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.


Beware the Crash After Music Investment Boom Hits Its Crescendo

MarketMinder’s View: Song publication rights have become one of the hottest alternative assets in the investment universe, and as this article details, there are some indicators that froth is forming. Private equity shops are splashing billions on legacy artists’ and modern hitmakers’ back catalogues, on the thesis that future streaming revenues will be a permanent moneymaker. After all, if you buy a record or CD, the royalty holder gets a one-time payment. They make the same amount whether you listen once or thousands of times. But on streaming services, they get a tiny bit for every time you play the song. Streaming services “may not pay a fortune every time you listen to a track, but they do pay something, and when you start to multiply all those fractions of a cent by a few billion it turns into a sizeable cheque.” That is a fine enough thesis to own publishing rights, but the question is: Does it justify the premiums catalogues are commanding right now? Or do prices already reflect this, leaving limited upside? This article offers two pieces of evidence supporting the latter. One, the switch from CDs to streaming “is a one-off transition,” and a widely known one at that. Two, “prices are soaring out of control, and rich buyers are bidding up the prices. Every deal is bigger than the last one. Neil Young’s catalogue fetched a reported $150m. Bob Dylan, as smart a manager of his own career as he is a brilliant songwriter, sold his catalogue for $300m because he may well have realised it was far more than it was really worth.” In our view, that last point makes this analogous to IPOs. While people often mistakenly see them as an entry point to big riches, the early investors have incentives to sell at the highest possible price the market will bear. That is why you often see IPO booms near market peaks, as investment banks try to capitalize on euphoria. Jumping on bandwagons isn’t a great investment strategy.

UK Bond Yields Soar as Markets Brace for Interest Rate Rise

MarketMinder’s View: Here is a real-time lesson in markets’ efficiency and tendency to move ahead of widely expected events. In this case, Bank of England (BoE) Governor Andrew Bailey all but told people to expect a rate hike within the next few months. “‘Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,’ Bailey said on Sunday during an online panel discussion organised by the Group of 30 consultative group. ‘And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act,’ he said. ‘But of course that action comes in our monetary policy meetings.’” While markets can move for any or no reason and reading into short-term volatility is mostly a fruitless exercise, we doubt it is a coincidence that UK bond yields rose across a range of maturities on Monday. When markets see a high likelihood of something happening in the foreseeable future, they don’t wait for it to happen—they incorporate it into prices in real time. Now, that isn’t to say that whenever the BoE does hike rates there won’t be further volatility on the day—that isn’t predictable. But it does show surprise power is basically nil at this point. Additionally, for the moment, with long rates rising alongside expectations for a rate hike, the likelihood of said rate hike inverting the yield curve is incrementally lower. While folks always debate the timing and appropriateness of a hike, inverting the curve is the chief potential error to watch for where rate hikes are concerned, in our view.

China Breaks Silence on Evergrande, Says Risks Controllable

MarketMinder’s View: At last, they speak! Evergrande and Chinese officials have been publicly silent on the company’s missed interest payments, leaving investors to hunt for clues of the policy response. Evergrande is still staying mum, but the People’s Bank of China (PBOC) broke its silence today. “Authorities and local governments are resolving the situation based on ‘market-oriented and rule-of-law principles,’ People’s Bank of China official Zou Lan said at a news briefing on Friday. The central bank has asked lenders to keep credit to the real estate sector ‘stable and orderly,’ said Zou, who is head of the financial market department.” He went on to single out Evergrande as a company that made poor decisions and is having to live with them, which basically confirms the government won’t bail it out. At the same time, casting Evergrande as an outlier keeps the door open for the PBOC to keep credit flowing to ensure otherwise solvent developers don’t fall victim to a liquidity crisis, which Zou confirmed is happening. (Separately, the government also reportedly eased measures restricting mortgage lending, which should further support property prices and developers, in turn.) That should help ringfence Evergrande and limit the risk of contagion, which should help ease investors’ fears of a hard landing. Markets already seem to have realized this, but the official confirmation likely helps shore up sentiment. For more, see our 9/20/2021 commentary, “Putting China’s Evergrande Saga in Perspective.”

