Weekly Market Insights

1. Weekly Market Insights Dow Jones:16026 YTD -2.69% ‌ │ S&P 500: 1815 YTD -1.19% │ NASDAQ: 3999 YTD -3.92% April 14, 2014 Capital is a Coward In our view, there are three factors that led to last week’s sell-off: investors’ concern about preserving portfolio profits, last week’s disappointing earnings numbers, and a ratcheting concern about events in Ukraine. All of these are understandable, explainable or not overwhelmingly significant to the U.S. economy and financial markets. Investors’ desire to preserve gains after a powerful market move has always been an important factor influencing investor behavior. Memories of 2008 have not disappeared. It is clear that within the marketplace prices of some securities, mostly tech and biotech, got way ahead of themselves. A correction was needed: all that was needed was a catalyst, and investors got two. Lastly, investors were disturbed by some disappointing earnings. This, interestingly, seemed to come as a surprise. It shouldn’t have. For the past quarter, we have had disappointments in economic data releases. It had been explained away for the most part by the difficult winter which most of the country experienced. It doesn’t seem unreasonable to us that if the quarter’s economic progress was disappointing, the company earnings should also be disappointing. There is no reason to think the same factors that affected economic growth should affect earnings in the same direction. This should not have been a shock. In normal times it probably would not have been, but these are not normal times. As we wrote earlier, investors were and are jittery about preserving profits. Also, investors are looking around the globe and getting nervous about what they see. Now that the Middle East is not the most important part of the world to us, two areas have captured the attention of investors: China, Japan, South Korea conflict (which has been smoldering for awhile), and, of course, Ukraine. Here is where our title comes in: Capital is a Coward. Capital will flee conflict, no questions asked. Investors have done just that. The question to ask is: Does this pose a real threat to global economy and U.S. equity markets in particular? The answer, of course, is it depends very much on the timeframe. If we were to pick between the two problems mentioned earlier, we would argue the former as far more crucial, but not imminent. Ukraine is now. Ukraine, obviously, is a far more crucial problem to Europe than for the U.S. Europe’s economy, with its Faustian bargain with Russia (their dominant supplier of energy), is far more at risk. Certainly a re-acceleration of an economic slowdown in Europe would have a weakening effect on the U.S. economy, but the U.S. economy is less dependent on the international sector than others, has a thriving trade relationship with Asia and the rest of the non-European world, and both fiscal and monetary policy are working in the same direction. Where can we be wrong? We have made two assumptions on which, in our view, the consequences of Ukraine rest: first, the U.S. will not become embroiled in the conflict, and second, the conflict remains localized. If either assumption proves incorrect, we will have to re-evaluate our view. In the meantime, it does seem an opportunity to buy companies that are being beaten up for all the wrong reasons. The views expressed are subject to change. Any data cited have been obtained from sources believed to be reliable. The accuracy and completeness of data cannot be guaranteed. Past performance is no guarantee of future results. • The Week Ahead: • MONDAY: EC Industrial Production SA (m/m) expected at 0.20%, US Retail Sales Advance (m/m) expected at 0.90%, US Retail Sales ex auto and gas expected at 0.40% • TUESDAY: US CPI (m/m) expected at 0.10%, US CPI ex food and energy (m/m) expected at 0.10%, Russia Industrial Production (Y/Y) expected at 0.50% • WEDNESDAY: EC CPI (m/m) expected at 1.00%, US Housing Starts (m/m) expected at 7.50%, US Building Permits (m/m) expected at 0.10% • THURSDAY: Russia Unemployment Rate expected at 5.70%, US Initial Jobless Claims expected at 310K, US Continuing Claims expected at 2778K • FRIDAY: