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Market Commentary - Week of 4/21/14

The Markets

"Donetsk is a British city! God Save the Queen." In a parody worthy of The Onion, an online poll suggested citizens of the Ukrainian city of Donetsk would like to secede and join Britain. The city, which was founded by Welsh steel worker John Hughes in the 19th century, has been the site of conflict between pro-government and pro-Russian groups recently.

Ignoring the Donetsk poll, which showed 61 percent of citizens favored accession to Britain, the European Union, the United States, Ukraine, and the Russian Federation reached an agreement on Thursday to “Refrain from any violence, intimidation, or provocative actions… All illegal armed groups must be disarmed; all illegally seized buildings must be returned to legitimate owners; all illegally occupied streets, squares, and other public places in Ukrainian cities and towns must be vacated.” Russia’s Micex index closed higher on the news; however, the gains may be short-lived as pro-Russian separatists refused to comply and continued to occupy government buildings in nine cities and towns in eastern Ukraine (including Donetsk).

Just across the Asian continent, China missed its government’s target for economic growth (7.5 percent) during the first quarter of 2014, although it exceeded the expectations of economists who had estimated growth at 7.2 percent. The country’s gross domestic product (GDP) grew by 7.4 percent.

In America and across the globe, news of conflict in Ukraine and slowing growth in China were trumped by positive economic data and the Federal Reserve’s reassurance it was committed to keeping interest rates low for some time. The majority of indices tracked and reported by Barron’s International Recap showed gains for the week.

Data as of 4/17/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    2.7%    0.9%    20.2%    12.6%    16.5%    5.1%
10-year Treasury Note (Yield Only)    2.7    NA    1.7    3.4    2.9    4.4
Gold (per ounce)    -1.4    8.1    -6.7    -4.5    8.3    12.4
DJ-UBS Commodity Index    0.9    9.5    5.7    -6.8    4.7    -0.8
DJ Equity All REIT TR Index    2.1    10.4    2.1    11.1    22.2    9.7
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

IT MAY NOT COME AS A SURPRISE TO LEARN MEN AND WOMEN have different priorities and worries. A recent survey by U.S. Trust found wealthy women – those with $3 million or more in investable assets – have goals similar to those of wealthy men, but they prioritize differently. The survey reported:

“Women create and control an increasing share of wealth and have a powerful economic influence in the workforce and at home – as business owners, executives, investors, philanthropists, consumers, caregivers, and role models for the next generation. They have a distinct perspective and set of behaviors, shaped by their experiences, upbringing, outlook, and goals that uniquely affect their income, financial security, wealth, and wealth planning needs.”

For example, when it comes to investing, almost two-thirds of women surveyed think it’s important to consider the social, political, and/or environmental effects of the companies in which they invest (42 percent of men share this belief). In fact, more than half are willing to accept a lower investment return if they believe the company in which they’re investing has a positive social impact. Close to three-fourths simply don’t want to invest in companies that have negative social or environmental influences.

On the family front, more than a third of women indicated they devote more time to caring for aging parents and other relatives than do their spouses. In some cases, women said care giving has affected their career advancement and/or income levels; however, relatively few have taken time to calculate the monetary value of the time they’ve spent providing care.

A 2013 Congressional Budget Office report estimated the economic value of caregiving for older Americans was about $234 billion in 2011. It arrived at its estimate by multiplying $21 per hour (the average wage of a home health aide in 2011) by 11.2 billion hours of donated care. Despite the cost, or perhaps because they don’t understand it, the vast majority of survey participants had no formal plans in place to provide for family members who might need support.

When it comes to taxes, a lot of people – male and female – are perplexed. Three-fourths of women are unclear about the effects of tax law changes on investments and income (as compared to 62 percent of men). Regardless of confusion, high net worth investors of both men and women felt pursuing higher returns was more important than letting tax matters determine their investment choices.

Weekly Focus – Think About It

“My mother said I must always be intolerant of ignorance but understanding of illiteracy. That some people, unable to go to school, were more educated and more intelligent than college professors.”
--Maya Angelou, American author and poet

Market Commentary - Week of 4/14/14

The Markets

If you’re feeling whiplashed from the mid-week collision of good and bad economic news, you’re not alone.

On Wednesday, the Federal Reserve’s Open Market Committee (FOMC) meeting minutes were released and investors were reassured by what they read. Although the Fed lowered its Gross Domestic Product (GDP) growth projections for the first half of 2014, the minutes indicated real GDP is expected to grow faster over the next few years than it did last year (FOMC Meeting Minutes, Staff Economic Outlook, paragraph 1). In addition, “to support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate” (FOMC Meeting Minutes, Committee Policy Action, paragraph 2). Reassurance the Fed would not increase the federal funds rate sooner than expected was received with gusto and all three major U.S. stock indices raced ahead finishing the day up more than 1 percent.

On Thursday, good news about the world’s largest economy (United States) ran right into not-so-good news about the world’s second largest economy (China). Economic indicators suggested China’s economy might be slowing faster than anyone expected. MarketWatch reported, “[China’s] Exports fell 6.6% from a year earlier, slower than the more-than-18% tumble in the previous month, but widely missing a Dow Jones survey consensus for a 4.2% gain. Imports were even uglier, plunging 11.3% – more than the 10.1% drop in February – and trailing far behind an expected 2.8% gain.” When trading ended on Friday, the Standard & Poor’s 500 was down 1.8 percent for the year, the Dow was off 3.3 percent, and the NASDAQ had lost 4.2 percent of its value.

