Month: January 2015

Climate Action Panel

Climate Action Panel

Lou will be speaking on a Climate Action Panel titled “Local Climate Action in the Age of Big Fossil” sponsored by Greater NYC For Change, 350NYC, Manhattan Young Democrats and United For Action this Tuesday February 3rd starting at 6:30pm.  The event will be held at St. John’s Church meeting room located at 81 Christopher Street.  Space is limited, so if you are interested in attending, please RSVP on Facebook or via emai  to dale.corvino@gmail.com  Hope to see you there!

2015 Investment Themes: The bells that toll

2015 Investment Themes: The bells that toll

 

  1. If not now, when? If not the Fed, who?: We expect the Federal Reserve to raise interest rates in 2015. We expect rates to gradually rise to a 1.0%–1.5% target, which would still be historically low. Short term rates after the tech wreck and 9/11 were kept below 2.0% for 3 years. For one of those years, rates were at 1.0%. Since the financial crisis of 2007/2008, rates have been kept below 0.25% for over 6 years. Both the level of the rates and the duration of the rate cut is extraordinary.

 

  1. No one rings a bell at the top of the market: US stock markets ended the year at almost three times the lows reached at the bottom of the market less than six years ago. We expected sharp corrections last year that failed to materialize. We are renewing our call this year and urge equities investors to exercise caution. And while we recognize the US stock economy looks healthier than those overseas, we expect major US indexes (S&P 500, Dow Jones, Nasdaq) to finish the year in negative territory.

 

  1. Emerging troubles: Emerging economies will continue to stumble in 2015, this includes resource dependent countries such as Russia and Brazil which have run into roadblocks as energy prices have fallen dramatically. The challenges are different, but as impactful for economies with internal imbalances created by over-investment in infrastructure such as China, and those facing enormous upheaval and political instability like Turkey. In the Chinese case, we are particularly concerned about the state of local and provisional government finances. We expect emerging market stocks and bonds to underperform developed markets this year.

 

  1. Commodities weighed down: With a slow-down in emerging markets and the global economy in general, we expect commodity prices to continue to come under pressure. While prices in certain commodities may stabilize, we do not expect a bounce back to levels seen in recent years.  We see commodities finishing the year flat to negative.

 

  1. The trouble with oil: We do not expect oil prices to substantially recover in 2015. It is clear that major OPEC participants in the middle-east are keen to minimize the profitability of oil as a source of funding for rebel groups in the region. They are also responding to medium-term strategic threats from unconventional oil producers (shale, deep sea, and tar sands) by forcing prices to levels that makes investment in such projects unprofitable. Continued unrest in major oil producing regions (Middle East, Russia, Venezuela) does not seem to have impacted supply or prices. We expect brent crude prices to remain under $60 by year’s end.

 

  1. Playing defense: For US equities, we believe defensive sectors, including healthcare and utilities will outperform others over the course of 2015. In any sort of correction, we expect enterprises providing essential goods and services to maintain profitability and revenues. Over-levered companies that have benefitted from speculative euphoria in recent years are particularly vulnerable to sell-offs in our view.

 

  1. Euro Crisis, back to the future: The Euro and Greek debt crises have faded from world news headlines over the past three years. A series of loans by the EU and IMF have succeeded in bringing down interest rates on Greek debt. In the past two months, however, a confluence of factors have roiled European markets. An impending election and veiled threats to renege on prior commitments by the party leading in Greek polls (Foriza) weigh heavily. We also expect court rulings on whether the European Central Bank can follow in the Fed’s footsteps with quantitative easing . Depending on outcomes, another round of brinksmanship will likely begin between Greek politicians, the markets and EU officials. Over the past few years, attitudes have hardened and we believe there is a real chance that Greece may be forced to, or choose to leave the Euro.

 

  1. Junk bonds get kicked to the curb. If, as we expect, interest rates rise over 2015, the long winning streak of high yield bonds will likely come to an end.  Junk bonds have benefitted from the Fed’s zero interest rate policy as savers have been forced to invest in increasingly lower quality bonds in order to find yield.  With rates rebounding (even marginally), we believe investors will find the reward that comes with high yield bonds no longer worth the risk.

 

  1. Growth in Renewables: 2008 saw high flying clean energy stocks taken to the wood shed when oil prices collapsed.  The thinking then was that renewables were not viable in a world flush with cheap energy.  While that thesis made sense seven years ago, the renewable industry has grown in leaps and bounds since.  Utility scale solar and wind projects have proven to be viable sources of energy as costs have come down and demand for renewable power has increased globally.  With oil prices falling again, we’ve seen many renewable stocks follow suit, as sort of a knee jerk reaction by investors.  We think this provides a tremendous buying opportunity, particularly in the YieldCo space where, like utilities, companies own a portfolio of newly constructed power projects with long term power purchasing agreements in place.

