3.30.14: Linkfest and Discussion of q1 ’14 Markets

What we bought last week: we added to the Inverse Treasury TBF, and also added to Micron Technology (MU) in small quantities on Friday, added to Whole Foods (WFM) near long-term support at $50, added to Twitter in small quantities, added to a long-held position in Alcoa (AA) in many accounts with last week’s 6% move on Wednesday and also added to IBM.

It seems like last year’s underperformers like IBM, Intuitive Surgical (ISRG), and Commodities, are re-asserting themselves this year. (Long IBM, ISRG)

Our fixed income positions for 100% bond or balanced accounts consist mainly of:

1.) Substantial part in money market or cash;

2.) JRO – Nuveen’s closed-end floating-rate fixed income fund with a 6% distribution currently and trading at a 5% discount to NAV;

3.) BlackRock’s Floating Rate Fixed-income Fund currently yielding 3.75%;

4.) The TBF or Inverse Treasury ETF that is anywhere from a 5% t0 15% weighting in client’s accounts;

5.) Individual muni bonds that mature in 15 months or less that were bought for taxable and tax-deferred accounts, at better yields than I could find in the taxable universe. We have a decent broker showing me muni paper that matures in ’14 or early ’15 with better yields and higher credit ratings than I can find in Schwab’s taxable offerings.

Here is a graphical portrayal of q1 ’14 returns from U Karlewitz’s Twitter feed: not only did the 10-year and 30-year Treasury rally hurt because I wasn’t long the long end of the Treasury curve, but I started buying back the TBF at the end of 2013, given that the 10-Treasury closed the year at the high yield of 3.03%. I got caught both ways – last time I make that mistake.

Per Norm Conley of JAG Capital, this might be keeping a bid under Treasury yields, as well as this, from Minyanville (subscription required). US real returns on Treasuries and the lack of any inflation in the US, seem to be good reasons for the lack of any real “fear” trade in bonds (i.e. rising yields). We are looking for curve steepening in q2 ’14: some of the pent-up retail demand should improve in q2 ’14 as the weather in the Midwest improves. Housing and auto’s are expected to bounce.

The PCE deflator of 1.1% and the GDP Deflator of 1.6% (both y/y readings) are starting to be challenged by accelerating wage growth, and the increase in commodity prices. The ying and yang of the inflation debate.

Here is Bob Brinker’s contribution to the inflation / deflation debate.

Charlie Bilello, CMT on the outperformance of emerging market vs. US credit. A few weeks ago in Chicago we attended a lunch by TCW and EG/A around the launch of three Emerging Market Investment Grade ETF’s: SEMF, IEMF, and LEMF. Started following the ETF’s, haven’t bought anything yet.

Equity Strategy: Staying with Large-Cap, split between growth and value

Our equity returns should be pretty decent in q1 ’14. The giveback in Facebook (FB) will hurt, but at Friday’s close FB was still up 4% for the quarter, ahead of the SP 500’s return. Schwab’s (SCHW) +5.6% quarterly return as of Friday, 3/28 should also help the quarter. Our top 4 holdings coming into quarter end, which hasn’t changed much since the end of 2013 are Facebook (FB), Schwab (SCHW), Microsoft (MSFT) and Alcoa (AA), which is up almost 20% for q1 ’14.

Another great article by Josh Brown on q1 ’14. If you read the “You Are Here” piece in its entirety (originally published on January 5th, 2014) you should find me and Trinity Asset Management quoted down near the end of the “Where We Stand” section of the article. Josh has done another good job of summing up the quarter. It isn’t just the volume of his work that Josh produces every week, but the quality of it, that continues to impress me week in, and week out. Josh is consistently, along with Ryan Detrick, amongst a group that qualify as “must read” bloggers every week.

Speaking of Ryan Detrick, Ryan talks about prospective returns after the SP 500 has been up 5 straight quarters here. This (also from Ryan Detrick) is why we sold our IWM in early January. Maybe we need to look for a short Russell 2000 ETF now.

Per LPL Financial Strategist Jeffrey Kleintop, this is reflective of the  commodity trade in 2014.

Conclusion: the rally in the longer-end of the Treasury curve, and our 10% – 15% position in the TBF, will hurt our fixed-income accounts in q1 ’14, but our equity returns should be ok. We bought our first coal stock ever last week, with Peabody (BTU), but natural gas probably needs to continue to trade higher, and despite the push for solar. Coal has been at the bottom of the relative performance sub-sector ratings for 3 years. With Russia, Crimea and Ukraine and the hunt for alternative energy, maybe the sector sees some life. Plus it fits with the commodity trade for 2014.

As we’ve noted in our Weekly Earnings Updates here, SP 500 earnings could actually grow year-over-year in 2014, but the stock market may not cooperate. Use 1994 and 2011 as your analog. SP 500 earnings were great both years, very robust and the SP 500 was flat, or barely increased for both years. Macro events suppressed earnings fundamentals.

The 2-year President Cycle theory of a flat year through September and then a q4 ’14 rally continues to gain traction.

Thanks for reading. Time to watch the Blackhawk’s – Penguin’s game.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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