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Themes for 2015

And so it begins, themes and forecasts for the New Year.  As usual, December will be a month to sponge all the prognostications and form an opinion to help guide investment choices throughout 2015.   As the first of this forward looking series, we’ll start with the high level themes of what we know today, heavy on fact – light on guesswork.

 

Commodities

 

As a clear and defined six month trend, we know that the primary trend for commodities of all sorts is down, very sharply.  Major support has been broken in the metals and energy groups and we have no idea how long this asset class will continue lower.  Commodities should hold almost no weight in your investment portfolio now but we’ll be watchful for some incredible upside opportunities after a complex bottom develops (months away).  The energy group is heading clearly down to the long term trend line at this point, which could provide some stability – see chart below of the Energy Select Sector ETF (XLE).  Another 8% lower will bring the price back to the long term UP trend line and the break out level from 2011.

 

 

Are commodities dead?  For now, yes.  But longer term, the world is doing nothing but gobbling up natural resources at a faster and faster rate.  Developing countries are driving new demand, resurgent economies need more materials to build out, and more humans are eating, drinking, driving, and living than last year.  Jeremy Grantham of GMO does an excellent job outlining the facts behind long term global resource scarcity and it is a real thing.  Commodities may very well be a place for us to make money in 2015 as they now represent some of the best values and dividends.  Remember, let it bottom first!

 

Bonds

 

Treasury bonds and all forms of sovereign (Government issued) debt are ugly and will be at best unproductive investments for a long time.  I said the same about Gold at our annual meeting in October of 2011 showing the folly of ATM type devices that kick out little cute bars of bullion in a Middle East casino.  Gold is down over 40% since then. 

 

 

I said the same thing about real estate in 2006 when it became painfully obvious that we had approached a “House of Cards” moment.  Very few areas of the country have yet to exceed real estate price levels set in 2006 after falling dramatically in the last eight years.  Real estate is still dead money and this is clearly not the time to chase or get into the fix and flip business. 

 

Now, the 30 year US Treasury bond is up nearly 22% YTD making such a statement sound flat out wrong.  But what if I told you that this same bond is still down -1.73% from its high in 2012 while stocks have been appreciating at 15-18% annually.  Hear me now; if there were a moment in time, in history, to sell your long term Treasury bonds as it has now recovered (but not exceeded) the losses incurred in 2013, this would be it.  Follow Bill Gross if you don’t believe me.

 

Stocks

 

Stocks are still your best, most liquid, bet for making returns in 2015.  However, as I said at this year’s annual meeting, there are no more free rides from here on out.  Returns will be earned, not given in 2015.  By that I mean that robust systems focusing on portfolio net exposure, selectivity and position sizing will generate higher risk adjusted returns than simply owning a few indices passively.  Volatility is already on the rise and monthly whips in your stock account balances will become more pronounced.  Stocks and stock markets are now expensive but there are still pockets of opportunity.  Domestically, we’re definitely having a harder time finding things that are establishing new up trends but offer some value.   Like the commodities groups, internationals are becoming increasingly attractive but are not yet showing leadership, especially when adjusted for a rising US dollar.   Every week, I see more “piling on” mentality among late investors to US stocks, chasing absurdly priced securities.  Clearly 2014 will be a year for the record books in terms of net new inflows of cash into equity funds – nearly $180B so far.    Now the money shows up?  Now after nearly six consecutive years of cumulative gains in stocks?  After 200%, investors decide to put some cash to work?  Behavioral economics is not pretty as the cycle of buy high and sell lows is obviously still in play.  If you’re going to add money to the markets now, please do it with someone who has a system, a real historical track record and the will to manage risk when needed.

 

Other Stuff

 

Now that Black Monday through Sunday is behind us, we know that retail sales were down substantially year over year (-11%).  Excuses have been running wild but the answer is still clear to me.  Retail, as we have known it is on the ropes as brick and mortar stores continue to give way to on-line shopping.  I heard an interview with a company called Bonobos.com .  I think this model or some derivative of it will become more prolific.  Check it out – guide shops where you just go to try something on, and then it’s delivered to you next day.   I don’t know what will happen to Malls and all the big box spaces but I wouldn’t depend on their survival.  On-line sales are still barely 10% of total sales and we can see the negative impact already.  Imagine when on-line sales get to 20-30%?  Speaking of..... the key ingredient to the success of on-line sales is obviously delivery.  UPS and Fed Ex will be winners for a long time (we own UPS in Worldwide Sectors in full disclosure).   Amazon (AMZN) and Google (GOOG) are down substantially this year as they take a breather from 2013.  They could be close to a great buy and source of additional returns in 2015.

 

Auto transportation, efficient buildings and primary energy are going through historical evolutions.  This theme is still well in place and will accelerate making renewables, energy efficiency and clean technology attractive sectors on discounts.  They have held up very well as traditional fossil fuel companies have entered bear markets.  2014 has been a Transition year for efficiency companies after the blow out in 2013 (+60%) but not a bad one.  Stay tuned as this story is not over. 

I also see the megatrend in healthcare, biotech and pharma as connected firmly to an aging baby boomer population.  I have no doubt that the Affordable Care Act will get a work over with the next administration but it will not change the fact that we have one of the biggest generations of all time wanting to age gracefully and stay active well into their 80’s and 90’s.  They have the money to spend on self-preservation and they will do it.  Maintain core positions in these areas and buy discounts until further notice. 

Finally, it seems that the innovation cycle for technology may be tapering at least for some applications and distribution in the US.  Technology companies with a strong presence in the developing world still have long legs but are also subject to international risk amid currency wars.  Mobile, social and local are still big themes and the carriers of data (wireless and networking) should still be solid core positions.  But anything in the desktop hardware space is hard to hold in my book as we all can do more with handheld stuff.  Wireless charging is neato, coming soon. 

 

That’s all I can think of for now but stay tuned to the Red Sky Report this month as I take a stab at patterns and timing for 2015.

 

Have a great week

 

Sam Jones