When markets get dramatic, it may be a good idea to stay calm and remember one of the most basic tenets of investing: Buy low, sell high.

Data as of 4/11/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -2.7%    -1.8%    14.0%    11.1%    16.2%    4.7%
10-year Treasury Note (Yield Only)    2.6    NA    1.8    3.6    2.9    4.2
Gold (per ounce)    1.6    9.7    -15.8    -3.5    8.2    12.4
DJ-UBS Commodity Index    1.2    8.5    1.0    -7.6    3.8    -1.0
DJ Equity All REIT TR Index    -1.1    8.1    -1.6    10.8    22.9    9.7
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THERE’S A NEW INDEX IN TOWN… About five years ago, the World Economic Forum’s Global Agenda Council proposed a new index be developed, one that would “increase the impact that social entrepreneurs, business leaders, and policy makers can have in the world.” The general idea was the new index would measure social progress and spur competition between nations to improve the environment for social innovation in much the way the Global Competitiveness Index assesses the drivers of economic productivity and prosperity and identifies nations that are most competitive.

Just 48 months later, the Social Progress Index (SPI) was born. The beta version of the index debuted in 2013 and focused on measuring the extent to which 50 countries met the non-economic needs of their citizens. The 2014 SPI gauged 54 social, health, and environmental factors across 132 countries, considering only outputs (like literacy) and not inputs (like spending on education). When the numbers were tallied, New Zealand was number one – even though it’s in 25th place when measured by GDP per person (SPI, pg 62).

According to The Economist, when the results of the SPI are compared with a country’s GDP per person, its value truly becomes apparent. The publication quoted Michael Porter, a professor at Harvard Business School, who said, "There is a view that economic development and social progress go hand in hand. That's true on average, but not in particular." For example, Costa Rica and Iran have similar GDPs, but Iran falls far lower on the scale of social progress. Brazil and Kuwait are about equal in terms of social progress, although Kuwait’s GDP per person is multiples greater than that of Brazil.

So, how did the United States do? We’re in 2nd place for GDP per person and 16th for social progress (SPI, pg 63). A New York Times Op Ed piece summarized the scores like this, “In the Social Progress Index, the United States excels in access to advanced education but ranks 70th in health, 69th in ecosystem sustainability, 39th in basic education, 34th in access to water and sanitation, and 31st in personal safety. Even in access to cellphones and the Internet, the United States ranks a disappointing 23rd, partly because one American in five lacks Internet access.”

Will the United States respond by improving the environment for social innovation as the developers of the index had hoped? Stay tuned. The results of the 2015 SPI will be out in just another year.

Weekly Focus – Think About It

“The price of success is hard work, dedication to the job at hand, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand.”
--Vince Lombardi, former Coach of the Green Bay Packers

Market Commentary - Week of 4/7/14

The Markets

The first quarter of 2014 offered up all the excitement and chills of a thriller. First, stock markets careened like runaway mining cars during January. Next, in her first press conference as new Federal Reserve Chairwoman, Janet Yellen implied the Fed might tighten monetary policy sooner than anyone expected which unsettled markets. Finally, Russia annexed Ukraine’s Crimean Peninsula, incurring sanctions from other countries, and tipping its economy further toward recession. As in many thrillers, after some devastation (Russia’s stock market lost billions as capital fled the country), the quarter ended on a more encouraging note with many of the world’s stock markets in positive territory.

Last year was a very, very good year for stock markets in general, thanks to a brightening economic outlook in many parts of the world and the stimulative monetary policies implemented by many countries’ central banks. By December 31, the Standard & Poor’s (S&P) 500 Index had gained about 29 percent for the year, Japan’s Nikkei was up more than 56 percent, and shares in Europe rose by about 16 percent.

January 2014 was breathtaking, too, but for an entirely different reason. Concerns about global economic growth, company earnings in the United States, and the resilience of emerging countries caused stock markets around the world to give back some of the previous year’s gains. The S&P 500 lost about 3.6 percent, the MSCI World Index lost 3.8 percent, Europe’s Stoxx Index fell 5.1 percent, and the MSCI Emerging Markets Index was down 6.6 percent.

Fortified by largely positive domestic economic data, U.S. stock markets recovered somewhat during February. Regardless, it looked like some major indices were going to finish March in negative territory until the Fed Chairwoman stepped to a microphone on March 31, and told a community development conference in Chicago:

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed. In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.”

U.S. investors celebrated the idea the Fed would not begin to tighten monetary policy sooner than expected which pushed stocks higher. The S&P 500 finished the quarter with modest gains.

Outside the United States, markets delivered mixed performance during the first quarter. Portugal, Italy, Ireland, Greece, and Spain – labeled the PIIGS of Europe because of their economic woes following the financial crisis – delivered strong performance for the quarter.

The Shanghai Composite fell during the first quarter as investors worried China would not hit its growth targets for 2014. The State Council tried to assuage worries about the slowing pace of economic growth by pledging to move forward with approved infrastructure projects.

India was a top performer among emerging markets during the quarter. Stocks rallied as inflation eased, the rupee stabilized, and the country’s current account deficit was brought under better control. Markets also were boosted when foreign investment increased in anticipation of a pro-business government being elected.

