12.22.13: Weekend Links of Some Gravitas

One of the best tweets of the week, from Josh Brown (naturally) who linked this Harvard study noting that for individual investors, returns are “extrapolative”. Explained another way years ago by a fellow contributor to TheStreet.com, Gary Dvorchak, individual or retail investors tend to be “trend followers”, while institutional investors are “mean reverters” or probability players. Josh’s citation of the study confirms the “trend following” nature of the retail investor. Granted I don’t understand all the math and or the academic jargon of the article, but the point seems clear, as does the mutual fund flows now showing up in stock mutual funds. To be honest, we like to be utilize both styles for client accounts: we like growth stocks, which tend toward the “trend following” crowd, and we like value stocks that are not correlated to current market action, but in our view represent the “next phase” of the market, which today would be global cyclical stocks (which is a nice segue into our next bullet point). The tough part of our style investing for clients is that our winners have to win by enough to compensate for our underperformers. Not as easy as it sounds.

Norm Conley of JAG Capital Management out of St. Louis, notes the improvement in Basic Materials, and is “intrigued” by the prospects for the sector in 2014. We are too, but a narrower segment of the sector. Chemicals is about 70% of Basic Materials, and Basic Mat is just 3% of the SP 500 as a whole. We are looking at the non-Chemical part of the sector. More will follow in a separate blog post.

With year-end very close, there is a lot of scrutiny now of 2013’s underperformers, hoping to find the 2014 version of Best Buy (BBY) or Hewlett-Packard (HPQ).

Street pundits are starting to jump on the Financial’s bandwagon, when no one wanted to own them a year ago, except our posts telling readers that Financial sector earnings revisions, boded well for 2013. Schwab (SCHW) one of our rising rate plays as far back as Sept ’12, is up 82% this year, excluding the dividend, and the FOMC just tapered slightly. Our top Financial sector holdings exiting 2013 are SCHW, Goldman Sachs (GS), Chicago Mercantile (CME), JP Morgan (JPM) and Wells Fargo (WFC). JPM is up just 31% in terms of its capital gains in 2013, slightly ahead of the market. It has worried me for some time that the stock is universally loved. (SCHW, GS, CME, JPM and WFC). (The tweet is from Ukarlewitz, be sure and follow him. He has so many good points.) Im growing a little less comfortable with our Financial overweight into 2014. Our overweight consists of Financials being 3 of our top 5 holdings and 4 of our top 10 positions as of October and November ’13 month end.

Never been to Ireland, don’t really have any burning passion to visit, but I was impressed how they took on the austerity program and the EU debt crisis, and are the first country to exit the program. Like the infamous “Irish goodbye” the exit is being done quietly, efficiently, and without the sturm and drang of the other EU participants. Good job, Ireland.

Kristen Bentz, another professional contact from TheStreet.com has a very good retail blog and is a frequent media interviewee. She wouldn’t like our buy of JC Penney (JCP) but we are going to give it more time. JCP is another stock being eyed as a turnaround for 2014, as everyone wants to own the next BBY or HPQ. The difference between JCP and those two stocks is that at this time last year, BBY and HPQ were trading at 3(x) cash-flow (ex-cash) and their dividends were safe. JCP is operating cash-flow negative, according to our internal spreadsheets, which is a MAJOR issue for the retailer. I care less about JCP has to say about this quarter’s earnings, than I do about operating cash-flow, which I would like to see turn positive with the holiday quarter. The key to JCP is NOT comp’s or EPS, but definitely, sustainable cash-flow from operations. (Long JCP)

Acrossthecurve.com is another good tweeter of credit spread and yield curve info. This is a December 18th link, which talks about credit spreads. Both high yield and high-grade credit spreads are at 2007 lows or “tights” which implies further good news for the equity market. If there is a canary in the coalmine for the equity market, one of the better ones is credit spreads and monitoring credit spreads. Speaking of which…

Moody’s Christine Padgett, a Senior VP in their Credit Group, published their December ’13 Credit Outlook or Monitor this week and the headline was “Speculative Grade Liquidity Outlook is Solid Heading into 2014”. We have been trading the HYG and JNK (high yield ETF’s) and are currently waiting for a pullback even though both were up on solid volume this week. Credit spreads and default rates for 2014 are expected to remain a positive story, although at 2007 tights, I just don’t think there is much upside in either the high-grade or high-yield corporate bond markets. The May high for the HYG was $96, and it closed Friday at $93 and change. If I had to pick between high-grade and high yield right here today, I’d say overweight high yield, but in terms of credit spread, it is a relative value and not an absolute value game.

I keep hearing this Payden & Reigel commercial that talks about 1/4 of all the goods and services produced in the history of the world (how is that for hyperbole) have been produced in the last 12 years. No one has seemingly challenged the commercial and it keeps running on CNBC, but I find that comment or fact to be one of the single most astounding pieces of information I’ve ever heard. It truly speaks to the “technology economy” we live in today. It also bodes well for the future in my opinion, but think of the volatility that creates, if so “much” can be created so quickly;

Marketwatch looks at the various Strategist forecasts for 2014 here. The same info can be found on Bespoke (more or less). Most were too bearish in 2013, and most will likely be too bullish for 2014 to compensate, but that is just a guess on my part. Ryan Detrick of Schaeffer’s has one of the better calls in 2013 after the first few days of trading. I couldn’t find the link, but will try and get it for next weekend. From what I understand, how the market trades on the first trading of ’14 and then the first few days of the year, will be a good tell. More next week.

Doug Kass and Bill Gross have gotten a lot of attention for their closed-end fund splash, and their municipal bond market call this past week, including this weekend’s Barrons.  We write about that here, including our buying of muni’s for “cross-over” or tax-deferred accounts like IRA’s and here in early August, ’13. Actually Barron’s has been on this topic for a while, all summer in fact, as municipal relative values were hurt by California, and Illinois pension issues, then Puerto Rico’s looming downgrade to below investment grade. The municipal bond market has been on shaky ground all year. (I think I need a better marketing department).

No one can explain to me in a reasonably coherent and simple way how QE3 has added to the stock market’s 30% rise this year, despite the constant cacophony of another bubble being created by Fed policy. No one.

We’re going to finish up with another article by Josh Brown, this one on mean reverting performance and persistence in investment ability. Given this, should I just shut down, and give all the money back to clients ? I read on a CFA reading in the early 1990’s that persistent investment skill had very little to do with skill, and more to do with luck. It is an issue for a longer, more thoughtful piece between now and year-end, but the bear markets of 2001, 2002 and then 2008 were not what I would call personal highlights. I struggled badly, and lost assets, clients and sometimes friends. However, we still have clients from the mid 1990’s and the numbers aren’t bad: performance isn’t shoot-the-lights-out, but we have added value if only minimally, but that performance trend is starting to improve again. I think Josh Brown’s tweets and blogs add value every day, along with some other guys and women cited on this blog, but from the clients we have kept over the years, there are other things that matter. This requires a longer, subjective piece on the business.

Thanks for reading this weekend. Still have more to write today.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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