No Worse Than Meteorologists: A Review of Our 2013 Forecast.

December 23, 2013

Never make predictions. Especially about the future. At least that's what Casey Stengel said.
Fear, greed and uncertainty are to the soothsayer what oxygen is to the lung. Hindsight and common sense, his greatest vulnerability.
Predictions make one look smart initially. Narrow minded, further along. And damn ignorant in hindsight.
Consider the professional forecaster. Those for whom I've the utmost respect are not the ones who predict and promote (i.e. Wall Street Analysts, Politicians, Futurists, meteorologists and Doomsday Prophets). But the ones who make their forecasts and then put their money where their mouths are (traders, speculators, wildcatters, entrepreneurs and cult leaders).
If you don't have any skin in the game, keep your wild hairs to yourself. Oh, you know the type. Dull and pretentious. Look you in the eye, and then past you, as if channeling Nostradamus.
"I'm telling you, by year's end, our economy will be on the verge of collapse. We will literally be rethinking the Fed's existence. The people will be on the verge of rising up."
Then, adding to the melodrama, he reaches out to gently knock on the faux wood desk before him. Not aware of the irony of the exercise. Or, perhaps he's actually cheering for mass societal anarchy?
Of course, the sober, level headed and grade school educated can pick these fools out of any lineup. Yet, that leaves these Monday morning soothsayers with a pretty sizable audience.
So long as we recognize this verbosity to be as relevant as Kim Kardashian's dictionary, we'll be fine.
That said, we at HPWM have been prone to a bit of forecasting in the past. Of course, we utilize these forecasts to allocate capital. Our own, and that or our clients. Skin? Meet game.
In that spirit, you may recall that we proffered a number of annual projections as 2013 got underway (here). Trends and trajectories we believed would be the dominant themes for the year.
We were accurate with most. Of course, that is easy to say. Because by not forecasting something, the forecaster was essentially incorrect by omission. Though rarely admitting to such omissions. We do.
So, herein we provide our Hits and Misses for 2013.
Greatest Hits:
Equities would have another good year...
The S&P 500 is up 30 percent. Developed, foreign equities are up 20 percent. We noted that Wall Street and Main Street were bearish to begin the year. Since the stock market exists to disappoint the largest swath of investors as frequently as possible, stocks were bound to elevate. That, and an accommodative Fed, ample worldwide liquidity, low inflation, energy costs and record-low interest rates.
Commodities and precious metals would stink...
Cocoa jumped like a five year old boy with a sugar buzz. Energy rose slightly. But everything else dropped like palladium. And other precious metals. Gold fell 29 percent. Silver dropped 36 percent. In fact, the metals were massacred. Further, sugar lost 22 percent. Corn and coffee each plummeted more than 28 percent. Bottom line? Not a lot of hot commodities this year.
The Rust Belt's re-emergence...
We postulated that closing wage disparities, logistical benefits, lower energy and transportation costs and a growing appreciation for relative political stability will continue to bring American companies to repatriate manufacturing facilities. As they do, the Rust Belt region will offer attractive costs of living, tax incentives and a family orientation. Not to mention a ready made manufacturing infrastructure that's hungry for work.
Further, the natural gas revolution will be a dynamic source of economic largess for the Rust Belt, as many of the shale deposits, continuing discoveries, and much of the growing infrastructure, are located throughout the region (more here).
Both assessments proved accurate.
In May, 90 percent of the energy used in the U.S. was produced domestically. North Dakota's economy grew five times faster than the rest of the nation. The Boston Consulting Group reports that more than half of U.S.-based manufacturers with sales greater than $1B are planning to bring back production to the U.S. from China, or are actively considering it.
In the words of Champ Kind, sports anchor for the Channel 4 News Team, "Whammy!"
U.S. equities will outperform foreign and emerging markets...
We believed that a strengthening dollar and healthy corporate profits would enable U.S. stocks to glean attractive comparisons to their overseas counterparts, especially those in emerging markets.
With U.S. stocks up over 30 percent, the developed foreign market index is up 20 percent, and the emerging market index has dropped nearly four percent, on the year.
Hedge Funds will continue to under perform U.S. equity indexes...
They have. For the last half decade. Though they're still collecting 2 percent of assets under management, and 20 percent of any profits. Great work, if you can get it.
Greatest Misses:
U.S. M&A activity will increase dramatically...
Or, not. We looked at done deals like Amerigroup. Coventry. Nexen. Dell. Figured they were the appetizers. With U.S. companies holding so much cash, 2013 would surely be a dealmaker's paradise.
Alas, from October 2012 to October this year, there were 266 fewer deals done. That represents a 6.1 percent drop in deal flow. And while the 2013 deals were more than $1.5B bigger on average, that doesn't discount the idea that we whiffed on this one.
U.S. Large Caps will outperform U.S. Small Caps...
Well, the S&P 500 outperformed the Russell 2000 small-cap index until June. Since, small caps have raced ahead, currently having returned 37 percent versus the S&P's 30 percent.
Politicians will exit stage left...
Following the year-end fiscal cliff and sequestration debacle, we assumed that D.C. politics would dissipate from the headlines. Enable us to focus on economic and financial results. Boy, were we wrong.
In October, the U.S. Federal government shut down. Federal services stopped. Parks were closed. Jobs were lost. The economy was hurt.
Further, the tragicomic rollout of the ObamaCare website only exacerbated the American public's perception of big government's failure. Not to mention its inability to enact any semblance of positive control over our day-to-day lives.
This will likely be positive, moving forward. As we may be more prone to tell Uncle Sam to leave us alone.
Volatility will escalate as the year matures...
We figured that hedge funds and institutional investors would tire of under performing the markets, and so would begin to shovel boatloads of capital into the market. All of which would serve to escalate volatility as the year pressed on.
Wrong. In fact, S&P 500 volatility as measured by the VIX has fallen as the year has progressed. It is well below historical averages, as well as its five-year average. And at 13, it's approaching a five-year low.
At some point, this will change. Dramatically. Which could be both a positive and a negative. But, following the sound and the fury of the government shutdown, let's enjoy the relative calm while we can.
Summarizing, we nailed five, whiffed on four.
We were accurate in predicting the direction of the market, as well as the general market segments that would benefit. We accurately assessed the generational trends playing out in the American Midwest and the renaissance in its ebullient alternative energy sector.
We failed to see a lack of catalysts in the U.S. M&A arena. And, not for the first time, were failed by our Federal politicians.
It was a great year for stocks. Japan. Zombies. Marijuana. Private equity. Freedom fighters. Middle Eastern despots. The Hunger Games. Warren Buffett. Ravens fans. Risk. Earnings. Data. Investors. Centrists. Twitter. Iran. Methodology. Sheryl Sandberg. Natural Gas. Red Sox Fans. Jimmy Kimmel. The housing market. Duck Dynasty. Jay Z. Vlad Putin. Technology. Mikhail Khodorkovsky. And Bernanke.
It was a bad year for bonds. President Obama. Privacy. Detroit. Anthony Wiener. Venezuela. Bill Ackman. Gold. The Hobbit. Jay Leno. Big government. Coal. Nancy Pelosi. China. Teen retailers. Lil' Wayne. Short sellers. Congress. Physicians. Brazil. And the Kardashians.
All in all? Not bad. Especially considering the idea of how meaningless it all really is. Because, according to turn-of-the-20th-century market historian and trading savant Jesse Livermore, "There is only one side of the market, and it's not the bull side or the bear side, but the right side."
2013 found us, and all of our dear clients, on the right side. Merry Christmas, to you and yours.

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