As the new quarter began, the European Central Bank flirted with the idea of quantitative easing. Its overtures pleased investors who began to invest in some of Europe’s most indebted nations – countries that had been shunned during the debt crisis. The rally caused yields on Spain’s five-year notes to fall below those of five-year U.S. Treasuries for the first time since 2007, and rates on Italy’s five- and ten-year notes fell to the lowest levels they’ve reached since Bloomberg began tracking the data in 1993.

Data as of 4/4/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    0.4%    0.9%    19.6%    11.9%    17.4%    5.0%
10-year Treasury Note (Yield Only)    2.7    NA    1.8    3.4    2.9    4.2
Gold (per ounce)    0.2    8.0    -16.1    -3.3    8.3    12.0
DJ-UBS Commodity Index    0.0    7.2    0.8    -7.6    3.8    -1.1
DJ Equity All REIT TR Index    1.2    9.3    2.1    10.5    24.8    8.8
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

IS IT TIME TO BE HOPEFUL ABOUT GLOBAL ECONOMIC GROWTH? Certified Financial Analysts (CFAs) are more optimistic and confident that both local and global economies may grow this year, according to the 2014 Global Market Sentiment Survey (pg 5). Sixty-three percent of CFA Institute members think the world economy may expand in 2014. That’s a big change from 2013 when only 40 percent were optimistic about global growth prospects (pg 8). Overall, the survey found CFAs think stock markets in the United States, China, Japan, and Germany may offer the best investment opportunities in 2014 (pg 11).

Optimism at the local level varies by region. The sharpest turnaround in perspective was among CFAs in Japan – just 11 percent thought their country could experience economic growth last year. This year, 73 percent are optimistic. There was a surge of positivity among CFAs in Europe, the Middle East, and Africa (EMEA), too. Fifty-six percent have positive expectations for local growth, up from 33 percent last year. In America, 62 percent of CFAs are optimistic about growth compared with 39 percent in 2013, and, in the Asia Pacific region, 69 percent expect to see things improve in 2014 as opposed to 32 percent the previous year (pgs 8-9).

Not everyone’s outlook is rosy, however. Chinese CFAs have guarded expectations – just 45 percent expect to see their local economies grow. In Hong Kong, Brazil, and India, CFAs are actually less optimistic than they were last year (pgs 8-9).

Survey participants in both emerging and developed markets said one of the biggest risks to local economic growth is political instability. Participants in the United States, India, South Africa, and Brazil – countries that are gearing up for general elections – shared the concern. Other risks that could affect economic growth included the end of quantitative easing and the possibility of a financial bubble developing in local markets (pg 14).

Since the report was written in late 2013, CFAs’ optimism may have been buffeted by the ups and downs of the year’s first quarter, but it could prove out over the longer term.

Weekly Focus – Think About It

“Education is the most powerful weapon which you can use to change the world.”
--Nelson Mandela, Former President of South Africa

Market Commentary - Week of 3/31/14

The Markets

Whether it’s good news or bad news, it is often surprising how investors and markets react. Last week, Russia annexed Crimea and the Standard & Poor’s 500 Index gained about 1.4 percent. 

This week, U.S. investors had the chance to bask in the glow of some good news: jobs growth was healthy, consumer spending improved modestly, consumer confidence numbers were better than expected, and fourth quarter’s U.S. gross domestic product (GDP) growth number was revised upward. How did U.S. markets respond? Only the Dow Jones Industrial Average finished the week in positive territory.

What offset the good domestic news? 

First, there was some not-so-good domestic news. Several banks, including a leading global bank, failed the Federal Reserve’s stress test causing share prices in the banking sector to fall.

Next, there was some global news that proved to be unsettling for American investors. According to Barron’s, U.S. markets had a strong negative response to comments made by President Obama after a summit meeting with top European Union (EU) officials. Reuters quoted the President as saying, “If Russia continues on its current course, however, the isolation will deepen, sanctions will increase, and there will be more consequences for the Russian economy.”

The President also said NATO would increase its presence in Eastern European member states that share borders with Russia and Ukraine. The upcoming Group of Eight summit meeting was cancelled and a G-7 meeting – excluding Russia – was scheduled for June in Brussels.

Investors and stock markets in other countries were far more sanguine about world events, and most finished the week higher. As reported by Econoday, “Investors were cheered by talk of Chinese stimulus and encouraging U.S. economic data… Equities advanced thanks to renewed chatter about monetary stimulus from the European Central Bank.”

Data as of 3/28/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.5%    0.5%    18.4%    12.3%    18.7%    5.2%
10-year Treasury Note (Yield Only)    2.7    NA    1.9    3.5    2.7    3.5
Gold (per ounce)    -3.1    7.8    -19.0    -3.0    6.9    11.9
DJ-UBS Commodity Index    1.4    7.2    -2.0    -6.8    4.7    -0.9
DJ Equity All REIT TR Index    0.4    8.1    2.7    11.1    29.8    8.4
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT DOES THE FUTURE HOLD? If you’re wondering about reality television, National Public Radio says it may be virtual reality goggles that let viewers feel as though they are part of a show or let them interact with shows. If you’re asking about astronomy, it could be finding a planet that’s ten times larger than earth orbiting our sun. Of course, if you’re curious about global economic growth, it’s almost as exciting – experts indicate we can expect relatively steady growth.

