Covenant Weekly Synopsis as of December 24, 2015

December 28, 2015

Last week global equity markets rose in what many consider the final trading week of the year. While the markets are open this week, wedged between the Christmas and New Year’s holidays, most trading desks will operated by skeleton crews whose main responsibility is to call their bosses if a global event shocks the financial markets. Last week’s rally (which included gains of +1.5% to +3% in broad indices) was a nice bounce, but insufficient to push equity markets into positive territory for the month.

In response to the general risk-on sentiment last week, precious metals, industrial metals and energy assets rallied (Natural Gas rose 15.6%, though at $2/MMBTU it remains more than 80% below its 2008 high of nearly $14/MMBTU). With assets flowing toward risky assets, naturally fixed income instruments declined (the 10-year UST is now yielding 2.2%, while the 30-year UST remains below 3% @ 2.96%). The VIX Index, a measure of stock market volatility, also fell -24%, closing the week at a rather sanguine level of 15.6.

Additional asset class performance detail can be found here.

Looking Forward: The end of each calendar year always brings a flurry of market forecasts for the upcoming year. It also brings personal forecasts about how one will change her/his behavior, aka “New Year’s Resolutions”. The majority of both types of forecasts usually end up being wrong. Rather than add to the numerous lists of predictions for what may or may not happen in 2016, below is a summary of a recent conversation that, at least for me, was a great reminder of why the United States (despite many, many problems) is the greatest country in the world.

This conversation took place on a flight to the East Coast where I was headed for business meetings with a lot of work to complete. A young couple with an infant sat next to me, and like most people in my situation I thought selfishly “Ugghhh….this is going to be a long flight”. After struggling midflight to mix baby formula for his four-month, the young man (who I will call Bradley) struck up a conversation by asking if I was working on a business plan. Thus began an unexpected dialogue that ranged from politics to foreign policy to parenting.

Bradley, as I learned during the conversation, is a seasoned Army Ranger. Following several deployments to Iraq and Afghanistan, he is currently training to become a commander. Bradley’s goal is to return to the Middle East to lead high-value missions and “bring the fight to terrorists, as opposed to having them come to America”. He did not make this remark in a cheesy, naïvely patriotic manner that you would hear in a movie, rather it was stated in a reserved, yet determined way that comes from an experienced warrior. One that has been engaged not only in the idea of battling an amorphous, non-state sponsored terrorist movement, but in live firefights with ISIS’s human manifestations.

“With a new child aren’t you afraid of what might happen to you when you go back?”  His reply was straightforward – “Our training, our equipment and our resolve give us the advantage. I’ve trained Iraqi army soldiers, and they really don’t give a sh*t about protecting anything besides Baghdad. They lack discipline and the dedication to training that is required to be a great soldier. I’ve also fought alongside coalition soldiers, and while better than the Iraqis, they don’t train as hard as U.S. soldiers. They lack the same level of extreme motivation that powers U.S. forces. It is a cultural thing. That is the difference with America – we take pride in our work, our craft. This is why America is the one remaining superpower – we take everything more seriously than other people in the world.  I hope we as a nation don’t lose that”. Though a relatively simple assessment of the world order, it resonated with me.

“We need to instill a strong work ethic in the young people of our nation and rally against an increasingly common sense of entitlement. The United States became a world power through hard work and maintaining that status will require the same. Countries don’t remain super powers without hard work and innovation – complacency is the enemy few people talk about.”

Thank the good Lord that there are people like Bradley in our country. People who voluntarily risk their lives in faraway places to preserve our liberties and to allow us to pursue our own interests.

There will be no update next week due to the New Year’s holiday, but I’ll be back on January 11, 2016. In the meantime, I hope that 2016 brings health, happiness and success for you and your loved ones.

Jp