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.