Tag Archives: Investing

Contrarian Tea Leaves.

Investors love a contrarian idea. Though terrified of actually investing in such ideas, they love discussing them. Believing they’re “in the know.” Part of the smart money.

Discerning when such ideas have taken root? Easy. Everyone from clients, third cousins’ spouses and the local barista wish to discuss them.

“Hey, listen. I know some guys who have been buying up XYZ. Been really beaten down. Think it’s gonna go through the roof and soon. What ya’ think?”

Probably the most loaded question ever asked. Because distressed, beaten up contrarian plays will, eventually, rise again. But, the catalyst for such a move could be hours, days or years away.

Lately, everyone has been asking about commodity stocks. Because low prices have brought much attention to these cyclical plays. Oil. Corn. Uranium. Potash. Coal. Each of which have seen values decimated over the last six to twelve months. Time to buy?
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House of Disregards.

Sometimes life imitates art. More often, art imitates life. So it is with the fascinating, made-for-Netflix hit, House of Cards.

My wife and I? We try not to watch. Because, with all of the episodes readily available on Netflix, one can easily indulge in an entire season in one sitting. So elongating the painful period until the next season drops.

So, we try to avoid it. Like an alcoholic tries not to drink. As much as we wish to gander just one episode. Yet, we can never stop at one. So, we attempt to stay away. To avoid its sweet-as-nectar content in order to prolong the pleasure. But, we can’t. Inevitably, we find ourselves on the coach. Binge watching episode after episode. Until the bottle has poured its final drop.

House of Cards is based on the BBC show of the same name. Which is based on the British novel of the same name. All of which are prone to fictitious flights of fancy. But, the book and its offspring do effectively portray the Olympian levels of hubris, ambition, greed and corruption through which Federal politics are distilled.

Moreover, after a few episodes, even the casual observer might ask, “Where are the voters?”

Though a small aside, this is, in fact, another revelation wrought by the show. The idea that Federal politics occur within the ecosystem of Washington D.C. A world in which voters are relegated to the role of extras.

Today’s polling numbers reveal an electorate that does not trust its politicians. In fact, discord with our political institutions sits at historic lows (here).

Amid a prolonged economic downturn. Weekly revelations of political corruption and hypocrisy. The enactment of questionable national policies. And a seeming lack of leadership at every turn, who can fault the electorate’s disillusionment?

The Declaration of Independence foresaw such problematic periods. And built in a means of addressing them.

“In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury.”

Only, the Founders wrote of their redress against a tyrannical English monarchy. Yet, how can those words not be applicable today? When the electorate is so commonly aggrieved, manipulated and turned upon by those elected to represent its interests?

The greatest irony? Whenever things get vicious (translation: bad poll numbers for leading political figures), these elected officials take every opportunity to find a television camera and demand a return to civility. Though, those politicians are nearly always the source of such incivility. Always ginning up the tools of divisiveness before each election. Because it is more politically expedient to turn one’s constituents against one’s opponent than it is to run on one’s record. Or lack thereof.

Mahatma Gandhi said that “Corruption and hypocrisy ought not to be inevitable products of democracy, as they undoubtedly are today.”

And yet, corruption and hypocrisy remain two of D.C.’s major exports. Which is why our democracy has been limping.

For democracy to work, voters must believe in it. Yet, every year seems to bring a diminishing faith in our public institutions.

We watched the IRS bully Tea Party groups in Ohio. We watched Wall Street and D.C. tar and feather Occupy Wall Street. The “Fast and Furious” scandal and cover up. The Department of Justice spying on Associated Press journalists. The bungling and cover up of the embassy deaths in Benghazi. Government shutdowns. The NSA’s secret surveillance of, well, everything.

The sheer volume of ineptitude and deceitfulness does not engender confidence.

And yet, when citizens have had enough, and create political movements that seek to redress the wrongs wrought by greedy, misguided politicians and political institutions, the political class calls for a return to civility, and an end to all of the contention.

Regardless of their politics, organizations like Occupy Wall Street and the Tea Party share a common interest. The goal of changing a massive government bureaucracy that does not listen to the people it is supposedly there to serve. By whose very consent and support they even exist.

Notice, however, that when these movements gain any traction, Republicans and Democrats, the largest, most powerful organizations in the world, react by targeting, attacking and isolating these disillusioned voter groups.

By engaging in their First Amendment rights, these activists are branded as part of the lunatic fringe. Such tactics have long been utilized by governments intent on the consolidation of power. Focused on weakening the ignorant, unwashed masses.

Today’s elected officials don’t view you as a constituent, but as a constraint.  A vote to be won, or a problem to be managed. As House of Cards aptly demonstrates, citizen voters are simply a means to an end. A necessary commute to the halls of power. Once arrived, most politicians quickly demonstrate that their loyalty is to party and self. To those who can keep them there. Not those who sent them.

D.C. remains the only formal ball where it’s standard procedure to leave your date at the door.

In D.C., an elected official will spend markedly more time with lobbyists and special interest groups than with the constituents of his district.

Thankfully, this problem is solvable. Bring our elected officials home.

Technology permits professionals in nearly all fields to work from anywhere in the country. Why are politicians any different?  If our local Representatives serve our interests at our pleasure, then should they not work among us?

Elected officials could easily work in their districts full time. Perhaps return to D.C. once per quarter for major votes. Or better, why can’t they vote from their districts? If the rest of us can do so, then surely a cadre of public officials can follow suit.

If elected officials worked within their districts day in and day out, then perhaps they might better sympathize with voters. As opposed to their parties. Because any antechamber consistently packed with angry constituents will quickly eradicate the formerly pressing need to satiate some committee chairmen or party head.

More importantly, having our elected officials spread throughout the country would immediately dull the power wielded by lobbyists. Even the deepest pockets would find it difficult to travel all 50 states to press their interests. Much easier to deal with a captive audience — like all of the nation’s legislators living within the capital. Even the NRA would admit, that’s shooting fish in a barrel.

Best of all, bringing politicians home will finally impress upon them who their real employers are. Not large corporations. Not large lobbyists and influence peddlers. Not the political parties. Not the special interest groups.

Nope, Congressman, those guys do not pay your salary. But, if you listen real hard, you can hear the guy who does.

He’s in your reception area.  Hear him belching, laughing aloud and cracking inappropriate jokes? Well guess what, Senator? That is your boss. He made you. Bought into your promises. And now that you live so close, he’s here for your quarterly review. So swig some Scope and and think of something funny to say, because he hasn’t laughed with you in a long, long while.


Sunday marked the five year anniversary of the S&P 500’s nadir. March 9, 2009. The stock market bottomed out at 667. Representing the beginning of the end to the most extreme financial catastrophe mankind has ever seen.

There was little fanfare. Just another Sunday. Families attended church. Walked their dogs. Dined. Watched television. Read the paper.

Recall the state of affairs only five years ago. Then, the U.S. financial system teetered on extinction’s ugly precipice. Retirements were postponed. Families walked away from mortgages. Left keys in the mailbox. The bank’s problem now.

Jobs were lost. As was the ability to pay for tuition. Cars. Cable television. Food.

Anxiety levels rose. As did the suicide rate.

On that March day in 2009, the world seemed a volatile, chaotic and unfriendly place. Nor did it appear as if things would improve anytime soon.

To worsen matters, denizens of Main Street hardly understood what was causing the chaos. How could they? Wall Street’s grotesquely misshapen financial wizardry was largely beyond the pall. A confluence of ill-conceived financial engineering that, in aggregate, sparked a financial cataclysm.

Fannie Mae, Freddie Mac, lending money to anyone who could fog a mirror. Those “subprime” (read: less than desirable) loans were then bundled with decent and better-than-average loans and packaged into collateralized-debt obligations (CDOs).

Greedy, lazy financial institutions like Merrill Lynch loaded their balance sheets with these toxic instruments. Couldn’t help themselves. Nor did they know better.

In Michael Lewis’s boon on the financial crisis, The Big Short: How Wall Street Destroyed Main Street, hedge fund manager Steve Eisman explained Merrill’s role in the crisis as follows:

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there. When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit.” That was Eisman’s logic – the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things.”

Yet, I digress.

As variable rate mortgages rose, homeowners were increasingly unable to pay. So, they began walking away. Leaving keys in the mailbox. Somebody else’s problem.

As loans began to default, those subprime strands of the CDOs quit paying. And as with any packaged financial instrument, if a one-percent facet of the instrument goes bad, the entire product becomes worthless. So, the prices of CDOs plummeted. Became illiquid. Toxic.

Next, FAS 157 instituted mark-to-market accounting in November 2007. All these banks had been happily collecting income from all these CDOs. Suddenly, nobody wanted them. They became illiquid. And FAS 157 forced institutions looking to sell any instrument to place a value on those instruments. Which was, essentially, zero. Billion of assets marked down to nothing.

Balance sheets were destroyed. Firms like Merrill Lynch which only the day before had been thoroughly addicted to the CDO’s easy income streams were now forced to unload them for 20 cents on the dollar. Which forced other banks to mark their CDOs at 20 cents. Causing further write downs. More chaos.

Eventually, mighty Merrill, now insolvent, was handed off to Bank of America in a government-arranged shotgun wedding.

Other firms, like Lehman Bros., were no more destitute than was Merrill Lynch. They were simply solvent longer. And so were too late to attract a suitor.

The destruction wrought by the ensuing collapse? Mythic. Millions of jobs lost. Thousands of companies eviscerated. Trillions of dollars in market capitalization, wiped out. 57 percent of the S&P 500’s value, gone.

Even today, with markets having risen 183 percent from the ’09 low, investors still quiver like wet Chihuahuas with each market decline. There remains a bit of post-traumatic stress disorder at work. Both on Wall Street, among those who caused the cataclysm, and on Main Street, which took the brunt of the blow.

In 2009, much of the populace believe that the U.S. was to be forever relegated to emerging market status. Never would the American economy gain back the wealth, jobs, GDP, optimism and opportunity lost within the swirling vortex that was the 2008 crisis.

Much of the so-called intelligentsia believed that 2008 marked the beginning of the end. The fall of Rome. The nexus at which the nation’s hubris, ambition, greed and innovation integrated in a lethal cocktail of cultural decimation.

And yet. Resilience has always been among the least understood attributes. It is not granted the lofty accolades of fellow adjectives like talent, genius, ambitious or focused. Yet, resilience generally outlasts them all.

Five years later, American GDP leads those of all major developed nations. Jobs are slowly returning. The domestic energy sector is flourishing. American social networking technologies are helping the world to communicate faster, cheaper and more effectively. Company IPOs have returned to Wall Street. And shoppers the world over are once again clamoring for U.S. retail technologies, clothing and consumer products.

The U.S. economy has not grown dramatically. Still, grown it has. When nobody thought it would.

Despite a frequent lack of leadership from both parties in D.C., the American people, led by the private sector, with an occasional assist from the public arena, have managed to rise from their knees, bloodied but unbowed. Having shaken off the dust and grime, the American worker has again shown what it means to be resilient in the face of seemingly insurmountable odds.

While stocks have climbed 183 percent off of the lows, achieving new highs following a 14-year consolidation, opportunities remain. This most hated of all bull markets continues to lack the frothy enthusiasm that generally marks an end. Investors continue to complain about the Fed’s stimulus programs. The surplus of paper money. Yet, the omnipresent liquidity poured into the global financial system not only served to assuage the massive global despair, but provided the springboard by which the S&P 500 might, according to some analysts, reach 3,330 before this bull ends. That’s five times the market low.

“But, we’re five years in? Ain’t this thing getting’ a bit long in the tooth?”

While the average bull market lasts five years and three months, there are three primary reasons as to why this cycle will differ.

First, the post-2008 recovery has been much slower than most. Credit-driven recession recoveries usually are. We expect the typical three percent GDP growth following such periods. This recovery took longer to heat up. Spent a protracted amount of time stuck between one and two percent GDP growth. Now, however, it appears that the expansion is finally getting some legs.

Second, there remains too much money on the sidelines. Or in bond funds. Largely a by-product of the post-traumatic stress harbored by a community of investors badly burnt twice in 13 years (2000-2002 and 2008). They will again be late to the party. When they arrive, however, it will extend the duration of the soiree.

Finally, the S&P 500 traipsed a 14-year consolidation period. Up, down, sideways. Ending up at in exactly the same position in March of 2000, October of 2007, and Q4 2013. Today, the index has pushed through that ceiling. Traditionally, when stocks or indexes break through a ceiling that had contained them in a trading range, they propel much higher before coming to a halt.

While there will inevitably be pullbacks, some large and scary, participating investors have grit their teeth and pushed through every dilemma these last five years.

Without the participation of many Main Street investors. Devoid of the assistance of many on Wall Street. Investors, believing in the resilience of the market, have reaped the rewards.

Nor did the American worker ever fly the white flag. Throughout the harsh economic circumstances of the last half decade, Americans remained resolute. Woke early. Worked hard. Day in, day out. Catalyzing a domestic manufacturing renaissance. An energy boom. And the rebirth of our technology, healthcare and banking sectors, just to name a few.

Due to the resilience of our economic system and workforce, our domestic economic landscape now appears to be back in a position of strength. Despite the faults and foibles of our political system and those operating therein. Despite the harsh vituperations of critics. Despite the inevitable environmental and geopolitical trauma with which we will always contend.

“The human animal will keep behaving the way it has in the past,” Warren Buffett has said. “We will have periodic recessions and occasional panic but the good news is in the 20th century, we had two world wars, the flu epidemic, the Cold War, atom bomb, you name it. And the Dow Jones went from 66 to 11,497. All these terrible things happened, but America works.”

The future of this nation? Shame on those who doubted it. Do not let the occasional clumsiness of her leadership cast any doubt on one crystalline, cast-iron fact:

Five years after rock bottom, though unfinished the journey remains, we’re back, baby.