The Economist asked a group of economists to predict GDP growth for 2015. GDP is “the monetary value of all the finished goods and services produced within a country's borders in a specific time period.” For the most part, they predicted 2015 will be better for developed nations than 2014. 

“Only the economies of Britain and Japan are expected to expand at slower rates in 2015. But for those European countries that have suffered deep recessions, notably Italy and Spain, growth is likely to remain sluggish over the two year period.”

The story in emerging countries is improving, too. According to Price Waterhouse Coopers, economic fundamentals (such as labor force growth and potential for capital investment and productivity improvement) in emerging countries look good over the longer term.

The International Monetary Fund, which has more robust projections for growth than The Economist’s economists, expects to see improvement in emerging markets. Growth is projected to increase to 5.1 percent this year and 5.4 percent in 2015. Eastern Europe and Latin America aren’t expected to grow much faster than the United States in 2015. However, growth in developing Asia is expected to reach 6.8 percent. One exception to the rule is China where growth is forecast to slow from 7.5 percent in 2014 to 7.3 percent in 2015. Even for an economy with slowing growth, those are some pretty good numbers.

Weekly Focus – Think About It

“The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd.”
--Bertrand Russell, British philosopher

Market Commentary - Week of 3/24/14

The Markets

After a series of moves that proved far more effective, but were almost as complicated as the Acme Corporation strategies Wile E. Coyote employed in pursuit of the roadrunner, Russia dropped an anvil on Ukraine and annexed Crimea. In response, Ukraine’s acting Prime Minister Arseniy Yatsenyuk signed a political association agreement with the European Union (EU), and the United States slapped sanctions on some of Russia’s President Vladimir Putin’s wealthy allies and Bank Rossiya.

The EU also took action although the BBC reported Russia’s foreign ministry called the European Council's decision to impose sanctions "regrettable" and "detached from reality." European and Russian economies are interdependent. Twenty-five percent of the EU’s gas comes from Russia, and more than one-half of Russia's budget is derived from oil and gas sold to the EU. In addition, experts cited by the BBC indicated sanctions on Bank Rossiya could tie up monetary transactions in EU banks and potentially affect individual European countries’ business dealings with Russia if economic sanctions are implemented.

Economists cited by The New York Times said, “The uncertainty that now hangs over nearly every profitable enterprise in Russia is what poses the gravest threat to the country’s long-term prosperity, rather than any immediate consequence of the specific sanctions.” While many of Putin’s allies seemed relatively unaffected by the sanctions, at least one has experienced consequences. Reuters reported Russian billionaire Gennady Timchenko was forced to sell his ownership stake of almost 50 percent in a global commodities trading firm after sanctions against him disrupted the company’s operations.

Russian markets have been unsettled by recent events. Consumers and businesses already have been stung by interest rates which are very high by western standards and may move even higher. Rating agencies, like Fitch and Standard & Poor’s, have warned they will downgrade Russia’s credit rating. Russian consumers have been thwarted as both Visa and Mastercard have stopped doing business with Russian people or companies that have been targeted by sanctions.

U.S. stock markets remained relatively blasé about events overseas but were alarmed by Federal Reserve Chairman Janet Yellen’s comments during her first quarterly press conference. She suggested the Fed might begin tightening interest rates in 2015, just a few months after tapering ends.

Data as of 3/21/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.4%    1.0%    20.8%    12.9%    17.8%    5.5%
10-year Treasury Note (Yield Only)    2.8    NA    1.9    3.3    2.7    3.7
Gold (per ounce)    -3.5    11.2    -17.2    -2.3    7.1    12.3
DJ-UBS Commodity Index    -1.5    5.7    -3.7    -7.1    3.1    -1.3
DJ Equity All REIT TR Index    -0.2    7.6    4.3    10.6    25.8    8.4
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

SOME WORRY THE U.S. STOCK MARKET, LIKE A FIRST TIME MARATHONER a few miles from the finish, may be getting a little wobbly. There is no denying the Standard & Poor’s 500 Index has had a good run. It has gained about 172 percent since its low following the financial crisis, and its earnings have grown by 121 percent since 2008, according to Barron’s. Of course, that growth has been supported by extraordinary measures including very low interest rates and multiple rounds of quantitative easing.

Low interest rates have meant businesses could borrow money relatively cheaply. Barron’s pointed out lower borrowing costs were reflected in bond spreads – the difference between the current yield on one type of bonds (for example, high-yield bonds, investment-grade bonds, or government bonds) and that of other types of bonds with similar maturities. The differences in yield between higher risk and lower risk bonds are a lot smaller than they once were. According to Barron’s, from late 2008 through early 2014, the yield on high-yield bonds and comparable Treasury bonds has narrowed from about 22 percent to about 4 percent.

As private borrowing costs have dropped, companies have been able to borrow billions of dollars and pay relatively little in interest. Some have returned the money to shareholders as dividends; some have used the cash to make acquisitions; and others have repurchased shares on the market or directly from investors. Typically, when companies repurchase stock, their earnings per share rises and so does the value of any outstanding stock. Regardless, low interest rates and cheap borrowing costs have helped fuel share price appreciation and the bull market in stocks. 

Three rounds of quantitative easing (the Fed’s bond buying programs) also helped push stocks higher. An expert cited in Barron’s noted “there has been a more than 90 percent correlation between the growth of the central bank's assets and the S&P 500 since the bull market began five years ago.”

