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: Treasury auctions usually don’t make headlines, but this month’s 10-year Treasury sale drew some eyeballs. The reason: Last month’s 7-year Treasury auction attracted a record-low amount of bids, supposedly unsettling markets fearful of rising bond yields (which move inversely to their price). That spurred a number of concerns ranging from questions about Treasury demand to possible ripple effects on the stock market. However, as this title here implies, today’s auction shows demand for US Treasurys remains strong. The bid-to-cover ratio was 2.4—there were more than double the amount of buyers for the securities on offer—in line with January and February’s 10-year sales. In our view, the still-strong demand suggests the recent hubbub about rising yields is sentiment-driven—and a sign pockets of skepticism still persist. For more, please see our 2/26/2021 commentary, “On Rising Rates and Stocks.”
MarketMinder’s View: With vaccinations underway and states beginning to reopen, many pundits are opining about which consumption patterns are—and aren’t—likely to resume in a post-lockdown world. Though some experts anticipate a big rebound in hard-hit industries—namely, airlines—that may not necessarily pan out. While this thinkpiece touches on some sociological topics (e.g., climate change) that are generally outside of the areas stocks weigh, we think it raises some interesting points about the future of business travel in a post-COVID world. “Aviation is a modern miracle; it is also expensive, annoying and environmentally costly. Now that videoconferencing has been shown to be an acceptable way to get work done, there’s no reason to quit it when the virus is gone. We can all afford to be much more judicious about traveling for work, even if Zoom isn’t perfect.” The article then shares anecdotes of how “road warriors” found a way to thrive despite COVID’s restrictions on travel. We aren’t saying videoconferences will replace all business travel, but it seems likely not all industries will look exactly as they did pre-pandemic—important to keep in mind for investors. For more, please see our 3/3/2021 commentary, “Vaccines Likely Can’t Vanquish Value’s Headwinds.”
MarketMinder’s View: Last week the UK decided unilaterally to extend some grace periods exempting Northern Irish businesses from new post-Brexit trading rules, citing the need for more time to help companies prepare. The EU warned the UK’s decision would trigger a legal response, and this article runs through what that would likely entail. “The commission believes it has established the legal basis for such a step, which would be launched by a formal notice accusing the UK of being in breach of EU law. Britain would have several weeks to respond but could face sanctions or even fines if it did not comply with an ECJ decision. The commission is also set to send a second letter, this time to the joint committee, accusing the UK of breaching article 167 of the withdrawal agreement, which requires both parties to consult and act in good faith in implementing it, allowing the treaty’s dispute settlement mechanism to be triggered.” Cut through all the harsh rhetoric on both sides, and this is the key point for investors: There are legal processes and dispute mechanisms to deal with Brexit agreement disputes, so little is likely to change overnight. Moreover, fines or sanctions aren’t inevitable, as politicians have a way of grandstanding before compromising. We don’t know how this particular episode of post-Brexit drama will play out, but little here is likely to take anyone by surprise, which is what moves markets most. We suggest tuning out the noise and monitoring the resulting actions—if there are any.
MarketMinder’s View: This analysis includes some nifty graphics and interesting anecdotes that highlight a key point: States’ tax revenues didn’t suffer the doomsday many projected last year. Though the pandemic hit certain states particularly hard (e.g., tourist destinations including Hawaii and Nevada), others benefited from the remote working boom (e.g., Idaho and Utah). Now, we think this piece is a tad too generous in crediting policymakers’ efforts with saving the economy. Yes, COVID relief spending provided a lifeline to households and businesses impacted by lockdowns and other restrictions, but any recovery ultimately relies on COVID restrictions ending—not whether more federal aid is on the way. However, while these tax data don’t have any specific investment takeaways, we think they are the latest evidence of the better-than-expected reality stocks fathomed about a year ago. Despite the myriad forecasts of a Great Depression-type downturn and all the related possible damage—including roiled states’ finances—a new global bull market began last March. Stocks started looking ahead to a brighter future—and these tax data are late-lagging confirmation of that better-than-forecasted reality. For more on this, please see our yearend 2020 commentary, “The Sentiment Overshoot That Spurred Stocks in 2020.”