 

  1. The Russian question: 2014 has been a disorienting year for Russia. Ukraine, a neighboring state with long historical ties to Russia saw enormous unrest leading to a revolutionary change in government and the potential breakup of the country into Eastern and Western factions. Russian forces occupied and appear to have annexed the region of Crimea. Meanwhile, declining oil prices have placed substantial pressure on Russian public finances and may begin to erode support for Mr. Putin among both the grassroots and his oligarchic supporters. It is difficult to see non-traumatic paths out of the morass. Under Putin’s leadership, Russia’s structural problems (declining population, aging industrial base, and undiversified economy) have become worse. We are bearish on Russia and expect the Russian market to underperform in 2015.
2014 Themes: Year-End Review

2014 Themes: Year-End Review

2014 Themes: Year-End Review

 

  1. × The bond decline continues: …The 20 year treasury began 2013 at 2.63% and ended the year at 3.70%. We wouldn’t be surprised to see it exceed 4.50% by the end of 2014….  We were flat out wrong on this prediction. Increasing uncertainty overseas drove demand for treasuries that was not countered even by the unwinding of the Fed’s bond buying program. 20 year treasuries ended 2014 at 2.49%, while the 30 year was at 2.76%.

 

  1. × Equities: Last Call at the QE punchbowl …These will put a lot of pressure on stock prices. With multiples at cyclical highs, conditions are ripe for a significant correction, especially in US markets. We advise investors to avoid complacency and prepare for a potential 20%+ correction in 2014.  We were wrong on this prediction as well. The S&P 500 ended the year up almost 13% and earnings were at an all-time high for the index.

 

  1. ? Bitcoins backlash: …Despite the concerted efforts of many conspiracy theorists, we do not see a major reckoning for fiat currencies in the offing and therefore continue to caution against allocations to alternative or commodity based currencies. We were right on this call. Bitcoin prices fell from over 750 at the beginning of 2014 to start 2015 under 300.

 

  1. ? Social Media Mania: …We are long-term believers in the transformative potential of technology, but do not believe current valuations are anywhere near reasonable. Investors will have to be a lot more selective in 2014 if they are to avoid the kind of fall we saw in the early 2000s. We expect to see several of these high-flying tech IPO darlings come back to earth this year. A number of 2012 and 2013’s high-flying social media IPOs saw prices collapse, this included companies like Twitter, Yelp, Zynga, Groupon. Others like Facebook and LinkedIn retained or regained their heights.

 

  1. ? Go Global or Go Home: …We believe media companies with strong properties are on the cusp of another period of growth in market-share. At reasonable valuations, they represent an attractive long-term investment. At the same time, we believe strong regional, cultural media properties will also find traction in their home markets and any areas with affinity. This is more of a long-term prediction and we expect to evaluate it over time.

 

  1. ? Commodities Wane: Commodities, for the most part, have been in a relatively flat holding pattern since the 2008 bubble. We expect commodity prices to remain weak or stagnant throughout 2014. We do not anticipate large rises in economic activity in the offing, which means commodity prices will remain depressed.  We do not expect gold or other precious metals to recover and anticipate further declines. We were right on this call, almost spectacularly so on oil, which fell almost 50% to under $60 a barrel. Gold was largely flat. The S&P/Goldman Sachs Commodity Index lost 35% over the course of the year.

 

  1. × Wages and Profit: The past few years have seen corporate earnings rise while average wage income has stagnated along with labor costs as a portion of GDP. We expect 2014 to reverse some of this trend as a declining unemployment rate and an evolving political climate make for higher wages and a higher minimum wage floor. We believe this will put pressure on industries and companies that rely on a large, low-paid work-force. After-tax corporate profits as a percentage of GDP rose to over 10% during 2014. This is higher than at all previous periods in US history. The last period that came close was 1929, the eve of the Great Depression when they reached 9.1%. Pre-tax corporate profits hit 12.5%, tying the prior high set in 1942 when companies benefited from increased demand for industrial goods as the US entered World War II.

 

  1. ? Health-Care Strengthens: Gains in the Health-Care Index have outpaced that in the broader markets by about 10% in 2013. 2014 is the first year the impact of the Affordable Care Act will be felt in revenues of insurers and health-care providers. We expect health-care revenues will rise and the sector will continue to outperform the broader market this year as well.  The S&P healthcare service index rose over 24% during 2014. The healthcare equipment index rose over 18%. Both handily exceeded the overall S&P gain.

 

  1. ? Atlantic tug of war: The Euro has appreciated against the Dollar over the course of 2013, as the European fiscal crisis has been pushed off center stage. We believe the Fed’s tapering will reverse this move and we will begin to see the dollar appreciate as rates rise in the US. We were right on Euro valuation, the Euro fell over 12% during 2014 to end the year under 1.20.

 

  1. ? Water Works: We have been concerned about water-related infrastructure for a number of years. Most population growth is occurring in regions with limited access to large quantities of fresh water and this problem is more acute than any issues with power generation. We believe consumers and regional planners have begun to appreciate this as well and we will see a rise in investments directed towards water infrastructure. Major engineering companies and water utilities should benefit, as will firms with consumer products that improve efficiency.   While we view this as a long term investment trend, 2014 saw US water-related stocks substantially outperform the S&P 500 index.  The Dow Jones US Water Index was up 24.67% for the year.