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: The shine is pretty clearly off special-purpose acquisition companies (SPACs). After they dominated initial public offerings early this year, the market for these blank-check firms that go public solely to raise cash and acquire a private business has cooled dramatically. “Only five SPACs priced their shares for a public-market debut in August, followed by a single one thus far in September, FactSet figures show. This compares with a peak of 141 in February.” That part of this article is sensible, as it documents how even the isolated, faddish froth that existed early this year has retreated. But the balance of this piece argues investors should now dive in, because of SPACs’ curious structure, which could offer arbitrage opportunities. You see, SPACs are required to either complete a merger or return investors’ cash plus some rate of interest (median: 2.4%, per the piece) within a predetermined period. It argues this makes them “an almost riskless bet that the market will once again get excited about [SPACs].” We disagree. For one, SPACs could acquire a business and then tank, even if it is in a “hot” area. Hence the higher yield than cash or investment-grade bonds. Go ask electric vehicle startup investors, which have seen exactly that outcome multiple times. Two, there is opportunity cost. Any cash you plow into a SPAC that sits on it for months and months (or even a year or more) is cash you haven’t invested elsewhere.
MarketMinder’s View: After lagging badly this year to date, Japanese stocks have soared in the past two weeks, with the MSCI Japan rising 11.2% versus the world’s 1.6%. (Source: FactSet.) This piece, citing the fatally flawed, price-weighted Nikkei 225, celebrates that outperformance and projects it forward. It cites allegedly bullish factors like structural changes to the Nikkei’s makeup that will add several big-cap names and help lure more foreign investor cash; improved vaccination rates; and unpopular Prime Minister Yoshihide Suga’s announcing he won’t seek re-election later this month as Liberal Democratic Party head, ushering in a new leader who may grant the ruling party more stability. Folks, index changes aren’t market drivers and are widely known near-immediately. Foreign investor cash? For every buyer there is a seller, and their nationality isn’t relevant. Vaccination rates may matter on the margin, to the extent they encourage a government to lift lockdowns, but if you look worldwide, America is far outperforming the world this year to date—a fact that has persisted even as regions like Europe caught up to and eventually surpassed the US in vaccination rates. There just isn’t a direct connection between COVID stats and market returns—and hasn’t been since the very early days of the pandemic, and that faded fast. As for politics? When Shinzō Abe took the PM post in 2012, reform-and-stimulus optimism boosted returns for a few months. Then outperformance melted away. Same thing happened last year, when Abe resigned and Suga took office. Now looks very similar, and we strongly doubt Japanese outperformance is more lasting now than the last two times a new PM took office.
MarketMinder’s View: This has some politics in it, so please remember MarketMinder favors neither any party nor any politician, assessing developments solely for their potential effects on markets, economies and personal finance. Across Europe, electricity prices are up big. According to Spain’s National Statistics Institute, Spanish consumers’ electricity bills jumped by 7.8% m/m in August and are up 34.9% y/y—a huge spike no matter how you slice it. Behind the rise? A lack of wind to generate power from renewable sources (which highlights one challenge of such intermittent sources of power), rising carbon offset costs that utilities are passing on to consumers and high natural gas prices tied to big demand. This piece details those causes and notes the Spanish government’s response. There is some good, some neutral and some bad in that response, in our view. The good: The government sensibly saw that having consumers pay a 5.11% tax on electricity consumption boosts costs. It cut this to 0.5%, which actually should help lower bills some, assuming it passes. It has already reduced the VAT from 21% to 10% on the same. The neutral: Plans to promote clean energy, which will have next to no effect on prices in the here and now. The bad? It wants to cap some utilities’ profits—gas, nuclear and hydro plants—and redirect them to consumers, in a yet-to-be-determined strategy. Such measures discourage investment in generation and supply in an already heavily regulated market, which raises the specter of shortages and high prices ahead. Look, these factors are pretty small, in our view, and don’t really call for significant government action. But interfering with prices and profits is generally popular-yet-shortsighted policy. That applies to the profit caps in Spain’s plan presently—and it may add uncertainty to Spain’s large Utilities sector, which is already underperforming this year markedly.
