Quagmire

Joe PreisserJoe Preisser, Portfolio Specialist, Brinker Capital

The drums of war, which resounded so strongly from our nation’s Capital during the past few weeks, have quickly been muffled by the possibility of a relinquishment of the Syrian government’s chemical weapons stockpile to an international force.  The hastily, cobbled-together diplomatic effort led by the Russian government is dangerously scant on detail, but has offered, as German Chancellor Angela Merkel observed on Wednesday, “a small glimmer of hope” that these weapons of mass destruction can be seized peacefully (New York Times). The delay, and possible aversion of a military strike by the United States, brought about by this development has temporarily allayed tensions around the world and added strength to the current rally that has brought equities in the United States back within sight of the historic heights reached earlier this year.

9.13.13_Pressier_Quagmire_2The long march of the United States back toward armed conflict in yet another nation in the Middle East began with Secretary of State, John Kerry’s emphatic denunciation of the heinous chemical weapons attack perpetrated by the Syrian Government on August 21, which killed an estimated 1,429 people including at least 426 children (New York Times).  Mr. Kerry was quoted as saying, “the indiscriminate slaughter of civilians, the killing of women and children and innocent bystanders by chemical weapons is a moral obscenity…And there is a reason why no matter what you believe about Syria, all peoples and all nations who believe in the cause of our common humanity must stand up to assure that there is accountability for the use of chemical weapons so that it never happens again” (Wall Street Journal). The possibility of American intervention sparked a precipitous decline in stocks listed around the world, with those in the emerging markets having been sold particularly aggressively, as fears of a spillover into a broader regional conflict containing the potential to disrupt the price of crude oil, weighed on investors.

The unprecedented vote by the British Parliament on August 29 to decline the government’s request for an authorization of military force (Telegraph U.K.), began a tentative rebound in global equities, which was furthered by President Obama’s decision on August 31 to seek Congressional approval before embarking on an attack, as both decisions led to the ebbing of worries about any immediate action.  The recent emergence of the potential diplomatic solution to the crisis in Syria, brokered by Russia, has provided further fuel to the reversal in indices around the globe, as concerns of the unintended negative consequences which surround any military conflict have, for the time being, abated.

Chart representing MSCI Emerging Markets Index.

Chart representing MSCI Emerging Markets Index.

Though the President has requested that Congress delay any vote related to the authorization of force until this avenue of diplomacy is fully explored, the potential for United States military action lurks in the shadows and may have in fact been strengthened by this development.  Democratic Whip, Steny Hoyer of Maryland commented on the potential failure of Russia’s endeavor to Bloomberg News, “People would say, well, he went the extra mile…He took the diplomatic course that people had been urging him to take—and it didn’t work.  And therefore under those circumstances, the only option available to us to preclude the further use of chemical weapons and to try to deter and degrade Syria’s ability to use them is to act.”

The suffering in Syria, where the United Nations estimates the death toll to be in excess of 100,000 lives, with half of those lost being civilians and an untold number of injured and displaced, is a tragedy of unfathomable depth.  The fact that it has taken the use of some of the most hideous weapons on Earth to spur the international community to action in an effort to stop the slaughter is deeply regrettable, however it has brought with it the promise of an end to the conflict now in its third year.  Although a diplomatic solution is certainly preferable to military action, if the current negotiations fail to bring Bashar al-Assad’s store of chemical weapons, which is the largest active stockpile in the world, (Wall Street Journal), under international control, the use of force will be a necessary recourse, as the killing of innocents must be stopped.

9.13.13_Pressier_Quagmire_3It’s easy … to say that we really have no interests in who lives in this or that valley in Bosnia, or who owns a strip of brushland in the Horn of Africa, or some piece of parched earth by the Jordan River. But the true measure of our interests lies not in how small or distant these places are, or in whether we have trouble pronouncing their names. The question we must ask is, what are the consequences to our security of letting conflicts fester and spread. We cannot, indeed, we should not, do everything or be everywhere. But where our values and our interests are at stake, and where we can make a difference, we must be prepared to do so.” –William Jefferson Clinton

The views expressed above are those of Brinker Capital and are not intended as investment advice.

