Posts Tagged market trends

2018: A Challenging Year Might Be Ahead

“Whatever has the nature of arising, has the nature of ceasing.” – The Buddha

 

First thing first: I hope you had a wonderful Thanksgiving with your family and loved ones, and wish you a great Holiday Season, Christmas, News Year….under whatever name, shape or form you enjoy celebrating. My usual attitude I have adopted from a longtime friend is: “Is there something to celebrate? What are we waiting for?”

If you have read my previous newsletter, you might recall the above quotation and might be wondering if I have forgotten something. No, I haven’t. When I sat down to produce this quarter’s letter, I realized that I couldn’t have found a better quote, so I kept it.

As we’re approaching a new year, following a period of strong performance, many of you are probably nervous or wondering if a deep correction is due. Common questions are: Is this time to sell? Is there more room for growth? Should I invest now or wait for a downturn?

For those looking for quick answers: not yet; probably yes; and what about dollar cost averaging?

It all depends on your goals, time horizon and risk appetite. To demystify my answer, let’s dive in.

Cry Wolf

The current market regime we are in might be best described as the “most hated bull market in history.” For years, many participants have been calling for a correction and yet here we are, with solid returns.

I can not tell you how many client meetings I have had since 2011, making a bullish case, settling a client’s nerves, who had just read a report suggesting that huge losses were ahead.

There is actual research showing that some republican leaning investors had missed out on the “Obama rally”. It looks like now it is the democratic and liberal leaning investors’ turn to sit on the sidelines and watch the market that they so “hate”, to run up.

Looking at valuations and extreme optimism, is this “the” time to go out and save the shepherd from the wolves? If we do so, will we look like fools, again? There is a third way.

Don’t Throw the Baby Out with the Bathwater

There is plenty of research that shows that the majority of portfolio returns come from asset allocation decisions. In other words, whether or not you will be invested in stocks, bonds, alternatives or stay in cash, is the most important decision. The effect of security selection, is miniscule compared to this very fundamental decision.

That being said, like most things, it is not black and white. You should make buy all, or sell all decisions. Better said, fine tune your asset allocation, to fit the current investment regime.

We are not bound to decide whether to fully get out of the market, or blindly stay in it. Instead, we need to keep our eyes on current market drivers, pay close attention to our time horizon and investment goals, and make adjustments accordingly.

Current Market Drivers

I am fortunate to serve many clients who are smarter and better educated than myself. One of them once told me “I don’t get what you’re doing, it seems so complex.” Coming from a man with a PhD in computer science, I was humbled, but to tell you the truth, it isn’t all that complex, it all boils down to:

  • Markets go up because there are more buyers than sellers.

 

  • Economies grow because more money is spent this year than last.

So, the two most important components are: 1 – How much money is out there? 2 – What is the investor/consumer sentiment? In short, it’s all about the FED and psychology.

How about valuations? Research shows that valuations are better indicators for long term (5-10 year) returns, but have a terrible record for shorter term (1-3 year).

The FED, crowd psychology, the economy and politics are undoubtedly interrelated but the end-result on investments has to be separately and carefully analyzed.

We still have a friendly FED, an overly optimistic crowd, a strengthening economy and a market friendly tax bill on its way.

Not too shabby, however the key word here is “overly”. In spite of Keynes’ famous quote “Markets can stay irrational longer than you can stay solvent.” overly optimistic sentiment usually gets punished shortly after.

So…2018?

If you think I am giving mixed messages, that’s because I am. On one hand, I know that when the FED is friendly, the crowd is optimistic, the economy is strong and politicians are market friendly, fighting against this picture is foolish.

On the other hand, looking at historically high valuations, very little cash sitting on the sidelines, and extreme investor optimism, this might be the time to give the shepherd who cried wolf, the benefit of the doubt.

Action Items

How to reconcile these two sentiments?

