MARCH 2014 INVESTMENT JOURNAL: PUTIN PUTSCH
- ECB keeps rates unchanged
- Russia takes back Crimea
- Janet Yellen era begins
- Copper plunges; Chinese defaults erupt
As the first quarter of 2014 comes to a close, most major asset classes are flat or slightly up with the exception of Emerging Markets Equities, which are down 2%. March didn't provide much of a bump to this year's low single digit returns.
The 3 year view continues to show the outperformance in U.S. equities. That strength has continued in 2014, but with more of the returns coming from Value stocks over Growth. Commodities have been one of the few dark spots in the last 3 years, which have been a drag on emerging markets.
As March began, tensions in the Ukraine remained high. On March 5, a recorded phone call between the EU High Commissioner Catherine Ashton and the Estonian Foreign Minister Urmas Paet was leaked, and it was a stunner. Minister Paet, having just returned from Kiev, reported that there were credible reports that both police and protesters in Live had been killed by the same snipers, who were working for either a.) pro-Western forces seeking Yanukovich's ouster or b.) pro-Russian forces who were seeking a provocation to take back Crimea. In other words, the massacre was orchestrated to trigger a violent reaction. It remains to be seen how long it will take to authenticate this revelation, but it is available online, and is a fascinating and rare inside look at "diplomacy" in action. If you have ten minutes to spare, have a listen:
The Ukraine crisis dominated headlines in March, with Czar Putin executing a modern day "putsch", using tactics and media spin right out of the Third Reich's playbook. Vlad the Bad doesn't look like he's going to stop with just Crimea. (Hint: If visiting the Baltic States has been on your bucket list, you might want to arrange a trip soon.)
Russian stock markets sold off, with most observers saying to "keep clear" until the dust settles. We've run smack dab into a geopolitical crisis of the first order, with the threat of military escalation ever-present. Investors always seek safety in times of turbulence, so U.S. stocks and bonds, and gold, will be high on the list of "safe havens".
On March 6, the European Central Bank (ECB) met and announced no changes to their official interest rates. Most observers were surprised that they did not cut them to zero like the US, since the Eurozone has been experiencing persistent deflation and slow to no GDP growth.
On March 19th, the Fed released the first policy statement under Janet Yellen's leadership, and she gave her first press conference. The FOMC statement announced another $10 billion in "tapering" (less bond buying), but Yellen reiterated that the economy was still weak, and a lot of work remained to be done. When asked about the oft repeated guidance that short term rates would be low for a "considerable period of time" after QE ended, Yellen surprised everyone by saying "probably six months". Markets sold off on that unanticipated statement, since it had been pricing in "a year or more".
While Fed members continue to see the fall of 2015 as the most likely end of their QE program, the bond market is grappling with this new thinking. As we pointed out last month, high quality bonds have resumed a bullish posture, and there are signs that economic growth is starting to falter (especially overseas, where Europe is moribund and China and the emerging markets are back-sliding). The evidence continues to point to stronger bond prices until a more clearly defined environment towards ending QE emerges. Rate hikes by the Fed, in short, are still a long way off.
As March closed, markets began to notice large corporate bankruptcies in China. On March 20th, Highsee Group, the largest private steel makers in Shanxi province, defaulted on CNY3 billion (yuan) of debt, unable to repay its bonds on time. The reason for this collapse is a plunge in domestic steel prices, which have fallen to their lowest level in more than eight years in mid-March as a result of weak demand and a surge in output.
It appears that many large enterprises in China are struggling with weaker commodity and real estate prices, from the solar, coal, steel, and real estate industries, and are rumored to be future bankruptcy candidates. Where it gets really interesting is that the bonds of these companies, and many others like them, have been sold and packaged into "trust" products sold to the Chinese public. Who is going to bail out these busted trusts?
It is a significant looming problem, made worse by the massive domestic loan book collateralized by copper and other natural resources. With prices weakening, it is not hard to see a squeeze developing, as Chinese banks demand repayment and sellers sell at any price. A chart of Dr. Copper shows the weak pricing picture:
This is not a Page One story, yet, but we think it bears careful watching, just as Ukraine was last November.
Thanks for reading our Journal, and we'll be back to you as May begins.
©2014 Stratford Advisors, Inc. All Rights Reserved.
This publication is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or sell or trade in any securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Stratford Advisors, Inc., or any of its officers, directors, employees, affiliates or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. All investments are subject to risk which should be considered prior to making any investment decisions. The firm may hold for its clients, Principals or employees, positions in any securities mentioned herein, and may buy or sell such securities at any time without prior notice.