Biden Presses Climate Agenda on Wall Street

MarketMinder’s View: Before we dive in, let us all set aside our own personal viewpoints about climate change, whether government engineering or free-market ingenuity has a higher likelihood of bringing reduced emissions without hampering economic development in impoverished nations, and even whether the policy changes discussed here will have their intended economic effect. Those debates are all important at a societal level, but markets look past sociology. So let us look at this as markets do and assess the potential unintended consequences for stocks, as we see a few. Not immediate risks, mind you, but areas to watch for unexpected trouble. One area is the SEC’s plan to require more climate-related disclosure in company filings. That may be fine, as disclosure itself isn’t problematic. But if there isn’t a safe harbor from Sarbanes-Oxley restrictions that make balance-sheet reporting errors a criminal offense for executives, it could create many problems. That likely presents a large increase in compliance costs and could further reduce the incentives for smaller companies to go public, compounding the long-term decline in the number of listed companies. Another policy that could invite trouble is adding climate to the Fed’s remit and incorporating it in stress tests, as it could place unnecessary capital burdens on banks, restricting lending and weighing on economic growth. Here, too, Sarbanes-Oxley may motivate banks to be extremely aggressive with climate-related asset writedowns. In extreme circumstances, it risks otherwise healthy banks being treated as bankrupt, which could diminish risk-taking and sow panic in a crisis. There is also the risk that monetary and regulatory policy becomes based on fallacies like the widespread belief that natural disasters are huge economic risks. They aren’t—even Hurricane Katrina, the costliest US disaster on record, didn’t cause GDP to contract. Again, we don’t think any of these are reasons to be bearish now if these rules take effect—and that is a very big if, considering all we have now is a study with policy recommendations. Implementation—how these may be applied—is crucial. We are simply showing that assessing risk requires looking deeper, at potential second- and third-order consequences, and then weighing the probability that those risks actually come true and aren’t already priced in if they do.

Britain’s Age of Austerity Is Far From Over

MarketMinder’s View: We are off-the-charts, amazingly ambivalent about this piece, which has a nice discussion of the UK’s history of high debt and economic growth, rightly observes that last decade’s “austerity” wasn’t very austere, and debunks the notion that “inflating the debt” is a viable solution when governments are stretched too thin. But it also leans too much into decades-long forecasts that appear to use straight-line math to extrapolate conditions far into the future. It also focuses on debt-to-GDP while paying short shrift to the primary determinant of a debt load’s sustainability: the cost of servicing it. So let us take both issues on, briefly. Regarding the first, this is a rehash of long-running concerns about old-age related social safety net spending sapping resources from the productive economy and monopolizing public spending. That leans on long-term, widely known demographic forecasts that could easily be proven wrong by immigration, baby booms, robotics, automation and medical advancements. All of this is unknowable, making it rather useless to dwell on now. Long-term productivity gains that could cause GDP growth to exceed expectations are another entirely feasible wildcard. This is why markets generally don’t look more than about 3 – 30 months ahead. As for the second, the March 2021 Budget projected interest payments in fiscal 2021/2022 to be about 7.7% of tax revenue (excluding national insurance contributions), which is on par with the US and low relative to history. As the article notes, the weighted-average maturity of UK debt is long, at about 14 years. Interest rates remain near historic lows, allowing the government to refinance much of its maturing debt stock at a discount, keeping costs low. For the interest burden to become prohibitive, interest rates would have to skyrocket and stay there for several years for the majority of the debt stock to be subject to much higher rates—and that is after accounting for the 25% of outstanding gilts with inflation-linked payments. In short, while public policy defies prediction, we think it is quite premature to pencil in years of painful austerity.

Rising Rents Are Fueling Inflation, Posing Trouble for the Fed

MarketMinder’s View: There are a lot of interesting nuggets here, and the information presented makes it a worthwhile read. However, we think the argument falls flat. In a nutshell, it claims high rents and home prices drive inflation as they force wages higher, forcing businesses to raise prices so they can afford higher wages, creating a vicious circle known as the wage-price spiral—thus the Fed should act now to contain housing costs. Nobel laureate Milton Friedman debunked the wage-price spiral back in the 1960s, and his logic holds today: When businesses set wages, they factor in inflation, competing on real (inflation-adjusted) wages rather than nominal. So saying wages drive inflation amounts to saying inflation drives inflation, which just doesn’t hold up—prices drive wages, not the other way around. Plus, labor is just one of businesses’ many costs, and there are plenty of other ways to preserve profits without jacking prices up. More broadly though, even if you accept the wage-price spiral and agree housing is the catalyst, what can the Fed realistically do about it? The article suggests rate hikes to cool mortgage lending, which, sure, but if people aren’t buying homes, then it stands to reason they will rent, which drive demand and rents higher—a point the article makes. Ultimately, as the article documents, housing prices are a supply problem, especially in urban areas with onerous construction restrictions that discourage or outright block development. That is outside the Fed’s purview. So again, an interesting read, but we suggest focusing on the information and applying a healthy dose of skepticism to the framing.

