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.


The Conventional Wisdom on Margin Debt Is Wrong

MarketMinder’s View: We found this an interesting discussion about margin debt—money borrowed using stocks as collateral—and its market implications. Many point to record-high margin debt as evidence speculative fervor is riding high and won’t end well, invoking the crash of 1929 as evidence. However, as this article explores, this comparison may be off base. “While it’s clear that rising margin debt mirrors the rising stock market, it’s hard to know when levels signal danger. One way to measure this is to weigh margin debt relative to GDP or to the total capitalization of the stock market. Some market watchers have done that in recent weeks, claiming that not only is margin debt at record highs in nominal terms, it’s at all-time highs relative to GDP: approximately 3.6 percent. Once again, the historical record disagrees. Back in 1929, margin debt was as high as 6% or even 8% of GDP.” Now, some of the research cited here that treats margin trading as a predictive tool strikes us rather speculative—interesting for discussion but not necessarily useful for making investing decisions. In our view, margin debt is one way to gauge sentiment. What matters isn’t the absolute level but the rate of change—if margin debt is spiking, that could indicate investors are ratcheting up risk to juice returns, perhaps signaling euphoric sentiment has taken hold. But it is just one indicator and should be used in concert with other data as well as fundamental analysis.

Instant Settlement May Not Be Gratifying for All

MarketMinder’s View: During late January’s “meme stock” episode, we noted a boring reality underpinned much of the drama: the mechanics of clearing a trade. Now that some time has passed, some have found settling stock trades instantly may not be a cure-all. Currently, brokers sometimes have to restrict clients’ trades when clearinghouses ask them to put up more cash when volatility strikes—cash they might not have readily available. Instant settlement would remove this need. Trouble is, the current practice of taking two days to clear a trade carries benefits. As this article explains, “One thing about delayed settlement that is helpful to banks and brokers is the so-called netting of diverse flows. Firms have day traders as clients but also retirement accounts, fund managers and so on. These trades can all net against each other for a far lower ultimate settlement bill in the current system. The Depository Trust & Clearing Corp. says out of over $1.7 trillion in U.S. equities transactions passing through the system on a typical trading day in 2020, by the day’s end the typical total value settled by the main stock clearinghouse was under $40 billion.” Moreover, real-time settlement would also necessitate a big tech investment to upgrade software and regulatory compliance systems. Perhaps we will get there one day, but we think these realities highlight why big changes to the financial system’s plumbing probably won’t happen instantly.

Yields Have a Long Way to Go Before They Sting Yellen’s Treasury

MarketMinder’s View: There is a bit of partisan politics related to the recently passed $1.9 trillion stimulus and a possible tax hike plan embedded in this piece, which we encourage you to overlook. The interesting part, and the central thrust of it, is rather sensible coverage of the decline in interest payments on the federal government’s debt—a sound reason why, even after big increases tied to COVID response packages, we don’t think US debt is a calamity waiting to happen. With rates plunging and Treasury bond maturities averaging about five years, the government is refinancing itself over the medium term at interest rates far lower than in the past. The upshot: “Interest payments on the national debt fell last year, to $345 billion or 1.6% of gross domestic product. They’re on track to shrink further in 2021 -- even after all the pandemic spending, plus a debt-market selloff that’s taken 10-year Treasury yields to the highest in more than 12 months.” The article goes on to make the point that “[it] would take Treasury yields averaging about 2.5% across all maturities -- well above where they are now -- to turn that trend around, according to calculations by Bloomberg Intelligence.” Note in that last sentence: The words across all maturities are key, considering short-term debt is well below 1% now. Not stated, but equally important: Rates across all maturities would have to rise and stay there while the government refinances.

Why $40 Billion in Stimulus Won’t Go ‘Into’ Stocks

MarketMinder’s View: Here is a fun piece that succinctly sums up why arguments pertaining to stimulus flooding markets with new money is a fallacy: “Stimulus money, or money ‘on the sidelines,’ cannot ‘come into the market’ for one very simple reason that gets ignored time and time and time again when this comes up. Every time a security is bought, one must be sold.” So we largely agree with the take that this is no reason to be bullish, bearish or anything else on the stock market. It is simply nothing. Zippo. The market is an auction. The willingness of bidders to pay more for a company’s expected earnings is the key. Perhaps investors more flush with cash can bid more for shares, but good luck mathematically working out how much that would be.

