Week in Brief: March 21

March 21, 2014

Last week saw stocks behave like twelve-seeds in the NCAA tournament's opening round. Advancing unexpectedly.
Chairwoman Yellen's not-so-dovish comments about the end of easing sent a shiver through markets, but it was not enough to deter animal spirits amidst a slew of positive economic news.
Buffet's Billion? Safe for Now
Like that bottle of wine you've stored for the right occasion, the NCAA tournament was uncorked and poured throughout the weekend. Served with or without food, it did not disappoint.
Duke, Cincinnati, Oklahoma, Saint Louis, VCU, Villanova, among the palate-busting bouquet of upsets served to connoisseurs across the country.
By Friday evening, we knew no one would collect Warren Buffet's $1 billion promised to anyone who could pick the outcome of each game throughout the tournament. 99% of brackets were eliminated after Dayton vanquished Ohio State and Mercer toppled Duke. Three perfect brackets remained, but all were nullified when Memphis defeated George Washington later that night.
Tournament aficionados know that those 12- and 5-seed matchups entail the best potential for first-round upsets. This year was not different. St. Louis was the only five seed to advance to the weekend's second round.
Next weekend will again tickle bracketologist's senses. Dayton shoots for the Elite Eight. And multiple epic battles unfold, including the Commonwealth's own version of Game of Thrones as Calipari's surging Wildcats lay siege to Petino's Champion Cardinals.
Valar Morghulis, my friends.
Chto nOvava?
Following Russia's decision to annex Crimea, the U.S. responded by imposing sanctions on a number of President Putin's closest cronies. The sanctions prohibit these oligarchs from entering the U.S. Or doing business with American companies. Europe is expected to follow suit this week.
Once the ratings companies digested the sanction's potential impact, S&P wasted no time in downgrading Russia's credit rating - delivering another kick in the teeth.
Critics are calling the administration's move toothless. Placing sanctions on a select few Russians. Yet, people forget that a select cadre of powerful oligarchs control the media, the energy sector, manufacturing and banking. Essentially, the entire economy.
So, kicking these guys where it counts does, in fact, have an impact. Because these oligarchs represent Russia's economy. Add the fact that S&P downgraded Russian credit, and the other ratings agencies may follow suit, and you exacerbate the negative trend line. All of which explains why Putin seems intent, at least currently, to remove the story from the international headlines.
The Good
Goldman Sachs U.S. equity strategist David Kostin forecasts a near-term 10% market correction. Kostin explains that stocks are "lofty by almost any measure," based on ten metrics used to gauge valuation. How's that good news?
Because John Stephenson and Richard Ross state that Goldman's prediction could be correct. We might expect a normal, 10% correction in the short term. Yet, investors would still be best served to remain "long and strong this market."
Both point out that 3% 2014 GDP growth will bring a 7.5% boost to corporate earnings. Further, large corporate cash holdings and U.S. economic strength relative to the rest of the world will make U.S. markets attractive in 2014.
More importantly, using long-term technical analysis, Ross shows the similarities between this bull market and another four decades previous. Based on that comparison, he believes this bull could yet bring "another fantastic multi-year - perhaps multi-decade - bull run which has just started now." More here.
The Bad
Last week's market machinations can be partly attributed to our neurotic obsession with the Fed. During her press conference, Chairwomen Yellen made hawkish comments alluding to the Fed funds rate being raised roughly six months following the termination of tapering. Placing the official end of easing within Q2 next year. Most prognosticators had it occurring next year, Q3 or Q4.
This contracting time frame spooked QE -addicted investors. But, should it? Perhaps the Fed's slight change in verbiage is a vote of confidence on the economy's current trajectory. Or, perhaps it was not meant to signify the dynamic change of intentions that investors took it to mean. And remember, there's a lot of ground to cover between now and then.
Either way, it's coming. QE will end. Markets will adjust. Investors will survive.
The Ugly
The Libor manipulation scandal now includes 17 financial institutions and 28 individuals spanning 11 countries and four continents. Thus far, penalties amount to $5 billion, with more to come. The one commonality across this wide-ranging geographic scam? Nearly all of it was perpetuated by publicly traded financial institutions. At the heart of it was Tom Hayes, a UBS trader criminally charged with fraud in the U.S. and U.K. Graphic here.
For years, we've voiced our opinions on the inherent conflicts of interest that exist when companies with a quarterly earnings obsession are tasked with managing Main Street's finances. Nothing good comes from that conflicting cocktail. It remains one of the great, seedy, shameful and yet untold stories.
The Bottom Line
Investors continue to loathe this bull market. It's as if the hangover of the last two market corrections has permanently darkened the optimistic sentiment of global investors. Every headline and pullback seems to portend something ominous.
Between Fed policy updates, Russian troops in Crimea, the Middle East, and the ever-changing Affordable Care Act, the current state of affairs looks like a Goat Rodeo.
Yet, this market appears to be just a touch overbought. Could move sideways for a few weeks. Perhaps longer. But the economy is improving. News overseas is calming. And we would not be surprised to see a material move higher come early spring.
Weekly Results
Major markets finished higher last week. The DJIA rose 1.48%, the S&P 500 advanced 1.38%, and the Nasdaq gained 0.74%. Small cap stocks increased 1.04%. And the 10-year Treasury bond yield rose 9 basis point to 2.74%. Gold fell $48.84 per ounce, or 3.53%.

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