  • Clarify the purpose of your investment. If you have a long-term goal, short term fluctuations shouldn’t scare you away from investing, but if you may need these funds within a year, this might not be the best time to get in.

 

  • Brace yourself for volatility. 2018 probably has one or two 5-10% pull back(s) built in to it. So, consider how to lower stock exposure, raise cash, or prepare yourself to ride the roller coaster, and have a 10% drop in US stocks as one of your what if scenarios.

 

  • Make sure you’re diversified. Usually, what went up the most, comes down the fastest. In the current case, it is the tech stocks. Make sure your tech stock exposure is in line with your risk appetite.

 

  • Have some international exposure. While the US FED is raising rates, European and Japanese central banks are still in their easing mode, most likely till the end of 2018. These countries, along with Emerging Markets may offer better value.

 

  • If you’re overly concentrated in any particular security, look for strategies such as put options.

 

  • Don’t be afraid of raising cash.

 

  • Watch for earnings because the market is priced for perfection and a negative surprise could be the black swan in the lake.

In Short

2018 will likely end up being a positive year, but returns may be muted and may come with volatility. So adjust your strategy accordingly.

Thanks for reading my commentary and as always, you can reach me at bbakan@shieldwm.com for questions and comments.

Disclosure

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

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Oil Falls, Dollar Rises, Stocks Get Confused

“Reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.”  George Soros.

As we come close to the end of a volatile year in stocks, one sudden an unexpected development (for some surely it was expected) slowed down the pace of a typical Santa Claus rally, it caused a shallow pull back, and raised a lot of questions. Crude oil price’s sharp decline caught many investors off guard and the confusion increased volatility.

Meanwhile, the dollar’s rise is also raising eye brows and questions (this is especially entertaining as I remember reading and listening the experts arguing over a crash in dollar’s value during the years following 2009). These two macro level trends create their winners and losers, and their impact is so huge, I wanted to clear some of the confusion and discuss pros and cons of each of them.

Also in this market update, as promised, I will go back to the list of indicators outlined in the previous market update, to help us objectively monitor the direction of the markets.

I picked the above George Soros quote because more often than not, the stock market makes no sense, at least in the short term. Eventually, things settle down but markets can and do stay irrational longer than investors can remain solvent. The reaction to the oil and the dollar price movements is no different, confirming Soros’ conviction.

Oil

Let’s start with oil. Oil is a commodity, which means its price is determined by the global supply and demand, and once set, it’s the same price everywhere you go. So the crude prices fell because there is a glut of it, exceeding the demand. The US is now the largest oil producer along with the Saudis. Shale oil and fracking technologies opened up global reserves twice the size of crude. This is so significant that it’s worth a pause here: the world’s known crude oil reserves are 1.7 trillion barrels, while shale oil reserves are 3.3 trillion barrels, of which 2.6 trillion is in the US. In other words, the US has more shale oil than the rest of the world has crude! How about that?

On the demand front, the Chinese economic growth rate of 8-9% is starting to look like a thing of the past. The world is adjusting to a growth rate of 6-7% in China, which implies less demand for oil. Europe is also not doing so well, neither is Japan, so there is lower demand for oil. Also, here is something for those who would like me to be a more creative. Over the past couple of years, Putin’s Russia has grown to be a more bold, wealthy and aggressive country, not shying away from threatening Europeans of cutting off their natural gas. The drop in oil prices is an enormously effective economic sanction policy as Russia heavily relies on energy exports. So one can speculate: Is Putin being “put in his place”? Clearly, the Russian elite are shaken, which is the only force that can pose a threat to him.

So how do these developments affect you or your investments? Why is the stock market falling along with oil prices? Stocks are falling, because the market is confused and tending toward disequilibrium. The stock market is pricing the scenario in which the falling oil price is due to a slowing down world economy. Partially this is correct, but it doesn’t factor in the benefits of lower oil prices, such as more money in consumers’ pockets, lower input prices and inflation, lower interest rates and less pressure on the FED to increase rates. So in net, it is good for the US consumer, an economy which relies 70% on consumer expenditures. So it should be a good thing for the stocks, also right? Yes and once this is realized, it will be a tail wind for stocks.