Last Week in Brief: January 17

iStock_000018690571XSmallLike drunken sailors on shore leave, markets fell for a second straight week. Friday in particular saw the Dow drop nearly 2 percent. It now looks oversold.

Interesting to watch markets rage over bond and currency declines in emerging markets, particularly Argentina, after major credit crises in major European markets like Italy and Spain failed to derail them these last three years.

Meanwhile, the world’s richest and most powerful have gathered in Davos. Private planes. Limos. Skiing. Full-body fur coats. Private chefs. And $26,000 bottles of Cristal. All, so that the world’s top 0.00000000001% can discuss a more effective means by which your life might be run. For Jon Stewart’s ever-humorous take on this hubris festival, click here.

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Last Week in Brief: January 24

Stocks behaved last week like the Denver Bronco’s Super Bowl offense. Frenetic with activity, little to show for it.

Does this country love football or what?

I would posit that, to the occasional detriment of our families, jobs, literary accomplishments, yards, spiritual lives, friendships, financial resources, nutritional habits, exercise regimens, household projects, Sudoku, tennis games, running mileage, sleeping routines, livers, skin tone, blood pressure, cholesterol counts, self esteem and mental acuity, there is nothing we love more collectively than watching the National Football League.

Need proof? Here you go…

The most watched event in television history (112 million views) provided quite the anti-climax. Probably a positive that football season is over. Consider the time and energy that can now be redirected towards more productive activities. Like NCAA hoops brackets. And The Masters.

Among an array of aggressive attempts at advertising humor, there was one commercial that pulled at our heartstrings. That reminds you of the service, commitment and kindness of which we’re capable. View the ad here.

Then, suddenly, football was finished. Adding to the horror, it was Monday morning. Why do they do that to us? Terminate football AND force at to awake to Monday — all at once?!
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The Witches of Wall Street.

Those fingers in my hair

That sly come-hither stare

That strips my conscience bare

It’s witchcraft

And I’ve got no defense for it

The heat is too intense for it

What good would common sense for it do?

’cause it’s witchcraft, wicked witchcraft

And although I know it’s strictly taboo

When you arouse the need in me

My heart says “Yes, indeed” in me

“Proceed with what you’re leadin’ me to”

It’s such an ancient pitch

But one I wouldn’t switch

’cause there’s no nicer witch than you

–Frank Sinatra, Witchcraft

. . .

Before science, there was magic.

Lacking logic and rationale, man ascribed much of what he could not understand to magic. Sorcery. Mysticism. Witchcraft and wizardry.

Of course, whenever human beings exhibit fear and ignorance, there will always soon appear the archetypal soothsayer, and his bag of tricks. Magic, sorcery, visions and elixirs – there is nothing these foretellers of fate cannot see and do. Where your vision is clouded and opaque, theirs is clearly focused on the dark, mystical outcomes ahead.

But, good news. Generally, for a meager sum, you too can tap into their divinations.

Sympathetic magic was a type of sorcery based on the metaphysical belief that like affects like. In other words, an object, figure or person could continue to exert some influence or control over another object, figure or person, by having been, at some point in time, connected, related or aligned.

Lacking much else to explain the mysteries of the world, our ancestors placed great amounts of faith and hope in the power of sympathetic magic.

Distant lovers wore lockets containing their beloved’s hair in the belief that it would fortify their love. Voodoo priests stuck needles into dolls bearing the likeness of their rivals, hoping it might do their rivals harm. Warriors ate the hearts of their brave but vanquished foes believing they could glean their strength by consuming the flesh. Psychic detectives used psychometry in the belief that touching an item belonging to a vanished loved one might grant psychic contact with the individual.

We are a strange bunch in a strange land.

Sympathetic magic paved the way for many of today’s new-age notions. Consider the idea of “morphic resonance,” which explains the basis of memory in nature by the idea of mysterious telepathy-type interconnections between organisms and the collective memories of species. Remember Avatar?

Sympathetic magic is also the foundation for most forms of divination, the idea that the lines, shapes and patterns found within everyday objects can be magically connected with the empirical world. Its past, present and future. Using divination, man began his attempts to foretell the future. Or, to reveal occult knowledge through the interpretation of omens, or the use of paranormal or supernatural powers.

For centuries, divination has been a source of comfort and torment.

On the one hand, that lock of hair provided a measure of intimacy to the wife of a seafaring mariner. On the other hand, the accused witches in Salem took little pleasure in the revelation of their innocence as their bodies did, in fact, burn at the stake – so proving their innocence.

Which, my superstitious friends, brings us to today. This so-called modern era. The age of science and empirical thinking. Truth is, we have not strayed far from our magical roots.

Last week, my wife explained that she will be joining some girlfriends as they willingly pay actual money to see “The Long Island Medium” as she makes a tour stop in Cincinnati.

Of course, I’ve requested a few questions on my behalf. First, the S&P 500 year-end values in one-, three- and five-years. Second, David Chase’s intended meaning for the final episode of The Sopranos. And finally, the future World Series and Super Bowl championship victory dates involving the Reds and Bengals.

Yet, the Long Island Medium isn’t the only one playing upon our desires to divine the future.

Perhaps you recall the Reverend Harold Camper who convinced thousands of followers that the apocalypse was nigh, and the world would end on May 21, 2012. Yet, the end never came, leaving thousands of Reverend Camper’s followers crestfallen and wondering in whom they could place their faith if not a 90-year old retired civil-engineer cum doomsday proselytizer?

Of course, in a world of cyclicality and mean reversion, if you make enough forecasts, you get a few right. Take Nouriel Roubini (Dr. Doom!) or Marc Faber (author of “The Doom and Gloom Report”). These perma-bears have spent much of their careers calling for financial Armageddon. In 2008, they finally nailed it.

The sad truth? Gloom and doom sells. We watched with morbid fascination as the tidal surge swept away the Thai coastland. As earthquakes destroyed Haiti. Or as any number of stock market sorcerers predicted the next economic implosion (click here for, Economic Pessimists Gain Cache.)

Besides the average baseball locker room, there is no more superstitious a corridor in the land than Wall Street. Each day, tasseographists turn their tea leaves in an effort to forecast the future. Using esoteric bits of graphology, the practitioners of Wall Street witchcraft tell us our likely fates. Sounding poised and mysterious on CNBC. Then charging $1,700 per year for a newsletter detailing all of the sorcerer’s market magic.

Today, its the alleged “January Barometer.” And its portent of the bad omens at hand.

Originally identified by Yale Hirsch of the Stock Trader’s Almanac, this touch of present-day sorcery posits that January’s performance will in turn influence that of the remaining calendar year. Good January? Good year. Bad January? Witchcraft!

According to the Stock Trader’s Almanac, since 1993, when the S&P 500 rose in January, the rest of the year saw an 11.2 percent gain. A negative January, in turn, resulted  in a meager 0.2 percent rise the rest of the year.

January 2014 saw the market decline 3.46 percent. Accordingly, the January Barometer indicates a miserable year. According to the sorcerers of finance, you may as well sell stocks and go to cash, because this year has about as much to offer as a Kardashian in calculus class.

Last year, it was The Hindenburg Omen. Last Sunday, it was those nutty kids in Pennsylvania, planning their springs around the sleep habits of a groundhog named Punxsutawney Phil.

We remain a superstitious bunch. Under girded by technology and science, only to invoke mysticism and superstition when an explanation is not ready made.

Today, in the age of mass spectrometry, particle acceleration and online dating, we are still prone to superstition, sorcery and fear. Even in the 21st century, we remain one panic away from another witch hunt.

Which questions any rational-minded market purveyor should ask?

Is there any logical explanation for the causality of such omens? Is there a repeatable, historically documented variable leading to a proven correlation between cause and effect?

Given our weakness for superstition, one begins to understand why the herd mentality is so dangerous. Particularly when it comes to investing. Or, for that matter, the identification of witches. Once we seek our teeth into an idea, we are loath to let it go.

And yet, there remains no significant reason as to why a negative January would portend a difficult period throughout the remaining eleven months.

As I write this, the market is down roughly five percent year-to-date, having fallen 3.5 percent in January alone. Any tasseographist worth his salt might tell you that his tea leaves are telling us to sell. Get out. Go to cash.

But, in January 2010, markets fared even worse, falling 3.7 percent. And as the oracles began reciting their incantations to vacate the market, the S&P 500 proceeded to post a 14.8 percent calendar-year return.

That year, mystics lost their asses.

Sometimes, regardless of which of the twelve months in which it occurs, the market simply drops. Moreover, following a 10,000 point, five-year gain in the Dow, sometimes the market has to give a few points back. That is to say, sometimes markets don’t go up.

I don’t need a medium to tell me as much.

Wall Street knows this all too well. And when the not-so-convicted buyers of Main Street panic and sell shares in XYZ Company, the smart money picks those shares up on the cheap. Because the smart money knows that one bad purchasing managers’ index number, one shoddy employment report, or one sub par ISM reading does not a recession make. But the herd will always shoot before aiming.

The market has risen for five years. We have not had a legitimate correction in a year and a half. The pundits have discussed a pending correction, ad nauseam. Well, this could be that.

At some point, the market will drop. Meaningfully. Right now, with markets falling like Justin Bieber’s Q Score, investors’ behavioral biases are going off like smoke detectors in a Colorado coffee shop.

Yet, so long as we’re not on the precipice of another 2008-style meltdown, and all signs say that we’re not, then stocks will likely recover over the next two to three months.