Cold Weather Chills US Retail Sales, Factory Output

MarketMinder’s View: Following an upwardly revised 7.6% m/m January rise, US retail sales fell more than expected in February, -3.0%. Industrial output also fell -2.2% m/m, with manufacturing production down -3.1%. These drops come with a huge caveat, though, as this article points out: cold weather. February’s snow and ice were rather extreme in parts of the country like Texas and the Pacific Northwest, causing power outages, closures and interruptions to business. Few economists see this trouble as lasting, instead dismissing the dip as a one-off. (They don’t even mention the base effect, which will be a ginormous factor skewing economic metrics higher in the coming months.) Most see strong growth ahead, as this article documents quite thoroughly late. While these forecasts will be nice if they come true, the fact a strong rebound is so widely expected limits any significance for investors. Simply put, if everyone knows a big rebound is likely, those inclined to buy or sell on that information probably already did.

Stumbling Hotel Industry Starts to Regain Footing After Its Worst Year

MarketMinder’s View: Yes, as vaccines roll out, green shoots are emerging for the travel and hotel industry. This article does an ok job rounding them up, noting that “U.S. hotel occupancy for the week ended March 6 stood at 49%, the highest since October and just a percentage point lower than the pandemic peak in August, according to hotel data tracker STR. The rate was about 65% in March 2020 before the pandemic hit, STR said.” The article also documents a recent jump in hotel stocks. Some investors seem increasingly inclined to see factors like this as bullish for this small industry group. But the thing is, markets anticipated it. As we type, the MSCI USA IMI Hotels, Restaurants and Leisure Industry Group stands 15.8% above its pre-pandemic high. (That figure is from FactSet and includes dividends.) This suggests a pretty significant recovery in both pleasure and business travel is pre-priced now, meaning the future is murky. That is likely doubly true considering that, as this documents, “‘Most of the business-travel increase is from smaller companies,’ said Michael Bellisario, a Baird analyst. ‘What you’re not seeing is the large companies, the top business-travel accounts, coming back.’”

Israel’s Fourth Election in Two Years: What’s Different Now?

MarketMinder’s View: First, note that MarketMinder favors no party nor any politician, assessing political developments and news for their potential market impact. With that out of the way, to answer the titular question, everything and nothing. The last Israeli election, as this article notes, came in March 2020—just days before the government locked the country down—and resulted in deadlock, with a compromise shared leadership arrangement between Prime Minister Binyamin Netanyahu and Alternate Prime Minister Benny Gantz eventually forming. The predictable result of that was gridlock, eventually resulting in the government’s collapse and these new elections. Since then, the pandemic has obviously changed many dynamics. But politically, the landscape remains fractured, as this piece notes. Despite a strong early response and the world’s leading vaccination program, Netanyahu’s stumbles last summer led many to conclude he was distracted from COVID response by divisive issues like West Bank annexation. Hence, it doesn’t seem like Netanyahu’s Likud Party will do much more than win a narrow plurality of the vote again, necessitating coalition talks. Likud itself is fractured, and many parties seemingly refuse to align with it in government. So expect an inconclusive vote and long government formation talks, with the result a continuation of the extreme gridlock the country has had for years.

Biden Eyes First Major Tax Hike Since 1993 in Next Economic Plan

MarketMinder’s View: This piece has the emerging, early details on the Biden administration’s plans for major tax legislation later this year. Proposals on the docket, according to the always-reliable (ha) unnamed sources within the administration, include jacking the corporate tax rate up from 21% to 28%, closing loopholes for limited partnerships and other “pass through” entities, raising income tax rates for individuals making over $400,000 annually, broadening the estate tax’s reach and raising capital gains tax rates on people whose annual income exceeds $1 million. On the cutting room floor, meanwhile, are a wealth tax and other ideas floated by Democratic senators in recent months. As always with all things political, we are non-partisan and assess developments solely for their potential and economic impact, and it is quite premature to try to analyze that right now. For one, tax changes don’t have a pre-set market impact, and they are just one economic variable. Two, as this piece notes, there is broad Republican opposition to many of these measures, which will likely result in the final legislation getting watered down heavily from initial proposals. Democratic Senate leadership could opt to use budget reconciliation instead, as they had two shots at that this year, which would allow them to pass tax legislation with a simple majority. But even that isn’t a sure thing, despite the article’s hinting otherwise, as Democratic senators in red and swing states have heavy incentives to force moderation. So, we suggest taking a wait and see approach while remembering that tax hikes—even big ones, on the outside chance that actually happens—aren’t automatically bearish. For more on that, see Ken Fisher’s 10/25/2020 Real Clear Markets column, “Markets Much Prefer Clarity to Tax Cuts or Tax Hikes.”