MarketMinder’s View: As we noted recently, the Social Security Administration’s latest report on the program’s finances claims it won’t have sufficient funding to pay full benefits as soon as 2034, a long-range projection rekindling decades-old worries about its solvency. We question those forecasts, as noted here, and pointed out that Congress can easily fix this. This article details five options to bolster the program. One of them is very likely unconstitutional (a wealth tax), but the remainder are pretty benign and range from ensuring self-employed people (especially gig workers) pay into the program to changing the fund’s long-term investment strategy. We will add some others: Benefit ages could shift, as they have multiple times, and the cost-of-living adjustment’s calculation method could change. There are more. Point being: As much as people seem to think this program is on a one-way trip to the trash heap, there are myriad relatively painless choices that could preserve it far longer than most think.
MarketMinder’s View: With the race to replace outgoing Japanese Prime Minister Yoshihide Suga underway, foreign investors are evidently getting more and more bullish, citing falling political uncertainty, the potential for big fiscal stimulus and economic reforms, Japanese stocks’ low valuations and the country’s recent vaccine progress. Sharp inflows in the week ending September 3 “put 2021 on course to be the best year of buying of cash equities by foreign investors since 2013, when foreign interest surged in former Prime Minister Shinzo Abe’s Abenomics program. It would also be the first year of net purchases by foreigners since 2017, data from Japan Exchange Group show.” This piece argues those inflows are another big reason to be bullish, which we have our doubts about. Yes, Japan outperformed the MSCI World Index by a smidge in 2013 and 2017, but it underperformed by almost 30 percentage points during the entirety of the Abenomics era (Source: FactSet). Moreover, for every buyer there is a seller, stocks don’t care whether demand comes from international or domestic investors, and foreign investment flows are widely known—therefore, likely priced in. As for the country’s political fundamentals, MarketMinder favors no politician or party and assesses political developments solely for their potential market impact. To that end, we agree falling uncertainty is likely a near-term tailwind, but that too is widely known now. Beyond that, the notion of a new administration bringing big reforms seems overly optimistic. Abe had more political capital than any Japanese prime minister since Junichiro Koizumi in the early 2000s, yet he couldn’t push through meaningful reforms to Japan’s labor code or the cross-shareholding among conglomerates that has stifled competition. Thus far, none of the candidates to succeed Suga have anything near Abe’s popularity, making it difficult to envision a new administration having success where he didn’t. There is also the risk Japan’s infamous revolving door (eight different prime ministers from 2006 – 2012) is returning. With expectations for domestically focused Japanese companies potentially running too hot, we think investors remain better off focusing on the larger multinationals that don’t depend as much on domestic demand.
MarketMinder’s View: This piece argues that while the eurozone’s economy is enjoying a boom from reopening and pent-up demand for now, the titular “sweet spot” doesn’t look lasting. Supply chain bottlenecks, COVID variants and slowing demand in the US and China raise the risk of a sharp slowdown, it claims. In our view, all are likely overstated as economic risks. Supply chain issues hamper manufacturing, but the vast majority of the eurozone economy is services. The government response to the virus, not the virus itself, is the main source of negative economic impact—and in Europe, most governments are veering from lockdowns to learning to live with the virus. As for slowing growth in China and the US, that doesn’t point to weakness—rather, it shows these economies returning to normal as lockdown-related distortions even out. The eurozone’s reopening process is running behind those countries, which we think explains its faster Q2 growth—it was only just enjoying the initial unleashing of pent-up demand. That was always likely to cool off after a few months as economies returned to normal and the novelty of being able to dine out and shop in person again wore off. This is likely just fine for global stocks, in our view, and it points further to growth leading value. For more on that, see our 9/3/2021 commentary, “Your Handy Primer on Value and Growth.”
