Global Market Commentary

January 23, 2014

Investment Summary

The four emerging trends mentioned above are all significant parts of understanding the investment picture for 2014 and for the remainder of the decade.

Trend #1: With large banks curtailing commodity trading businesses, there should be less risk of instability in commodity markets. The U.S. banking system could actually be strengthened by their exit from the commodities trading markets. U.S. banks can make plenty of money by cutting costs and focusing on their core competencies. Currently, lending is highly profitable, as a yield curve where banks can borrow at low rates and lend at higher rates is very helpful to their profits. Banks should turn their focus away from currency, bond, and commodity trading, and return to their roots in investment banking and commercial banking. This will make the banking system safer by decreasing its leverage. Additionally, it will decrease illegal behavior by banks.

In the U.S., we are in the middle of earnings reporting season, and so far about 70% of the companies reporting have exceeded profit expectations. For 2014, we are bullish on U.S. stocks, but we expect a normal correction of 5-15% during the course of the year. The correction could possibly occur in the first or second quarter. We believe that now is the time to work on a buy list to be implemented when the market has its expected correction.

Trend #2: European reforms are taking shape, albeit slowly. We see progress, and think Europe is OK for investment — but we believe Europe will be a better buy after a correction.

Trend #3: We see stronger economic data in Japan. Japan as a potentially great investment venue longer term, but the market has risen a lot and may correct. We would be buyers of Japan on that correction.

Trend #4: Increased military activity in and around Southeast Asia is a result of China gaining so much prominence over the past decade. We are monitoring China’s relationships with its neighbors and other developments in the region closely.

As for investing in China, China’s fast GDP growth (recently reported at 7.7 percent for the fourth quarter of 2013) may be very high relative to all other large countries, but it doesn’t necessarily translate to a good place to put investment dollars. We see China as an unattractive place to invest currently, because of shadow banking problems and a struggle by the current leadership of the Politburo to slow corruption among top government officials.

Emerging Markets

Due to events taking place in India, we are becoming progressively more bullish on India — and although we believe that the Mexican market is a bit too expensive, we plan to buy if these markets experience a correction.

Thanks for listening, and we welcome your calls.

Leave a Reply