Dollar

The US dollar’s uptrend can also be explained by the supply and demand to it. Everywhere you look whether it is China, Japan or Europe, you’ll find accommodating central banks opening their can of quantitative easing packages. They do this to stimulate economic growth, keep rates low, turn cash into thrash, escape deflation trap etc. Rings a bell? As the whole world is drinking the FED’s cool aid, FED is (finally) saying enough is enough. This divergence in central bank policies will raise interest rates in the US, make its securities more attractive, bring foreign investors and push the dollar up.

Just like falling oil prices, rising dollar is also a net gain event. Yes it makes exports more expensive and less competitive, but import prices go down, helps keep rates lower, taking the pressure off of the FED to increase rates, encourages bringing production back to the US, improving the consumers’ purchasing power. A stronger dollar by definition means relatively cheaper Euro, Yen and Yuan, which gives Europe, Japan and China a competitive advantage over the US in the global markets, hence the “currency wars” being back in the headlines. This advantage may translate into better performance overseas in 2015, which for diversified investors is welcome news as in 2014, international stocks have lagged significantly.

Naturally, these moves create winners and losers; for instance, companies that heavily rely on exports may find their margins squeezed, while energy stocks may  feel the heat but overall, a net gain for the US consumer, is a net gain for the US economy and the investor. As for the losers, my biggest concern is a contagion created by troubled Russian banks and a banking crisis in Europe. For now, this is a low probability event, but almost all financial crises seem to be so, prior to becoming obvious.

Let’s now move on to the market watch indicators, but first refresh our memories, my select list is:

Investor and trader sentiment, technical readings and seasonality, valuations, breadth, cash ratios, volatility, economic indicators and demographics, FED, political risks, interest and inflation rates.

Since we have been discussing currency, interest rates and central banks, let’s follow the theme and take a look at FED’s policy.

The FED

March of 2015 will mark the end of the sixth year of the US equity bull market, which has been driven by FED’s policies. Now that the monthly bond buying program is officially over, can this tip the scale so much that bears get their day under the sun? I don’t think so. The US economy is growing moderately, the inflation rate is below the 2% target, and wage growth is still lagging and exposing the recovery’s Achilles’ heel. The FED doesn’t want to slow down the housing recovery, so while raising short term rates, it will aim keeping long term rates the same (flattening the yield curve), and keep mortgage rates low. In other words, just because FED has stopped the bond purchasing program, doesn’t mean it is out of the accommodating game all together, and if the last six years have thought us anything, it’s this ; DON’T FIGHT THE FED. So long as the FED is not tightening, which will be driven most likely by inflation rate peaking its head above the 2% target, its policies will be a positive for the market.

Economic Indicators and Demographics

To summarize, this can be said: the US economy is growing moderately and demographics are favorable. Today (12.23.14) third quarter 2014 gross domestic product growth rate came in at 5%, which is the fastest growth since the third quarter of 2003. So it is extremely difficult to argue in favor of a recession. As for demographics, the largest age group in the US is millennials, or generation Y; those born (roughly) between 1980 and 2000. The significance of this is that these folks are stepping in to their highest spending years in 2015 (please note that these figures are reported differently by different analysts, so there is some room for subjectivity here). The US economy will have a tailwind as a result of this for the next 15 years. Granted, some of the effects will be offset by the mega baby boomers retiring trend, but in net, this is a positive. So, two out of ten indicators are so far, favorable.

Let’s leave it here for now and pick up where we’ve left off in the next market letter. In it, I will also dust off my crystal ball and include 2015 projections.

I wish you all Happy Holidays and a great New Year.

 

Disclosure

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

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An Irrational Stock Market?

“Don’t let your ego get too close to your position, so if your position gets shot down, your ego doesn’t go with it.” – Colin Powell.

