The year 2014 is off to an uncertain start. Earnings reports are not doing that well (see Best Buy, Citigroup & all retailers etc.), and bond prices have rallied so far in 2014 despite the fears of tapering which were expressed as last year ended.
These cross currents have produced little in terms of price movement so far. As the charts above illustrate both the Dow Jones Industrial Average and the NASDAQ Composite were slightly positive last week. The key word here is “ slightly. ” On a Year-to-Date basis there is nothing to note as both still remain around their end of year levels.
The Market & Economy
It is ironic to me that most economists and even the always wrong International Monetary Fund are raising their views about global growth for 2014, but if you listen to companies and the consumer you find a different tune. Job cuts are once again the feature announcement from firms such as Best Buy, Target, and Intel just to name a few.
Top line growth remains a problem for most firms, and loan growth remains anemic as all sectors of the economy are cutting back on hiring and capital spending plans in favor of higher dividends, stock buy backs and strategic mergers. Sound familiar? It should as this phenomenon has been the hallmark of the bull market for years now and is shaping up again that way for 2014.
It is most likely the case, and January seems to be confirming this, that performance in 2014 will be more selective. Thus we have begun the year with a few portfolio adjustments (see our comments below). We are on the lookout for entry points in a few company names. We expect stock prices to pull back in the near-term as earnings simply are coming in below expectations.
In addition, the next few weeks will be dominated by State of the Union speeches calling for higher minimum wages and taxes and more regulation. These are just the sort of things which have not worked in the past, but will coincide with sloppy earnings and perhaps some downgrading of the economic outlook for 2014. All things considered, now is the time to raise a little cash and be ready to pull the trigger at better price points in company names better suited for this 2% growth economy which I expect to play out in 2014.
Remember, as I have long said, the worst case scenario for the stock market would be an economic boom which causes the monetary authorities to change policy. This is not in the cards and the reason I know this is that the discussion in Europe and elsewhere still focuses on avoiding deflation. Believe me when I tell you that as long as Central Bankers are talking of their concerns of deflation that monetary policy will be uber easy. Janet Yellen, the ultimate dove, is taking over the Federal Reserve Board with just such a point of view.
This remains a contrary opinion for this year, but if correct will represent good news for bond prices and of course equities of all stripes.
What to Expect This Week
This is a holiday shortened week with yet another blizzard due to hit the Northeast tomorrow. Hence, the individual earnings reports will have an outsized influence on trading.
In addition, all of the “beautiful” people in government and the corporate sector are fawning over each other in Davos, Switzerland. Accordingly, this is another excuse to do nothing until next week.
In the meantime, our look at the weekly leading economic indicators from the Economic Cycle Research Institute shows a little life. There is certainly nothing to indicate a recession, but neither does it imply a jump in what has been several years of subpar growth.
SYMBOL: INTC
We sold our shares of Intel, following the fourth-quarter earnings results that were released last week. While the fourth quarter was not a disaster for Intel, we think the Company will struggle to reach its financial targets for 2014. Sales grew by 2 percent, which is the third consecutive year of slowing growth at the Company. Earnings per share also came in a couple of cents light of consensus estimates. Despite the lackluster operational results, the stock price for Intel was up 28 percent during 2013, and we took advantage of this opportunity.
Intel is behind its competitors in the mobile device market, and is spending a tremendous amount of money to try to take market share. We believe this will depress margins for the next several quarters, and would not be surprised if the shares retreat to the low 20’s later this year. We took very little risk in owning Intel in 2013, and still were rewarded with a solid return. We believe there are much more attractive investment opportunities in the current market environment.
SYMBOL: PBCT
We also sold our shares in People’s United Financial following the release of their fourth-quarter earnings results. The earnings results were a bit worse than we were expecting, as net income was lower than last year’s results and just shy of Wall Street’s consensus estimates. The management team at PBCT has been extremely conservative in running the Company over the past several years, and we do not believe the bank is positioned to take advantage of any improvement in the economy.
The shares of People’s United did rally in 2013, and we believe they are fairly valued at these levels. With a 4.5 percent current yield we see little downside, but almost no upside other than a possible takeover, which is very unlikely. We look to put this cash into much more attractive investments quickly, and will use any market correction to reposition your portfolio.
© McIntyre, Freedman & Flynn
