The stock market has fallen off of its highs from last summer and has tried to stabilize since hitting a low on Nov. 16. Many breakouts have been met with resistance and reversals.
We bought US Silica (SLCA) and were met with a swift reversal, so we took a loss as we tried to preserve our funds for better trending markets. There have been some positive trends in stocks as Home Depot (HD) and Lowe’s (LOW). However, the markets are not convincing us that they are ready to rally yet again.
We owned Qihoo 360 Technologies (QIHU) this month but did not hold the stock long enough for the breakout that occurred. We sold QIHU due to the market sell off. We are considering re-entering the position.
We are seeing that the breakout of stocks to new highs has become an area of high risk and until this changes our model is signaling that more of a correction may be on the way.
Because we follow the trends, we must be ready for a breakout rally. Our bias however is towards more of a corrective pattern. We are seeing oversold stocks making bounces off of lows and we may choose to play this scenario.
We believe potential surprises in 2013 may be as follows:
1) Emerging Markets: The rise of the Russian and Indian stock markets, if the governments get smart and stay out of the way.
2) Coal: A potential rally is possible for the coal sector that was already on a downtrend from natural gas price competition and Obama administration policies. Many of these stocks are leaner and meaner and ready to fight. We favor Walter Energy (WLT), Peabody Energy (BTU) and Consol Energy (CNX).
3) Oil: It is also possible we may see a collapse in oil prices due to new well discovery, technological advances in extracting oil and alternative sources of fuels such as natural gas coming online to the transportation sector.
4) China recession: The world’s No. 2 economy may contract as it has over-built its infrastructure and has undervalued its currency. There will be some large bumps on the road to transitioning to a more consumer-driven economy. This will be good news for other economies around the globe.
5) Japan: This economy may reemerge as a powerhouse of technological innovation and engineering and its stock market finally rises like Godzilla. Japan’s stock market has been on a downtrend for 20 years, but its engineering standards for automobiles and other products have become more advanced. The country is a leader in technologies like hybrid engines.
6) Commercial real estate: We believe technology and the Internet will hurt commercial real estate prices. We also believe online retailers such as Amazon (AMZN) and Apple (AAPL) will accelerate the migration of sales away from brick-and-mortar retailers, but quality clothing retail outlets may be spared.
7) Brazilian stock market: There have been some strange government actions that do not benefit the shareholders of Brazilian securities. Consider the government’s rate cuts of the utility company Centrais Eletricas Brasileiras (ELET6). The move by the government may cause steep losses for this utility operator.
8) Europe: Misplaced investor hopes the region will pull out of its recession may trigger a market rally as governments “prime the pump.” This may be short lived and turn into a Japan-like scenario unless they “bite the bullet” and cut spending. We don’t believe they will, and so, in our opinion, a short-term rally will get the next round of politicians elected at the expense of the working class.
9) Wall Street: The U.S. stock market may fall steeply and then set up to finally take out the highs from 11 years ago as new technologies pave the way and cause more efficiency to the chagrin of tax hungry politicians. We believe governments won’t be able to keep up with the trading and bartering on the Net.
Think about what goes into sending a letter. Postal organizations are created, trees are cut, chemicals are mixed, trucks and planes are built, men are hired to deliver these messages, buildings are built to store the paper letters and packages. Emails and the Internet are destroying that business model.
3D printing is coming and will enable the storage of product in cyberspace instead of warehouses. With a push of the button your product is made in 10 minutes or 2 hours. There will be less warehouse space, less toolmakers and more robots. The testing of engineered products has been speeded up ten fold.
Those are the potential surprises for 2013! Now, let me make a point about my overall market outlook.
As of this moment we are not looking for a strong up trend in 2013 if we look at the potential of increased taxes for dividends and capital gains. This makes investing and trading less profitable. With too many rules regulations and government intervention, we believe a recession in 2013 is a very good possibility.
On the other hand, the discovery of huge oil and gas reserves with new technology to extract large amounts of these fuels may give U.S. markets a lift if oil prices come down significantly. Another reason for the market to potentially rise may be the low interest environment and Federal Reserve intervention. This Fed intervention may also cause markets to fall if it is overdone or done incorrectly.
No one really knows how things will play out. So we will wait to see what market trends emerge and give us a buy or sell signal.
The investments discussed are held in client accounts as of November 30. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
