As we are within a few hours of the ball dropping in Times Square, I wanted to take the time to reflect upon My Gut Feeling for 2013. Hence, here were my thoughts as we entered the year and how they fared:
- Bottom up estimates for 2013 earnings as complied by Standard & Poor’s for its S&P 500 Index (SPX) are expected to increase by about 13% to just below 113. I believe that is too aggressive. My expectations are for 6% nominal growth with another 2% added on for a reversal in the US Dollar as foreign currencies catch up for declines that they experienced in 2012, arriving at earnings of 108 for the index. The SPX earnings multiple which stood at around 14.25 by the end of 2012 remains at one of the lowest historical levels for non-recessionary markets. I am inclined to nudge that multiple up slightly to 14.5. Hence, I am setting a year-end target for the S&P 500 at 1,566.
– Clearly I was way too conservative for my outlook as we began the year. Earnings growth accelerated as the year progressed and price / earnings multiples expanded greater than I expected. Even after raising my 2013 year end price target for the S&P 500 (SPX) to 1,650 in a letter to my investors at the end of the first quarter, I remained conservative. However, recognizing that Gross Domestic Product (GDP) was accelerating (more on that later), bonds were rising in yield and multiples were expanding, I remained fully invested with an overweighting in growth stocks.
- The bond market, despite ZIRP, zero interest rate policy, will not hold to its multi-generation lows for yields. The 10 Year US Treasury Note declined in yield by about 20 basis points in 2012 to 1.76%. I am expecting that the 10-year note will modestly back up in yield to 1.90%
– The bond market bubble finally, after three decades, got pricked and interest rates began to rise on the long end of the curve, faster and with greater magnitude than I expected. The exit from the long end of the bond market was one of the catalysts for the stock markets’ superlative rise. As we now stand, the 10 Year US Treasury Note now stands at about 3.00%
- US Gross Domestic Product will grow in 2013 by about 2.5% on average. However, the growth will be uneven. On a quarterly basis, I expect GDP in the US to grow by: 1.5% in 1q; 2.5% in 2q; 2.5% in 3q; and 3.5% in 4q. The reason for this uneven growth is that fiscal cliff worries have delayed capital investment and hiring in 4q12. This will begin to redeployed sometime in the latter part of 1q13, resulting in a lagged impact on GDP to materialize in the second half of the year.
– For the most part I was on target. GDP rose as the year progressed as did the employment rolls. Third quarter GDP rose by 3.6%
- Opportunities will become far more abundant and less risky overseas. My focus will be on both emerging and established international economies. I plan on allocating ten to fifteen percent of capital to be spread out amongst: Europe using the SDPR Euro Stoxx 50 Index ETF (FEZ); South Korea using the iShares MSCI South Korea Index ETF (EWY); Latin America using the iShares S&P Latin America 40 Index ETF (ILF); and, Turkey using the iShares MSCI Turkey Investible Market Index ETF (TUR). These purchases are in addition to my existing positions in Israeli funds.
– European, South Korean, Japanese and Israeli markets all fared well. Latin American, Chinese and the Turkish markets all performed poorly. Early in the year I was positioned in the South Korean, Japanese, Turkish and Israeli markets. With the exception of the Aberdeen Israel Fund (ISL) which we still held at the end of the year, exposure to all other foreign markets were eliminated in the first half of the year. The best place to be invested though in 2013 was the US markets and that is where we remained concentrated with our capital.
- There will be a major scandal in the Obama Administration. However, without an election to protect, it will not get swept under the carpet like Fast and Furious; the General Petraeus CIA scandal; or Bengazi. Bengazi won’t go away so fast as well. The market impact will be fleeting.
– Where do I begin with scandals for the Obama Administration? There are plenty to choose from. First there was the Internal Revenue Scandal. Then came, the National Security Administration (NSA) spying scandal. Of course, the best was saved for last when the rollout of Obamacare, (the Affordable Cara Act) was a major disaster
- Research in Motion (RIMM) will be forced to put itself up for sale. The buyer will likely come from overseas. Ericsson (ERIC); Sony (SNE) or Nokia (NOK) might be surprise acquirers. Do not rule an American company like International Business Machines (IBM).
– Research in Motion was renamed Blackberry (BBRY) and was put up for sale. However, a private equity deal fell through. Nokia on the other hand sold its mobile device and services business to Microsoft. Sony is rumored to be shopping – Blackberry or perhaps a cable network.
- The most hated sector of 2012, utilities, will experience resurgence in enthusiasm as the worries of increased rates on dividends are quelled by a budget deal in Washington which would only impact the municipal bond investor rather than the utility widow, orphan and retiree crowd. If you want to play it via an index, look toward the Utilities Select Sector SPDR (XLU). For single stocks, try on one or more of the following: Consolidated Edison (ED) – 4.4% yield; Duke Energy (DUK) = 4.8% yield; Southern Company (SO) – 4.6% yield; or for the less risk adverse, Exelon (EXC) – 7.1% yield.
– Utilities staged a first quarter rally but then reclaimed its old form and got no love in 2013 as interest rates rose. The sector is likely to remain the red-headed stepchild in 2014
- The Pimco Total Return Fund (PTTRX) will experience net outflows and a decline in total return for investors. The net assets in the fund stood at $285 billion at the end of November 2012.
– The Pimco Total Return Fund net assets declined to about $244 billion. Pimco fund manager Bill Gross is still waiting for Dow Jones Industrials (DJIA) to hit 5,000. It now stands at nearly 16,500.
- There will be a big shakeup at Facebook (FB) but the finger will not be pointed at CEO Mark Zuckerberg or COO Sheryl K. Sandberg. Expect some heads to roll and the stock price to suffer.
– For the most part, Facebook had a few operational glitches in 2013 but took a backseat to Twitter (TWTR) which launched its initial public offering in the fourth quarter.
- While SAC Capital Steven A. Cohen may have eluded prosecution for insider trading, the Securities & Exchange Commission under its new Chairman Elisse B. Walter will get aggressive with hedge funds. Walter’s SEC catches a big hedge fund fish that starts to spill the beans on the industry in order to avoid criminal prosecution and time behind bars. As a result, regulations are changed to eliminate or severely reduce performance fees that hedge funds may earn. The hedge fund industry sun begins to set.
– There was a major perp walk at SAC Capital. Steven A. Cohen continues to elude criminal indictment but his namesake company was not so fortunate.
On January 2, 2014 I will unveil My Gut Feeling for 2014. Until then, please accept my wishes for a very Happy and Healthy New Year.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long ISL, ED, DUK, SO, EXC and TWTR stock — although positions can change at any time.
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