MarketMinder’s View: “Plagued by political infighting, supply disruptions and public resistance, continental Europe is far behind in distributing the vaccine. The EU has administered 8 doses per 100 people, compared with 33 for the U.K. and 25 for the U.S., according to Bloomberg’s Coronavirus Vaccine Tracker. A delay of one to two months in reopening could cost the EU economy between 50 billion and 100 billion euros in lost output, according to calculations by Bloomberg Economics.” That is the upshot of this article, which goes on to argue that losing another tourist season in 2021 would be hugely damaging to the EU economy, likely putting the upturn in European stocks at risk. While we don’t downplay the economic effects of a delayed reopening, which are real, this is the most widely watched issue in Europe, judging from recent headline flow. Efficient markets reflect matters of widespread concern almost immediately, limiting their surprise power over stocks. We saw this in droves last year: After the shock of the lockdowns wore off, virus trends, renewed restrictions, fading and renewed stimulus all came and went with little identifiable impact on markets. Reminder: If everyone is watching something, you probably ought to look elsewhere. For more, see Ken Fisher’s 3/1/2021 column on RealClearMarkets, “How to Know What Everyone Else Is Sweating So You Don’t Have to.”
MarketMinder’s View: Tuesday, Brazilian Supreme Court Justice Edson Fachin overturned former President Luis Inácio “Lula” da Silva’s conviction on corruption charges, on the grounds the court ruling in the case lacked jurisdiction. There are two key angles to this for investors. One, Lula remains a very popular politician on the left in Brazil. As this article notes, he is actually polling ahead of the current president, Jair Bolsonaro, before 2022’s election campaign. Many speculate he would have defeated Bolsonaro had he not been in jail during 2018’s vote. Politicking already seems underway, with Lula’s backers claiming this vindicates him from the charges, which stemmed from a sweeping investigation known as Operation Car Wash that implicated many in the country’s political elite. Now, that is premature, considering the case could be heard once again, although as this article notes, it seems unlikely this would prevent him from running next year. The second angle for investors: This casts the anti-corruption push into doubt, a negative for a country in need of reform. Perhaps this is an isolated case and won’t prove overly worrying, but it is worth watching.
MarketMinder’s View: First, a disclaimer: This piece mentions numerous individual companies. Please note that MarketMinder doesn’t make individual security recommendations and we are highlighting this solely to address a higher-level theme. That theme: The article draws a parallel between the current fervor for special-purpose acquisition companies, “meme” stocks hyped on social media and electric car makers to 2000’s dot-com bubble, claiming that spells trouble for Tech and markets generally in 2021. While we agree the areas highlighted here are pockets of euphoria, they are exceedingly small and limited in scope. The 2000 bubble, by contrast, was widespread—as the discussion of firms included here actually implies. 2000’s bubble also followed years of rising sentiment and optimism, which gradually morphed into the euphoria that blinded investors to the inverted yield curve and signs of trouble ahead. We aren’t there yet, in our view. Euphoria isn’t widespread and there is enough skepticism remaining that articles like this are commonplace, not contrarian. There also, crucially, doesn’t seem to be a lurking negative punch-drunk investors are dismissing. Euphoria alone isn’t the risk. It is what euphoria makes you miss.
MarketMinder’s View: “Hedge funds and other institutional investors are paying an annual rate of as much as 4% to borrow the most-recent issue of the 10-year U.S. Treasury note in the market for repurchase agreements, or repos. These hedge funds and others want to borrow and sell the bonds now in a wager that they can buy them back later for less, as rising U.S. rates push bond prices lower.” This is one indication of just how widespread expectations are of rising rates, which very often means investors in efficient markets like the Treasury market have already acted on them. When expectations and opinions are very one-sided—as they are now—it serves investors to look elsewhere. For more, see our 3/9/2021 commentary, “Interest Rates’ Spike and a Lesson in Market Efficiency.”