Now, the Fed is tapering quantitative easing and has indicated tighter monetary policy may begin as soon as early next year. Should investors worry the bull market will go away as these exceptional support measures are taken away?

If an investor has long-term financial goals, the answer is no. The portfolio allocation may have been chosen to help pursue those goals through all kinds of market conditions. If the stock market is slowing down, an investor may experience slower growth but that doesn’t mean the goals have changed or the holdings are unsound. We may want to stay focused on the finish line.

Weekly Focus – Think About It

“Humility is not thinking less of yourself, it's thinking of yourself less.”
--C. S. Lewis, novelist, scholar, broadcaster

Market Commentary - Week of 3/17/14

The Markets
Russian President Vladimir Putin sure has stirred up a hornets’ nest. Why is annexing the Crimean peninsula and, possibly, Ukraine such a priority for the Russian leader? When asked, Putin has indicated Russia’s military influence is necessary to protect Russian-speaking populations in Ukraine. However, The Economist has a different take on Putin’s actions:

“Russia’s economic stagnation has exposed the limits of Mr. Putin’s political and economic model, which relied on rising oil revenues and allowed him to buy the support of the elite and the acquiescence of the population at large. Real disposable incomes, which rose by 12 percent in 2007, on the eve of the war with Georgia, are forecast to rise by 3 percent this year. The Kremlin faced a choice between political liberalization and mobilization of the country by the means of war and repression. Mr. Putin has chosen the latter. Confrontation with the West is one of the main goals of Mr. Putin’s operations. Any sanctions imposed will allow him to blame Russia’s economic downturn on the West, though that may not placate the ruling class, with its cash stashed abroad in property and bank accounts.”

No matter what Mr. Putin’s motivation really is, he faces clear opposition from the international community. Last week, a United Nations Security Council resolution was introduced which stated Sunday’s referendum in Crimea – a vote to determine whether Crimea would remain part of Ukraine or join Russia – had no validity and could not form the basis for any alteration of the status of Crimea. The resolution was supported by 13 of 15 member nations. China abstained from voting and Russia vetoed the resolution.

Perhaps more importantly, the economic consequences of Russia’s actions have been quite harsh. According to Barron’s, the ruble has fallen to a record low against the U.S. dollar. As a result, the Russian central bank has spent $28 billion to support the currency and has increased short-term interest rates by 1.5 percentage points, pushing yields on 10-year bonds to nearly 9.75 percent. In addition, capital is fleeing Russian markets. During the past three weeks, the MICEX equity index, in U.S. dollar terms, has lost about one-third of its value relative to its 2013 high.

Russia’s failure to back away from Crimea unsettled U.S. markets last week and gave the Federal Reserve pause when its holdings of U.S. Treasury securities for foreign and official accounts fell by more than $100 billion (for the week ended Wednesday). Since Russia had threatened to sell its U.S. Treasury bonds if sanctions were imposed, some believe the drop was Russian muscle-flexing. Others suggest Russia hasn’t divested itself of its U.S. holdings; it simply moved them outside of the United States so the assets wouldn’t be vulnerable to sanctions.

Data as of 3/14/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -2.0%    -0.4%    17.8%    12.4%    19.6%    5.2%
10-year Treasury Note (Yield Only)    2.6    NA    2.0    3.4    3.0    3.8
Gold (per ounce)    3.7    15.3    -12.7    -0.9    8.5    13.3
DJ-UBS Commodity Index    -0.9    7.3    -2.4    -6.1    4.7    -0.9
DJ Equity All REIT TR Index    0.0    7.9    3.7    11.1    29.3    8.6
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

HOW QUICKLY DO WE ADOPT NEW TECHNOLOGY? More quickly all the time, it seems. MIT Technology Review looked at the time it took for nine different technologies to fully saturate the U.S. market. They started back in 1876 and looked through 2010, breaking the process into three phases:

•    Traction: The period from consumer availability to10 percent market penetration
•    Maturity: The period from 10 percent to 40 percent market penetration 
•    Saturation: The period from 40 percent to 75 percent market penetration (the point at which new demand typically slows)

Some innovations, like the original telephone and electricity, took time to saturate markets. Alexander Graham Bell’s patented telephone took 25 years to gain traction, another 39 years to reach maturity, and almost a full century before the market for landlines was saturated. Electricity also was slow to reach saturation. Both technologies were hampered by infrastructure issues, like running enough cable and wire to provide services to businesses and homes.

Newer technologies have been and are being adopted far more rapidly. Television took more than a decade to gain traction, but progressed through maturity to saturation in less than a decade. The mobile phone caught on a lot faster than landlines, becoming mainstream in less than half the time. That’s nothing compared to smart phones which took about 10 years to reach maturity. Tablets appear to be catching on even faster. In fact, in a separate 2012 article, MIT Technology Review pointed out, “Mobile devices outsold PCs last year for the first time, and top smart-phone apps need little more than a year to win the kind of audience it used to take technologies decades to reach.”

The mobile revolution is progressing rapidly, and some businesses still need to prepare. According to Forrester Research, as reported via CSO.com, about 15 percent of employees are accessing sensitive data that may include client information, non-public financial data, intellectual property, or corporate strategies from their own devices rather than those provided by their employers. As a result, many firms need a more scrupulous identity management strategy, not to mention a chief mobility officer.