Retail Sales Unexpectedly Rise in September as Consumers Keep Spending

MarketMinder’s View: Economic data are backward-looking, so September’s strong retail sales aren’t reason to be bullish. But they are another instance of reality defying rather dour expectations, which is what bull markets are made of. To wit: “The increase came during a month when the government ended the enhanced benefits it had been providing during the Covid-19 pandemic and against forecasts that growth would slow in the third quarter due to the delta variant spread and a perceived pullback in consumer activity.” Now, it is also worth noting that the headline number is a bit deceiving as it isn’t adjusted for inflation. (It doesn’t explain all of the move, considering the US consumer price index rose 0.4% m/m while retail sales rose 0.7%). It also got a boost from rising gas prices, which drove gasoline station sales up 1.8% m/m—adding to the headline number but perhaps detracting from more discretionary categories. Yet sales excluding gas stations were still up nicely at 0.6%, so thus far it appears people are weathering higher fuel prices just fine. We do agree with those who think sales (and economic growth in general) likely slow looking forward—not because of the Delta variant, but because the pent-up demand from lockdowns is largely spent, which points to people returning to pre-pandemic spending habits. But that trend was fine for stocks pre-2020 and should remain so looking forward.

Lower House Dissolved, Paving Way for Oct. 31 General Election

MarketMinder’s View: Ten days after Japanese Prime Minister Fumio Kishida launched his Cabinet, the new premier dissolved the lower house of the Diet, Japan’s parliament, setting the stage for an October 31 general election. Most expect Kishida’s Liberal Democratic Party (LDP) and its coalition partner, Komeito, to win once again, but the party’s goal is rather telling. They are entering the contest with a supermajority in the lower house, yet Kishida’s stated aim is to win a majority. Not another supermajority, but a simple 233 or more of the Diet’s 465 seats. That might be partly because the opposition has consolidated: “For the upcoming election, the [Constitutional Democratic Party of Japan] CDPJ has coordinated with other opposition parties including the Japanese Communist Party and the remainder of the Democratic Party for the People to jointly support a single candidate in more than 200 out of the 289 single-seat constituencies.” If they are successful and cut far into the ruling coalition’s edge, it would likely erode Kishida’s political capital significantly. That could make it even more difficult to pass meaningful legislation—already a challenge, given his stance as a party insider and entrenched political opposition. It could also prompt a turn of Japan’s revolving door sooner rather than later.

Norway to Keep Searching for Oil and Gas, New Centre-Left Government Says

MarketMinder’s View: Please note, MarketMinder is nonpartisan, and we favor no politician nor any political party. Our political commentary focuses solely on the potential economic and market impact. We highlight this story because it offers a timely reminder that a new government doesn’t necessarily mean a sharp departure from the old one, especially in gridlocked nations. In Norway’s general election, the role of the country’s oil and gas industries was a big talking point (Norway is Western Europe’s largest oil and gas producer). The center-left Labour and centrist Centre Party backed continued drilling, though smaller left-wing parties (e.g., the Socialist Left Party) pushed for major change. These three parties won enough seats to displace the incumbent center-right coalition and form a parliamentary majority in September 13’s election. However, government formation talks fell through over policy details, as the Socialist Left wanted to end oil and gas exploration. Now a minority coalition led by Labour and the Centre Party will rule—and, as expected, they aren’t rocking the boat. “Norway will continue to explore for oil and gas in the next four years, with most new drilling permits to come in mature areas of the sea, the incoming centre-left government said on Wednesday. … While climate change was a major issue debated during the campaign for parliament, Labour has said it wants to ensure any transition away from oil and gas, and the jobs it creates, towards green energy is a gradual one.” That, dear reader, is why we focus on policies, not personalities—stocks care about what politicians actually end up doing, not what or how they say it.

