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2/2/2015

OK, I know you’ve all been sitting on the edge of your seats, looking for the Doc’s first write-up for the new year (then again, maybe not).  Regardless, here it is.

Many of the factors that we highlighted towards the end of 2014 have reared their ugly head once again to start 2015 but the intensity of those factors have increased significantly. This should be no surprise since they are structural and serious in nature.  Just to refresh your memoires, the financial markets are facing a rapidly declining Euro currency and the conundrum of Euro members’ extreme difficulties to remain solvent.  This is not just a Euro Zone problem as multinational companies are now experiencing earnings depletions due to the currency effect.  The Chinese economy is experiencing increases in bad debt and slowing growth.  Why are these issues so serious?  Think about it, these are two of the top three economies of the globe. 

The markets are now facing a new variable to contend with of equal importance and this involves the rapid decline in the price of oil.  Although there may be some positives over the long run to this scenario (e.g. lower fuel prices), the near term ramifications are taking their toll on oil producing nations such as Brazil, Russia etc. (and corresponding financial markets…debt markets), not to mention the development of oil producing projects in the US, many of which may no longer be profitable.

The result of all these issues is a dramatic increase in underlying risk in market valuations for Equities, Fixed Income and Currencies.  Perhaps the point to note is that these problems are not going away anytime soon, where solutions require intense, long term fiscal and monetary discipline.  A lack of credible policies to address these issues heightens the risk of markets around the globe and some markets may be reaching a tipping point. We’ll be back soon to keep you posted.

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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