Weekly Market Commentary 05/19/2014

21 May

So I came home from work Tuesday and my wife, Carolyn, was watching the evening news. She said, “I hear the market was way up today.” The Dow was actually up 0.11% for the day. I don’t blame her because every time it notches a “new high” it gets a lot of media hype.

So I frequently hear things like this, “Why do we have so much in cash? The market just hit a new high.” The logic in this statement fails to register with me. The old adage “buy low sell high” seems to be replaced with “If I’m not all in at the peak I’m missing out.” Yes the Dow hit a “new high” last week but it was only up 0.84% year to date. At the end of the week the Dow was down year to date 0.51% the Nasdaq was down 2.06% and the Russell 2000 was down 5.52%. A great rotation is taking place with sell offs in all the sectors that were previously hot; technology, biotechnology and small cap stocks. Valuations are high and it’s been over two years since a 10% correction. We are heading into the weakest time of year (May-June) and the weakest time of the election cycle (2nd and 3rd quarter before mid-term elections). We have a Federal Reserve anxious to exit its unprecedented stimulus by September. Inflation seems to be approaching the FED’s goal which may lead to short term rate increases sooner than expected. While I’m positive on the US Economy and stocks over the medium term I believe risks are somewhat elevated right now. This is not to say that a downturn is imminent. We just need to exercise caution as risks are elevated.

We are now two years into the Advance & Protect Strategy. Our objective in using a tactical strategy is to limit the major market downturns while capturing most of the upside of the markets. Losses are asymmetrical. In other words it takes a bigger gain to recoup a loss. The bigger the loss the bigger a gain needs to be to offset the loss. For example, a 10% loss only needs an 11% gain to recover. A 50% loss needs a 100% gain to recover.

Our goal is to protect capital during market downturns and capture growth during rising markets. No tactical strategy is perfect, but over time if we have the discipline to follow it, I believe it will provide better risk adjusted returns.

Of particular interest this week:

· US Household debt rose $129BN in the first quarter, mostly due to new mortgages and rapidly declining foreclosures. Meanwhile, credit card debit actually fell $24BN to the lowest levels on record going back to 2003.
· US Import prices fell 0.4% in April from March and were down 0.3% from one year ago.
· US Producer prices rose sharply by 0.6% in April after rising 0.5% in March. Over the past 12 months producer prices rose 2.1%.
· US Consumer prices rose 0.3% in April and 2.0% over the last year. In March consumer prices had risen only 1.5% from last year. Excluding volatile food and energy consumer prices rose only 0.2% in April.
· US Housing starts rose sharply in April by 13.2%. However, single family homes increased only 0.8% while the remainder of the increase was due to multifamily housing. This coincides with my belief that we are becoming a nation of renters. Higher interest rates and home prices are slowing the demand for new homes.