Wednesday, January 8, 2014

It was the best of times, it was the worst of times...

It was the best of times, it was the worst of times... 2013 that is.

If you're a long-term thinking, all equities investor, 2013 was the best of times. If you're a long-term thinking, balanced portfolio investor---and "balanced" means bonds (along with stocks) occupy a good chunk of your portfolio---it was a decent year. If you're a long-term thinking, thinking you're conservative, investor and you had all of your money in bonds, it was the worst of times---you're not supposed to lose money when you're conservative.

If you're the average hedge fund manager, while you're probably still one of the richest blokes in the country, 2013, like 2012, 2011, 2010 and 2009, was a rough year for you---in that those clients who pay you 2% per year plus 20% of their earnings expect you to outperform the average Joe who simply throws all his long-term money at the S&P 500 Index. The average hedge fund, for all the resources its manager(s) brought to bear, eked out a 7.4% return in 2013 against a 30% gain in the S&P. Ouch!

Of course I can easily turn this into yet another rant about the ills of market-timing, but I'll save that for another day---there'll be oodles of opportunities for that going forward. Instead, I thought we'd take a quick look at the state of the market a year ago versus today:

A Year Ago (as I recall):

  • Both sides in Washington were gearing up for round whatever of their fiscal (budget/debt ceiling) fiasco of a fight.

  • The Fed wasn't yet signaling an end, or a beginning to an end (a tapering), of their amazingly generous, to Wall Street, quantitative easing (QE) program. Meaning they were still pessimistic on the economy.

  • The Fed was signaling that it would keep short-term interest rates low until all the ice caps finally melt. Also meaning they were still pessimistic on the economy.

  • Stocks looked relatively cheap by conventional valuation measures. 

  • There was a generally bearish tone toward the market (hence the plight of the hedge fund [they bit] in 2013).

There's more but that gives you the gist...


  • Weighing the political damage from the recent rounds of their fiasco of a fiscal fight, both sides in Washington managed to kick the bigger can beyond this year's mid-terms. However, we can yet expect a bit of head-butting (albeit---behind all the brinksmanship---softly) around making America more equal in terms of outcomes. Alas, that in fact appears to be shaping up as this year's campaign theme. Warning: you'll hear lots from me on the topic...

  • The Fed broke the ice last month and announced a $10 billion tapering of QE. That was a hurdle that needed jumping. The "market" should expect more of that this year, particularly if today's 238k ADP jobs number is a harbinger of things to come.

  • The Fed remains committed to keeping short-term interest rates low until coastal California is under water (literally).

  • Stocks, while not---in my view---dangerously expensive, are no longer cheap.

  • According to surveys that track individual investor and investment adviser sentiment, there's a very bullish tone going into to 2014.

So what's all that mean? Well, perhaps we should ask the best and the brightest. Uh, wait a sec, that would be the hedge fund guys and gals. Please pardon my cynicism, they're humans doing the best they can---the thing is, the market simply doesn't allow humans to win, consistently, at the market-timing game. So here's my view of what it all means:

  • Washington: The market is, for now, numb to short-term political wrangling. It's their long-term "successes" that we should concern ourselves with---more on that later.

  • The Fed: Thank goodness they've begun to slow the "printing" (they don't actually print it). We should expect more tapering going forward as long as the economy continues to improve. The improving economy should temper big potential reactions (selling) to future tapering.

  • Stocks and Bonds: The market should like the Fed's commitment to low interest rates until you head to Vostok to get a tan. However, I expect we'll see the yield curve steepen further (long rates rising while short-term rates remain relatively low), which means more bad news for bonds, and a potential headwind for the stocks of companies in the more interest rate sectors of the economy. 

  • Stock valuations: While, again, stocks aren't cheap, an improving economy should translate to better top-line growth for a now-efficient corporate American (and world), which translates to better earnings going forward. A better macro environment could also mean gains by way of multiple expansion---a fancy way of saying stock prices could increase faster than do earnings.

  • Sentiment: If I were a short-term investor trader, this one would bug me a lot. Too much bullishness is ultimately not a good thing for stock prices. I.e., who'd be left to buy the dips if everybody's already in the market.

So you might say, on balance, that things look pretty good going into 2014. Okay, but that in no way spells another banner year in the making---remember, the January 2013 picture was anything but rosy going in and the market saw its best year since 1997---i.e., don't predict.

My prediction (I know, I just said don't): Based on what I've discovered during my painstaking, in-depth analyses, I fully expect that the market will end 2014 either higher, lower or about where it is right now. I'd bet money on it!

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