Trouble in the Mediterranean

Joe PreisserJoe Preisser, Investment Strategist, Brinker Capital

Blue-chip stocks listed in the United States stumbled on their quest to reclaim the historic heights they recently attained, as a renewal of concerns from the European continent served to unsettle investors. Proverbial wisdom contends that markets will climb a, “wall of worry”, and this statement has rung particularly true this year as the Dow Jones Industrial Average has marched steadily higher amid a torrent of potential pitfalls. Up until this week, market participants have largely disregarded the political gridlock ensnaring Washington, D.C. and the possibility of a resurgence of the European sovereign debt crisis, instead clamoring for risk assets, and in so doing, have driven stocks into record territory. The current rally has, however, paused for the moment with the increased possibility that Cyprus may become the first member of the Eurozone to exit the currency union, once again casting the shadow of doubt across the Mediterranean Sea and onto the sustainability of this collection of countries.

A decision rendered by leaders of the European Union last weekend—to attempt to impose a tax on bank deposits within the nation of Cyprus in exchange for the release of rescue funds the country desperately needs—sent tremors through global financial markets. Although the Cypriot population stands at slightly more than one million citizens, making it one of the smallest countries in the Eurozone, the repercussions of this decision were felt across continents. Policy makers representing the nations of their monetary union hastily gathered to decide what conditions would need to be met in order to disperse the necessary financial aid to Cyprus, totaling ten billion euros, and in so doing, made a significant policy error. According to The New York Times on March 19, “Under the terms of Cyprus’ bailout, the government must raise 5.8 billion euros by levying a one-time tax of 9.9 percent on depositors with balances of more than 100,000 euros. Those with balances below that threshold would pay 6.75 percent, an asset tax that would still hit pensioners and the lowest -income earners hard.” Although the intentions of the European leaders making this decision were to target large foreign depositors, who have historically used the country’s banks as a tax haven, the proposed inclusion of those on the lower end of the spectrum has created widespread uncertainty.

EurosThe imposition of a tax on deposits that would include those of 100,000 euros and less, which had been guaranteed by insurance provided by the European Union, has created concerns over the stability of the banking system in Cyprus and by extension, that of the Eurozone in its entirety. By negating the very guarantee that had been put in place to strengthen this vital portion of the Eurozone’s financial system, policy makers have increased the risk that large scale withdrawals will be taken across Cyprus, which is exactly the type of situation they had hoped to avoid. The New York Times quoted Andreas Andreou, a 26-year-old employee of a Cypriot trading company, who gave voice to the feelings of the populace when he said, “How can I trust any bank in the Eurozone after this decision? I’m lifting all my deposits as soon as the banks open. I’d rather put the money in my mattress.” In order to forestall such an event, and protect against the possibility of contagion to the other heavily indebted members of the currency union, the country’s banks have been shuttered and are scheduled to remain so until Tuesday.

Uncertainty continues to swirl in the warm Mediterranean air as the Cypriot Parliament on Wednesday rejected the original terms of the bailout, casting the nation’s leaders into direct conflict with those of the European Union. With the deadline for
the country to propose a viable plan to raise the requisite 5.8 billion euros,
set by the Continent’s Central Bank for Monday, fast approaching, the stakes of
this game of brinksmanship have been raised, as the possibility of the country
leaving the euro zone has been broached. Eric Dor, a French economist who is the head of research at the Iéseg School of Management in Lille, France offered his opinion on the rationale of Europe’s leaders in The New York Times on Thursday, “They are saying we can take the risk of pushing Cyprus out of the Eurozone, and that Europe can take the losses without going broke.” Although the raising of the possibility of Cyprus being expelled from the monetary union, is most likely a negotiating tactic designed to goad Cypriot leaders into adopting the reforms the E.U. has deemed necessary, with the more likely outcome of a compromise being reached, the current impasse serves as a reminder of the difficulties facing the Continent as it continues its unprecedented experiment in democracy.

Growth Fears Weigh On Shares

Joe Preisser

The rally in global equities, which has carried share prices to heights unreached since 2008, stalled last week as the marketplace struggled to evaluate the current risks facing the world economy.  Stocks listed from Europe to the United States slipped as concerns of a slowdown in global growth were drawn into focus.