What Used Cars Tell Us About the Risk of Too Much Inflation Hitting the Economy

MarketMinder’s View: To answer the headline in a word, not much. This article spends most of its space explaining what rising prices in narrow categories signals for broad inflation down the road, with used cars the primary example. The general logic is that stimulus checks plus low interest rates equals used car boom, which allegedly previews how more government assistance plus continued low interest rates could drive broader prices up from here. We think this is a stretch, though, as a supply shortage was the primary driver of used car prices rising last summer—not really a preview for broader supply conditions for the overall economy looking ahead. Individual goods go through stretches like this all the time, but what matters for inflation is how the supply of money is pushing up prices across all categories. With all that said, however, we do give this article a point for explaining that even rising prices as measured by price indexes don’t necessarily mean much, as “used car” is a broad category that can include a 20-year-old clunker as well as something newer with better (and more expensive) technology. “Americans generally prefer SUVs and trucks that come with higher price tags. ‘Infotainment’ technology behind the dashboards, plus entertainment systems in newer models, have pushed prices up. Parts shortages or other supply chain issues might cause dealers to prioritize their most-profitable models, said Peter Nagle, an automotive industry expert at IHS Markit.” So yah, hard to argue this is actual inflation.

Tax Cuts Could Be on Sunak’s Agenda Before the Next Election

MarketMinder’s View: Brits are still buzzing about the raft of planned tax hikes in Chancellor of the Exchequer Rishi Sunak’s recent Budget proposal, and this piece is a nice antidote to all of the associated fears. It echoes a simple point we made in our article covering the initial announcement: Things could easily go better than forecast, allowing Sunak to change course. It then dissects the potential problems underpinning the economic forecasts driving his present plans. One big issue “concerns the [Office for Budget Responsibility, or] OBR’s view on the extent of the permanent loss of productive capacity as a result of Covid. Its central scenario puts this ‘scarring effect’ at about 3pc of GDP. That implies that tax revenues will always be correspondingly lower and the public deficit, other things equal, will always be 2pc of GDP higher, implying the need for tax rises and/or spending cuts of this magnitude to close the gap. But this figure of 3pc for the scarring effect is a guesstimate. The OBR itself has a downside scenario in which scarring is 6pc, and an upside scenario in which it is zero. There are some reasonable arguments as to why the true figure may turn out to be lower than 3pc but they do not receive much attention.” Those arguments, discussed in the piece’s second half, are a litany of plausible reasons the country could reap big productivity gains in the months and years ahead, driving more growth and higher revenue as the tax base broadens. This rosy outcome isn’t guaranteed, but it is a very overlooked possibility, illustrating the potential for positive surprise for stocks.

China’s Economic Activity Soars but Jobless Rate Hits Ceiling Set by Beijing

MarketMinder’s View: This does a nice job putting China’s eye-popping January – February economic data in context. As it shows, the astronomical growth rates stem partly from last year’s depressed base, as January and February are when China dealt with lockdowns and their economic impact. Those base effects will likely linger several months more. But here is an encouraging nugget: “Officials noted Monday that, for all the statistical volatility of the past year, the economic levels for January and February this year were higher than those for the first two months of 2019, well before China’s economy was walloped by the emerging pandemic. Industrial output in the January-February period increased by 16.9% compared with the same period in 2019, while retail sales were 6.4% higher, the statistics bureau said.” Even so, full-year growth targets remain modest, as officials are still focused on promoting deleveraging as corporate defaults continue trickling in. So we wouldn’t expect stimulus to boost economic data much longer from here. Rather, we probably see a continued tug of war between tighter monetary policy and targeted fiscal stimulus to address the titular unemployment rate, bringing modest economic growth—basically the pre-pandemic status quo, which stocks are used to.

Value Investors Finally Have Reason to Celebrate - for Now

MarketMinder’s View: This rehashes all the popular reasons people expect value’s recent run to last for the foreseeable future. We have addressed all of them in various articles in recent weeks, including vaccine cheer, bank earnings and oil prices, and we will not bore you with a rehash. Suffice it to say, all of those investment theses are very, very widely held, making them priced in and exceedingly unlikely to offer an edge or lead value to outperform for a meaningful length of time from here. Value does best when no one wants to own it, and articles like this show that just isn’t the case today. But our biggest quibble with this piece is its myopic focus on year-to-date relative returns, as if the margin between value and growth’s being larger as of March 11 than any prior year through March 11 over the past 20 years is somehow predictive. That just isn’t the case, and thinking otherwise reads too much into short-term trends and, critically, presumes past performance is predictive. We think investors are best served right now by looking forward, like markets do, and searching for things the value-loving crowd is missing. That is how you can avoid getting sucked into a crowded trade with a short shelf life.

