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Q2 2014
Q2 2014

2014 Positives and Negatives


1. Central banks remain highly accommodative

2. Corporate profits at all-time highs

3. Equities more attractive than bonds

4. Unemployment is declining

Negatives 1. Fed tapering is tightening on the margin 2. Geopolitical risks are rising 3. Asset bubbles are growing 4. Mid-term elections will bring negative rhetoric 5. Commodity inflation hurts consumer spending

2 nd Quarter Commentary The second quarter was a good one for virtually all asset classes. Needless to say this is highly unusual. Bonds, stocks and commodities all appreciated to higher levels. Fixed income markets continued to show surprisingly positive returns, while equity markets bounced back from a weak first quarter. This strong performance shrugged off all negative news. First quarter GDP in the US contracted almost 3% which was the worst since 2009. While much of this was weather related, this lost growth is unlikely to be completely re-captured over the rest of the year. This theme played out in most major economies. First quarter numbers disappointed in Europe, Japan and China, relative to forecasts. Markets also ignored rising geopolitical risks in Iraq and Ukraine. Despite all the negatives, investors bid up all financial assets, buoyed by expectations that global monetary policy will stay easy for a very long time. With this backdrop, we focused our investment research on Kerchunker® service companies as well as dividend paying stocks. With rates likely to stay low for at the short-to-intermediate term, high quality companies that pay 2-3% dividends are often more attractive than fixed income securities.

ECB trying negative rates In June, the ECB made a historic move by lowering the rate at which it pays banks for their overnight deposits on reserves to -0.1%. Because the rate is negative, banks now have to pay a small interest rate to the ECB to keep their reserves safe at the ECB. This is a dangerous monetary experiment but the ECB is increasingly worried about deflation in the Eurozone. The real issue is whether the demand for loans from creditworthy borrowers is there. Will this force banks to take on more risky loans? ECB President Mario Draghi has pledged additional support in potential asset purchases like the Fed if inflation doesn’t pick up soon.

Janet Yellen and the Fed will monitor the European economy closely to see how negative rates affects the EU economy. If it proves effective, the Fed will likely use the same strategy should the US economy show signs of slowing. American banks have built up huge reserves (chart on right) with the Fed which amount to nearly $3 trillion. Don’t be surprised if the Fed tries negative rates in the coming months.

if the Fed tries negative rate s in the coming months. R UNNYMEDE C APITAL M

RUNNYMEDE CAPITAL MANAGEMENT, INC. P.O. Box 359, Mendham, New Jersey 07945-0359

TEL: 973.267.6886

FAX: 973.267.5525

Looking ahead Central banks are expected to maintain their highly accommodative monetary policy. This is the variable which trumps everything else. While the Fed is tapering its asset purchase program, the Fed balance sheet is still expanding at close to 30% year over year. The Fed balance sheet now totals over $4.3 trillion. Unprecedented easy monetary policy from the Fed, ECB and BoJ will likely drive financial assets higher. On the negative side, this will create significant asset bubbles over time. Volatility has been driven to new lows and investors have become complacent to any negative economic data or geopolitical risks. As long as central banks don’t tighten, the party marches on.

as central banks don’t tighten, the party marches on. Since retiring as Fed Chair, Ben Bernanke

Since retiring as Fed Chair, Ben Bernanke has been sitting down with hedge fund managers and businessmen for a fee of $250,000 per appearance. According to a recent Reuters article, one guest was left wondering if rates will stay low for decades much like Japan. “At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime.”

The second half will probably be more challenging than the first half. Geopolitical risks are rising especially in Iraq. This typically leads to higher oil prices which hurts US consumers and lowers US growth rates. The Fed and ECB also want more inflation so commodities are expected to rise higher. Because of these factors, we have shifted out of some consumer stocks and into oil service stocks like Schlumberger. While mid-term elections will drive negative rhetoric from both sides of the aisle, we believe that financial markets will be driven by printing press money which is likely to flow to the speculative arenas of the financial markets.

Investment Team Members

Samson Wang

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Andrew Wang

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Christopher Wang

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Disclaimer Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede Capital Management, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede Capital Management, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Runnymede Capital Management, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.

© 2014 Runnymede Capital Management, Inc. ® No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Runnymede Capital Management, Inc.

RUNNYMEDE CAPITAL MANAGEMENT, INC. P.O. Box 359, Mendham, New Jersey 07945-0359

TEL: 973.267.6886

FAX: 973.267.5525