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Ho, ho, ho...Hum

December is typically a good month for stocks and I don’t expect any real upsets this year.  Some are beginning to wonder as the start of this month hasn’t been as healthy as one might want.  The patient investor will like to hear that the weight of evidence still points to higher prices starting…. Later. Also in this update, a possible new asset class may be joining the party and a sad look at a country literally choking on unregulated growth.  Enjoy.

The Situation Now

Last Friday was a relief to investors who had greatly suffered through a decline of less than 1% in the first 4 days of December.  I’m joking of course.  The only notable thing about last week was the near panic that came from a market showing some very mild signs of profit taking.  Good grief people.  Don’t forget, investing is not a fixed income giving tree with positive results every day.  A 10% correction is POSSIBLE ANYTIME IN ANY STOCK MARKET.  Such a move would correlate to 1,600 point loss in the Dow from current levels.  When it really happens, it will feel like the world is coming to an end, as we have seen virtually no downside volatility in stocks in over a year.  If you are a DIY investor, plan on this event and know what you will do in response.  Maybe something?  Maybe nothing?  I am doubtful that the next real correction will be limited to only 1,600 Dow points. 


Economic reports in the last couple weeks have been largely benign, extending trends in place since the middle of 2012.  ISM manufacturing and services reports combined to show a growing economy, the jobs report on Friday was genuinely healthy pushing the unemployment rate back to 7% flat.  Consumer sentiment rocketed higher breaking a 5 month downtrend and GM broke out to a new rally high on strong truck sales. 


Technically, the market is overbought as it has been for many months.  Breadth and volume are weak in the last couple weeks but not by enough to generate any signals to reduce market exposure (yet).  Leadership is changing daily so no reason to really change any holdings.  The only thing that I find a bit bothersome is the fact that investor sentiment is now again at an extreme with over 66% bulls in the “dumb money” and less than 33% bulls in the “smart money”.  Rarely does the market run higher once the spread between these two groups approaches these extremes.


Finally Gold, Silver and Bonds are all still in the toilet driving investor money to find new homes in stocks.  From a timing perspective, it might give a little confidence to know that widely expected December gains do no typically materialize until after the 15th.  Historically, the first two weeks have been flat.


So all things considered, I’m not terribly worried but also not expecting much between now and year-end.  The situation is not the type that generates real selling although we need to be prepared to get defensive every day right?  Best bet is to sell nothing, but avoid new purchases until we see a real resurgence in broad market buying.  The Ho Ho Ho rally may be more of a ho–hum rally this year.


Commodities Bottoming?

The short answer is maybe.  In the last two weeks, I’ve certainly noticed a bit of outperformance in commodities over most other asset classes including stocks, bonds and foreign investments.  The US dollar has been a little weak but not enough to justify the move in commodities by itself.  Also, commodities are now trading at their 3 year lows.  Often, institutional investors will begin accumulating positions they want to carry in the next year during December so I’m going with that assumption for causality.  In terms of the business cycle, we would also expect commodities to begin showing some signs of strength about now.  The economy is now in full recovery with demand for natural resources rising.  Stock and commodities often trend higher together in this Stage (III) of the cycle, while bonds continue to suffer.  Seems like that’s quite possible.  Finally, I think investors are looking around for deals as stocks are no longer cheap.  The energy complex looks especially attractive now considering their double digit, 1 and 3 yrEarnings per share growth rates and P/E ratios in the low teens.  With that said, I am not a buying of gold or silver within commodities.  In fact, they look worse now than anytime in the last 4 years during which both have lost 40% or more of their value.  Commodities investments should be limited to useful commodities – I have called them utilitarian type commodities.  Unless you live in India, Gold and Silver have very little real utility.  We have chosen to own Basic materials as our pseudo commodities position across almost all strategies.


Choking in China


What if you lived in Shanghai, China?  It’s unbelievable to me that the city still has inhabitants.  Take a look at these photos courtesy of 361 Capital.  That is not fog.  And the air filter on the right is only 3 days old!  If you have ever questioned the value of the EPA or our regulations on emissions from power plants and autos, think about what life could look like in a city near you.  Wow.  One more reason to embrace New Power.


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Our New Power Fund is now approaching +60% for those who have been there since the beginning of 2013 net of all fees.  Much of the gain has come from incredible returns in the renewable energy and energy efficiency holdings.   I have little doubt that clean tech and clean energy investments will continue to be the real drivers of tangible company based global growth for the next decade, maybe longer.  New Power is all about owning companies in this space as well as innovators and game changers in other industries.  When I look at the global problems of air quality, energy demand and resource scarcity in places like China, I know that the solutions will be wildly profitable.  We were early to the scene when we started this program in 2004 and paid the price for being out on that speculative frontier.  Today, I was surprised to see that New Power is now gaining ground quickly on the total returns generated by the stock market over the last 3 and 5 years.  Next year will mark the 10thyear anniversary for New Power and I would like to see it mark that moment by outperforming the S&P 500 ( on a 10 year basis ).  I think it’s both possible and likely.  Cheers to that!


Happy holiday shopping and have a great week


Sincerely,

 

Sam Jones