Germany Declares a Covid ‘Third Wave’ Has Begun; Italy Set for Easter Lockdown

MarketMinder’s View: The ebb and flow of COVID and restrictions continues in Europe, with cases rising in Germany and Italy planning an early-April lockdown. For weeks now, pundits have warned Europe’s vaccine distribution issues could bring more economic pain as the virus resurges and necessitates new restrictions, and this might prove to be the beginning of that coming to fruition. We don’t downplay the public health consequences of this or the potential economic effect. For stocks, however, this shouldn’t qualify as a negative surprise. Markets are forward-looking and have been dealing with fears of slow vaccine rollouts for most of this year, sapping their surprise power—just as the autumn wave lacked much power over stocks. Markets look 3 – 30 months ahead, and while near-term setbacks can hit sentiment temporarily, we think stocks are mostly weighing the brighter economic reality awaiting whenever the world overall is able to move past the lockdown two-step. The precise timing of that matters less than the simple observation that it is somewhere on the horizon.

Economy Set for Shallower Contraction Than Feared

MarketMinder’s View: Yes, UK GDP fell -2.9% m/m in February, and yes, that is milder than expected. But as the article details, some of the items lifting GDP aren’t exactly signs of economic strength. One of the biggest contributors was pandemic-related health spending, including vaccinations, testing and contact tracing. That is all (primarily public) spending that is detached from the real economy—yes, the money eventually recirculates, but the 0.9 percentage point contributed by this activity isn’t a sign of robust demand. Another mathematically positive factor was imports’ falling faster than exports, which many are interpreting as a terrible Brexit byproduct but seems to us mostly like noise. We aren’t dismissing the problems truckers have encountered at the UK border, but it is impossible to separate the impact of new customs checks from the ongoing pandemic-related delays as social distancing needs continue reducing staffing at checkpoints. It will take a few months to get a better sense of how Brexit itself is altering trade patterns. Meanwhile, the UK’s mighty services sector slipped -3.5% m/m, illustrating extended lockdowns’ continued economic impact. But this is also where a silver lining appears. Restrictions are now easing once again, with school reopenings earlier this week a noteworthy milestone. That should pave the way for a post-lockdown bounce similar to what the country enjoyed last summer, and we think UK markets are looking past the present issues and anticipating a brighter future.

It May Be Time to Start Worrying About the Estate Tax

MarketMinder’s View: This is a classic example of how sentiment toward new Democratic administrations takes a while to catch up with the reality of gridlock (when it is present), which we think is the driving force behind nicely positive returns in Democratic presidents’ inaugural years. In this case, since now-President Joe Biden mooted reducing the estate tax threshold on the campaign trail—and since Treasury Secretary Janet Yellen has said she will “investigate the implications of” eliminating the cost basis step-up for inherited assets during her confirmation hearings—people are starting to worry about their heirs being hit with large, unanticipated tax bills. Much of the related commentary in here is sociological, which is always worth considering, but is generally outside the factors stocks move on. Set those aside when making portfolio moves. Overall, making big changes to either the estate tax or treatment of cost basis of inherited assets would create winners and losers, and changes passed now would upend many folks’ careful estate planning. New taxes would likely also be a big gift to the estate planning industry, which would balloon as millions more families sought to avoid the tougher rules. Yet the end of the article shows why this probably shouldn’t be a source of major worry right now: It is all just talk, and the road through Congress would be a tough one. If the Senate couldn’t even push through an increase to the Federal minimum wage, we don’t think it is terribly likely to pass something far bigger and more intrusive. Not with a 50/50 split and several Democratic Senators in red or swing states fighting to win re-election in 2022. The more gridlock kills or waters down proposals like this, the more investors’ relief is likely to boost stocks.

Inflation Fear Lurks, Even as Officials Say Not to Worry

MarketMinder’s View: The prospect of rising inflation has dominated financial headlines for much of the young year, and this piece lays out the general concerns. To summarize: Thanks to President Biden’s COVID relief plan and massive household savings, rising prices will accompany this year’s strong economic recovery. That prospect allegedly pushed Treasury yields up, with the volatility spilling over a bit into the stock market. Now all eyes are on the Fed, and pundits have questions: How will the Fed’s revised monetary policy framework work; what data will prompt the Fed to act; is the Fed missing anything? Tellingly, this article spends little time discussing the actual math behind inflation calculations—even though the math will probably have a big effect in the near future. The reason: Base effects are likely to inflate price gauges, important for investors to keep in mind. We don’t dismiss the prospect of higher inflation in the future, but acting now seems premature. Rising prices alone don’t doom stocks, and investors generally have time to monitor the situation and carefully weigh whether changes are necessary. Moreover, today’s myriad permutations of inflation fears allows markets to pre-price those concerns and move on—decreasing the likelihood of negative surprise potential. For more, see our 2/11/2021 commentary, “Good News! More Pundits Are Worried About Inflation."

