Tariffs, Nukes, Rates: More Sound Than Fury

dealmaker · Jun 16, 2018

UP AND DOWN WALL STREET

Tariffs, Nukes, Rates: More Sound Than Fury
By Randall W. Forsyth
June 16, 2018
PHOTO:GETTY IMAGES

Does news make the markets or do markets make the news?

Those of us in the news business hold fast to the conceit that what we report is what really matters, while old hands in the financial markets contend that the price action portends the headlines. After a week of big, potentially market-moving events, a financial news reporter has to wonder how much any of it really mattered, considering that the major averages ended not far from where they had started.

The week saw a hissy fit among the Group of Seven major industrialized nations; a made-for-TV summit that is supposed to bring about the “denuclearization” of North Korea, whatever that means and whenever it’s supposed to happen; the clearance of the combination ofAT&T(ticker: T) and Time Warner, as another owner of the information pipeline gains control of the content being pushed through it; plus a further escalation of the trade skirmishes with tit-for-tat tariffs being imposed by the U.S. and China, in a circular firing squad firing mostly blanks.

Sound and fury signifying nothing in a tale told by idiots, as the Bard wrote, and the markets would appear to agree. For the week, the S&P 500 index rose—wait for it—0.02%. The Dow Jones Industrial Average shed 0.89%, but the Nasdaq Composite gained 1.32%.

If anything, the news on the monetary-policy front arguably was more important, but held no great surprises, at least on the surface. As expected, the Federal Reserve raised its key policy interest rate 25 basis points, or one-quarter of a percentage point. The European Central Bank confirmed that it will end its bond-buying program by the end of the year, while the Bank of Japan said that it would maintain its expansionary policy.

Under the surface, however, there are key things that didn’t get widely reported, but that investors should consider.

As for the tariffs the U.S. imposed on $50 billion of exports from China, the big numbers in the headlines exaggerate the impact. David Goldman, formerly the head of credit research at some of the biggest Wall Street banks, points out in his latest Asia Timesblog postthat “the overwhelming majority of products slated for tariffs are old-economy staples, ranging from steel pipes to industrial chemicals to glass-molding equipment.” Cathode-ray tube monitors, supplanted a decade ago by flat-screen displays, also are targeted, suggesting more sound and fury signifying little.

The market’s apparent indifference suggests it doesn’t see these tariffs as the reincarnation of Smoot-Hawley, but just the latest in President Trump’s negotiating tactics. Moving away from his denunciation of Kim Jong-un as “Little Rocket Man” inviting “fire and fury” by missile launches, Trump last week declared the threat from North Korea neutralized. Similarly, many professional investors view the bluster on tariffs as part of Trump’s negotiating tactics, rather than the start of an actual trade war.

NEWSLETTER SIGN-UP
As for the Fed, Chairman Jerome Powell made clear the central bank saw no reason not to keep normalizing interest rates with the U.S. economy growing robustly and inflation reaching the central bank’s 2% target. In a comment that got surprisingly little notice, Powell said that the last two recessions didn’t follow flare-ups in inflation that forced rate increases and cracked the economy, but rather financial-market plunges, asI wrotelast week. Bubbles invariably are followed by busts, which seems to be the message here.

One real fear overhanging the risk markets is the signal from the Treasury yield curve. The spread, or difference, between the two- and 10-year note yields, shrank to under 40 basis points, with the longer benchmark yield remaining below 3% in the face of rising short-term rates. That historically has been a sign of tighter money, which has tended to be a harbinger of slower growth, if not recession.

In part, the lack of a rise in longer-term U.S. yields may reflect the ECB’s declaration that it won’t raise its policy rates, which are zero or below, until the summer of 2019. This forward guidance appeared to stave off a rerun of the notorious “taper tantrum” of 2013, when the Fed disclosed its intention to reduce its bond purchases. Given the parlous state of Europe, especially Italy, it’s not surprising that the ECB wants to maintain stability.

The real news of the week, from the markets’ perspective, was that mundane fundamentals of growth and monetary conditions count more than hyperventilating headlines. That suggests a continued tug-of-war between those two key market factors.

If you borrow enough, they will buy. that’s how it works in the field of dreams of the capital markets.

The upshot: Corporate borrowers funding multibillion-dollar deals can be assured of ready demand for their paper from bond index funds, as well as from institutional portfolios that hew closely to those benchmarks.

By now, the impact of indexing in the equity market should be vividly apparent. The latest example: News ofTwitter’saddition to the S&P 500 boosted its shares (TWTR) by 5% on June 5. Twitter’s business didn’t change overnight, but the decision by the solons who pick those 500 companies added nearly $1.5 billion to the social-media company’s stock-market value. That’s why critics of S&P 500 index funds call them managed portfolios, rather than truly passive trackers of the U.S. equity market.