There are many reasons why managing your own investments is a daunting task. The biggest challenge isn’t the lack of expertise or time…those can be attained. The ultimate challenge is removing your emotions from your money and investments. If you associate success, self-worth, security and future well-being with the balance in your bank account, then you need to be aware of the emotional roller coaster you are on. That’s not even the worst of it all. If you make decisions influenced by these emotions, that’s when you get hurt. Your ego gets in the way and sometimes, what your ego asks you to do in the short term, isn’t necessarily in your best interest in the long run. Your ego should carefully be excluded from your critical thinking. Makes perfect sense and sounds easy to do, but even step one – identifying your ego – is a long process, let alone excluding it from important decision.

So what can we put our trust in? Objective data. To find the right answers, one has to ask the right questions.

What are the most important and main macro drivers of capital markets?

  • Inflation (or deflation)

  • Economic growth or lack of it

  • Demographics (aging population)

  • Policy (FED – monetary and Congress – fiscal)

  • Trend (momentum) and prices

  • Sentiment (consumer and investor)

  • Debt burden (or lack of it)

  • Credit conditions

  • All of the above factors in international markets and geo-political conditions

Now clearly, getting into the details of all the above would be beyond the scope of this newsletter, but we can at least talk about the crème de la crème factors and decide for ourselves, whether or not there is more room for growth in stock values given we are at all-time highs. Ladies and gents, allow me to introduce: Inflation, the FED, credit conditions and the economy.

Inflation:

Research shows that, there is indeed a sweet spot for a market friendly inflation rate, which is somewhere between 1.5% and 2.5%.

Below 1.5%, the economy shows the signs of weakness and the risk of deflation becomes a reality. Here, probably the supply-demand balance is supply heavy. Above 2.5%, the economy starts heating up, borrowing rates start to climb, as a result the FED is pressured to raise rates to fight inflation and cool off the economy.

So in case of low inflation, excess supply slows down stock price appreciation. With high inflation, rising costs become the nemesis. A growing but not overly heated economy is where you want to be.

Current year over year inflation rate, (Consumer Price Index issued by the Bureaus of Labor Statistics) is 1.6%. Judging by weather related economic slow-down (more on this later) and its effects on inflation, high inflation is a low probability event for 2014, so you can add this as a plus.

Last note on inflation: low inflation also means low interest rates; low interest rates mean cheap money; cheap money means an investor friendly environment and relatively low fixed income (bonds) returns. When savings accounts and fixed income investors feel they are wasting time with low returns, they are forced to allocate a higher percentage to stocks. Even if these investors chose large dividend paying companies, this pushes valuation of these stocks higher, making growth stocks relatively cheaper and a preferable habitat for growth stocks as well.

The FED:

 In a free market capitalist economy, there are two masters pulling the strings at the macro level: central banks (the FED) and law makers (the Congress). The FED controls monetary policies while Congress oversees fiscal policies. Together, they aim to provide just the right amount of incentives and limits to foster a healthy environment for economic growth and prosperity of all citizens.

The FED has more influence over the market in the short term. Easy monetary policies make it cheaper to borrow and invest, start or grow a business, refinance existing loans and stimulate the economy. Tighter monetary policies would reduce liquidity, raise interest rates and aim to cool off the economy.

Current FED policies are market friendly and accommodating (even with tapering = cutting bond purchases). Yes, the FED cut the amount of sugar but the candy jar is still out there kids. Just because it’s not all you can eat, doesn’t mean you are on a no-chocolate diet, so yes, add this on your list of pluses as well.

Credit/Lending Conditions:

Remember, we are going through the crème de la crème factors, so credit conditions are equally important and surprise: inter-related to the inflation rate and FED policies.