Weekly Focus – Think About It

“Success is not final, failure is not fatal: it is the courage to continue that counts.”
--Winston Churchill, British Prime Minister

Market Commentary - Week of 3/10/14

The Markets
Okay, so Russia sending troops into Ukraine’s Crimean Peninsula did unsettle world markets. At least it did on Monday.

Like a diver plummeting off a cliff, markets in various parts of the world lost value last Monday as investors responded to the possibility of war between Ukraine and Russia. The New York Times said it like this:

“The escalating crisis in Ukraine created turmoil in global markets on Monday, hitting stocks from Wall Street to Ukraine and causing a spike in oil and natural gas prices that could reach into consumers’ wallets. But despite fears that the conflict between Russia and the West over Ukraine could shift into a military confrontation, analysts said there was little risk of global financial contagion or of major blowback to Western economies.

Perhaps that was the reason markets generally did so well during the rest of the week. That and the fact Russian President Vladimir Putin seemed to pause for a breath and, possibly, a reconsideration of strategy after the Russian stock market lost about $58 billion on Monday. (That’s more than the cost of the Sochi winter games.) There were other economic consequences, too. A rapid decline in the value of the ruble led to a sharp rise in short-term Russian interest rates, and the Russian central bank was compelled to spend about $12 billion defending the country’s currency.

Meanwhile, back in the United States, the bull market celebrated its fifth birthday. During the last five years, the value of investors' holdings in U.S. stocks has increased by about $16 trillion, according to Wilshire Associates as reported in Barron’s. As if that weren’t remarkable enough, last week the Federal Reserve reported the net worth of U.S. households rose by nearly $3 trillion during the last quarter of 2013. It’s enough to make you wonder whether the cost of quantitative easing, which expanded the Federal Reserve’s by more than $3 trillion, was worth it.

Data as of 3/7/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.0%    1.6%    21.1%    12.8%    22.7%    5.1%
10-year Treasury Note (Yield Only)    2.8    NA    2.0    3.5    2.9    3.8
Gold (per ounce)    0.7    11.1    -15.5    -2.4    7.7    12.8
DJ-UBS Commodity Index    1.6    8.3    -0.5    -6.9    5.4    -0.6
DJ Equity All REIT TR Index    -0.4    7.9    4.2    11.0    31.6    8.4
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHERE ARE THEY NOW? Remember that island in the Mediterranean that was in turmoil about a year ago and turned to the European Union (EU) for a bailout?  The situation in Cyprus was a bit confounding because the country was growing relatively robustly and had a small budget deficit. The issue was the country’s banks which were bigger than its domestic economy. Cyprus had about 8 trillion euros in deposits and only 4.5 trillion euros of annual government revenues, according to BCA Research cited in The Economist. Since bank deposit guarantees are only as good as the country providing them, Cyprus needed some help.

Eurozone leaders responded to the Cypriot bailout request with demands for austerity and reforms – pretty much the same thing they’d been requesting from other bailout recipients – but a ‘bail-in’ also was part of the package. What is a bail-in?  The EU required debt holders and uninsured depositors help absorb bank losses and fork up new capital. Although the idea was initially rejected by the Cypriot parliament, the government capitulated relatively quickly. The Economist described it like this:

“At first, a raid on insured [bank] deposits was envisaged, though ultimately they were spared and the main victims were uninsured depositors – a decision made easier by the fact that many of them were Russians. But getting creditors both to absorb losses and to recapitalize the country’s biggest bank (which also had to absorb the second-biggest and even more comprehensively bust bank) is not proving to be a great success.”

How unsuccessful has it been? The Cypriot economy contracted by about 5 percent in 2013 and is expected to continue to wither this year. Unemployment in the country is at 17 percent.

There are several lessons that can be learned from events in Cyprus, according to The Economist: 1) It’s important to have a state-backed ‘bad’ bank where bad loans can be held and dealt with over the long term; 2) Forcing uninsured depositors to take a hit helped protect taxpayers, but it also damaged public confidence in banks; and 3) Fiscal policy makers need pragmatic and flexible solutions because every banking crisis is different.

Weekly Focus – Think About It

“If your actions inspire others to dream more, learn more, do more, and become more, you are a leader.
--John Quincy Adams, Sixth President of the United States

Market Commentary - Week of 3/3/14

The Markets
If you think Russia could have found a colder place to hold the winter Olympics than Sochi, where the average January 2014 temperature was 51° Fahrenheit, you’re right. In some Siberian towns, negative double-digit temperatures are considered the norm during winter months. If you thought Russia sending troops into Ukraine’s Crimean Peninsula would unsettle world markets, you would have been wrong.

While the world was watching the winter Olympics, the Ukrainian people were staging a revolution. They ousted President Viktor Yanukovych and, according to The Economist, Ukraine’s new leaders began forming pro-European government. Russia’s president Vladimir Putin asked the Russian parliament for permission to deploy troops in Ukraine. America warned there would be consequences for such an action.

Regardless, Mr. Putin persisted, perhaps believing the West will be more “worried about keeping Russian oil and gas exports flowing than about standing up for the idea of a Europe whole and free.” It’s probably fair to say neither the winter Olympics nor reality TV about housewives in any county or city has ratcheted up the drama in the way Mr. Putin did last week.

So, how did markets respond? Six world indices lost value last week (in Australia, Japan, China, Indonesia, United Kingdom, and Mexico), 17 showed gains, and one remained unchanged.