MarketMinder’s View: China’s CSI 300 Index has now erased its year-to-date gains end breached -10% from its most recent high (when measured in Chinese yuan), entering correction territory. This piece cites a host of potential reasons why, with most centered on policy announcements at the rubber-stamp Parliament’s annual meeting, including lower-than-expected GDP growth targets and an apparent focus on reining in asset bubbles. That probably did pinch sentiment somewhat, although the volatility predated the legislative session by a few weeks. To us, that illustrates a timeless point: Volatility and corrections can strike without warning, for any or no apparent reason. The key question for investors who own mainland Chinese companies, in our view, is whether forward-looking fundamentals have actually deteriorated or sentiment has gotten too hot relative to reality—and in our opinion, the answer is no. Nothing announced over the weekend represents a shift from the long-running status quo, and pullbacks like this can help reset sentiment. They are a normal and healthy part of any bull market, and the key to navigating one successfully is staying cool and not making knee-jerk reactions.
MarketMinder’s View: We think there are plenty of reasons to be bullish on stocks, but this isn’t one of them. For one, retail investors’ enthusiasm for stocks is well known, and to the extent people actually follow through on what they tell surveyors, it would just extend a longer-running trend. That trend has been discussed to death and lacks positive surprise power at this point. Two, the notion of an “inflow into the market of $170 billion,” which this piece implies is some hugely positive force for returns, is a misnomer. Even if retail investors buy $170 billion worth of stocks with their “stimulus” checks, that means other investors are selling $170 billion worth of stocks to them. Money going in and out always sums to zero. What matters is the relative eagerness of buyers and sellers in an auction marketplace, and fund flows tell you nothing about that.
MarketMinder’s View: This look at one financial services company’s global investing yearbook makes a number of interesting observations about historical returns, which the report purports to calculate back to 1900 in developed and developing markets alike. In our view, it is an overall mixed bag. On the plus side, it makes the salient observation that not all Emerging Markets (EM) are automatic winners: “Very few emerging markets actually emerge. In fact, the failure to do so is one rather cynical definition of what constitutes an emerging market. Some go the other way: a hundred years ago, Argentina and Chile were both considered to be developed markets. Greece was given developed status in 2001 but has since been demoted. There were established stock markets in Brazil, India and Mexico in the 19th century but they have failed to follow the likes of Hong Kong and Singapore out of the waiting room.” But the broader thrust of this piece undermines that keen insight, as it seems based on the notion that EM returns overall are inherently superior to their developed counterparts always and forever, with only one-time catastrophes like the communist destruction of China’s stock market in 1949 to blame for the category’s long-term underperformance. We think this paints with too broad of brush strokes and gives too much credence to reconstructed past returns, especially when the vast majority of international investors couldn’t access developing markets until the late 1980s or so. Returns that you can’t earn don’t do much good. In our view, no category is inherently superior. Sometimes EMs will lead (with a wide variance among individual countries), and sometimes developed markets will. A broad look at reconstructed past performance won’t tell you when that will happen, as markets are forward-looking. Finally, as the piece hints at late, EMs’ rising accessibility and popularity is making them trade more and more like developed-world stocks.
MarketMinder’s View: COVID restrictions in Tokyo and surrounding areas—which generate about 30% of Japanese GDP—are set to last an additional two weeks, shaving another ¥700 billion ($6.4 billion) off consumer spending. That is the latest forecast from one research outlet, which estimates the extension will cut expected GDP growth by 1.12 percentage points—up from 0.99. As with all such forecasts, it is impossible to know whether this will prove too gloomy, overly optimistic or spot-on. But projections like this help drain whatever surprise power lockdown-related economic weakness had left, which is what enables markets to move on and price in the better future likely lying further ahead.
MarketMinder’s View: US employers added 379,000 jobs in February, trouncing expectations of 182,000. Positively, the hard-hit hospitality sector contributed to most of the growth: “Restaurants and bars hired 286,000 workers last month, accounting for 75% of the payrolls gain. There were also increases in employment at hotels and motels and at amusements, gambling and recreation establishments. Altogether, leisure and hospitality employment jumped by 355,000 jobs.” We don’t downplay news that reflects a reopening economy and people finding work, but from an investing perspective, labor data are late-lagging economic indicators—old news for stocks. We think markets are already looking ahead to a vaccinated world and the return of economic normalcy. However, while this article’s tone is generally optimistic, the latter half also spills a bunch of pixels suggesting a recovery will take a long while—a sign sentiment isn’t uniformly euphoric today. For more perspective on what jobs reports can say about sentiment, see our January 12 commentary, “What Reactions to the Jobs Report Say About Sentiment.”
