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Thoughts for 2014

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December 30, 2013 – Comments (2)

Board: Value Hounds

Author: saunafool

Like anyone in the market, 2013 has been a great year. All the accounts at record highs.

It makes me nervous.

The Economy
I think the economy is actually entering a full-recovery phase. The oil & gas finds in the U.S. are driving a huge manufacturing advantage for the U.S. with cheaper energy than the rest of the world--not to mention tons of direct and indirect jobs in the oil patch. This is supported by rebounds in the auto and housing markets. The auto sector is pretty much fully recovered. The housing market has a long way yet to run. I think new home construction for 2013 will come in at a bit less than 1 million units, compared to a long-term average of 1.5 million units. Still a few years of growth there. Prices have stabilized, and interest rates, while rising, remain remarkably low.

Verdict: Bullish

The Fed
Don't fight the Fed. Interest rates will remain low, but QE is ending. If the economic recovery continues, rates will begin to rise. Probably not a headwind at this point, but the Fed will no longer be providing a tailwind.

Verdict: Neutral

Valuation
This has me worried. A number of valuation metrics are at very high levels. Mungofitch has posted a few times about the record level of the price/sales ratio of large companies, and other typical measures like the market P/E are also pretty well above average valuation.

Verdict: Bearish

Market Sentiment
It feels like the internet bubble all over again. The laggards in the portfolio are the ones which didn't double in 2013. What? You didn't buy Twitter? (Neither did I to my wife's chagrin.) Even though it made no sense at $40, it went to $70 in a few weeks. Bullishness is at very high levels and ridiculously valued "leaders" keep rising. Plus, the bull market is very long in the tooth. I can't find a good mungofitch post with historical data, but I believe this bull market is running into the "very long" part of historical data.

Verdict: Very bearish

What I'm doing
Over the past few months, I've been raising cash. I've been trimming my positions in stocks which are very highly valued (CREE, ARMH). I'm also trimming my positions in some value plays which have underperformed (CSCO) where I think I was basically wrong. I'm keeping my pharma (except ABBV, which I sold) and oil & gas because I view them as "forever" stocks and any sell-off will simply mean higher dividend reinvestment for a while.

Meanwhile, I'm putting together a watch list. 2013 was a very busy year and 2014 looks even more busy, but I need to do it.

So, I don't believe in market timing. But that is what I find myself doing for 2014. Sitting on the sidelines, waiting for a market correction which might be a few years down the road. 

2 Comments – Post Your Own

#1) On December 30, 2013 at 4:53 PM, MoneyWorksforMe (< 20) wrote:

Very well said. I like your approach; and agree with much of your analysis.

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#2) On January 01, 2014 at 5:39 PM, kandiskane (35.82) wrote:

Thank you. I was wondering if anyone else out there was looking at the big picture, and saying,"I've seen this before". When the bullish emotions take over, it seems like people become blind to the patterns of history. Only, I've never seen anything like this before. With the invention of the Internet we've seen world-wide investing take on a whole new character. Money changes hands at lightening speed, the push of a wrong button can cause a flash crash and more. But what I'm really worried about is the FED printing up money to prop up the economy, and causing growth where there shouldn't be any. Now other countries are doing the same thing, yet there is no real valuation here, unlike when a currency is backed by a precious metal. There is an agreement of arbitrary valuation between countries, but everyone knows the whole thing is mirage, that will vanish when someone finally says, "The emperor isn't wearing any clothes."

What I would like to know is how to prepare for  this. Cash on the side? Buy blue chips? Last time there was a crash we came through it, but this time I wonder where it will end, and I fear that when the house folds, it's going to be very painful for everyone. We will pull through it, Americans are good at that, but it will be difficult. 

God Bless,    Carol B. 

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