Once companies get past the velvet rope to be admitted to the S&P, their weighting in the index is on merit—that is, their market cap. The top stocks in the most popular index exchange-traded fund, theSPDR S&P 500 ETF Trust(SPY), might be called FAAMG, albeit not in that order:Apple(AAPL), of course, is No. 1, with 4.1% of the fund, followed byMicrosoft(MSFT), at 3.3%; Google parentAlphabet,with a combined 2.94% for its class C and A shares (GOOG and GOOGL, respectively);Amazon.com(AMZN), 2.92%; andFacebook(FB), 1.99%.

Most importantly, these stocks became the S&P’s most valuable companies owing to their performance. Bond index funds also use capitalization weighting. But instead of reflecting the market’s assessment of their assets’ value, they are weighted according to the size of their debt. Ironic result: The more a company or country borrows, the more of their paper bond-index investors must buy.

So, for the big bond indexes, that would mean governments predominate. In theiShares Core U.S. Aggregate BondETF (AGG), which tracks the main taxable-bond benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, Treasury securities comprise over 38%, followed by 27.7% in mortgage pass-throughs, mainly from government-sponsored enterprises, such as Fannie Mae and Freddie Mac.

Globally, that means that the governments most deeply in hock get the biggest weights. Italy is important to the bond markets because it is the world’s third-largest debtor, even though its gross domestic product is only the world’s eighth biggest, behind India and just ahead of Brazil.

In the U.S. corporate bond market, the biggest borrowers get the top weighting. So, in the $32 billioniShares iBoxx $ Investment Grade Corporate BondETF (known far better by its ticker, LQD, than its mouthful of a name), most of the biggest nonfinancial names have one thing in common: They have issued billions in debt to fund megadeals.

For instance, AT&T already was building up its war chest before last week’s federal court decision to allow its acquisition of Time Warner, which will put the combined entity’s debt at an eye-popping $181 billion. In LQD’s portfolio, AT&T debt accounted for 2.59%, the same as the weighting of rival telecomVerizon Communications(VZ), which borrowed heavily to acquireVodafone Group’s(VOD) former stake in its wireless unit. (Hat tip to our researcher Dan Lam for invaluable help assembling these numbers.)

Anheuser-Busch InBev(BUD) accounts for 2.24% of LQD as the result of rolling up most of the major brands of suds around the world.CVS Health(CVS) comprises 1.82% of LQD, ahead of its proposed $69 billion deal to buy health insurerAetna(AET). Then there’s Comcast’s (CMCSA) 1.49% weight in LQD, but that’s before its proposed $65 billion bid for21st Century Fox(FOXA), which our colleagueTiernan Ray writeswould create a “debt beast,”topped only by AT&T after the Time Warner deal, with an estimated $170 billion of debt, should it win the bidding war withWalt Disney(DIS) for the Fox properties. (Fox and Dow Jones, the publisher ofBarron’s, share common ownership.)

But is this the way to invest? “In the corporate bond segment of fixed income, you need to avoid the losers,” Cliff Noreen, deputy chief investment officer of MassMutual, the big insurer, writes in an email. “Buying the entire market doesn’t make sense to us. Corporate bond research and due diligence are critically important in delivering strong investment performance to our policyholders.”

On that score, Gimme Credit, the very independent corporate credit research outfit, last week reiterated its negative stance on AT&T’s notes maturing in 2027, given the increase in leverage following the Time Warner acquisition. That’s contrary to what index-tracking portfolios must do, which is to take on more AT&T paper as the telecom issues it.

The basis of index investing is agnosticism, that you don’t know more about a company than the collective wisdom of the market does. Moreover, modern portfolio theory holds that the capital structure—how much is debt versus equity—doesn’t affect the value of a corporation. Yet the value of a company’s debt is determined mainly by management’s decisions on borrowing. The practice of weighting corporate bond indexes according to a company’s debt provides an additional incentive for firms to go into hock.

Email:randall.forsyth@barrons.com

https://www.barrons.com/articles/tariffs-nukes-rates-more-sound-than-fury-1529108154

dozu888 · Jun 17, 2018

dealmaker said:

UP AND DOWN WALL STREET

Tariffs, Nukes, Rates: More Sound Than Fury
By Randall W. Forsyth
June 16, 2018
PHOTO:GETTY IMAGES

Does news make the markets or do markets make the news?

