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STILL UNDER-OWNED?

As this year comes to a close, the many successes along with the ever present regrets and disappointments are brought to mind while cleaning the slate for another new year. The magic of the calendar makes every January a special time when we each anticipate a new adventure, and say goodbye to the past. It has all been programmed into our minds: taxes, reports, summaries, and history are centered on each December’s 365th revolution of our planet.

While we mentally prepare for a change, the markets continue on…trade after trade, closing hour to closing hour. The analytical mind must also think seamlessly, never washing away the residue, but always looking around the next bend for something new to “chew on.” Nevertheless, the human being in me wants to “turn the page” and start a new adventure, so my comments will focus on a “new year” as if it is just that.

The stock market strength in 2013 was really a manifestation of money shifting from over-owned assets (foreign markets and bonds) to under-owned assets (U.S. stocks). While we saw this shift happening a year ago, we remained cautious in our overall approach, concerning ourselves with the lack of economic vibrancy and earnings momentum for many corporations. These proved to be legitimate concerns as many of our finest corporations reported earnings disappointments. The market shrugged it off however, and marched steadily higher, only to pause briefly during the “Washington closure drama.”

As the year closes, we find some signs of economic strength coming from the drop in the gasoline price, a budget agreement (albeit weak), and a bit of wealth effect thrown in. This economic strength represents a “wind at the back” of the market which could also lift the price of those stocks with previous earnings disappointments. The high fliers that make investors giddy may well continue pleasing, but on a risk adjusted basis, my bet will be with those fine companies where shares haven’t risen due to earnings disappointment, a.k.a. “the dogs of the market.”

Back at the Central Bank, Janet Yellen kicks off her term as chairwoman, facing a stronger economy and perhaps anticipating the first signs of resulting inflation. The tactics that she will resort to remain unknown, but given her Keynesian spots, I’m fairly safe in expecting her to “tilt” on the side of ease.

About the only remaining “hiccup” in government policy will likely come from a debt ceiling issue, due to arrive sometime in March-April. I frankly expect the Republicans to surrender and give the Administration enough monies to spend for the remainder of the year, leaving us with clear sailing to the election.

On the global scene, many countries are still skating on the edge of solvency. China is currently having a liquidity problem with short term interest rates spiking near 10%, and Spain is looking at a very sizeable payment coming due. Other than that, everything else seems manageable, except for tempers, age-old prejudices, and atomic bombs in the wrong hands. Somehow, I’m sure we’ll get by, but not without a sleepless night or two.

All in all, it looks like a placid lake scene between now and November: better economic growth, relative civility in Washington, and some degree of improvement in economies around the world.

As next November nears, we will find ourselves in the season of poll watching, attempting to handicap the “pols.” The country’s critical decision about whether to embrace small government or larger government will likely have a meaningful effect on markets and currencies. Accordingly, we expect a wind storm to stir up our placid lake, but we have no idea whether that wind will be at our back or into our face.

With the actual election results, will come prognostications of change, effecting industries, currencies, interest rates and economic conditions in general. We are somewhat certain about volatility pick-up by the fourth quarter of 2014, but again, we have no idea whether that volatility will be up or down.

In the meantime, we will be busy identifying and investing in good value situations in the stock market. Our main focus, however, will be on the monetary and economic signs looking for our old friend, inflation, to rear his ugly head. There are still many who feel that to be a certainty, while others, mostly deflationists, claim that our friend has passed away. His re-appearance would be a “game-changer,” to say the least, wreaking havoc on the bond market and the short sellers in the commodities pits before threatening the manageability of our Government deficit and the economy at large. Inflation will likely first show up in money velocity (the rate of currency circulating in our banking system), or in currency exchange rates or perhaps the price of gold and other commodities. In the meantime, let’s move forward and enjoy the low interest rates and an inflation free world, watchful that this environment doesn’t slip into damaging deflation. Somehow, I still can’t stop looking over my shoulder…

So the vigil goes on. For me, the watch now takes place in two locations; our Park City trading and operations center, where I have an office, and in Honolulu. Traveling between the two places has its issues, but I get to enjoy two lives. The contrast between lifestyles is greatest during the winter, of course, but the information is always only a finger touch away. Contrary to what the rumor mill may be saying about me, I have not retired nor disappeared. After all, who in their right mind would give this up? It’s just too much fun! If you need to talk, simply call Robyn and she will put you through.

Wishing you all a happy and healthy New Year!

About the Author


Harlan J. Cadinha
Founder, Chairman and Chief Strategist
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