03/05/14   The Budapest Memorandum

Editor’s Corner

Ron Rowland

Events taking place near the Black Sea have captured the world’s attention.  We are not referring to the Winter Olympics – they officially ended ten days ago.  The action has shifted a few hundred miles to the northwest, to the country of Ukraine.  Before last week, and maybe even today, most Americans would probably be hard-pressed to find Ukraine and its territory of Crimea on a map.  The length of Ukraine’s coastline with the Black Sea is second only to that of Turkey.  Crimea is technically a Ukrainian peninsula jutting into the Black Sea, but it appears to be an island on some maps.

Many U.S. citizens wonder why we should care about what is taking place there and why it is any of our business.  The short answer is the Budapest Memorandum.  More formally known as the Budapest Memorandum on Security Assurances of 1994, it is a widely recognized international treaty.  Back in 1994, Ukraine held the world’s third largest stockpile of nuclear weapons.  In exchange for Ukraine giving up its nuclear arsenal and agreeing to the Non-Proliferation Treaty, the U.S., U.K., and Russia provided security assurances against threats or use of force aimed at the territorial integrity or political independence of Ukraine.  In short, it’s our obligation to be involved.

Ukraine elected Viktor Yanukovych as its president in 2010.  Shortly after his election, the country’s Constitutional Court repealed the constitution, an act that became the focal point of the citizens complaints.  Civil unrest and anti-government demonstrations during the early part of 2014 escalated into riots and lethal force on February 18.  The bloodshed has resulted in more than 80 deaths so far.  Parliament impeached President Yanukovych on February 22 and named Oleksandr Turchynov as the interim president of Ukraine the following day.  The new government issued a warrant for the arrest of Yanukovych as he fled to Russia.  New presidential elections are set to occur May 25.

A lot has happened in a very short amount of time, including Russia’s parliament approving a request from President Vladimir Putin to deploy Russian troops in Ukraine.  Over the weekend, Russia moved troops into Crimea, invoking its right to protect Russian citizens living there.  Western countries, including the U.S., showed their support for the new government in Ukraine and condemned the actions of Russia.

Markets around the world fell as trading opened on Monday.  Putin stated his case, and while reserving his right to use force in protecting Russia’s interests, said he didn’t see any immediate need to send troops deeper into Ukraine.  Investors took that as a sign of softening, and markets rallied strongly on Tuesday.  Even Russian stocks bounced back somewhat, but the damage there had already been done.  More is sure to unfold in the weeks and months ahead, but for now, further crisis seems to have been averted.

Investor Heat Map: 3/5/14

Sectors

After a brief setback that began Friday afternoon and ended Monday morning, the Health Care sector raced to new highs yesterday to maintain its position at the top of the rankings.  Last week, Real Estate was tied with Technology for third place, but today it claims the #2 spot for itself.  Materials followed commodity prices higher for the week as the Ukraine situation encouraged flights to safety and hard assets.  Technology had a good week, although it slipped to fourth in the process.  Consumer Discretionary jumped to fifth on strength in homebuilders and retailers.  The defensive nature of the Utilities sector did not receive much investor attention this week, causing it to slip from second to sixth.  Industrials posted a strong improvement in momentum yet slipped a spot to seventh.  The bottom four sectors remain the same as a week ago with Energy, Financials, and Consumer Staples lagging the field while Telecom sits in last place.

Styles

Small company stocks are wrestling with Mid Caps in an attempt to regain control of the style-box rankings.  Micro Cap was successful in regaining its leadership position after a three-week absence.  Small Cap Growth has been moving in tandem with Micro Cap for most of the past three months and did so again this week by climbing to second.  The rise of Micro Cap and Small Cap Growth pushed Mid Cap Growth, the former leader, down to third.  Mid Cap Blend held steady at fourth.  Mid Cap Value fell to sixth, pushing all of the Value categories to the lower portion of the rankings and strengthening the Growth over Value story.  Small Cap Value is somehow wedged among the Large Cap categories near the bottom, and Mega Cap hobbles along below all the others.

Global

Fears of Russia invading Ukraine created shifts in our global rankings.  The U.S., typically considered a safe haven in times of global tension, climbed from third to first.  The U.K.’s performance for the week lagged that of most other regions, although it was able to keep its second place ranking.  Europe’s close physical proximity to Russia and Ukraine caused it to relinquish its top ranking and drop to third.  Russia funds suffered the most, with iShares Russia Capped (ERUS) plunging 10% the past six market days and losing 19% year-to-date.  World Equity moved ahead of EAFE due to EAFE’s higher exposure to the weakness in Europe.  Canada and Pacific ex-Japan typically benefit from strong moves in the Materials sector, although that was not the case this week.  The bottom four global categories remain in negative trends.  Russia’s poor performance did not carry over to the broader Emerging Markets category thanks to gains in China.  Earlier today, China said it is targeting 7.5% economic growth this year, the same as last year.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“If we see that disorder starts in the eastern regions, if people ask us for help – we already have an official request from the serving legitimate president – then we reserve the right to use all means at our disposal to protect our citizens…We think that would be completely legitimate.”

Russian President Vladimir Putin, March 4, 2014


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