The Treasury Market Could Soon Get More Love

MarketMinder’s View: Like stocks, bonds move most on supply and demand factors over the longer term. This pithy piece highlights a point about the latter: America’s long-term sovereign debt yields are among the highest in the global developed world, making them especially attractive to investors outside the US. “Investors in the eurozone and Japan are getting negative returns of 0.3% and 0.1%, respectively, for buying their own ultrasafe 10-year government bonds. Even after the cost of currency hedging, the 1.5% available on a U.S. bond gives them a full percentage point more yield than their domestic bonds—the most in four years. This is a recent phenomenon: For most of 2020 it was U.S. investors who got paid extra for investing in the eurozone and, for a brief period, even in Japan.” Factor in other demand sources (e.g., the Fed’s quantitative easing program) and the scarcity of longer-term US debt, and we expect Treasury yields to end the year not much higher than where they started—though the path there may be bumpy.

Why $4-a-Gallon Gas May Be Coming Your Way This Summer

MarketMinder’s View: This comprehensive look at global oil markets covers a lot of ground and veers into some speculative areas, including Middle Eastern tensions potentially hurting supply and the prospect of higher gasoline prices this summer. Though interesting, these possibilities aren’t necessarily probable today, and we suggest readers put those topics aside. Instead we share this because it nicely illustrates the global oil supply picture. Yes, producers worldwide claim they will remain disciplined and refrain from firing up production for the time being. Yet that can change quickly. “But the temptation to produce more when prices rise has not disappeared completely, especially for countries, like Colombia and Guyana, that want to pump as much oil as they can before rising concerns about climate change reduce the demand for fossil fuels in favor of electric and hydrogen-powered vehicles. Russia has been pressing Saudi Arabia to loosen production caps, while Kazakhstan, Iraq and several other countries are exporting more. Even Iran and Venezuela, which have struggled to sell oil because of U.S. sanctions, are beginning to export more.” Some analysts here think American producers, too, may sing a different tune if oil prices climb much higher. In our view, this reinforces how robust global supply still is, putting a lid on prices in a price-sensitive industry. That is part of the reason why we think Energy’s strong performance this year is more countertrend than true leadership shift.

Brexit: Trade Survey Finds 74% of British Firms Hit by Delays With EU Markets

MarketMinder’s View: UK businesses have encountered some turbulence while trying to adjust to a post-Brexit business environment, which the titular survey illustrates. “Faced with mounting Brexit red tape, customs checks and disruption to global trade caused by the pandemic, more than half of companies said they were suffering from increased costs. More than a third had lost out on sales, while fears over continued disruption was losing firms future business.” Some of the interviewed executives cite the increased paperwork and bureaucracy, as well as unpredictable delivery times, as burdensome headwinds. We don’t dispute those headaches, but the crucial thing for investors to remember is that none of this is sneaking up on markets. Headlines have gone over and over this scenario for years now. Again, we don’t dismiss companies’ Brexit-related struggles or other challenges—most notably, the pandemic. But we also think firms will find ways to remain competitive as they adjust to the new rules, and forward-looking markets are good at anticipating those adaptations.

Covid Relief Bill Changes Tax Rules Midseason. What to Know About Filing an Amended Return

MarketMinder’s View: With April 15 approaching, you may want to know how pending COVID relief legislation may affect your taxes, especially if you filed already. If the bill passes Friday as expected, already submitted returns may be incorrect and require updating. But don’t fret just yet. As this article helpfully explains, “If you already filed your 2020 return but had unemployment income and would have benefitted from the new Covid bill, there’s a chance the IRS will take care of updating your information and sending you any money owed. If that happens, it would mean those people do not have to take any action to update their tax returns. But it’s just as likely that the IRS won’t be able to do that, meaning that taxpayers will have to either file a another return to correct the information before April 15 — the current end of the tax season for individuals — or file an amended return after the deadline.” So, stay tuned. In the event you do have to amend your taxes, the article provides some helpful tips how. If you have further questions, be sure to consult your tax professional.