Q4 2013

2013/2014 Positives and Negatives Positives 1. Central banks remain highly accommodative 2. Corporate profits at all-time highs 3. Congress actually agreed to a 2-year budget 4. Unemployment is declining 5. Consumer benefitting from wealth effect Negatives 1. Fed transitioning to new leadership 2. Debt ceiling debate will return in March 2014 3. Pockets of bubble type valuations can be found 4. Fukushima radiation environmental risk 5. Zero interest rate policy is hurting retirees

2013 was a banner year for the stock indices which hit historic highs. In our first quarterly strategy of 2013, we wrote, “The capacity utilization rate is running below 80% allowing businesses to grow without putting pressure on labor, capital, and raw materials. Earnings are coming in above expectations. At the same time valuation is reasonable at a P/E of 14x earnings of $108 in 2013. Given this backdrop, stocks continue to push higher and commodities like gold are weakening.” We were correct in our decision to favor equities over gold and bonds. As we head into 2014, the critical question is, “Where do we go from here?” Bubble Cycles are Here to Stay Throughout the economic history of the last several hundred years, economic bubbles have been common occurrences. They repeat themselves over and over from tulip bulbs to real estate to internet stocks. The pattern is always the same. The price of a financial asset becomes detached from the real value of the economic asset it represents. For example, during the internet bubble in 1998 to 2000, technology stocks skyrocketed, completely detached from the fundamentals of the underlying assets. Many companies had no earnings at all. Startup companies were flying, sometimes going up 30-100 points per day. We believe investors who rode them up and back down have not forgotten the joy and pain of the dotcom bubble and hopefully, are not likely to drive the current market into a frenzy similar to 2000. As we look at the current market, we are beginning to see signs of bubble like valuations in certain names and sectors though the overall market is not a bubble at this time. In our opinion, some technology stocks and dividend paying stocks are trading at extremely rich multiples. Twitter went public in November and is trading at a staggering price to sales ratio of 66. Central Bankers Want Bubbles What is very troublesome is that central bankers and economic policy makers in Japan, the EU, and the United States are rationalizing that financial bubbles are a good thing to battle negative real interest rates and persistent secular stagnation. Professor Paul Krugman of Princeton University argues that bubbles may be necessary to make up for insufficient demand, high unemployment, and sluggish growth. Here’s a quote from his New York Times blog, “We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.”
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Larry Summers, who was almost our next Fed Chairman, is saying pretty much the same thing. His position is that our economy needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. So, absent bubbles, there’s no credit expansion, no full employment, and no strong recovery. That sounds a lot like an excuse for keeping the current policy (QE and zero rates) in place for a long time. This notion is supported by incoming Fed Chairwoman Janet Yellen who rejects the notion that the current stock market is in bubble territory despite major indices hitting record highs in the context of a stagnant economy and high unemployment. Interestingly, when we did our research going back to the last market cycle, we found that in 2007 similar arguments were made in Daniel Gross’ book Pop! Why Bubbles are Great for the Economy. Further in the June 2008 edition of Businessweek, we found the article “Don’t Fear the Bubble” as the market was crashing. Euphoria is a common characteristic in the latter stage of bull markets. Policymakers and investors are all cheering for “the wealth effect” of rising stock prices to sustain economic growth. The latest data from Investors Intelligence shows that 4 out of 5 investment managers are highly bullish. Therefore, we would not be surprised if bullish sentiment carries market levels to new highs in the first half of 2014. The divergence between the economic fundamentals and market technicals is well illustrated by the chart (on the right) that shows real personal income continuing to fall as a result of the zero interest rate policy. 2014 Outlook During the last three months, there has been a honeymoon period between the Fed and the stock market. Reality will likely begin to come into play once Janet Yellen is confirmed in January. The Federal Reserve can set short-term interest rates to any level it wishes, but the central bankers cannot control longterm interest rates which are set by the marketplace. Long-term bonds have been falling since August of 2012 and are continuing to make new lows. Investors pulled out over $70 billion from bond mutual funds through the first week of December which makes it the worst year for bond funds ever. The bond market, which accounts for 68% of the market cap of US Stocks and Bonds, currently dwarfs the size of the equity market. To give you some perspective, back in 1999, the ratio was equal at 50/50. We expect this to normalize as the Fed winds down its latest QE buying program and interest rates continue to rise. With central banks highly accommodative and encouraging bubbles, we expect the stock market to push higher for at least the next few months. However, it is difficult to predict how large the bubble will get and precisely when it might pop. Given this scenario and with the bull market nearing its fifth year anniversary, we are expecting negative surprises to appear in the second half perhaps once the Republicans and Democrats begin to dual in the midterm elections. The Runnymede team will be hyper vigilant and stands ready to protect client assets when we foresee a financial hurricane on the horizon. We assign an above average probability that the bull market will become nervous as 2014 progresses.
Investment Team Members Samson Wang ext. 108 Andrew Wang ext. 103 Christopher Wang ext. 107
RUNNYMEDE CAPITAL MANAGEMENT, INC. ▪ P.O. Box 359, Mendham, New Jersey 07945 -0359 TEL: 973.267.6886 FAX: 973.267.5525 www.runnymede.com

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 www.runnymede.com