Those of us in the news business hold fast to the conceit that what we report is what really matters, while old hands in the financial markets contend that the price action portends the headlines. After a week of big, potentially market-moving events, a financial news reporter has to wonder how much any of it really mattered, considering that the major averages ended not far from where they had started.

The week saw a hissy fit among the Group of Seven major industrialized nations; a made-for-TV summit that is supposed to bring about the “denuclearization” of North Korea, whatever that means and whenever it’s supposed to happen; the clearance of the combination ofAT&T(ticker: T) and Time Warner, as another owner of the information pipeline gains control of the content being pushed through it; plus a further escalation of the trade skirmishes with tit-for-tat tariffs being imposed by the U.S. and China, in a circular firing squad firing mostly blanks.

Sound and fury signifying nothing in a tale told by idiots, as the Bard wrote, and the markets would appear to agree. For the week, the S&P 500 index rose—wait for it—0.02%. The Dow Jones Industrial Average shed 0.89%, but the Nasdaq Composite gained 1.32%.

If anything, the news on the monetary-policy front arguably was more important, but held no great surprises, at least on the surface. As expected, the Federal Reserve raised its key policy interest rate 25 basis points, or one-quarter of a percentage point. The European Central Bank confirmed that it will end its bond-buying program by the end of the year, while the Bank of Japan said that it would maintain its expansionary policy.

Under the surface, however, there are key things that didn’t get widely reported, but that investors should consider.

As for the tariffs the U.S. imposed on $50 billion of exports from China, the big numbers in the headlines exaggerate the impact. David Goldman, formerly the head of credit research at some of the biggest Wall Street banks, points out in his latest Asia Timesblog postthat “the overwhelming majority of products slated for tariffs are old-economy staples, ranging from steel pipes to industrial chemicals to glass-molding equipment.” Cathode-ray tube monitors, supplanted a decade ago by flat-screen displays, also are targeted, suggesting more sound and fury signifying little.

The market’s apparent indifference suggests it doesn’t see these tariffs as the reincarnation of Smoot-Hawley, but just the latest in President Trump’s negotiating tactics. Moving away from his denunciation of Kim Jong-un as “Little Rocket Man” inviting “fire and fury” by missile launches, Trump last week declared the threat from North Korea neutralized. Similarly, many professional investors view the bluster on tariffs as part of Trump’s negotiating tactics, rather than the start of an actual trade war.

NEWSLETTER SIGN-UP
As for the Fed, Chairman Jerome Powell made clear the central bank saw no reason not to keep normalizing interest rates with the U.S. economy growing robustly and inflation reaching the central bank’s 2% target. In a comment that got surprisingly little notice, Powell said that the last two recessions didn’t follow flare-ups in inflation that forced rate increases and cracked the economy, but rather financial-market plunges, asI wrotelast week. Bubbles invariably are followed by busts, which seems to be the message here.

One real fear overhanging the risk markets is the signal from the Treasury yield curve. The spread, or difference, between the two- and 10-year note yields, shrank to under 40 basis points, with the longer benchmark yield remaining below 3% in the face of rising short-term rates. That historically has been a sign of tighter money, which has tended to be a harbinger of slower growth, if not recession.

In part, the lack of a rise in longer-term U.S. yields may reflect the ECB’s declaration that it won’t raise its policy rates, which are zero or below, until the summer of 2019. This forward guidance appeared to stave off a rerun of the notorious “taper tantrum” of 2013, when the Fed disclosed its intention to reduce its bond purchases. Given the parlous state of Europe, especially Italy, it’s not surprising that the ECB wants to maintain stability.

The real news of the week, from the markets’ perspective, was that mundane fundamentals of growth and monetary conditions count more than hyperventilating headlines. That suggests a continued tug-of-war between those two key market factors.

If you borrow enough, they will buy. that’s how it works in the field of dreams of the capital markets.

The upshot: Corporate borrowers funding multibillion-dollar deals can be assured of ready demand for their paper from bond index funds, as well as from institutional portfolios that hew closely to those benchmarks.

By now, the impact of indexing in the equity market should be vividly apparent. The latest example: News ofTwitter’saddition to the S&P 500 boosted its shares (TWTR) by 5% on June 5. Twitter’s business didn’t change overnight, but the decision by the solons who pick those 500 companies added nearly $1.5 billion to the social-media company’s stock-market value. That’s why critics of S&P 500 index funds call them managed portfolios, rather than truly passive trackers of the U.S. equity market.

