Russian Commander Issues Ultimatum

March 3, 2014

Ultimatum Reported By Reuters via Telegraph

The following information was posted on this morning:

There are a lot of moving parts to any geopolitical crisis, and thus, things can change quickly and dramatically. Therefore, it is important that we remain flexible and make decisions based on hard evidence, rather than fear.

ECB Has Key Meeting This Week

While the events in Ukraine will grab most of the headlines this week, the ECB has a get-together scheduled. As we outlined on December 4, central bankers are terrified of deflation. From MarketWatch:

A prolonged period of low inflation in the euro zone may derail the currency area’s fragile economic recovery and must be fought with additional monetary stimulus, International Monetary Fund chief Christine Lagarde said Monday. Lagarde, who was speaking at a conference in Bilbao, northern Spain, said that while the European Central Bank already has taken a number of strong measures to help the euro area, “even further accommodative policies and targeted measures are needed to address low, below-target inflation and achieve lasting growth and jobs.” Annual inflation in the euro zone was 0.8% in February, according to European statistics office Eurostat, well below the ECB’s target of just below 2%. The ECB will meet Thursday to decide on interest rates for the area.

Buffet: Best Days Lie Ahead

While it is nearly impossible for individual investors to gather scuttlebutt in the same manner Warren Buffet does, the markets understandably take note when the Oracle of Omaha offers his opinion on the state of the economy. From MarketWatch:

Though we invest abroad as well, the mother lode of opportunity resides in America,” Mr. Buffett wrote in his annual letter to shareholders, released Saturday along with Berkshire’s fourth-quarter and annual report. The “dynamism embedded in our market economy will continue to work its magic,” Buffett wrote. “America’s best days lie ahead.”

Investment Implications – Watching Geopolitical Developments

As regular readers know, our personal opinion regarding the conflict in Ukraine is of little value from an investment perspective. However, the aggregate response to geopolitical developments this week is very important. The tweet below sums up our approach:

Our market model relies heavily on weekly outcomes. Therefore, the look of weekly charts on Monday is not nearly as significant as how they look on Thursday or Friday. Our rules do allow for incremental allocation adjustments during the week, which means we are open to reducing risk if the observable evidence calls for it. The glass half empty Monday is our U.S. stocks (SPY) and technology stocks (QQQ) were having a difficult session. The glass half full perspective looks at gains in our bonds (TLT) and gold-related position (GDX). TLT was up 0.67% midday and GDX had tacked on 2.47%. The S&P 500 chart below shows some areas where buyers may become interested if the situation in Ukraine continues to spook the markets.

As covered in detail March 1, the weight of the evidence continued to support the bullish case as of the close on Friday, February 28. Just as we needed to see hard evidence of a bearish turn before overreacting to the 1929 parallel, it is important that we stick to our discipline during times of increasing fear and uncertainty. If the Ukrainian situation flips the markets to a risk-off stance, observable shifts will begin to appear.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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