MarketMinder’s View: This piece spends most of its energy using individual companies to make the case that markets are drunk on euphoria, so we remind you MarketMinder doesn’t make individual security recommendations. Our interest here is in the final third, which argues Fed policy and the negative real yields it created have inflated a bubble along the lines of Japan in the 1980s, with the massive runs in “meme” stocks, digital assets and certain companies being the evidence of irrational exuberance. When the music stops and the selling starts, it argues, the crash will be epic. Look, we agree there are pockets of froth, but we have already seen what happens when bubbly niches of the market crash. Bitcoin and special-purpose acquisition companies (SPACs)—which had big spikes early this year—crashed hard in Q2. The broader market kept rising. Why? Because euphoria is confined to those niches, not spread across markets. Far from spurring excessive risk-taking, Fed policy has flattened the yield curve, weighing on lending and growth overall. Ending bond purchases would let the yield curve steepen, which is the opposite of pulling the punch bowl. That skepticism over tapering asset purchases abounds suggests to us the probability of positive surprise is high.
MarketMinder’s View: This piece explores the disagreements erupting among eurozone member-states about COVID relief spending, echoing the philosophical and fiscal differences that reigned during the eurozone debt crisis a decade ago. As OECD analysts explained: “‘Some regions have been more affected by the pandemic than others. For example, Southern EU economies, partly due to their higher reliance on tourism and on very small firms, have recorded the largest GDP falls in 2020.’ Meanwhile Germany suffered only a relatively small recession and borrowed only modestly. This raises the prospect of those countries which struggled with debts and a poor recovery after the financial crisis - such as Greece, Italy and Spain - requiring more resources from northern economies, despite only mixed progress in cleaning up their finances after the credit crunch.” In short, while Greece, Italy, Spain and other Southern European nations made great strides toward getting debt in order after the crisis, the eurozone’s structural issues remain. In our view, that isn’t really inherently good or bad—it just is. We have long cautioned readers that the underlying issues weren’t an easy fix and would probably linger in the background for years, becoming part of the structural backdrop, and that has happened. But structural issues are generally old news to stocks, which care more about cyclical factors over the next 3 – 30 months. In our view, those point positively in the eurozone (and globally), as recoveries there don’t depend on fiscal stimulus anyway. Gridlock may annoy those who hope for more reforms in certain nations, but it also means reforms undertaken over the past 10 years likely can’t get repealed—a status quo stocks have already demonstrated they are fine with. Overall, we see stories like this as part of the proverbial wall of worry stocks climb.
MarketMinder’s View: First, please remember MarketMinder favors no political party nor any politician, assessing developments for their potential market and personal finance effects. Citing the fact corporations “could approach, or even surpass” 2018’s record $806 billion in share buybacks, a couple of Democratic senators on the Senate Finance Committee are pitching legislation that would charge corporations a 2% excise tax on the value of shares repurchased in a given year. The theory being, buybacks like these detract from R&D spending, capital expenditures, expansion, hiring and wage bumps—all while pushing share prices up and enriching executives. The evidence for this, in our view, is lacking, considering 2018’s record coincided with trillions of dollars in rising investment and ultralow unemployment. But that is neither here nor there. For markets, there are two factors worth weighing: One, this legislation is a far cry from passing now and, like virtually any tax measure today, faces a difficult path to passage given the Democratic Party’s slim Congressional margins, the GOP’s categorical opposition and looming midterm elections. Two, even if it does pass, it is worth remembering: While buybacks are a structurally bullish force reducing equity supply, they are neither required for markets to rise nor assured to have that effect. Myriad factors affect markets’ movement. For just a few examples, consider: earnings results versus expectations, expected economic activity, political developments or monetary policy decisions—any and all of these can impact stocks concurrently. Need more evidence that forces at work are larger than buybacks? That 2018 record came in a year US stocks fell by -4.4%. (Source: FactSet.)
MarketMinder’s View: This article documents Cleveland Fed President Loretta Mester’s argument that, “… the Fed should determine a list of indicators that it will follow ‘systematically’ over time.” Additionally, among the things Mester thinks central bankers “… need to clarify is what timeframe and what metrics they will use to determine if inflation is averaging 2%, in line with the central bank’s target.” In doing so, this article highlights a point we have made here often: Though the Fed claims to be “data dependent” and professes to weigh incoming figures in a quasi-scientific, dispassionate way, the fact is which data they emphasize and how they view those data is unclear and subject to bias. So the next time you see financial pundits dissecting an economic statistic (e.g., unemployment data, inflation rates, job openings and more) and trying to divine what it means for Fed policy, remember this piece. Remember that a person who will set monetary policy next year just told you there is no fixed list of indicators the Fed is watching. They haven’t even defined how they will know they have hit their newfangled inflation non-target. If the Fed itself hasn’t determined those factors, how can pundits forecast the bank’s decisions?