Once companies get past the velvet rope to be admitted to the S&P, their weighting in the index is on merit—that is, their market cap. The top stocks in the most popular index exchange-traded fund, theSPDR S&P 500 ETF Trust(SPY), might be called FAAMG, albeit not in that order:Apple(AAPL), of course, is No. 1, with 4.1% of the fund, followed byMicrosoft(MSFT), at 3.3%; Google parentAlphabet,with a combined 2.94% for its class C and A shares (GOOG and GOOGL, respectively);Amazon.com(AMZN), 2.92%; andFacebook(FB), 1.99%.

Most importantly, these stocks became the S&P’s most valuable companies owing to their performance. Bond index funds also use capitalization weighting. But instead of reflecting the market’s assessment of their assets’ value, they are weighted according to the size of their debt. Ironic result: The more a company or country borrows, the more of their paper bond-index investors must buy.

So, for the big bond indexes, that would mean governments predominate. In theiShares Core U.S. Aggregate BondETF (AGG), which tracks the main taxable-bond benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, Treasury securities comprise over 38%, followed by 27.7% in mortgage pass-throughs, mainly from government-sponsored enterprises, such as Fannie Mae and Freddie Mac.

Globally, that means that the governments most deeply in hock get the biggest weights. Italy is important to the bond markets because it is the world’s third-largest debtor, even though its gross domestic product is only the world’s eighth biggest, behind India and just ahead of Brazil.

In the U.S. corporate bond market, the biggest borrowers get the top weighting. So, in the $32 billioniShares iBoxx $ Investment Grade Corporate BondETF (known far better by its ticker, LQD, than its mouthful of a name), most of the biggest nonfinancial names have one thing in common: They have issued billions in debt to fund megadeals.

For instance, AT&T already was building up its war chest before last week’s federal court decision to allow its acquisition of Time Warner, which will put the combined entity’s debt at an eye-popping $181 billion. In LQD’s portfolio, AT&T debt accounted for 2.59%, the same as the weighting of rival telecomVerizon Communications(VZ), which borrowed heavily to acquireVodafone Group’s(VOD) former stake in its wireless unit. (Hat tip to our researcher Dan Lam for invaluable help assembling these numbers.)

Anheuser-Busch InBev(BUD) accounts for 2.24% of LQD as the result of rolling up most of the major brands of suds around the world.CVS Health(CVS) comprises 1.82% of LQD, ahead of its proposed $69 billion deal to buy health insurerAetna(AET). Then there’s Comcast’s (CMCSA) 1.49% weight in LQD, but that’s before its proposed $65 billion bid for21st Century Fox(FOXA), which our colleagueTiernan Ray writeswould create a “debt beast,”topped only by AT&T after the Time Warner deal, with an estimated $170 billion of debt, should it win the bidding war withWalt Disney(DIS) for the Fox properties. (Fox and Dow Jones, the publisher ofBarron’s, share common ownership.)

But is this the way to invest? “In the corporate bond segment of fixed income, you need to avoid the losers,” Cliff Noreen, deputy chief investment officer of MassMutual, the big insurer, writes in an email. “Buying the entire market doesn’t make sense to us. Corporate bond research and due diligence are critically important in delivering strong investment performance to our policyholders.”

On that score, Gimme Credit, the very independent corporate credit research outfit, last week reiterated its negative stance on AT&T’s notes maturing in 2027, given the increase in leverage following the Time Warner acquisition. That’s contrary to what index-tracking portfolios must do, which is to take on more AT&T paper as the telecom issues it.

The basis of index investing is agnosticism, that you don’t know more about a company than the collective wisdom of the market does. Moreover, modern portfolio theory holds that the capital structure—how much is debt versus equity—doesn’t affect the value of a corporation. Yet the value of a company’s debt is determined mainly by management’s decisions on borrowing. The practice of weighting corporate bond indexes according to a company’s debt provides an additional incentive for firms to go into hock.

Email:randall.forsyth@barrons.com

https://www.barrons.com/articles/tariffs-nukes-rates-more-sound-than-fury-1529108154
More...

a clueless reporter wants to sound relevant?

"Does news make the markets or do markets make the news?' - that's not even the right question.

The professionals in the market, the smart money, play the media like a tool... that's how it works.

murray t turtle · Jun 18, 2018

%%
Mostly markets make the news; even though earnings can move markets LOL.Sounds like his bearish take on T is right on; but they had such bad customer service, they haven't recovered much from 2008........Nukes most likely will not do much to US market; South Korea could be a buy, if the panic sellers hit the bids?? Cant blame EEM downtrend on any nukes or tariffs, ; low PE stocks tend to go lower, .......unless T Boone Pickens/C Ichan types start Trend /hunting/buys.....

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Tariffs, Nukes, Rates: More Sound Than Fury

dealmaker

dozu888

murray t turtle