The Daily Prophet: Even a Nobel Prize Winner Doesn't Get Stocks
Having a hard time understanding why U.S. stocks keep marching higher amid the threat of nuclear war with North Korea, turmoil in Washington, an economic recovery that is both long in the tooth and feeble, and a Federal Reserve that seems intent on raising interest rates until equities respond in the negative? If so, you're in good company. No less an authority than Richard H. Thaler, who was awarded the Nobel Prize in economics this week for his work on the irrational behavior of humans, can't get his head around it either.
“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler told Bloomberg TV Tuesday as the S&P 500 Index marched higher. “I admit to not understanding it.” To be sure, this is an unconventional bull market, and Thaler probably realizes more than he's letting on that one needs to view the market through an unconventional lens. Leuthold Weeden Capital Management Chief Investment Strategist Jim Paulsen notes that even though stocks have reached new highs, a persistent and abnormally strong wall of worry has kept irrational exuberance in check, and there's been a regular rotation in market leadership and the slowest economic recovery in post-war history hasn't sparked faster inflation.
And just because Thaler says he may not understand the rally in stocks doesn't mean his firm Fuller & Thaler Asset Management, where he is a principal, and its investors aren't finding a way to profit. Fuller & Thaler sub-advises the $6 billion Undiscovered Managers Behavioral Value Fund, which focuses on small-cap companies with significant buying by insiders or share buybacks. The fund has gained an annual average of 16 percent the past five years, beating 97 percent of its rivals, and is up 8.1 percent this year through Oct. 9, reports Bloomberg News' Suzanne Woolley
IS IT OVER ALREADY?
It's barely a month old, but the budding rebound in the dollar is already looking shaky. The Bloomberg Dollar Index fell as much as 0.53 percent Tuesday, its biggest drop since Sept. 7, sparking talk that the greenback's strength in recent weeks had less to do with confidence in the U.S. than it did with concern about political risk in Spain, which has weighed on the euro. In fact, the Bloomberg Euro Index rallied Tuesday as Catalonia’s President Carles Puigdemont stepped back from an immediate declaration of independence from Spain, instead seeking talks with the government in Madrid over the constitutional future of his region. Puigdemont’s stance “gives time for more dialogue -- crisis averted for now it would seem,” Shaun Osborne, Scotia Bank's chief FX strategist, told Bloomberg News. The Bloomberg Dollar Index fell as much as 10.4 percent this year to its low on Sept. 8, before gaining 3 percent through Monday. There are also fresh concerns that President Donald Trump's feud with Republican Senator Bob Corker might stall the White House's efforts on a tax overhaul, weighing on the economy.
WHAT'S IN A NAME?
Bankers in Europe have found a way to sell high-risk bank debt securities without making them seem risky. How? Just give them a name that obscures the risk. Banks have sold about 33 billion euros ($39 billion) of debt they’re calling “senior non-preferred.” The label allows underwriters to market the notes to managers of funds that can only hold senior debt, even though holders of the bonds can be forced by regulators to take losses in a crisis, according to Bloomberg News' Katie Linsell and Tom Beardsworth. They report that the semantics seem to be paying off as money managers snap up the notes and lower the borrowing costs for the banks as yield premiums fall close to the same levels paid on traditional senior debt. The new category was created by French regulators to meet requirements that bondholders, rather than taxpayers, bear the cost of rescuing failing banks. Its popularity may be a sign of complacency in a market suffering from near record-low yields.
KEY CHINA PROXY IS SINKING FAST
Rightly or wrongly, many market participants like to watch the price of iron ore -- the key ingredient in making steel -- because they think it's a good proxy for what's going on inside China, the world's second-largest economy. That's especially important now because China’s Communist Party will go through its once-in-five years leadership transition next week. So, what's up with iron ore? Futures have been dragged back down into the $50s, raising the possibility that the commodity may slump below this year’s low on concern that steel-output cuts in China will hurt demand over winter just as seaborne supplies from the world’s top miners expand, according to Bloomberg News. In Singapore, the most-active SGX AsiaClear contract retreated 3.3 percent to $58.48 a metric ton at 4:46 p.m, the lowest price since June. Iron ore sank into a bear market last month as investors weighed the impact on demand of steel production cuts in China to fight pollution.
China generally likes to make sure its financial markets are relatively quiet and stable around big events and meetings. Wild swings won't be tolerated. Policy makers have intervened regularly to reduce volatility in the $7.7 trillion stock market since the nation’s equity bubble burst in 2015, and state funds have been known to increase their presence during important political events. That's what they did Monday, when Chinese state-backed funds intervened to limit gains in the nation’s equities as part of the government’s effort to restrain market swings before the key leadership reshuffle this month, Bloomberg News reported, citing people familiar with the matter. The funds sold shares of large-cap companies, including banks and China United Network Communications, said the people, who asked not to be identified because the information is private. Before Monday, the funds had been buying stocks to support the market after S&P Global Ratings cut China’s sovereign credit grade, the people said.
Just how committed are Federal Reserve policy makers to raising interest rates in December? We may find out Wednesday, when the minutes of the last Federal Open Market Committee meeting are released. The Fed sent markets into a tizzy on Sept. 20 when it stuck to its forecast for another hike this year despite the soft inflation data. Twelve of 16 FOMC participants favored at least one more rate increase this year, according to the forecasts submitted at the Sept. 19-20 meeting. The issue of financial stability will also be closely parsed, according to Bloomberg News' Steve Matthews. In the minutes of June meeting, participants described stock prices as “high” and worried “increased risk tolerance among investors might be contributing to elevated asset prices more broadly.” Since that meeting, the S&P 500 Index has continued to set record highs and corporate bond yield spreads have shrunk to lows last seen before the financial crisis.
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