MarketMinder’s View: UK GDP rose 0.1% m/m in July, good for the nation’s sixth straight month of growth, though the findings were a mixed bag. As the article notes, “… the main contributor to growth was a 1.2% rise in production output, boosted by the reopening of an oil field production site, which was previously temporarily closed for planned maintenance.” Services—which comprise the lion’s share of UK GDP—saw flat output in July despite COVID restrictions easing to varying degrees in England, Scotland and Wales. Most pundits focused on the slowdown from June’s 1.0% m/m, worrying about a stalling recovery due to supply chain bottlenecks and the recent upsurge in COVID cases discouraging household spending. We agree these headwinds may be weighing on output to an extent, but we caution investors against reading too much into a monthly dataset—and especially against extrapolating one month of data into the future. Consider, as one economist raised here, that the England football team’s run to the Euro 2020 tournament final “… had boosted growth in June, leading to ‘a bit of fall-back’ in July.” More broadly, slower GDP growth seemed likely following a reopening-related pop to us, as lasting “boom” talk always appeared misplaced to us. Slower economic growth isn’t an issue for markets, either. These factors are well-known, limiting the shock factor. From an investing perspective, a slow-growth environment tends to favor growth stocks over value-oriented shares.
MarketMinder’s View: Here is an example of 50 “leading economists” committing the very error we critiqued today in commenting on a Reuters article. The titular prediction is based on a Financial Times/Initiative on Global Markets at the University of Chicago Booth School of Business survey. Per this piece, “Just over 70 per cent of respondents believe the Fed will raise rates by at least a quarter of a percentage point in 2022, with almost 20 percent expecting the move to come in the first six months of the year. That is far earlier than the 2023 lift-off from today’s near-zero levels that Fed officials pencilled in back in June. … According to the economists, the inflation rate may be high enough to compel the Fed to short-change its goal of maximum employment and instead raise interest rates before the US labour market has fully healed.” Do these experts know something central bankers don’t? Perhaps—we subscribe to the notion you can learn something from everyone—but in terms of forecasting future monetary policy, the leading economists aren’t likely to be any more prescient than monetary officials. Look at it this way: How could someone else divine how a regularly changing cohort of policymakers act? That said, we do think these types of findings give forward-looking markets more information to digest. Public discussions sap surprise power—we saw it happen with Fed taper talk this year already, and we wouldn’t be shocked if initial rate hike chatter tracks a similar course.
MarketMinder’s View: While we agree with the high-level point here that stocks produce the long-term returns necessary for growth-oriented investors, we aren’t advocating for the seemingly “perma-bull” position here—i.e., that stocks will inevitably rise, so the best course of action is to buy and hold. We think this vastly oversimplifies reality. For one, stocks cycle from bull market to bear market, and if you can identify the latter early enough in its lifespan, taking action to sidestep some of the decline and re-enter at lower levels can be beneficial, in our view. But two, we think this argument glosses over a critical discipline to successful long-term investing: the ability to admit you are wrong. The titular forecast, made in 1999, was based on a five-year timeframe. Yet as of today, September 9, the Dow Jones Industrial Average has yet to eclipse that 36,000 level (though it is close). If a five-year forecast takes over two decades to come true, we humbly suggest that forecast is wrong. Always remember: Any market forecast should have a timeframe attached. Rather than scrounge for reasons to make it correct, we think investors are better served analyzing why an outlook was wrong and applying those lessons to the future. Note, this isn’t a criticism of any specific forecast—no investor, legend or amateur, is right all the time. However, in our experience, successful investors don’t distort reality—they shun pride and accumulate regret instead.