Ever since societies evolved from a barter economy to transacting with the means of an exchange that today we call money, along came banks and credit. In a healthy and well-functioning economic system, banks serve as institutions that funnel savings into investments and support economic growth. Almost no business today can operate without the help of credit. How many people do you know who bought a house with no mortgage? This is all good and dandy but like most things, human greed and lack of regulations to control that, brought us to an abused and over used borrowing conditions, which popped in 2008. When the lending bubble burst, it created a below-the-means response, which meant that we went from extremely loose lending conditions, to an extremely tight lending zone.

Tight lending conditions in a debt driven economy brings compressed economic growth. It is like having one foot on the gas pedal, one foot on the break. If I had more space, I would share with you charts showing the direct relation between lending conditions and market performance.

Today, we are back to less restrictive lending. We are nowhere near pre-2008 levels, but we don’t need to be. As I have noted earlier, we are in a low inflation, low interest rate environment and that’s a great place to start.

Businesses are awash with cash, which eventually would translate in to capital spending and hiring. One side note: one of the strong tailwinds of the stock market performance has been stock buybacks and mergers and acquisitions activity. So there isn’t much demand for business loans compared to previous recoveries, thanks to technological improvements and related efficiencies but that will change and when it does, we will find ourselves in an increasing demand for loans and banks eager to answer that call. If you were wondering, where the next waive for higher earnings will come from; this one will be a big help.

The Economy:

And last but not the least; the economy has to be in growth mode for stocks to appreciate. The only exception is when the economy is coming out of a recession as stocks are a discounting mechanism. In fact, this is when you get your best returns. Since we are almost five years past that point, without the economic growth, there is no tunnel or light.

The most recent real economic growth rate is 2.4% during the last quarter of 2013. This is slow compared to 50 year averages of 3.5%. Add the weather related slow down, this quarter result will probably disappoint. Then why do stocks celebrate? The expectation is a strong recovery in the second half of the year. I wouldn’t be surprised with a 4% growth during the second half of the year, since we have started seeing over 4% growth rates, like 4.1% during third quarter 2013.

Now there is a lot that can go wrong. The market at an all-time high is challenging to maneuver as it is hard for investors to find bargains when there are so many eager sellers to cash in their gains. Secondly, geopolitical threats can throw a serious punch. Russia, luckily alone in the Ukraine crisis, is contained for now but there is no limit to what Putin can and will do once he takes his shirt off and gets on his high horse. Iran is on the back burner right now but Syria is still a boiling pot. Thirdly, European economies can surprise us to the downside. Current expectation for previously troubled economies is to start or speed up with their recovery and this expectation is priced in. What if they don’t deliver? Or conversely, what if the EURO over appreciates and creates headwinds?

 IMF recently has issued a warning/recommendation to the European Central Bank President Draghi, to print more money. If they do, that would be a market positive move; if not, hard to tell at this point.

 Coming off of a very strong year, being a second year in presidential cycle, right at all-time highs, corrections can be fast and furious, case in point the 6-8% waterfall decline that started on Jan 21st. The challenge this year and task at hand is to handle these corrections with your risk appetite and investment objectives in mind.

 Summary:

 In a low interest rate, low inflation, easy FED, loose credit and with growing economy, stock values tend to move towards the right top corner of your charts. Risks are plenty and corrections are expected but for the cool and collected longer term investor, this year may bring positive returns. Summary of summary: Markets are driven by fear and greed. Do you see more fear or greed out there? I see greed.

 Hope you have enjoyed reading my market update. Please feel free to forward it to your friends and family and don’t forget to email your questions or comments to: bbakan@shieldwm.com

 Disclosure

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

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2014

“Teach your tongue to say I do not know, and you shall progress.” – Maimonides (1135-1204 Spain)

 Investment management is the combination of science and intuition, anticipating what others anticipate, about a future set of events that are inherently unknowable.

 That’s what I will attempt to do in this market letter: Anticipate what others may anticipate about capital markets performance and behavior in 2014. Before I progress any further, I do need to disclose that I do not know. Having established some faith and confidence here, let’s pay a quick visit to 2013.