MarketMinder’s View: The titular “savings account” refers to an arrangement in which, “… an online trading or lending firm will borrow your cryptocurrency and then, in turn, lend it to hedge funds or other investors and traders. You will earn, as interest, a portion of whatever those borrowers pay your broker.” This piece explores the issues an interested investor should consider, as these arrangements carry risks, too: “In plain English, if your bitcoin brokerage goes bust, you could end up standing near the end of the line in bankruptcy court. ‘The yields are coming from real counterparty risk,’ says Ari Paul, chief investment officer at BlockTower Capital, a digital-asset management firm. By lending your virtual assets to a brokerage, you’re effectively ‘investing in the debt of a startup,’ he says. A single-digit yield may be too low to compensate for that risk.” Beyond the reminders of the drawbacks of investing in cryptocurrencies, this also provides another example of the perils of yield chasing. It is critical to have proper expectations of what savings accounts yield today. Options that purport to offer higher returns likely come with higher risks, as is the case here. For those wondering how to generate income in today’s environment, check out our 10/7/2020 commentary, “A Mindset Shift for a Low-Yield World.”
MarketMinder’s View: At first blush, the initial data cited here suggest UK trade with major eurozone economies is suffering in a post-Brexit world. “French exports to the UK were down 13 per cent in January compared with the average of the previous six months, while French imports from the UK fell 20 per cent, according to the French customs office. ‘Trade with Britain is disputed due to Brexit,’ it said.” The article notes German (-30% y/y) and Italian (-38% y/y) exports to the UK were down as well. However, the second half of this piece raises a couple sensible points, in our view. As some of the economists quoted here note, Brexit’s role in these declines is unclear, considering the likely huge influence of COVID-19 lockdowns. Moreover, “Before the UK left the EU single market at the end of last year, many UK and EU companies had built up their inventories in preparation for higher costs and disruption from Brexit, which may have contributed to the fall in January as they drew down their stocks, [French insurer Axa’s chief economist Gilles] Moec added. ‘There were so many stories about companies that had trouble exporting or importing after Brexit and a lot of hauliers were reluctant to deal with the customs issues, so there must have been an impact,’ he said, adding that it was ‘still too early’ to say how much of the drop in trade with the UK would be permanent.” We agree—it is premature to declare UK-EU trade in irreversible decline. Some short-term post-Brexit bumps were inevitable, and we have faith businesses on both sides of the Channel will find ways to adapt, as last we checked, Brexit didn’t banish the profit motive.
MarketMinder’s View: Please note, MarketMinder’s analysis is politically agnostic by design. Stocks don’t favor one political party over another, and we caution investors against presuming one type of political ideology is inherently good or bad for markets. This article focuses on UK politics. Much of it is a speculative discussion of the impact of Chancellor Rishi Sunak’s Budget. We suggest setting that all aside. Rather, this highlights another theme. Specifically: Investors’ biases about political parties’ ideologies often don’t match reality. “Sunak’s Budget leaves the overall tax take heading for its highest share of gross domestic product since the 1960s. How un-Tory. Or is it? It is said that Conservatives endure in office because they are pragmatic rather than ideological, adapting to suit the times. When it comes to fiscal policy, leaders may proclaim versions of George HW Bush’s ‘read my lips, no new taxes’, but don’t always follow through. Margaret Thatcher’s first Budget is remembered for cutting the top rate of income tax from 83 per cent to 60 per cent. But less so for the simultaneous VAT rise by 7 per cent, which helped to balance the public finances.” We would adjust one part of that slightly—politicians, whether they be Conservative or Republican, Labour or Democrat, will adapt their policies to attain their primary objective: re-election. Stocks recognize this reality, which is why they focus on policy, not personality—an important point for investors to keep in mind, too. For more, see yesterday’s commentary, “The UK Gets All ‘Austere.’ Again.”