MarketMinder’s View: According to this article, the Delta variant has only delayed the reopening trade—i.e., stocks that benefit most from the end of COVID restrictions, most of which are value-oriented—for an undetermined amount of time. Optimistic projections envision things getting better by October; pessimistic estimates posit a full reopening won’t happen until early 2022. Because of that uncertainty, “… many investors might prefer to wait until they have a bit more confidence in their forecasts before rushing back into reopening bets. Especially since those bets cost more than they used to. … The good news that is coming eventually might not be fully priced into reopening plays yet. But markets probably need to see at least a few better signs emerge before investors start betting on a return to normal, again.” We see things a bit differently: The reopening trade was part of a value-led countertrend, bolstered by vaccine-driven positive sentiment late last year. However, in our view, that reopening rally was more short term than the start of a longer, value-led bull market run. After the initial reopening pop, the return to slower economic growth—and growth-stock leadership—seemed likely to us. Markets have been acting that way since mid-May. Possible occasional countertrends notwithstanding, we expect growth and growth-like companies to lead for the rest of this bull market—helpful for investors to note when “reopening trade” chatter arises like here.
MarketMinder’s View: The ECB’s Governing Council announced today it will slow bond purchases under its emergency quantitative easing (QE) program for the rest of the year from the current €80 billion monthly pace to an undetermined “moderately lower” rate. Many pundits debated whether this adjustment constituted a taper. ECB President Christine Lagarde insisted otherwise, stating, “The lady isn’t tapering,” and stressed the ECB wasn’t planning to end its asset-purchasing program—rather, the decision was merely a “recalibrating.” That is nice, but this is a taper. The ECB’s balance sheet will grow more slowly, citing improved economic conditions. Lagarde seems to be taking a page out of her predecessor Mario Draghi’s playbook, for the ECB pulled a similar semantics stunt back in December 2016. But the non-taper taper didn’t upset the eurozone economy or markets in 2017, and we don’t think today’s non-taper taper will today, either. While this piece suggests concerns of rising prices and COVID-related uncertainty may threaten the recovery—requiring ongoing “accommodative” monetary policy—QE isn’t stimulus. Moreover, central banks can do little to address economic headwinds related to supply chain bottlenecks or COVID restrictions. In our view, this is yet another example of overrating central bankers’ abilities to impact the economy—a fallacy we suggest investors avoid.
MarketMinder’s View: Please note, MarketMinder is nonpartisan and doesn’t favor any party or politician globally. Our analysis here serves only to assess political developments’ potential market impact, if any. Four months ago headlines worried the Scottish National Party’s (SNP) winning the Scottish Parliamentary vote paved the way for an inevitable independence referendum. At the time we thought such chatter was premature—the process was more likely to be long and grinding than quick and clean. Fast forward to today and the upcoming SNP’s autumn conference, detailed here. Grumblings are building within the SNP about First Minister Nicola Sturgeon’s ability (and willingness) to hold a referendum by her stated goal of 2023’s close. “A senior SNP politician said the agenda sent out this week did not include a drafted resolution included in a previous draft agenda that called for the creation of an expert commission on how to manage an independent Scotland’s border with the remainder of the UK and other partners. … The only mentions of a referendum in the conference agenda sent out this week come in resolutions supporting Sturgeon’s pledge not to hold one until the coronavirus pandemic is over and backing ‘development of a campaign’.” Note, too, the extensive legal processes involved before a referendum happens: Sturgeon has to put legislation to the Scottish Parliament, and the UK government has argued its approval is necessary for an independence vote—to say nothing of the potential court challenges. Then voters would have to approve it, a reversal from 2014. That may be possible, but polls cited herein suggest it is a dead heat. In our view, Scotland’s political developments offer a useful reminder for investors: Don’t extrapolate the final results into definitive action. Even when a party has a majority, the legislative process in developed economies isn’t always smooth sailing.
MarketMinder’s View: Predictably, banks’ profit boom from last year doesn’t appear to have lasted. As this short article sums up: “U.S. bank profits fell 8.3% to $70.4 billion in the second quarter of 2021 as firms slowed their reductions in credit loss provisions, the Federal Deposit Insurance Corporation reported on Wednesday. While profits were still significantly higher than they were a year ago -- up 281% from the second quarter of 2020 -- banks slowed the rate at which they shrank the large cushions they built up at the height of the coronavirus pandemic.” We bring this up because banks make up the bulk of Financials—a value-oriented sector many touted this year thanks to surging earnings. But temporary one-offs—like banks’ release of loan-loss reserves—aren’t a good basis for investment decisions, in our view. Rather, we think investors are better served focusing on longer-running fundamental drivers, such as banks’ loan profitability. Here the picture doesn’t look quite as bright: “The regulator also reported that average net interest margin for banks hit a new record low of 2.5%.” For more on why we don’t think Financials—and value stocks—are likely to lead, please see our 4/16/2021 commentary, “Don’t Buy Big Banks’ Q1 Earnings Bounce.”