Why were markets so bullish? According to Barron’s, markets in the United States focused on strong consumer confidence data, evidence of sales growth for durable goods, and new Federal Reserve Chair Janet Yellen remarking the last six weeks of economic data have been surprisingly weak (which some hoped could signal a pause in tapering).

Data as of 2/28/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.3%    0.6%    22.8%    11.9%    21.6%    4.9%
10-year Treasury Note (Yield Only)    2.7    NA    1.9    3.4    2.9    4.0
Gold (per ounce)    0.3    10.4    -16.5    -2.0    7.2    12.7
DJ-UBS Commodity Index    0.2    6.6    -1.9    -6.9    5.6    -1.0
DJ Equity All REIT TR Index    1.1    8.3    5.9    9.7    31.0    8.7
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THERE ARE ONLY 10 TYPES OF PEOPLE IN THE WORLD: those who understand binary numbers and those who don't. The joke is funnier when you understand that 10 in the binary system is the same as the decimal number two.

There are two distinct ways of thinking, too, and both appear to be essential to companies that are trying to turn a profit through innovation. In an article about the World’s most innovative companies, FastCompany.com had this to say about innovation:

“…But there's another kind of faith in business: The belief that a product or service can radically remake an industry, change consumer habits, challenge economic assumptions. Proof for such innovative leaps is thin, payoffs are long in coming (if they come at all), and doubting Thomases abound. Today, pundits fret about an innovation bubble. Some overvalued companies and overhyped inventions will eventually tumble and money will be lost. Yet breakthrough progress often requires wide-eyed hope.”

Perhaps it’s less of a hope and more of a commitment to fostering both divergent and convergent thinking within a company, which probably is not an easy thing to do. Divergent thinking is the process of generating many ideas related to a single subject or many solutions for a specific problem. For instance, strong divergent thinkers can come up with dozens of answers for questions like: How many uses can you think of for a knife and a brick? As it turns out, young children are terrific divergent thinkers. A longitudinal study of kindergarten children found that 98 percent of them were genius level divergent thinkers. By fifth grade, that percentage had dwindled to 50 percent or so. After another five years, even fewer were strong divergent thinkers.

Convergent thinking, on the other hand, is the process of applying rules to arrive at a single correct solution to a problem or a limited number of ways to address a specific issue. Convergent thinking occurs in a more systematic and linear manner. Strong convergent thinkers rely on analysis, criticism, logic, argument, and reasoning to narrow down options and choose a path forward.

According to Psychology Today, “The highest levels of creativity require both convergent thinking and divergent thinking. This idea has long been known in creativity research… creativity involves a cyclical process of generating ideas and then systematically working out which ideas are most fruitful and implementing them. The generation stage is thought to involve divergent thinking whereas the exploration stage is thought to involve convergent thinking.”

Weekly Focus – Think About It

“Everybody gets so much information all day long that they lose their common sense.”
--Gertrude Stein, American writer

Market Commentary - Week of 2/24/14

The Markets
Behind the dark clouds of volatile markets there appears to be a silver lining. That may be hard to believe when so many are focused on whether economic weakness is due to bad weather or, well, economic weakness, but here are a few of the signs that things may take a turn for the better:

•    Business climate: On February 20, The Economist/FT Global Business Barometer, which surveys 1,500 business leaders around the world, found more than one-half of them expect the global business climate to improve during the next six months and more than one-third plan to increase capital investment in the coming year. A slight majority believe America will have a greater influence on their regional growth than China.
•    Consumer confidence: Consumer confidence climbed for the second month in January 2014. The Director of The Conference Board Consumer Confidence Index® said, “Consumers’ assessment of the present situation continues to improve, with both business conditions and the job market rated more favorably. Looking ahead six months, consumers expect the economy and their earnings to improve, but were somewhat mixed regarding the outlook for jobs. All in all, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead.”
•    Cash-rich companies: Corporate America is sitting on a lot of cash – about 91 weeks' worth of net income, according to Barron’s. It has been using that cash primarily for stock buybacks, but could use it for other things. An economist quoted in Barron’s said, "The purpose of the capital markets is to fund growth… it's difficult to call this de-equitization an economic equilibrium: Public companies should not make money just to buy back stock."

Of course, positive prospects don’t mean everything is coming up roses (especially not in this weather). Consider one of the effects of stock buybacks which is there is a lot less stock in our stock markets than there used to be. As Barron’s pointed out, “The Wilshire 5000 may have seen its list of components shrink by half since 1998, but its total market cap has doubled from $11.7 trillion to $22.5 trillion in that span. Unless you're a government statistician, you just might call that inflation.” Oh! Inflation. That’s something we may need to think more about soon.

Data as of 2/21/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.1%    -0.7%    22.2%    11.8%    19.8%    4.9%
10-year Treasury Note (Yield Only)    2.7    NA    2.0    3.5    2.8    4.1
Gold (per ounce)    0.3    10.1    -16.1    -1.9    6.1    12.7
DJ-UBS Commodity Index    2.3    6.3    -2.3    -6.2    5.4    -0.6
DJ Equity All REIT TR Index    0.5    7.2    5.6    9.9    28.6    8.8
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT IS AN ENTREPRENEUR? Merriam Webster defines an entrepreneur as “one who organizes, manages, and assumes the risks of a business or enterprise.” The Library of Economics and Liberty said successful entrepreneurs find ways to derive greater profit from materials or skills while unsuccessful ones don’t. The website shared this insight to entrepreneurship:

“An entrepreneur who takes the resources necessary to produce a pair of jeans that can be sold for thirty dollars and instead turns them into a denim backpack that sells for fifty dollars will earn a profit by increasing the value those resources create… Losses mean that an entrepreneur has essentially turned a fifty-dollar denim backpack into a thirty-dollar pair of jeans. This error in judgment is part of the entrepreneurial learning, or discovery, process vital to the efficient operation of markets.”