If we are, in fact, on the verge of another global meltdown, then batten down the hatches and go short, because all bets are off.

For the time being, however, the U.S. and Europe remain in stimulus mode. The economic recovery is intact, inflation is in check, and bonds are holding up well.

So, unless your horoscope or Ouija board says otherwise, give stocks the benefit of the doubt.

Outlook 2014.

2013 underscored an enduring idea that investors best not forget: politics be damned, the stock market is a universe unto itself.

Washington D.C. resembled a WWE main event. Complete with superstars, divas, pile drivers and head butts. The Middle East succumbed to another self-induced conflagration. The Far East dealt with fallout – both political and nuclear. And Russia prepared for the Olympics while essentially reestablishing itself as a dictatorship.

Throughout, investors, as well as many investment advisors, continued to suffer from the cognitive dissonance wrought by the 2008 credit crisis.

Most believe that the economy has stabilized. Is slowly strengthening. Yet, many remain woefully underweighted to stocks. Even as bonds declined against a backdrop of rising interest rates.

The lingering dissonance is understandable given the issues confronted these last two years. U.S. debt downgrades. Fiscal cliffs. Sequesters. Government shutdowns. Dodd-Frank. The threat of rising interest rates. China’s anticipated implosion. Europe’s debt crisis. Fukushima. Potential U.S. debt defaults. The Arab Spring. North Korea. Iran. Egypt. Syria.

Little wonder investors have been as anxious as a lightning-strike survivor in a thunderstorm. While a decade of fear and greed positioned markets for the best of all scenarios, investors obsessed over the next financial apocalypse.

Still, stocks continued higher.

All Quiet on the Western Front?

Aside from the continuing ObamaCare saga, this year sets up for relative tranquility. That is, as much tranquility as one can enjoy in a society driven by a myriad of 24/7 cable and network news organizations striving to uncover the next ad-selling catastrophe.

Sure, we have the midterm elections. But markets won’t sweat that. And after last year’s Greek tragicomedy, D.C. is weary of raising the electorate’s ire.

Moreover, the current environment appears relatively serene. Tapering is baked in. Bond yields are unlikely to surge in the short-to-intermediate term. GDP and earnings guidance have been raised. We’ve seen more recent political cooperation than we have the last half decade. The American industrial renaissances continues to build momentum. Central banks remain accommodative. U.S. energy independence appears increasingly likely.

In lieu of everything, investor’s remain schizophrenic.

Goldman Sachs’ Abby Joseph Cohen and Legg Mason’s Bill Miller, both of whom were remarkably prescient in their 2013 forecasts, agree that equities could climb another 20 percent this year. Further, the market’s relentless rise seems to have tamed all but a few perma-bears. Contrarily, many investors, both retail and institutional, continue to hold large cash positions.

So, what can investors expect from 2014?

Economically Speaking

Tapering signifies that the U.S. economy is normalizing. And while 2014 growth will be mediocre, it should continue to improve.

2013 GDP growth was 1.9 percent. The forecasts for 2014 range between 2 and 2.8 percent. Most economists agree that there is little-to-no chance for a near-term recession.

Of course, most dismal scientists missed the mark entirely in 2008. But, they have data on their side.

Unemployment is picking up. Purchasing manager’s indexes have improved. As has industrial production. Inflation remains stable. And interest rates should remain near zero into 2015. If D.C. can serve as less of an economic drag, GDP growth could approach 3 percent. That’s below the typical levels at this stage in the business cycle, but could be a technical and psychological boon for stocks.

Welcome Back, Volatility

After five years of market gains, not to mention last year’s volatility vacuum, we do not expect the ride to remain smooth. Markets have not only climbed the proverbial wall of worry. They’ve scaled the cliffs of fear. With investors making decisions amidst a constant expectation of a correction that never arrived.

Investing involves regular, if inconsistent, mean reversion. So, expect volatility to reappear in 2014.

The culprits?

Perhaps Europe hiccups. Perhaps the Fed decides to raise interest rates sooner than expected. Or the Middle East implodes into a conflagration of sectarian violence. Causing energy prices to spike. Or, some unforeseen natural or geopolitical fault line shifts, bringing panic and turmoil.

In 2013, the U.S. government threatened default. The government shut down. Yet, markets yawned. Today, as investors grow increasingly comfortable, expect a curve ball to disrupt the placidity.

Oscar Wilde quipped, “To expect the unexpected shows a thoroughly modern intellect.”

So we will. Because when we least expect it, something will shake investors from their complacency. Some drama that surprises everyone. Causing volatility to jump like cats on a hot tin roof.

Stocks: The Trend is Your Friend

The S&P 500 ended the year up 29.60 percent. A gift from the market gods. Yet, stocks enter 2014 overbought. A correction is long overdue. And this week’s Investor’s Intelligence survey hit a bullish extreme that usually portends a market top. The probability of a 10 percent correction to wring out the excess increases weekly.

