This morning's "Daily State" report was penned by Robert Barone (Ph.D., Economics, Georgetown University), a Principal of Universal Value Advisors (UVA) based in Reno, Nevada and a fellow Investment Committee member with Dave Moenning at CONCERT Wealth Management. We are pleased to be able to offer Robert's views this morning. Dr. Barone's firm focuses on core value investing using Benjamin Graham's "Margin of Safety" approach. We hope you enjoy Robert's take.

The Market's Angst - Historical Perspective

While the U.S. economy thrives and is likely to grow even faster in 2015, the disarray elsewhere in the world has caused the U.S. equity markets to pause ("dip," if you will). The immediate cause is the rapid fall in the price of oil and the possible fallout for foreign political, economic and financial structures. The fact that the markets hate uncertainty is certainly on display here.

A Dovish Fed

In its December 17th FOMC statement, the Fed took a dovish stance, with Yellen declaring in the subsequent press conference that the Fed was unlikely to raise short-term rates for at least the next 2 meetings. That makes May, 2015, the earliest the Fed will raise the Fed Funds rate. In addition, the "dot plot," a summary of where FOMC members believe the Fed Funds rate will be at future dates, showed lower interest rate projections than they had in the last FOMC meeting (October). So, the Fed, at least, did not stir the uncertainty pot.

Historical Perspective - The Asian '97/'98 Meltdown

If we go back in history, we find that the Asian meltdown in ‘97/'98 is similar in many respects to what is occurring in parts of the world today. Back then, the ultimate result of the crisis was a Russian default. And so, today, the markets are quite concerned about a similar result. The Russian ruble has been quite volatile in the current scenario, falling as much as 50% in value vs. the dollar at one point on December 16th vs. where it traded prior to the crisis.

Back in '97/'98, the emerging market economies went into recession. At the time, Europe did not, but the European governments could not stimulate their economies via fiscal policy due to the constraints imposed by the Maastricht treaty which required certain fiscal ratios for acceptance into the European Union and the formation of the euro currency. How ironic is it that those same European governments are now under similar fiscal constraints, this time in order to save the euro?

Comparison: Then

Let's look at conditions in the U.S. at the time and what transpired in the U.S. economy during the Asian meltdown. During the period of the crisis, U.S. real GDP grew by more than 4% each quarter. Of course, we were in the midst of the dot.com bubble. The unemployment rate fell from 5.4% (December '96) to as low as 4.3% (April, '98). The price of WTI crude peaked at $26.55/bbl on January 8, 1997 and fell to a low of $10.82/bbl on December 10, 1998, a 59% decline. During the two year period, the dollar strengthened, at one point, by 17.1%. The ten year T-Note yield fell 176 basis points from 6.41% at the end of '96 to 4.65% at the end of '98. At the end of '96, the Fed Funds rate was 5.25%. The economy was growing rapidly, and the Fed had a tightening bias. But, by the end of '98, the effective Fed Funds rate had fallen to 4.63%.

Comparison: Now

Now, let's look at the similarities in the U.S. today to the situation at the time. Many pundits expect real GDP to grow by 3% in 2015 (we believe growth will be closer to 4%). In its December 17th statement, the FOMC believes that by the end of 2015, the unemployment rate will have fallen from today's 5.8% rate to 5.2%. And, the price of WTI crude had an interim peak of $107.52/bbl on June 16, 2014. Six months later, December 17th, the price closed at $55.93/bbl, a decline of 48%. From June 16th to December 17th, the dollar has strengthened by 10.7%. Today, there is clearly downward pressure on the 10 year Treasury rate, mainly from foreign central bank demand, and demand from U.S. banks due to changing liquidity requirements. On that same June 16th when WTI was at its interim peak, the 10 Year Note closed at 2.61%. On December 17th, it closed at 2.14%. And, while we don't know where the Fed Funds rate will go, the dovish tone adopted by the Fed at its December FOMC meeting along with the changeover of FOMC members resulting in a net increase in doves, makes it a pretty good bet that the Fed Funds rate will rise more slowly than currently priced in.

How Did Equities Fare?

Finally, let's look at how the equity markets performed during the Asian meltdown. During the two year period, December, '96 to December '98, the S&P 500 index grew 63%. Let's not forget that this was the dot.com era. Even then Fed chief Alan Greenspan was flummoxed, as he made his infamous "irrational exuberance" comment on December 5, 1996, and the party in equities continued for several more years. Perhaps today, QE is the new dot.com.

The point of this missive is that we have been through a similar chapter in world financial history 16-17 years ago. The conditions look eerily similar. That doesn't mean all of the results will be similar, but this is the best historical model we have. As I said above, the markets abhor uncertainty. If history is any indication, this may well prove to be a "buy the dips" moment.

Robert Barone, Ph.D.

Robert Barone (Ph.D., Economics, Georgetown University), an advisor representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor. Dr. Barone is available to discuss client investment needs. Call him at (775) 284-7778.

Statistics and other information have been compiled from various sources that Universal Value Advisors believes to be accurate and credible but makes no guarantee to their complete accuracy. A more detailed description of Concert Wealth Management, its management and practices is contained in its "Firm Brochure" (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.

Read More of Robert Barone's Work

Turning To This Morning

Everything is rosy this morning as it appears that any and all fears have abated. Running down the list, the Fed allayed fears that it would raise rates prematurely by replacing "considerable time" with "patient" (show of hands; did anyone REALLY think the Fed would hike rates prior to May/June 2015?). Oh, and the Swiss National Bank introduced negative interest rates in response to the "crisis" in Russia. Speaking of Russia, the country's stock market as well as the ruble is rallying about 5% in the early going after the announcement that the central bank will allocate 1 trillion to the banking system. In addition, President Putin is meeting with reporters and apparently saying all the right things - including that yesterday's currency intervention could have come a half a step sooner. Finally, crude oil is up this morning and yields on the U.S. 10-year are rising. In response, European markets are up 1% - 2% and U.S. futures are soaring (so, crisis averted, right?). As such, it appears that there may be a Santa sighting at the corner of Broad and Wall today.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: +2.32%
    Hong Kong: +1.09%
    Shanghai: -0.10%
    London: +1.02%
    Germany: +2.00%
    France: +2.36%
    Italy: +1.65%
    Spain: +2.22%

Crude Oil Futures: +$1.71 to $58.18

Gold: +$13.50 at $1208.00

Dollar: higher against the yen and euro, lower vs. pound

10-Year Bond Yield: Currently trading at 2.163%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +26.66
    Dow Jones Industrial Average: +211
    NASDAQ Composite: +57.20

Thought For The Day:

For every minute you are angry you lose sixty seconds of happiness. -Ralph Waldo Emerson

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Oil Crash
      2. The State of Fed/ECB/BOJ Policy
      3. The State of the U.S. Economy
      4. The State of Russia/Emerging Markets "Crisis"

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Negative
(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

• Key Near-Term Support Zone(s) for S&P 500: 1975
• Key Near-Term Resistance Zone(s): 2020

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

• Trend and Breadth Confirmation Indicator (Short-Term): Negative
• Price Thrust Indicator: Negative
• Volume Thrust Indicator: Negative
• Breadth Thrust Indicator: Negative
• Bull/Bear Volume Relationship: Moderately Positive
• Technical Health of 100 Industry Groups: Neutral

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

• S&P 500 Overbought/Oversold Conditions:
        - Short-Term: Moderately Oversold
        - Intermediate-Term: Neutral
  
• Market Sentiment: Our primary sentiment model is Neutral .