Global Market Commentary

March 13, 2014

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Will We Get an April-to-October Market Correction in 2014?

We anticipate that the U.S. and European markets will rally this year, and close 2014 with good gains.  However, the crisis in Ukraine and fears (probably misplaced) about China melting down are creating a crisis of confidence in the European and emerging markets.

We have recently taken profits in corn for clients because we believe that the spring planting season will bring expectations of a strong supply of corn and soybeans due to record planting. We may re-enter corn, wheat, and soybeans for investment after prices fall. Longer term we believe that food prices will rise worldwide for several years.

Gold continues to rally as a result of fears about Ukraine — which are well-founded. We have no doubt that Russia plans to reestablish parts of the former Soviet empire. Russia’s military is weak, understaffed, and filled with draftees who have inadequate military skills. Russia is a poor country in spite of their mineral and oil wealth; corruption has sapped their economic strength. Russia will be vulnerable to economic sanctions. Clearly, Europe and the U.S. are afraid of military action, and if they institute economic sanctions, the sanctions will slow European economic growth.

Therefore, Russia — in spite of their weakened military status — should be able to hold onto Crimea and possibly gain other parts of eastern Ukraine without any real objection from Europe and the U.S. Seeing what they perceive as western weakness, Russia will continue their adventures and over the next few years they will try to take back the Baltic states and other parts of the former Soviet empire.

The markets may ignore this for awhile, but the beginning of a new minor cold war — even with a weakened and close-to-bankrupt Russia — will have a depressing effect on optimism in the U.S. and Europe.

Another worrying event is the appearance of speculation in stocks that are grossly overpriced, especially in two areas. Some biotech stocks and some tech stocks are selling at infinite P/E ratios, while others in these sectors are more rationally valued. This is beginning to be reminiscent of the stock bubble of 2000. Most stocks are fairly priced, and the market can move ahead gradually, but we will be careful.

Should Ukraine resolve itself and should the panic about China subside, we will get more fully invested.  Clearly, Europe’s weakness and the problems in Ukraine will shift more investment assets from Europe to the U.S., and the panic about China is probably sending assets in the U.S. direction as well.

Gold has rallied, and we have taken some profits — we expect gold to peak at slightly higher levels and level off or fall slightly for a few months. But longer-term it is obvious that growing aggression from Russia, inflation heating up in the emerging and developed words, and Chinese gold buying all argue for higher gold prices in the intermediate and longer term.

We are still in a bull market that is benefitting from strong corporate profits and low interest rates. We do not expect a big decline, although 10 percent is always possible during a bull market such as we are experiencing. We are currently in a low interest rate environment, which historically has led to higher stock prices and a prolonged higher market.

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