‘Make-or-Break Quarter’ on Wall Street as Earnings Roll in

MarketMinder’s View: In our coverage of financial headlines, we see analysts assign myriad causes to what drives stocks, so in that spirit, we award this article half a point for focusing on earnings. Owning a stock entitles you to a share of future profits, so a company’s earnings do matter. However, we must deduct several points since a common misperception underlies the argument: that strong earnings growth is necessary to justify high valuations and keep stocks rising from here .As described here, “When interest rates are rising and super-safe bonds are paying more in interest, investors feel less need to pay such high prices for stocks. They’re now paying about $20.60 for each $1 in earnings per share expected from S&P 500 companies in the coming 12 months. That’s down from a price tag that topped $24 a little more than a year ago. For stock prices to keep rising past their recent peaks, or even just to maintain their current levels, strong corporate earnings growth will have to do more of the lifting.” We agree with the general notion that at some point expectations will get too hot and disappointing reality will force prices—and valuations—to reset. That is generally how bull markets end. But high valuations, on their own, aren’t evidence this is imminent. Plus, mature bull markets can see years of multiple expansion before valuations have their final late-bull-market spike. The 1990s bull market is a prime example. In our view, about the only thing high valuations are evidence of is that this bull market is acting like an extension of the bull market that began way back in 2009—a maturing cycle, not a young one. Chalk that up as yet another reason growth stocks likely continue leading, as they usually do in maturing bull markets.

As Western Oil Giants Cut Production, State-Owned Companies Step Up

MarketMinder’s View: This article highlights a theme we have touched on before: When some countries try to control fossil fuel production for environmental purposes, others will increase output in order to capitalize on global demand. As long as fossil fuels remain necessary for economic development in impoverished nations and everyday life in most places, some company somewhere will have incentive to produce them. That is just how markets and prices work. So now, as some Western oil producers tout their plans to shift from oil and gas to cleaner sources, some oil-heavy countries plan to ramp up production in the coming years. “Iraq, OPEC’s second largest producer after Saudi Arabia, has invested heavily in recent years to boost oil output, aiming to raise production to eight million barrels a day by 2027, from five million now. The country is suffering from political turmoil, power shortages and inadequate ports, but the government has made several major deals with foreign oil companies to help the state-owned energy company develop new fields and improve production from old ones. Even in Libya, where warring factions have hamstrung the oil industry for years, production is rising. In recent months, it has been churning out 1.3 million barrels a day, a nine-year high.” Now, this piece worries Western nations’ ceding oil market share could lead to an overreliance on foreign oil—particularly from politically unstable countries—which could have negative geopolitical ramifications. However, that presumes private-sector producers won’t respond to prices and crank up output. The profit motive is a powerful thing, and presuming US oil production will be on permanent decline seems like an awfully big stretch. Moreover, markets just don’t look that far ahead—about 3 – 30 months is the general timeframe stocks weigh. So we recommend tuning out long-term speculation like this, although we think the broader conceptual lesson is timeless.

Column: Forget the 1970s, ‘Stagflation’ Playbook May Be 2005

MarketMinder’s View: As this article notes, history doesn’t repeat, but it can offer useful comparisons: “While all economic and market cycles are unique—none more so than the last 18 COVID months of recession, rebound and inflation caused by supply bottlenecks and shortages—the conditions that exist today are more akin to the ones that occurred in 2005.” Some of the similarities between now and then include headline inflation around 5%, oil prices doubling, equity valuations drifting lower and an uptick in volatility after a smooth stretch for stocks—none of which ended the 2002 – 2007 bull market. We have a couple quibbles, though. Volatility is unpredictable and never “in the cards,” as some experts cited here think. It comes and goes for any or no reason and, while not fun, volatility is a normal part of bull markets—and the price to pay for stocks’ long-term returns. Second, while we agree current conditions don’t resemble the 1970s, supposedly absent “wage-price spirals” aren’t why. Wages don’t drive inflation—it is the other way around. Employers must consider cost of living when competing for labor, so wages are already inflation adjusted. In our view, a big difference between the 1970s and today is that money supply now, although swollen, isn’t turning over very quickly. See banks’ lackluster lending (the primary driver of broad money supply in America’s fractional reserve system) this year with any questions. Also, no one is broaching price controls like the Nixon administration implemented, which compounded price spikes into energy shocks as market signals to ease shortages went haywire. Rather, politicians are, for the most part, allowing markets to sort out supply-demand bottlenecks. Relief won’t be overnight, but today is a far cry from 50 years ago—which we think stocks recognize.