MarketMinder’s View: While this piece focuses on UK deficits and debt, it commits a fallacy we see repeatedly in coverage of US debt. Now, we agree with the first half’s general assertion that people have probably “exaggerated the difficulties of getting the deficit down to zero,” as last year’s deficit spike came from COVID relief measures. The deficit-to-GDP ratio also includes skew from UK GDP’s lockdown-induced -9.9% decline last year. An economic recovery, combined with the end of emergency relief, would go a long, long way toward getting the deficit down to sustainable levels. Plus, the current government has large longer-term public investment plans, making deficits in the next few years more of a political choice than anything else. We aren’t here to pass judgment and are strictly neutral in all things political, but the UK’s national balance sheet is overall healthy enough that borrowing at today’s rock-bottom rates in hopes of generating wider-spread growth and a broader tax base years from now at least makes basic economic sense. But the second half, in our view, largely veers from sensible territory by focusing only on the numerator in the debt-to-GDP ratio. In doing so, it ignores the main way the UK reduced its big debt mountain after the Napoleonic Wars: astounding GDP growth courtesy of the first and second industrial revolutions. Solid growth post-WWII and the second half of the 20th century similarly chipped away at the country’s huge mid-20th century debt burden. That all bodes well for today, especially with—as the article points out—debt service costs far, far below tax revenues. The article mulls over the possibility of these costs skyrocketing, but the average maturity on UK debt is 14.8 years, according to the Debt Management Office’s latest report. Presently, the Treasury is refinancing this debt at a steep discount. So for interest costs to soar, interest rates would probably have to soar and stay there, making this potential outcome far beyond the 3 – 30 month window markets generally look to. Always remember markets move on probabilities, not possibilities. For more, see today’s commentary, “The UK Gets All ‘Austere.’ Again.”
MarketMinder’s View: Most observers pointed to Fed head Jerome Powell’s comments highlighted herein as the cause for Thursday’s market volatility, but realistically, nothing here is a surprise. The Fed head’s comments are rooted in well-known math. This is what Fed Chair Jerome Powell said: “‘We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects. … That could create some upward pressure on prices.’” Base effects are jargon for the level you use to calculate the year-over-year change. The “base” is the denominator in that calculation. Prices fell temporarily during last year’s lockdown-induced economic contraction. As those levels enter the year-over-year calculation, they reduce the denominator, skewing the inflation rate higher even if prices don’t increase much in absolute terms in a given month. Once that math works its way through the system and the denominator becomes higher, the inflation rate slows back down. This has been well known for months now. So the stated intent to hold off on interest rate hikes when this happens seems sensible enough to us—a math quirk is different from a broad and lasting rise in prices across the economy. Not that Fed moves are predictable or monumental for markets, but it underscores our belief that volatility today is a sentiment-fueled overreaction.
MarketMinder’s View: The tariffs in question were part of a tit-for-tat trade battle between the US and EU over subsidies to each side’s giant aerospace company. After Brexit, the UK was technically no longer party to that dispute and dropped its punitive tariffs, and now the US is following suit. In the grand scheme of things, these tariffs were small and probably won’t be a huge boon for exports, investment or growth on either side. But the symbolism in the US’s decision is interesting. On the campaign trail, now-President Joe Biden had tough words about the UK’s legislation implementing its post-Brexit trade with the EU and the complicated customs procedures surrounding Northern Ireland, saying anything that risked violating 1998’s Good Friday peace accords on the island of Ireland would make his administration decline to pursue a free-trade deal with a post-Brexit Britain. But this tariff decision suggests that rhetoric is behind us, which might bode well for a trade deal bringing investors a positive surprise. Keep an eye out here.
MarketMinder’s View: Remember when people feared a weak dollar spelled trouble for US stocks and the economic recovery? That was only a few months ago, and the dollar was stronger then than it is now, measured against a trade-weighted major currency basket. In our experience, people fear the dollar whether it is weakening, strengthening or just holding steady, with no consistency. In reality, neither a strong nor weak dollar is inherently good or bad for stocks or the economy. The dollar was all over the map during the 11-year bull market from March 2009 – February 2020, with no obvious impact on exports, imports or market returns. We think people are just reading way too much into a very short-term wiggle, which we see mostly as a sign pockets of skepticism remain, keeping sentiment short of euphoria for now.