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Hangover Year

As the first quarter of 2014 comes to a close, I can’t help but feel like the financial markets are behaving as if freshly awaking after a night of too much drink.  The hangover is not a pleasant thing and the price we pay for too much self-indulgence.  It can hurt and is often a driver behind the need for relief from other things.    2013 was the party, 2014 is pretty clearly going to be a hangover year.


Stock Headaches

I  see lots of sector rotation and lots of noise while the market averages move between +1% and -5%.  Smart money folks said this was going to be a year where sector rotation and stock picking could trump the averages.  That’s true but thus far we have really seen much persistence in our leadership groups.  For instance, technology, biotech, and internet sectors were all dominating the markets leading us higher with low volatility and lots of fanfare… until two weeks when all went into near death spirals.  Technology funds have faired the best as they are down ONLY 7% from the highs.  Biotech and Internet are -16% and -12% respectively with individual stocks off 20-30% in just two short weeks.  Energy and financials have been laggards thus far in 2014.  But now they are bubbling to the top of the rankings for the last two weeks.  While it’s nice to have something to buy with our internet proceeds, I don’t like being forced to make sector rotations every 2-3 weeks anymore than your tax prepared does.  The big rotations like those out of bonds and into stocks or commodities are the ones we want to act on – aggressively.  Sector rotation among industries can happen much more frequently and are somewhat of a pain to chase around if they don’t persist beyond a few weeks or months.   

Looking at the big picture, I think the market is recently orienting to accommodate expectations for the next earnings season.  If the rotation out of internet/ biotech and into energy and finance is correct, we might expect to see some disappointments in earnings from internet and biotech in the coming weeks while energy and financials might surprise to the upside. 

Also in the high-level perspectives camp, we know that fast moving sector rotations indicate and market environment in which investors and money managers are getting a little jumpy and anxious to find returns.  They are not willing to even sit with an underperformer and certainly not something that is losing money.  More hangover action in an effort to get comfortable.  After a big year like 2013, the possibility of losing money seems all the more painful.  Where’s the party?!!


Bond and Commodity Relief

So, Janet Yellen says that the Fed is no longer bound to a policy of low rates tied to anything.  She says they are likely to begin raising rates in mid 2015 and what does the Treasury bond market do?  It breaks out to a new high for the year.  I will never understand the bond market.  Regardless, 30 year Treasury bonds are now up nearly 7.5% YTD as yields fall on the long end.  Short-term bonds where all the money lies are barely up 2.5% (basis 10 year Treasury bond).  The yield curve is flattening if you understand the math indicating a greater likelihood of recession in the future.  The curve is not at all inverted and is a long way from it but this is the first time we have really seen the SHAPE of the yield curve change in many month.  Yellen and the Fed are no longer supporting a policy of zero interest rates and the markets are responding to that new reality.  In the meantime, we have some nice Alka-Seltzer type relief coming from our bonds in our blended asset portfolios.

Commodities are also providing some relief to the throbbing headache coming from the stock market.    Soft commodities like the grains and other foods have been on a tear this year – up almost 15%.  Shortages coming from drought are expected given the winter status and short water supply in our agricultural belt.   Metals and other hard commodities are recently lagging a bit but still up stronger than the stock market by a long shot.  And now energy and energy funds have recently broken out to a new high for the year.  I think this is a supply side thing as well as a value-based trend. 


Alternatives Ready

Alternative sectors and investment vehicles are also waking up fresh and ready to go after a terribly long sleep over the last 3 years.  Real Estate funds, REITS, Master limited partnerships, and pure alternative funds (managed futures, macro opportunities, long/ short, absolute return), appear to be bottoming selectively.  These funds are a nice new tool for the every day investor offering a new asset class with little or no correlation to the stock market.  

We have not invested in “alternative” funds for quite some time but I’m making a list and frankly surprised at how many great options I’m finding.  I would anticipate taking several positions in these funds in our Blended Asset strategies over the next 30-60 days if conditions persist.

All things considered, we may have a hangover type Stock market but we don’t have to look far to find relief for our aches and pains.  This is going to be a great year to manage your asset allocation on a somewhat dynamic basis using representatives from many non-common stock types of securities.  Get it done now; it’s not too late.

That’s it for this week and next as I will be writing the Change of Seasons quarterly update.

Happy Spring – 10” of snow last night up here in Steamboat Springs – ugggg


Sincerely,

Sam Jones