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The Sandy Spring Way

February Observations

February 4th, 2014 | By Beau Mercer

FredericBurke“Where have all the flowers gone, long time passing? Where have all the flowers gone, long time ago? Young girls have picked them everyone. Oh, when will they ever learn? Oh, when will they ever learn?”

—Pete Seeger

This time it’s different! Punxsutawney Phil Sowerby, the beloved groundhog of Punxsutawney, emerged from his hole yesterday, ate the flowers bought with seeds from the emerging markets and didn’t care for the results. Phil quickly observed the shape of his shadow and returned to his hole, thus predicting both a continuing correction in the markets and six more weeks of winter like weather. Peyton Manning and the Denver Broncos failed to lead the team to victory in the 48th Super Bowl. The Super Bowl predictor suggests that if the winning team had its roots as an expansion team, the market indexes would decline. Finally the January effect theorizes that as January goes, so goes the market. Since 1945, the S&P 500 has been up 7.3% when the market rose in January. Conversely the market has only gained 0.1% in those years in which January markets have not provided a positive signal. The disappointment of Phil and Peyton or the negative direction of the January market may corroborate a correlation but there is no causation. Even after four weeks of pullback, the S&P 500 is only 3% off its all-time high. Similarly the Dow Jones Industrial Average and Russell 2000 are only 4% and 3% off their all-time highs. Further so far in the fourth quarter earnings season, 52.8% of S&P 500 companies have beaten top line expectations. Signals, pullbacks and media conjecture are designed to create volatility and trader profits at the expense of wary investors.

The departure of the Federal Reserve Board Chairman was lost in the President’s State of the Union Message. The economy has started to show signs that it is turning the corner but skepticism persists. Chairman Bernanke left a legacy of $2.4 trillion dollars in excess revenues on deposit at the Fed in the US banking system. Total bank assets grew from $11 trillion at the beginning of 2008 to $14.1 trillion at the end of 2013. Significantly, however, bank credit expansion over the same period only went from $9.0 to $10.1 trillion. In effect, traditional market participants (borrowers and lenders) had reservations about the Bernanke script. Lending to job creating organizations resembled scoring at a NHL Hockey game. Wall Street and hedge fund managers recognized the negligible cost of leveraged money and consequently pushed the equity market to near all-time highs. For example, thanks to borrowed funds one ‘investor’ now owns approximately $4.1 BILLION of the largest company in the world (Apple).

Despite campaign promises, the State of the Union speech failed again to outline how we were going to transcend partisanship, heal the planet and slow the rise of the oceans. The President did however provide an accurate account of recent economic history when he described the nation’s problems as primarily structural: “Over more than three decades, even before the Great Recession hit, massive shifts in technology and global competition had eliminated a lot of good, middleclass jobs and weakened the economic foundations that families depend on…the cold hard fact is that…too many still aren’t working at all.” Rebuilding the economic foundation cannot take place in an era when government is unwilling to address solutions.

When Russia was awarded the 2014 Winter Olympics, it was seen as opportunity for Russia to display how the country had moved away from the prism of Cold War antagonisms. All concerned recognized that the modern Olympics are consistently marred by controversies and clashes (remember Tonya Harding and Nancy Kerrigan) and Sochi is near one of the most dangerous places in the world as far as terrorism is concerned. The Russian script could have been drafted by Boris Pasternak, the author of Dr. Zhivago, when he described the ‘advent to the inevitable’. According to the website-Sochi.FBK.info- Russia has spent $51 billion to deliver the games- more than all Winter Olympics combined. President Vladimir Putin rejected claims that rampant corruption caused excessive cost with the assertion that ‘inflated prices were due to the honest mistakes of investors’. The math is always difficult for the host country. The Sochi price tag is more than Russia spent on public education last year and 80% of what it spent on health care. Putin cited the Olympic motto: “Citius,forties and altius” or “faster, stronger and higher” and don’t forget your friends.
Enjoy the Games Dr. Zhivago!