December 22, 2014
Weekly Market Outlook
By Keith Schneider
Since the year is just about up and the performance numbers are just about finished, barring an unusual end of year reversal of historic proportions, all US asset classes have put in a stellar performance. What is most unusual however is that the US Dollar has roared, trading at 4 year highs, while US T Bonds hover near all times highs as well. The 20 year bond has withstood the ending of quantitative easing and some maybe hawkish statements out of the Fed.
Did I forget to mention that most US Stock indexes are just a hair off all-time highs as well? In fact, looking around at Global Equities, beside the US, only India and China have had meaningful positive returns this year. To sum it up, the US from the financial markets standpoint, pulled off a triple play, or if you like horsing around, a Trifecta. Having all three assets classes from a single country (bonds, currencies and equities) perform as well as they have in the US this year is highly unusual. The big question looms, just how long this state of the market can continue?
The flight to US assets of all types driven by dominance of a slow but steady US economic recovery, political stability and energy independence looks reasonable especially when compared to the stagnant global economy fighting deflation. This dominance of the US seems justified as long as rates stay low (After all, we are the biggest debtor nation) and we can keep the pressure on oil prices.
Although Putin fancies himself as the Kasporav of the Geo –Political chessboard, with the ruble in ruins, and the Russian stock market down almost 50% this year, and his Oil based economy teetering on the brink of collapse, he might not be the grandmaster he thinks he is. Obama and the West have him boxed in. Today Putin shut down a Facebook page of a dissident looking to organize an anti- government rally and this move does not reassure fleeing foreign investors or help attract fresh western capital.
Putin is not without some moves or resources. He is hoping that the EU fails when Greek elections play out in the beginning of 2015. There is a distinct possibility that Greece might choose to abandon the Euro and lean left. This would weaken the Eurozone and NATO as well. Along with the annexation of Crimea, Putin will try to cozy up to Greece and Turkey and hence control critical parts of the Mediterranean and the Black Sea. If those things do fall into place for Putin, he might be able to leverage that into higher oil prices and stabilize the Russian Economy. If anything, as we are witnessing from recent market gyrations, just a small shift in perception has a major impact on prices of all assets, especially oil.
Meanwhile the US equities markets have yet again shrugged off the recent swoon as if it never happened. From a pure momentum perspective US Equities look poised to make new highs again. After a two day, 700 + point move in the DOW, the markets digested this massive rally with barely a burp on Friday.
Warren Buffets favorite indicator for determining stock market valuation is the GDP versus total capitalization of the US equity markets and it is sitting at overbought or about 135% of GDP. It still has another 10% rise before it matches all-time high bubble valuations highs set during the dot com boom. Another cross current is that the strong presidential cycle is bumping into these high valuations and a long in the tooth bull run. For more details let’s go to this week’s video.
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