Welcome back to the Lewison Letter,
first 2014 edition. It’s been a
long time since my last writing, but this is as good of a time as ever to come
back. With the S&P up almost
30% last year, climbing to new all-time highs almost on a weekly basis, most analysts
are expecting a rather weak year, when compared to 2013. I however, disagree.
This
bull market has rallied on negative news after negative news, and there’s no
reason that won’t continue. New
all-time highs were made in the face of Fed taper talk, Washington stand-offs,
higher valuations, higher oil prices, higher interest rates, negative retail
sales figures, etc…New highs were also made on strong housing and auto data,
higher consumer confidence, lower (yet still high) unemployment data, better
ISM figures and in general, a better economic outlook. Hence the phrase: a bull market. I see absolutely no reason why that
cannot continue. Stocks suffered
just 1 pullback of 5% or greater last year, which turned out to be an
outstanding buying opportunity. In
fact, every pullback of just 2 or 3%, turned out to be a great buying
opportunity.
While
I still don’t see a 5% pullback coming, I am looking for the S&P to slowly
trend lower to 1765, which would be the 78.6% retracement from the 2013 low (1462)
to high (1849). That level should
be the low of the year, leading to a rally of 17% for the year, to 2163. How will we get there? Corporate revenues will be surprisingly
better than expected, along with another strong year of home and auto sales, together
with better than expected GDP, lower oil prices and a drop of the unemployment
rate to 6.4% by years end. While I
am calling for a 4% pullback from Friday’s close, you shouldn’t need to wait to
start buying stocks. Stick with
high quality names that worked last year, along with a few laggards. I still like Visa and Mastercard,
Apple, Caterpillar, Bank of America, Goldman Sachs, Home Depot and Toll
Brothers and Freeport MacMoran and my speculative stock pick of the year is
SunPower Corporation (solar stock).
To
aid in a higher stock market, I fully expect oil prices to end the year lower,
giving consumers more money to spend on products and services, increasing
corporate profits. 2013, while a
good year for crude oil, built a massive daily head-and-shoulders formation,
which should lead to a drop to $85/barrel, or 13.7% YOY. The best way to play lower oil prices
is being short stocks like Exxon Mobil and Conoco Phillips. If you don’t want to do that, play
lower oil by being long retail names like Macy’s, Michael Kors and Amazon and
airline stocks like Southwest Airlines and United Continential Airlines. The idea is that with more money in
consumer’s pockets, more money gets spent at retailers on non-essential
goods.
Despite
the 2013 gold bear market; I am looking for a rebound in gold back to $1,377.40/oz,
the 38.2% Fibonacci retracement from the 2013 low to high. The technicals show gold is still in a
downtrend, the yellow metal traded down to $1179.40 on June 28th and
$1,181.40 on December 31, before rallying $56 to Friday’s close of
$1,237.40/oz. That double bottom
should hold leading to a 14.5% gain for the year. If you want to buy gold, buy the GLD (gold ETF), and stay
clear of the gold mining stocks that have company specific risk.
Last
year, PIMCO’s Total Return Bond Fund manager, Bill Gross, pronounced that the
Treasury bull market has come to an end.
While I agree with that, I don’t see 2014 resulting in another long-term
interest rate rally like we saw in 2013.
The Fed will not end it’s taper until the economic recovery is in full
effect and I don’t see that happening until 2015. I predict that 10-year Treasury rates will hover between
3-3.5% all year, keeping 30-year mortgage rates around 4.75%, remaining
affordable for most new homeowners.
You can buy treasuries though the TLT (iShares 20+ year treasury ETF),
which is yielding about 4% right now.
The 4% dividend is nice, but you won’t get much price appreciation out
of TLT, so avoid treasuries altogether and stick with value stocks that will
also give you a rally such as Verizon, Pfizer, Phillips 66, Caterpillar and
General Eclectic.
Stocks
are not going to rally another 25-30%, but they are going to outpace
treasuries, corporate bonds, gold and other commodities. I also like non-US markets, like the
Emerging Markets ETF (EEM) which invests in companies like China Mobile,
Samsung, America Movil, etc…While the ETF has underperformed over the last
couple years, I like the emerging markets to breakout this year and actually
outperform US large-cap growth stocks.
If you don’t want to invest directly in those countries, stick with US
stocks that have global growth exposure like Starbucks, Caterpillar, Ford and
General Motors, PepsiCo, American Express, Visa, Mastercard, etc…
2014
should be another strong year for equities. You don’t have to wait for a pullback to get in because had
you done that in 2013, you would have missed the entire rally. Start building your positions now so
that you don’t miss the rally that will certainly come.
My current positions: Long Ford (F), Emerging Markets ETF (EEM), Home Depot (HD), Toll Brothers (TOL), Gilead Sciences (GILD), Whole foods (WFM), SunPower Corporation (SPWR), Starbucks (SBUX) and Anadarko Petroleum (APC), and Visa (V).
Jeff Lewison
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