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2014 "Call"

January is the most interesting month of the year for investors, at least it should be.  It’s like a “call” in any card game when the betting stops and everyone still in play shows what they have.  Winners and losers are established, those who have been bluffing are shamed and those with the goods, take all the chips.  With the month only half way over, it’s certainly too early to have confidence in which will be the winners and losers for the year, but we’re getting a clearer picture every day.  You might be surprised at those who have tipped their hands so far.

Not Quite What You Were Expecting?

Once again, the market has a crafty way of upsetting forecasts.  Today, via email, I received several more 2014 year investor forecasts. Calamos – “2014, The Year of the Fundamental Investor”.  John Hancock – “ Global Growth Prospects Brighten for 2014”.  Etc, Etc.  Not one suggested the results for 2014 could be anything other than bright, profitable, and yes even better than 2013.  Well so far, the pervasive overly bullish consensus opinion about stock market performance in 2014 is living up to its traditional role as a contrarian indicator.  Companies with strong fundamental performance reporting earnings and revenue that beat estimates are being sold off (Synnex, CSX, Barracuda, Alcoa, Capital One, Intel, JNJ, Verizon, GE).  UPS is down over 5% YTD because they simply have too much business to handle?   Others, like American Express, with complete misses on both earnings and revenue are up over 4% YTD. So far, I certainly wouldn’t call this the year of the fundamental investor but it’s still early.

You might also remember my comments about last year’s winners rarely extending to becoming this year’s winners.  Netflix is now down -13% and falling like a stone among others.  While losers from 2013 like IBM and Caterpillar are up both up!  Momentum investors beware.  Same goes for asset class rotations.  Stocks are down so far while the most hated asset classes in the world like long term treasury bonds and gold are up 3-5% YTD.

Also in the upset camp so far is the theory that the US stock market will dominate all global markets again in 2014.  Out of 76 country specific stock indices, the USA ranks 55th.  Leading the charge in 2014 are our old debt laden friends, the PIGS (Portugal, Ireland or Italy, Greece and Spain).  I suspect the theme of investors looking for growth a reasonable price (GARP) , presented in the last Red Sky Report, is at play here.  I’m not excited to invest in the PIGS now or later.

There is one “call” that seems to be playing out as expected and that is the market’s preference for cyclical sectors over defensive.  Again, please re-read the last Red Sky Report on GARP or GULP.  Growth sectors that benefit from a rising economic cycle seem to be the right place for investor money while defensive sectors like utilities, consumer staples and Energy and Telecom are not.  No recession in sight, low inflation and easy money are still the dominant themes driving performance differences.  A quick look at the sectors above and below their 50 day moving averages for 2014 tells the story clearly –  via Bespoke Investment Group.

The message is pretty clear to me.  Wall Street is littered with investors who refuse to see things for what they are and ride their assumptions all the way into insolvency. Selling is happening in stocks but more importantly, we are seeing selling into an environment where fundamental reports are perceptibly strong.  The “Call” is diverging from what is being reported.   This is a situation we often see closer to significant bull market peaks or at least significant market corrections.  With that said, it is too early to sell stocks, buy bonds and/or gold as our market “call” has not moved all the way around the table yet.  But so far, we should respect and be cognizant of what the cards say so far. 

In our shop, we are actively setting stops on all positions and selling them as they are hit.  In special cases we are using proceeds of those sales to buy new positions selling at better values but still in the growth sector or rotate into non-correlated asset classes.  By and large, we are focusing more on capital preservation now and following relative strength trends as they unfold.  From a timing perspective, this week should see a short term low in stocks with a strong seasonal period showing up during the last week of January.  If we don’t get a good thrust higher in late January, I’ll take that as another serious clue.

Stay tuned and have a great week

Sam Jones

Your money manager with both hands on the wheel