As Supply Chain Troubles Mount, Biden to Tout Longer Hours for L.A. Ports

MarketMinder’s View: Please note, MarketMinder is nonpartisan, preferring no party, politician nor any political agenda. Our aim is simply to assess politics’ potential market impact, if any. Also, as we don’t make individual security recommendations, certain companies this article mentions serve only to illustrate a broader theme: how businesses are addressing supply bottlenecks. In an effort to clear logjams at some of America’s biggest ports, the Biden administration has convened “a 17-person ‘virtual roundtable’ with port directors from Los Angeles and Long Beach, Calif., top officials from the Teamsters and AFL-CIO labor unions, the U.S. Chamber of Commerce and other business groups, the White House said. ... to clear a path for cargo. Several companies participating in the White House event will make ‘specific volume commitments’ about containers they will remove from California docks. Leaders of the International Longshore and Warehouse Union have agreed to work longer hours, provided individual terminal operators pay up.” That all makes for a nice sound bite, but as industry chiefs here remarked, extended hours “will matter only if trains, trucks and warehouses all do the same.” Global supply chains and logistics are complex, as this article explains, and there are no quick fixes to unblock supply clogs. Consider an anecdote shared here: A US official managed to win longer operating hours at the ports of Los Angeles and Long Beach, but that didn’t lead to a sudden influx of truck deliveries. Simply, the president can’t command and control the economy. But we think ongoing efforts, headed primarily by the private sector, suggest bottlenecks will ease sooner rather than later, so these headwinds are likely to be passing, not perpetual. The upshot: This all speaks to the vast complexity of the modern economy and the fact that locking it down and reopening it was always likely to be quite messy.

China’s Exports Surge to Record as Demand Outweighs Power Crisis

MarketMinder’s View: Given all the headlines out of China recently, here is a boring one, in a good way: trade data. “Exports grew 28.1% in dollar terms in September from a year earlier to reach a high of $305.7 billion, data from the General Administration of Customs showed Wednesday. ... A second straight month of upside surprises in China’s export growth in September shows external demand is providing support for the economy. But it’s unlikely to be enough to offset downward pressures caused by power shortages and strains in the property sector that are intensifying a slowdown in growth.” The article also noted slower import growth (17.6% y/y) signaled weakening domestic demand related to a property downturn. We have found that dour tone in a lot of economic reporting recently, with most reactions focusing on supply shortages of raw materials and energy. However, those headwinds aren’t powerful enough to derail the global economic recovery, in our view, and reality is proving to be better than projected. For example, last month many thought China’s power outages would slow exports—but they ended up better than estimated. That is one example of how prevailing low expectations leave more room for upside surprise that can boost stocks up the proverbial wall of worry.

China’s Power Problems Expose a Strategic Weakness

MarketMinder’s View: Even command-and-control economies face limits and can’t ignore the market law of supply and demand. As this article details: “The world’s No. 2 economy relies on energy-intensive industries like steel, cement and chemicals to power growth. While many of its newer factories are more efficient than their counterparts in the United States, years of government price controls for electricity lulled other industries and most homeowners into putting off improvements.” But this isn’t an insurmountable obstacle. The government is relaxing price controls and adopting more market friendly approaches to its economic management. Like the article also describes, China is following a well-trod development path to greater energy efficiency: “Sustained tight supplies could force China to remake its economy, much as the high oil prices of the 1970s forced North American and European nations to change. Those countries developed more efficient cars, embraced other fuels, found plentiful new supplies and shifted manufacturing overseas, much of it to China. But the process was long, painful and costly. For now, China is revving up coal consumption less than a month before world leaders gather in Glasgow to discuss confronting climate change.” We think that last sentence emphasizes an important theme about China: The government prioritizes social stability above all else, so measures (e.g., orders to coal miners to produce as much as possible) to make sure power plants keep operating aren’t surprising. They are par for the course, and markets are well aware of China’s balancing act between long-term economic liberalization and short-term interventions to keep the peace.

Gloves Come Off in EU Clash With Rogue Members Over Rule of Law

MarketMinder’s View: First, please note that MarketMinder favors no political party or politician, assessing developments solely for their potential market and economic impact. In this case, for years, the EU and the governments of Poland and Hungary have been at odds on a variety of different social issues, but it seems that fight is now ramping up to a level beyond mere sociology. This is chiefly true of Poland, where a court recently ruled that EU law cannot have primacy over national law—upending the existing legal structure in place across the EU. The case, championed by right-wing Prime Minister Mateusz Morawiecki of the Law and Justice Party, calls into question the financial penalties EU officials were slapping on Poland and Hungary, like withholding COVID response funding. There is already chatter growing that Poland could be en route out of the EU in a Polexit. (Poxit? Polaxit? Polout? We dunno. None of these are good.) While this is a matter worth keeping an eye on, investors really shouldn’t overrate it. Although it could stir uncertainty somewhat toward the two European Emerging Markets nations, developments here are likely to play out quite slowly and under a bright media spotlight. Markets are very good at weighing and pre-pricing such matters—and may already have been doing so, given the years-long squabbles.