Still, 2013 demonstrated that such overbought conditions can be greeted with moderate pullbacks and consolidations. Yet, considering the ferocity of last year’s move, as well as the dearth of downside, we would not be surprised by a more pronounced drop.

By its nature, the stock market doesn’t care about absolutes. Good or bad. The market is a pricing mechanism. It concerns itself with whether things are becoming better or worse. We believe that things continue to improve. Accordingly, we believe that the trend remains upward. Though this year’s market will likely involve more peaks and valleys than did 2013.

Why the cautious optimism? Too many forces pushing equities higher. They include:

Money flows from bonds into stocks for the first time since 2007.

Equities are more expensive than a year ago, but remain more attractive than bonds and cash.

If the S&P 500 remains at its current multiple (17x), it stands to reason that the market can rise significantly so long as 2014 earnings estimates are near their targets. With mean earnings projections at $117.20, a multiple of 17x would see the S&P rise to roughly 1,992. That’s a 10-percent gain.

Click here for a look at some year-end targets for the S&P 500.

Investors beware, however. As this stage in the business cycle typically sees uncertainty decline and confidence on the rise. This results in less risk aversion, as investors move from cash and bonds into equities. Eventually, that excessive optimism leads to a meaningful decline. March? April? Nobody knows. But it’s out there.

Fixed Income’s Rocky Road

Aside from the certainty of uncertainty, the idea of which we can most be sure is continuing volatility in fixed income markets. As rising interest rates approach, the multi-decade bond bull will turn bearish.

We don’t worry about a cataclysmic rise in rates, as some are predicting. It is the unintended consequences that wake us from our nightly slumber.

What will be the psychological impact of rising bond rates on those institutional trading firms, hedge or sovereign wealth funds, as rates rise? Which of these institutions has made large, leveraged interest rate bets via the massive derivatives markets? What happens as these unwind?

Warren Buffett called derivatives “financial weapons of mass destruction.” And so it is not the seen, but the unseen, that worries us.

Yet, fixed income is not the mine field everyone has made it out to be. With inflation low and rates likely to rise, non-government taxable bonds, high yield bonds and, possibly, municipals provide opportunities. TIPS and long-dated Treasuries, however, should be avoided.

House of Cards

As markets healed these last five years, and the 13-year consolidation period the S&P 500 began in 2000 ended with new all-time highs, we often found the biggest impediment to progress were those in our nation’s capital. Crisis after crisis. In perpetuity.

Yet, even with November’s mid-term election, this could be the year that politics gets out of the way.

Nobody in Congress wants to antagonize the middle class heading into the midterms. And D.C.’s denizens recognize, based on their dreary poll numbers, that voters are exhausted by the constant turmoil.

Better yet, the smell of compromise is in the air.

The fragile budget deal remains intact. It may remove the threat of yet another debt ceiling debacle and the annual government shutdown. True, partisan warfare over government spending may arise. But, the recent agreement ends a three-year budget fight and establishes Federal spending through 2015.

As the 2011 debt ceiling battle catalyzed the last real correction, we can at least remove that obstacle.

Finally, there may be talk of new taxes on the wealthy, but there’s not likely to be much movement. Especially given that the wealthy were stuck like pigs on January 1.

ObamaCare will receive its daily headlines. But, even that boiling rabbit is likely to improve.

So, even with November’s election, perhaps this year will be less political. Knock on wood, my friends. One can hope.

Foreign Affairs

Overseas? A mixed bag.

Many emerging economies, especially those in the Middle East, are dealing with massive unrest. Syria, Iraq, Iran, Egypt, Turkey, Lebanon, and multiple African nations — Shiite versus Sunni violence appears ready to drag the entire region back into the stone ages.

The unintended consequences relating to energy prices and geopolitics are disconcerting. Remember, WWI began with the assassination of an archduke on a shopping trip. And with a strengthening dollar threatening to further weaken emerging economies, that could destabilize these fragile situations.

That said, China appears to be emerging from its economic slump. Its reemergence would be a tonic for many of the natural-resource based emerging markets economies.

In Europe, the economic recovery there has not been fully appreciated. It was just last year that many thought the eurozone was on the verge of collapse. While fear and uncertainty still permeate the landscape, the economic trends in last year’s problem nations are improving. As are the opportunities.

Spain, Italy, Portugal and Ireland have made quantum leaps. England ended its recession. And Germany continues to lead the way. GDP is growing throughout much of the Eurozone, having already surpassed expectations.

Greece reeks of instability. But, even the Greeks have begun to right their once sinking ship. And with European equities having been beaten so far down, we believe the opportunity for continued outperformance exists for risk-attuned investors.

