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Uncharted Territory

4/4/2014

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With 2013 yielding astonishing returns, in the equity markets. Look for a positive year in 2014, although do not expect a nearly 31% increase in the SPX, again. The positive performance had in the past year was clearly an outlier.

"Greenhaus said stocks always move ahead of the improvement in the economy, and he expects gains to slow. He expects the S&P 500 to end the year at 1,980, up nearly 8 percent." Link

Perhaps we will settle into a less-frantic, sustainable, growth trajectory. With gains that are sure to emanate from the positive data flow at the end of last year. An economic recovery is just what the economy needed; with any luck the growth was built on solid fundamentals. All measurable points of economic activity have increased, perhaps most importantly, jobs are returning, hopefully not seasonal jobs, with any luck jobs driven by a legitimate need of increased productivity, however, the seasonal bump in hiring was apparent with the lackluster, with the final jobs report of 2012. Of positive catalysts for the economy (there are many), consumer debt is temporarily, falling, and corporations have a LOT of cash, with the positive data so look for a self-fulfilling expansion (stocks follow economic recovery, and economy increases with equity increases) it has taken almost four years, the author is nervous to say this but, it feels like real growth is in the economy.

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"The opening bell could ring a little more optimistically in 2014, but the stock market is unlikely to continue its sizzling pace of gains. [….]

This year [2013] is expected to close out on an up note, with the S&P 500 up nearly 30 percent—the best year since 1997." Link


"After four and a half years, we have waited for a powerful and self-sustaining economic recovery. More than once it seemed imminent. Then, for various reasons, it vanished, and we returned to a plodding expansion with too much unemployment and too little confidence. Could 2014 be the year when the recovery actually feels like a recovery? Well, it could." Link

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Household debt is down, wealth is up. The recovery's weakness has been reflected by many Americans' need to rebuild their finances. Having over-borrowed, they repaid debt, facing a collapse in housing and stock prices, they increased savings. All this has negatively impacted consumer buying, as income shifted away from shopping (consumption), and therefore, away from growth. Yet was needed for the market, companies, and economy, for personal wealth to return to normalcy.

Capital spending by companies in the S&P 500 stock index passed its earlier peak, attained in 2007. General Motors will invest $1.3 billion in five U.S. plants; Boeing is seeking a factory site for its redesigned 777 jetliner. Economist Joseph Carson of Alliance Bernstein expects “…business capital spending in 2014 to grow 9.6 percent for buildings and 8.1 percent for machinery and software, sizable gains over 2013's 1.7 percent and 2.7 percent. With these increases, Carson expects overall economic growth (gross domestic product) to accelerate to between 3 percent and 4 percent annually. That's a significant jump from the roughly 2 percent rates since 2010.”

Consumer debt is rising, eerily familiar to the last crisis we had: household buying is increasing; consumer debt is increasing because home sales are heating up very-quickly.Like I said in my last piece, any downturn, or potential downturn, could have disastrous consequences. Consumers have little to no cash-cushion to fall back on if that happens.

A correction at these levels is not out of the question, also, that die-hard investors are selling into good news definitely points to a correction. However, if there is a correction, that pullback, hopefully, will not be so severe to scare off people already in the market. As said in the previous piece, economic advances foretell stock gains. So, with increased hiring, logically, money circulation would increase, and thus, in a slow trickle effect, equity prices should benefit.

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The latest investment acronym fad has arrived, MINT (Mexico, Indonesia, Nigeria, Turkey). These countries do offer attractive investment opportunities, perhaps it would be wise to allocate small portion of your portfolio to this new group. The performance of the MINT group for the beginning of 2014 has been much stronger than the S&P, also the performance should increase since all countries in this group have a clear economic advantage, one, shared, advantage is that each country on the list shares a growing class of young-adults, which should be a windfall for the consumption and all the secondary and tertiary factors that contribute to that:

Mexico: For one the average age is below 30. The energy sector of Mexico is a huge benefit to the growth of the county. There is a definite abundance of sunshine in the state and Mexico is steadily increasing its energy output. Another positive attribute, as mentioned before, is the average age, which is below 30 years old. The age might not seem like a huge talking point, but consider how much consumption, especially a citizen in a country between 1) the second largest economy in the world (we forfeited that title to China’s, fishy trade numbers) and 2) the continent of many upcoming mass consumers (South America – home of Brazil). Mexico has boosted exports to the US as well the country has introduced a host of new economic reforms to fully capture the revenues derived off the increased exports. Finally, the location is quite fortuitous.  Located between the world’s second largest economy and a major trading partner with Brazil (remember the BRIC acronym?), also Mexico has a solid trade partnership with China, which should be a major benefit as the Chinese population moves towards consumption.

Indonesia: The majority of consumes are under the age of 25, unbelievably. The automobile industry, and all the industries that directly benefit, will likely see a large increase in business since Indonesians are commuting less and less on bike and more by car.

Nigeria: While the content of Africa has been over looked for investment, it may be time to rethink that investment trait. With the rise of the youth population (again), the disposable income is surely set rise, which benefits a litany of industries. As one of the sole investment countries (Kenya being the other) the likely coming increase of investment will surely benefit the country, by increased investment in economic staples, those companies will likely, increase wages and buy equipment and material from other smaller Nigerian suppliers. All these factors make an extremely attractive investment climate in Nigeria.

Turkey: This European country is currently in the process of sorting out its political issues. Turkey, which still uses the Turkish Lira, not the Euro, has faced significant declines in its currency; the declines will most likely be a win for all the exporters of Turkey. Also, the country has the unique fortune of being on two continents (Europe & Asia), which will definitely be a major shipping hub as global trade increases.

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With Gold prices still falling (but expected to come back into favor in q3/4 of this year), housing already well-into its bull market, and bonds will probably not made any meaningful returns this year, equities will still be a place for investors to park money.  Equities already had a stupendous rise in 2013, but the remainder of this year should see an equity rise due to, investors coming off the sidelines, the domino effects of last years rally and the infrastructure spending that Barak Obama has pledged to invest in in his second term.

For this year expect much slower growth (but growth, nonetheless), a continual improvement of the jobs picture, and increased global trade.The broad equity index, the S&P is expected to rise but no more than 10-15%, the wait for fixed income might be another year before we see any meaningful returns, physical commodities. Gold namely, will have to wait another 6 months at most, hopefully.What Bernake needs to realize is that his maintenance of stimulus for so long was keeping citizens invested in fixed income to avoid anticipated inflation. A good place to focus on to avoid the noise domestically would be the aforementioned MINT counties, however those counties host their own domestic issues.
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