” For a little extra ... umm ... color: “Tuesday’s launch of the new gilt maturing in July 2033 represents the largest single sale by a sovereign issuer, topping the previous 8.5 billion euro record set by Italy in March.” A couple observations for investors. First, the strong appetite for UK (and developed market) debt generally—not just “green” bonds—and their historically low yields suggest little market concern about issuers’ creditworthiness. Despite record global debt levels, which make many pundits apoplectic, we think bond prices (which move inversely to yields) are correctly seeing governments’ ability to service their debts aren’t too onerous. Second, the article notes these green gilts are earmarked for financing environmentally focused projects including wind farms, zero-emission buses and the like. But given the “green investment” market is still gestating, we think it behooves interested investors to understand what green assets are actually funding to make sure they fit with their own preferences and goals. Without commonly agreed upon (and enforced) standards, doing your due diligence is especially important, in our view.
MarketMinder’s View: The UK continues to think outside the EU box. After formally applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free-trade pact involving 11 countries around the Pacific Rim, London is now exploring the idea of joining the US-Mexico-Canada Agreement (USMCA, formerly NAFTA). As amusing as that sounds, this article highlights how tricky joining the USMCA would be for the UK. “The U.K. also would need to accept liberalization for goods that trade tariff free under the USMCA, [trade negotiator Kenneth Smith Ramos] said. Mexico’s trade with the U.K. is governed by a December 2020 continuity agreement that extends the rules of the Mexico-EU deal that took effect in 2000 for three years after Britain’s departure from the EU. But that deal only opened about 60% of agricultural trade, making it more limited in scope than the USMCA, said Smith Ramos, a partner at consulting firm AGON.” Rather than getting hopes up about a potential USMCAUK deal, we suggest investors keep in mind two things. One, while markets are generally fans of free trade—the fewer barriers to global commerce, the better—trade agreements (and the talks around them) are quite political. Given how long trade deals take to reach, little here is likely to move the needle in the foreseeable future. Two, trade agreements aren’t necessary for commerce to flow. See the US, which is the UK’s largest single-country trading partner despite the lack of a free-trade agreement.
MarketMinder’s View: Here is a fun article that marries the sports world and stock market to illustrate how changing trends in the business world mean today’s biggest companies are highly unlikely to remain the biggest over time. “Another graduate of Serra High, Barry Bonds, hit his 756th career home run on Aug. 7, 2007, passing Hank Aaron’s record—more of a juiced-player era vs. juiced ball like today’s juiced stock market era. At the time, the top companies by market value were: Exxon Mobil, General Electric, Total SA, Microsoft, Royal Dutch Shell, PetroChina, AT&T, Citigroup, British Petroleum and Bank of America—ghosts of a stock market past. Apple wasn’t even in the top 100 though the iPhone was introduced seven months earlier. The constant changing of the guard of top companies is exactly why antitrust is an unnecessarily blunt and mostly political tool as evidenced by calls to break up Amazon and Facebook. Markets work by funding companies with perceived bright futures and starving those with dismal prospects.” Now, the piece does go a bit far in presuming markets are excessively frothy today, but that is a very small part of an overall good piece. For more on this, please see Fisher Investments founder, co-CIO and Executive Chairman Ken Fisher’s RealClearMarkets column, “Don’t Break Up Big Tech – Let the ‘Invisible Hand’ Do It.”
MarketMinder’s View: This piece highlights “sequence of returns risk,” which simply notes the effect of compounding on returns earned early in retirement in a reverse fashion. It points out that two investors with identical-sized portfolios both 100% invested in the S&P 500 and taking identical withdrawals face very different depletion risks if you simply adjust when returns fall. A person who hypothetically started taking out funds on the cusp of the 2000 – 2002 bear market would have endured declines early—and taken funds out during a declining period—leaving less money to compound when markets improved. It goes on to note that someone would hypothetically wind up with way more if the 2009 – 2020 returns came first, since they enjoyed almost 11 years of compound growth before negativity arrived. This is just math, of course, but it then prescribes a couple of different solutions to this “problem.” One, it sensibly suggests maintaining flexibility and reducing expenses in periods of market weakness or carrying a cash buffer (although we don’t think you should take that too far). We think you could also carry some fixed income, assuming your cash flows are sufficiently high. But this piece also, in our view wrongly, suggests carrying a low stock allocation early in retirement that you build up over time. It doesn’t define exactly what low means, but this, in our view, ignores the second part of the “sequence of returns” lesson. Returns you earn early on are the most important to reaching your financial goals and objectives because they compound over time. Furthermore, ramping up equity allocations late ignores your actual time horizon—the time you need the funds to last to reach your goals. Most new retirees have a long one, giving them ample opportunity to recoup the hit of a downturn, in our view. Older folks with shorter time horizons? Less so. For more, see our 3/27/2014 commentary, “Shaped for U?”
MarketMinder’s View: The perils of price controls, illustrated. It seems several smaller UK utilities have ceased taking on new customers while a few others went under and some are seeing new restrictions on trading power on the UK’s market. The cause: These smaller power producers are feeling the pinch as gas prices rise while the UK government’s price controls—which aim to keep household energy costs low—restrict their ability to pass the higher costs on. The result is rather predictable to those who have studied price controls: Supply, in this case of electricity, is being restricted. Furthermore, “With high gas and power prices squeezing all suppliers, the usual mechanism of handing a failed company’s customers to another firm is being tested. A government-imposed cap on utility bills mean it’s not profitable for larger companies to come to the rescue.” The upshot of this: There are many separate reports of utilities planning major hikes to rates when the government’s cap resets, and others are offering fixed-rate plans that far exceed current costs, as producers aim to shield themselves from the squeeze. While we get the allure of price controls from a political standpoint, there is a harsh economic fact to confront: They are too shortsighted to work.