MarketMinder’s View: Divining sentiment is more art than science, in our view, but if recent Wall Street warnings are any indication, investors’ moods appear to be dimming for a variety of reasons: “The spreading delta virus strain, a flagging global growth recovery or moves by central banks to exit pandemic-era stimulus programs all pose risks.” These and other fears (e.g., high valuations and September seasonality) have some strategists underweighting equities. Should you, too? We take a different view. Sure, volatility or a correction (a short, sharp sentiment-driven dip of about -10% to -20%) could always hit, and we think it is sensible for investors to mentally brace for future bounciness. But changing your portfolio’s asset allocation in reaction to alarming headlines can be an even greater risk. Short-term wobbles are normal during bull markets, and sitting out those periods of generally rising stock prices could set you back from your financial goals. Moreover, markets move most on surprise. All the rehashed (and erroneous) reasons listed here don’t qualify; we think stocks have largely priced them in and moved on. We don’t dismiss the possibility of a short-term pullback or dip, but a bear market—a typically lasting, fundamentally driven downturn exceeding -20%—doesn’t look likely to us. As uncomfortable as short-term pullbacks may be, riding them out is wiser than trying to dodge them, in our view.
MarketMinder’s View: While this article doesn’t have a direct market takeaway, we think a couple data points here counter the popular argument that demographics are destiny for the economy or stocks: “In 1979, people aged 65 and older accounted for 3% of the nation’s workforce, representing the smallest contingent. Teenagers aged 16 to 19 years old were the second smallest cohort at 8.2%, according to the CPS data. Forty years later, that trend flipped: 6.6% of the nation’s workforce were those 65-plus, while 3.2% were older teens. Additionally, the 55- to 64-year-old age group’s share increased by 5.5 percentage points to 17.2%, while the 20- to 24-year-old contingent’s share shrunk 6 percentage points to 8.5%.” Older Americans are working longer, which is one way straight-line math predicting demographic doom—e.g., economic stagnation, a retirement crisis, Social Security’s depletion or other aging-population time bombs—is off target. Also, considering how slowly demographic trends play out, little here sways markets—which focus mostly on the next 3 – 30 months. For more, please see our 5/27/2021 commentary, “Why Stocks Shouldn’t Bawl Over a Baby Bust.”
MarketMinder’s View: As we wrote last week, Friday’s August jobs report disappointed many, seemingly suggesting a weaker economy, but that isn’t all pundits are fretting about. It appears August’s wage data are renewing inflation concerns, too: “Average hourly earnings jumped 0.6% for the month, about double what Wall Street had been expecting, and the increase from a year ago stood at a robust 4.3%, up from a 4% rise a month ago. Even leisure and hospitality, which saw zero net job growth in August, saw wages jump 1.3% for the month and 10.3% on the year.” This is sparking speculation the Fed might tighten monetary policy in response. But there are several problems with this thinking, in our view. First, the dreaded wage-price spiral is a myth, as inflation is always and everywhere a monetary phenomenon. Moreover, employers account for inflation when setting wages to compete for workers (who care about their buying power). Prevailing inflation drives wages, not the other way around. In our view, supply shortages explain most price pressures today, and while frustrating, they should ultimately prove temporary. Don’t take our word for it, though—markets are signaling a similar message. Inflation-sensitive Treasury yields have barely budged through the spring and summer as CPI soared. Second, what this means for Fed policy is academic, considering its actions have no preset market reaction. Stepping back, we think the persistence of false fears like this are, somewhat counterintuitively, positive for markets. It suggests sentiment remains far from euphoric, allowing stocks to keep climbing the proverbial wall of worry.