Conclusions and Action Steps

2013 was a great year for stocks. Still, many investors failed to participate due to lingering fears from 2008.  While stocks will continue to climb the wall of worry, we believe that opportunities remain. But, they will come at a price.

A reversion to more typical market volatility will serve to dampen investor enthusiasm, just as buyers begin to return. Still, these bouts of volatility will provide buying opportunities for those willing to put capital to work as others flee.

The typical precursors to large market corrections, those being spikes in inflation and energy prices, are not evident. Geopolitics could serve as a correction catalyst, yet the market has proven its ability to acclimate quickly to such events.

Understanding the above, we believe the following will represent areas of opportunity and misfortune in this year’s marketplace:

We are bullish on:

Domestic equities…

-Dividend-oriented large caps will provide income to buffer the peaks and valleys.

-Small caps appear to be benefiting by the current rotation and will provide opportunities for outperformance.

-We believe growth stocks will outperform value, as they typically do at this stage in the cycle.

Developed foreign equities…

-After having been thoroughly decimated, European equities offer yield, continuing value and upside, especially as Europe continues to stabilize.

U.S. corporate spin-offs…

-These newly issued shares will continue to offer excellent risk-to-reward opportunities as the marketplace, both consumer and investment, acclimate to their arrival.

Non-Government fixed income…

-Investors should focus on corporate and high yield bonds, which typically fare better in rising rate environments.

-Municipal and floating rate bonds may also provide opportunities.

Secular trends…

-As we’ve often discussed, we see value in a variety of positions related to the U.S. natural gas revolution, data storage and computing technologies, healthcare and biotech, as well as discretionary companies tied to the housing recovery.


-Selling covered-calls and naked puts will proffer income enhancement opportunities to buoy astute investors when markets trend sideways.

We are bearish on:

Commodities and commodities stocks…

-Until China recovers, and China’s emerging market clients find their footing, these natural resources and related stocks should be avoided.

Treasury Inflation Protected Securities (TIPS)…

-Down roughly eight percent last year, even the allusion of rising rates will continue to roil these positions.

Long-Dated Treasuries and Government Bonds…

-Short of some geopolitically inspired flight to safety, government bonds will be volatile without corresponding upside opportunities.

Emerging Market Stocks…

-While there is potential for risk-attuned investors, we believe that EM stocks will not offer enough reward to justify the risks, especially through the first half of the year.

Hedge Funds…

-Having underperformed for five straight years, and sensing that the client exodus may continue, the additional pressure on HF managers to justify their outsized fees will not assist their cause.

Bottom Line?

Increased volatility. Upside opportunity. Geopolitical turmoil. That’s the environment in which today’s investors operate. Have a plan. Execute it efficiently. Don’t let headlines and volatility shake you from your convictions.

And have your downside protection parameters in place. Because in this uncertain world, we are certain that 2014 will be ripe with excitement.

Happy New Years to you and yours.

Last Week in Brief: January 10

In spite of global economic recovery indications, financial markets have opened the year tentatively.

Still, most U.S. economic data is positive. Though, the labor data remains as confusing as a politician on a polygraph.

To say that the Bureau of Labor’s statistics are toothless is an insult to people with severe dental problems. The unemployment rate drops. As does the Labor Participation Rate. Weekly jobless claims fall. While new job growth does likewise. Is the labor market improving or not?

What a year, eh? 2013 was enough to make you consider day trading your retirement money. Though, this white paper from the Social Sciences Research Network will quickly deter you from that idea.

Take a look at Esquire’s 50 moments that defined 2013 in America, here.

The Good

TARP has been concluded. And believe it or not, taxpayers showed a profit.

D.C.’s conciliatory attitude continued, Congress compromised on a budget extension. And Democrats appear ready to compromise on next week’s emergency unemployment benefits bill.

Initial jobless claims fell by 330,000, besting expectations. While ADP’s private jobs growth was strong.

Home prices continue to elevate, up 11.8% year over year.

Finally, equity inflows continue to strengthen. As the rotation into bonds took years, this new rotation into stocks is just getting underway. All of which supports the idea that the trend remains upward.

The Bad

Another decline in the labor force participation rate underscores the idea that the jobs market remains weaker than usual at this stage in the business cycle.

The Ugly

Sectarian violence continues to play out across the Middle East and Africa, portending volatility and uncertainty as these stories continue to unfold. One never knows the unintended consequences.

Weekly Results

Major markets finished mixed last week. The DJIA fell 0.20%, the S&P 500 gained 0.60%, and the Nasdaq advanced 1.03%. Small cap stocks added 0.73%. And the 10-year Treasury bond yield fell 14 basis points to 2.86%. Gold rose $9.34 per ounce, or 0.76%.