Knowing this, it’s not all that surprising that traditional gauges of entrepreneurship measure things like the number of small businesses or self-employed people or business startups in a country. According to The Economist, these measures tend to provide misleading results with Egypt often appearing to be more entrepreneurial than America.

A new paper from the Research Institute of Industrial Economics offers a different way to measure entrepreneurial success. It focuses on Schumpeterian entrepreneurship. Austrian-American economist Joseph Schumpeter believed entrepreneurs were innovators, people whose ideas and execution produced high-growth companies that often upset and disorganized existing models for doing business – think Thomas Edison and electricity, or Steve Jobs and Bill Gates and computing.

The paper looked at Forbes Magazine’s billionaires list from 1996 through 2010 and focused on self-made billionaires who earned their dough founding new businesses. There were almost 1,000 of them in 50 different countries. (By the way, four of every 10 global billionaires are found in the United States, predominantly in California, New York, and Texas.) The researchers’ conclusion was the Forbes’ list offered, “an alternative – albeit imperfect – cross-country measure of Schumpeterian entrepreneurship with more intuitive results than small business activity.”

Weekly Focus – Think About It

“Think left and think right and think low and think high. Oh, the thinks you can think up if only you try!”
--Dr. Seuss (a.k.a. Theodor Seuss Geisel), American writer, poet, and cartoonist

Market Commentary - Week of 2/17/14

The Markets
With the enthusiasm of new love, American stock markets pushed higher during Valentine’s week.

Were investors enamored of the Federal Reserve’s new Chairwoman, Janet Yellen, who spoke on behalf of the Fed for the first time last week? Some suggested investors appreciated her dedication – she spent almost six hours answering questions from members of the Financial Services Committee – and were soothed by her commitment to continuing the policies of her predecessor. The New York Times said stock markets rose as a result of Ms. Yellen’s testimony and were further buoyed when the House voted to raise the government’s borrowing limit until March 2015 without any conditions.

Perhaps investors saw the good in employment numbers that were released recently. An analyst quoted in Barron’s said the American labor market “just might be tighter than most of us expected.” His argument was while long-term unemployment remains high, “…2.5 percent, higher than peaks seen in prior recessions, and much worse than the 50-year average of 1.1 percent,” the short-term jobless rate (measuring people who are out of work briefly) is 4.2 percent which is below the 50-year average of 5 percent. The article shared the thoughts of another expert, Michael Darda of MKM Partners:

“If our job market can mend even when gross domestic product (GDP) growth averaged a lousy 2.4%, what happens if growth picks up? Last week, Treasury data showed the federal fiscal deficit shrinking to just 3% of GDP from more than 10% four years ago thanks to higher taxes and restrained government spending. At this pace, our budget deficit could fall to zero next year, and we could run a surplus by 2016.”

Tarnishing this shiny outlook is the fact 36 percent of Americans who want a job and can’t find one have been unemployed for more than 27 weeks.

Maybe it was an unrequited desire for better weather. Huge swathes of the United States have been gripped by snow, ice storms, and freezing weather which Reuters.com suggested caused many investors to discount weak economic reports in the belief consumer spending and the company performance might have been stronger if weather conditions had been more favorable.

Data as of 2/14/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    2.3%    -0.5%    20.9%    11.3%    18.4%    4.7%
10-year Treasury Note (Yield Only)    2.8    NA    2.0    3.6    2.7    4.1
Gold (per ounce)     4.8    9.9    -19.8    -1.1    7.0    12.4
DJ-UBS Commodity Index    1.7    3.9    -6.4    -7.1    4.8    -0.8
DJ Equity All REIT TR Index    2.5    6.6    4.3    9.9    25.4    8.7
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

HOW MANY HOURS DO YOU WORK EACH WEEK? It’s a topic that has garnered significant interest for some time. In 1930, British economist John Maynard Keynes wrote:

“For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavor to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!”

If you’re a hard-driving, competitive person who logs well over 40 hours of work each week in pursuit of higher earnings, plum promotions, and peer respect, Keynes’ predictions may be mystifying, not to mention unrealized.

While it’s true that Keynes’ expectations for the future haven’t panned out (he also anticipated accumulation of wealth would lose social importance resulting in a changed moral code), the average work week did get shorter in many developed countries between 1990 and 2012. It’s interesting to note, as The Economist pointed out, more productive and better-paid workers often put in less time at the office. The publication offered this example:

“The Greeks are some of the most hardworking in the OECD (Organization for Economic Cooperation and Development), putting in over 2,000 hours a year on average. Germans, on the other hand, are comparative slackers, working about 1,400 hours each year. But German productivity is about 70% higher.”

When it comes to hours worked, America is an aberration relative to other developed nations. We’re highly productive and we tend to work longer hours.

Weekly Focus – Think About It

“I do not want to foresee the future. I am concerned with taking care of the present. God has given me no control over the moment following.”
--Mahatma Gandhi, a leader of India's independence movement

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