The selling arrived in the wake of the release of a dour assessment of the world’s economy by the International Monetary Fund (IMF) last  Monday and accelerated following a disappointing start to corporate earnings season.  Citing potential problems on both sides of the Atlantic, the IMF lowered its projection for the expansion of global growth to 3.3% for this year, and 3.6% for 2013 (Bloomberg News).   The International Monetary Fund specifically highlighted the lingering effects of the European sovereign debt crisis, as well as the political gridlock in the United States, as risks that hold the potential to destabilize global financial markets (New York Times).  In a reflection of the difficulties created by the lack of a substantive policy response by the Spanish Government to the current rash of problems confronting the country, Standard & Poor’s on Wednesday lowered the nation’s sovereign debt rating  two notches to BBB- and downgraded their outlook to negative.

Earnings season saw it’s unofficial start last week as Aluminum manufacturing giant, Alcoa Inc.* reported results for the third quarter, which exceeded analysts’ estimates.  Although the company’s revenue and per-share numbers were better than expected, a drop in their forecast of global demand for the heavily used industrial metal sent its stock price markedly lower last Wednesday.  Following on the heels of Alcoa’s disappointing comments, the engine manufacturer, Cummins Inc. declared that it was lowering its profit projections for the remainder of the year as a result of waning demand (Wall Street Journal).  The outlook for the global economy offered by these two manufacturing behemoths highlights the challenges currently facing investors, as they struggle to weigh the risks of an economic deceleration against the coordinated efforts of several of the world’s most powerful Central Banks to maintain expansion.

*Shown for illustrative purposes only.  This is not a security holding of Brinker Capital.

Central Banks Once Again Lift Stocks

Joe Preisser, Product Specialist

Stocks listed across the globe rose in dramatic fashion this week, carried on the wings of an announcement made by European Central Bank President, Mario Draghi that a program of unlimited buying of the distressed bonds of the Continent’s heavily indebted nations will be enacted. In a nearly unanimous decision, the ECB’s board endorsed Mr. Draghi’s proposal to reduce sovereign borrowing costs by making large scale purchases of short term debt, ranging in maturities from one to three years in a plan named, “Outright Monetary Transactions” (New York Times). As a means of countering German fears of increasing inflationary pressures through their actions, the money used by the Central Bank to buy the sovereign bonds will be removed from the system elsewhere, thus “sterilizing” the purchases. The bold action of the European Central Bank was characterized by its President as, “a fully effective backstop” for a currency union he deemed, “Irreversible” (New York Times).

The concern over the possible dissolution of the Continent’s monetary union, which has held sway over the global marketplace for the last two and a half years, was diminished by the resolute decision of the European Central Bank to embark on its latest plan to purchase the debt of its most heavily indebted members. Whether this action marks a decisive turning point in the struggle to end the crisis is yet to be determined, as obstacles remain, not least of which are the stipulations that the embattled sovereigns themselves must formally request aid from the Central Bank and adhere to strict conditions in order to be granted assistance. Despite the questions which continue to swirl around this collection of countries, the resolve of its policy makers to maintain their union has been affirmed. Doug Cote, the Chief Market Strategist for ING Investment Management was quoted by the Wall Street Journal, “it seems like there is a very clear and strong commitment that the euro will not only survive, but prosper.”

Speculation that the Federal Reserve Bank of The United States will enact additional measures designed to bolster growth in the world’s largest economy, following next week’s monetary policy meeting, increased in the wake of the release of a disappointing report of job growth for the month of August. According to Bloomberg News, “the economy added 96,000 workers after a revised 141,000 increase in July that was smaller than initially estimated…The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000.” The case which Chairman Bernanke made for possibly employing additionally accommodative monetary policies, after the Jackson Hole Symposium on Aug. 31, included language which categorized the current rate of unemployment as a, “grave concern” (New York Times). The lack of progress made toward improving payrolls in the United States, as reflected by the weakness of this report, greatly increases the chances of the Central Bank taking action, which will be supportive of risk based assets. Michelle Meyer, senior U.S. economist at Bank of America was quoted as saying, “The Fed will not stand idle in the face of subpar growth, we expect additional balance sheet expansion before year-end, with a growing probability of an open-ended QE program tied to healing in the economy” (Wall Street Journal).