Capital Ideas Newsletters


Everything’s Relative

January/Febraury 2014

December 2013 capped off a tremendous year for U.S. equities. The Federal Reserve has provided cheap money which has created rising asset prices. The question remains, “Is the real economy actually improving at the rate asset prices have risen?”

Stock markets around the world are more correlated than ever. It used to be that when the U.S. caught a cold, the rest of the world had pneumonia. Now that truism applies to China the world’s second largest economy, as well.

This past week, the slowdown in China coupled with the devaluing of the Argentinian Peso created havoc in the equity market. Additionally, some mixed news in corporate earnings fueled the decline.

We argued last year that top line sales growth may be difficult to achieve, though it seems that some companies are increasing sales and their bottom lines.

Corporations do have plenty of cash for buybacks and acquisitions. In September 2013, Applied Materials, Inc., a California maker of semiconductor manufacturing equipment, agreed to acquire its rival, Tokyo Electron, Ltd. in a $5 billion deal. We are likely to see more of these cross border deals as the world becomes a smaller place. Interestingly enough, while global deal making was more or less flat for the fourth consecutive year, annual volume in the U.S. was up 11 percent compared to 2012, according to Thompson Reuters.

President Obama has vowed to use his executive power to narrow the income gap. We are eager to see what his plan entails. If it means job training, infrastructure spending, fewer entitlements and more incentives, then we are on board.

Emerging markets are suffering as a result of China’s slowdown and a loss of confidence in many of their economic policies. And will Argentina ever get its act together? Weakening growth and high inflation has caused Tunisia and South Africa to raise their interest rates to avoid the stampede of capital out of their countries and, at the same time, to dampen inflation.

Bye Bye Ben – We will miss Federal Reserve Chairman Ben Bernanke. We owe Mr. Bernanke a debt of gratitude. Few of us remember how close we were to the brink of disaster four short years ago. Janet Yellen, the incoming chair (a Brooklyn girl!), has big shoes to fill.

New York seems to be suffering from Affluenza! Affluenza, you may ask, what is that? It is the importance placed upon a person just because of his/her pocketbook. America’s possession obsession is one of the ideals that must be changed if this society is to achieve greatness again.

We must be mindful that markets and moods can change rapidly. Adapting to swings in interest rates, gyrating stock markets and political uncertainty can cause a great deal of investor anxiety. The proper asset allocation is crucial, as is recognition of one’s own appetite for “downward volatility”, which in many instances can lead to good opportunities.

Abraham Lincoln once said, “We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”

The future is rosy; we hope that we can help you smell the flowers.

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