Critical Article by Top Finance Ministry Bureaucrat Causes a Stir

MarketMinder’s View: Once again, please note that MarketMinder favors no political party or politician, assessing developments solely for their potential market and economic impact. Just days into his term as Liberal Democratic Party (LDP) head, Japanese Prime Minister Fumio Kishida is apparently facing dissention in the ranks. Following Kishida’s decision to ditch a raft of planned capital gains tax hikes, an article penned by Vice Finance Minister Koji Yano took the highly unusual step of publicly critiquing LDP fiscal policy. He declared the party’s leadership election and its platform ahead of next month’s general election for the country’s lower house of Parliament, the Diet, “dole-out competitions” and argued Kishida’s “economic measures worth tens of trillions of yen” amounted to irresponsible fiscal policy. In our view, this is a perfect illustration of the fractures within the LDP. Despite the fact he is virtually assured to win next month’s general election due to the LDP/Komeito coalition’s huge edge in the Diet, these features call into question whether Kishida has the political capital to accomplish anything of note—or even stay in power for long. It reminds us of the pre-Shinzō Abe period, which saw six Japanese prime ministers in six years.

As Earnings Season Begins, Inflation and Supply Chain Issues Cloud the Outlook.

MarketMinder’s View: You know, we expect this article’s assertion that you will hear many executives cite supply chain issues, hiring difficulties and rising costs on earnings calls with analysts in Q3’s reporting season (which begins tomorrow) will likely prove correct. This shouldn’t shock you, though, considering it is about the most discussed financial news story in the world right now. It also shouldn’t shock you that, after torrid earnings growth over the last few quarters, the growth rate is expected to slow and optimistic guidance from management is less common. “FactSet reports that 56 companies in the S&P 500 have issued third-quarter guidance above what analysts expected, which is higher than average but down from 67 in the previous quarter. The number of companies issuing negative guidance rose to 47 from 37 the quarter before.” However, it is worth remembering that guidance is often management’s way of keeping expectations in check. So this seems mostly like a return to normal than anything problematic, in our view.

China to Let Power Prices Rise in Bid to Fix Electricity Crunch

MarketMinder’s View: Here is an interesting development in governments’ current global quest to quell fast-rising energy prices and ensure consistent supply: For 15 years, China has employed a tight ceiling and floor on energy prices. But “[b]ecause the prices don’t fully move with market supply and demand, they leave room for power producers to make windfall profits when coal prices are low, while potentially forcing them to sell at a loss when coal prices skyrocket.” So now, contrary to actions in Europe, the Chinese government is allowing more price fluctuation and for these market prices to apply to more customers. While this isn’t a magic bullet, it should help utilities that have been bleeding cash lately—and implementing brownouts as a result—as coal prices spiked. Allowing prices to rise closer to those dictated by global market forces should encourage users to dial down demand while the improved cash flow should encourage utilities to ramp up production (or at least keep it constant).

Lending at U.S. Banks Drops to New Low as Cash Hoards Rise

MarketMinder’s View: Lending didn’t fall in absolute terms at the end of September, so this isn’t a credit crunch. But it did sink to a new low as a percentage of banks’ total assets while cash, Treasurys and other similarly liquid securities gained. Interestingly, smaller banks’ balance sheets have higher relative loan exposure, but most of that has gone to commercial real estate, not funding for businesses’ day-to-day operations and investments in equipment and research. But banks small and large are hoarding cash and not lending as enthusiastically as they typically would this early in an economic expansion. In our view, there is a simple explanation for this: the relatively flat yield curve. Thanks in part to the Fed’s quantitative easing (QE) bond buying, long rates remain near generational lows, rendering a narrow gap between short and long rates. Banks borrow at short rates and lend at long rates, using Treasury yields as reference rates, so the yield curve spread is a decent proxy for their net interest margins—the potential profits on new loans. That gap is small, which discourages lending to all but the most creditworthy companies. This is a headwind for value stocks, which get most of their funding from banks rather than capital markets. Absent a big reversal in banks’ lending habits, which we think would require a much steeper yield curve, value stocks likely remain capital-starved, giving growth stocks a continued edge.