Market Letter

January 5, 2013

Our investment approach to the Market is a combination of opportunity investing, macro considerations and outperforming companies with good branding and growth potential. We want to find companies that will outperform, have potential take out candidacy or have been beaten down with good fundamentals. Our favorite approach is waiting for stocks to get hammered on bad news, nervous investors selling or falling out of favor during institutional sector rotations; then buy on the dip. This is primarily a secular bearish strategy. We are bullish when the conditions develop.

We choose to evaluate investing conditions in 2013 based on the current economic conditions and the upcoming two years. So this is a three year window.

2013

This will be the year of Congress. As the year unfolds no one knows just how things will get accomplished this year. Depending on what is passed will impact the consumer and various sectors of industry. This is a very serious time and the decisions made will chart a path.

2014

This will be the year of Diplomacy. In 2014 we will have the first full year of Obama Care and its effect on private sector earnings. Some macro issues will involve geopolitical risks of nations behaving badly. Middle East tensions and Russia remain on the forefront. Africa and Europe could see growth.

This is too far out to predict corporate earnings however four things could emerge:

Cash less system nearing implementation (with less currency brings higher tax receipts for governments)
Global territorial tax system world-wide with transaction taxes on investment, real estate and borrowing transactions.
More transaction taxes at state levels in the United States
A gold-backed trust fund to bring stability to markets as regard to rising levels of US debt.

2015

This could be the year of Growth. Depending on what takes place in 2013 as it pertains to legislation and budget constraints will lay a foundation for future growth (if any). My projection is lower corporate tax rates and some form of repatriation of foreign cash holdings back to the United States will be taken. I believe a wave of more nationalistic outcomes could become reality. Higher tax revenues and lower spending combined with growth could accelerate.

The energy sector is an important development. With the real possibility of U.S. oil and natural gas production increasing we could see the U.S. being more independent of Middle Eastern oil supplies.

Strategy for 2013

We would anticipate that this year will be a traders market once again. There may be opportunities to lay out longer term positions in second half of the year if growth emerges. The beginning of 2013 could be fairly volatile with debt ceiling negotiations to be made in February to March. The 2012 fourth quarter earnings season in late January could present opportunities as could the 2013 first quarter earnings season in late April. With many retail names under consumer spending pressures these same names could be bargains.

With important negotiations taking place in Congress for most of the first half of the year it could set up for a choppy start. If things get worked out and no rating agency downgrades U.S. debt I would expect a run up at the end of year to a S&P level of 1600 or higher. The more interesting developments this year will be interest rates and the Federal Reserve. Rising interest rates usually cause the market to go backwards or pause. Gold could underperform and U.S. Treasuries could sell down some. Since both of these are traditional safe havens they are subject to change because of nations behaving badly and other unforeseen events. It is hard to bet against gold perhaps silver is a better play. I like copper and Freeport McMoRan a lot.

If Middle East tensions abate and oil supplies remain flush oil could pull back. Right now it has a $15 risk premium. Natural gas fundamentals are still not strong. It is hard to bet against natural gas with prices at a historical low point. Natural gas is probably a better trade later in summer in anticipation of colder 2014 winter. Corn is also unfolding in a lower trend before planting season. Once again could drop to high 5s before weather outcome is known for sure. Just like last year with corn supplies potentially flush corn could stay down longer this year. I have seen that corn prices tend to drop when U.S. dollar rises. Iron ore and steel is probably the more interesting commodity sector. Coking and met coal could see some increase in price sending Cliffs, Walter Energy, Peabody and the sector a bit higher. The Obama administration is no friend of coal so downward pressure could check this.

It will be fun to see what happens in the tech space this year. Is Apple for real and does it have growth in its pipeline? We will find out for sure. Competition is rising for Apple and there are never any certainties. I believe Apple is a good buy if it sells off more. I tend to like companies that have good fundamentals and have retreated in price somewhat. This normally takes some of the down side risk out of it. I noticed that many good names that sold off over 20% bounced back during the 2012 year. So do not be afraid of a lower price, it could be your new entry point. Remember that what worked last year will not work this year and what works this year will not work next.

Note:

This is an editorial written to Horizon clients as part of our tax practice and economic advising toward healthy business practices.