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Market Letter

January 8, 2015

Markets go up and markets go down is a popular comment. I like to ask the question why do markets go up and why do they go down. It is much easier to see your investments grow if you can buy before the markets move in any direction. But since we are not omniscient we must rely on experience, fundamentals, models, forecasts, on the ground evidence and structural changes to economic systems of trade and services.

2015 is getting off to a rocky start. Some analysts view the first few trading days as a directional for the remainder of the year. They could be right. Or they could be wrong. I have found that markets many times reward the fewest of participants. A market is after all a valuation metric of supply and demand at a given price. That price changes based on buyers and sellers perceptions of its value. Volatility is a general disagreement on price.

Here at the end of 2014 and beginning of 2015 commodities are under selling pressure. This is disagreement on price. The market is in a bearish cycle in commodities. I like commodities. Oil is under pressure as is natural gas, more on these later.

The U.S. market has not had a measurable pullback in some time. It is only natural we would see some normalization, so one would not want to buy at market highs these days.

What are some concerns that need to be looked at?

• Are policy setters looking at cyclical measures for structural problems?
• Investors must be compensated for increased risk.
• Interest rates
• ECB ultra loose policy vs Federal Reserve tightening
• No significant/sustained pullback since 2011

Federal Reserve Impact

Guy Haselman director of market strategies at Scotia Bank seems to think Fed chair Janet Yellen is confused. He says "the Federal Reserve decision makers use models that are broken. The models have too many moving parts. The FOMC really does not know where it is headed. The Federal Reserve FOMC must learn to say what it knows not what it perceives. The way it behaves and acts is far too complex". This understanding shows that interest rate tightening may happen in 2015 or it may not. If global demand sputters and the U.S. economy sputters then tightening most likely will not happen. For a government that borrows, low interest rates are beneficial.

Global markets

The global growth story seems to be slowing a bit. 2014 was a bad year for global markets except the U.S. I just do not know if Chinese data is accurate and truthful. The Chinese economy has been slowing but it could bottom here at end of 2014. I would not rule out a round of stimulus measures and easing in China. Russia is in deep trouble with oil in free fall. I would expect rocky times for the Russian economy during 2015. If there is a rebound in oil then the Russian markets may be undervalued longer term. Therefore, at the bottom of oil prices is a potential buying opportunity in Russia, and ETF known as RSX is one to look at.

U.S. Political

The United States Congress and Senate will be led by Republicans. That is probably a good thing at this season in the U.S. economy. President Obama has two years left of which little will get through the Legislative Branch. This is how the Framers designed it. Energy policy is sure to be on the agenda. I am not sure what else this President can really do to encourage growth unless a comprehensive tax and infrastructure plan would be passed.

Oil and Natural Gas

Probably the most important development here is the decline in oil and natural gas. World oil production and consumption numbers are scheduled to widen just a bit. If one would be watching the price of oil in its decline here in early January you would think this gap is miles wide. It just is not. With declining prices means oil and gas production will slow. This will leave the gap narrowed in 2016 and 2017. Somewhere here is a tremendous buying opportunity for oil and natural gas. These commodities by definition are non-renewable and limited by extraction. As their price drops it makes it less profitable to produce and bring to market. So eventually supply will tighten once again. At these levels alternative forms of energy are just not viable based on profit motive.

Where will the opportunities exist?

I like oil and natural gas. I like sugar. I tend to think U.S. equities are overvalued unless corporations were to extend capital expenditures in larger measures. If Congress does not pass a comprehensive infrastructure bill then at some point here a cyclical pause will begin. So the question here remains when will U.S. equity valuations peak? What will interest rates do this year? Some bond experts believe the markets can begin to adjust rates with or without Central Bank assistance. So we shall see.


This is an editorial written to Horizon clients as part of our tax practice and economic advising toward healthy business practice.

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