I prefer to look at returns on investable indexes (Exchange Traded Funds) rather than benchmarks because they are more realistic in the sense that they reflect management fees.

  • So according to iShares, Nasdaq Biotechnology Index was the top global performer with 65.61% return, followed by DJ US Select Investment Services Index 65.37%. The bottom feeders were Gold Miners Investable Markets Index -52.21% and Silver Miners Index -51.46%. Wow! Gold itself (GLD) brought a whopping -28.32% loss. So much for being a safe investment.

  • As you can tell, best results came from the US, as its S&P 500 Index returned 29.6% (capital gains only). The rest of the developed world such as Germany and rest of the Europe were also mostly positive as the Eurozone got out of recession in Q2.

  • Even though it was a good year for the residential housing market, the same can’t be said for the returns on Real Estate Investment Trusts (REITs).

  • Bonds? Ouch! 2013 was a markedly bad year for bonds. The 20 year treasury index lost over -15% due to the tapering and rate increase expectations.

I looked at my Jan 2013 market letter and the headline said it all; “A Ticking Time Bond?” In so many ways, it was anticipated, but the timing is always the toughest and the most important part of investment management. In 2011, most bond fund managers thought it would be a bad year for bonds, only to watch double digit returns to slip away. They were right, but early.

In short, the best performing capital markets in the world was the good old US equity markets with all else trailing it.

One hard to believe figure came from the Bureau of Economic Analysis on third quarter Gross Domestic Product (GDP) growth over second quarter: 4.1%! This was surely unexpected and underlines the sustainability of the recovery. We still don’t have the fourth quarter results so we can only estimate 2013 GDP growth rate to be around 2.5%. This is still below averages but surely above recessionary levels.

Inflation has been tame at 1.2% through November. This actually gives mixed signals. A low inflation is a good thing, but too low will waive the deflation flag (prices coming down) and it is a serious risk to the health of the economy. With falling prices, investors prefer to stay in cash, consumers wait as much as they can to get a better price and the whole economy can get in to a grid lock. This is one of the reasons the FED (I speculate) hasn’t been as aggressive as some anticipated in cutting their bond purchase program that is now referred to as the tapering.

According to the Bureau of Labor Statistics, the unemployment rate dropped to 6.7%, yes another surprising result. A year ago it was 7.9% and most analysts didn’t expect it to drop to these levels until the end of 2015, we are two years ahead of schedule so it seems. Now…some surely will argue that this is due to less available labor pool, people giving up on looking for a job, it’s a flawed statistic and so on and so forth. True, can’t say no but this rate is still important to watch closely as it’s one key metric the FED  pays attention to while making interest rate related decisions. This figure, once below 6.5%, may start pressuring wages to the upside, great news for the individuals and consumer stocks and potentially bad news for the overall corporate profitability.

So much could go wrong in 2013 and yet we came through: an economic recession, military action on Syria, tensions with Iran, fiscal cliff, debt ceiling, fights on Obamacare and tapering were some big risks we had faced in 2013. Now what? After an approximately 30% return in US equities, what to expect in 2014?

As I have said, I don’t know, but please read on!  I do think that there are some possibly probable events ahead of us in 2014 that may or may not happen and here they are:

I think two big words to pay attention this year are seasonality and earnings. I anticipate positive returns in the US equities, but certainly nothing like the ones we had in 2013, with a pull back or two during seasonally weak summer months.

Where would gains come from? Earnings growth. Yes, there is still room for growth in company earnings and if you can find the sectors that may benefit from global macro trends or if you are a bottom up stock picker, find those companies with healthy earnings (low accruals), you’re golden. Oh, don’t forget to buy them low and sell high, so easy!

Bonds may have another tough year in 2014 as interest rates may face upward pressure due to the recovery in the US and Europe. So stay with high yields and low duration bonds.

A great comeback story may be seen in the emerging markets following an upsetting 2013. They have been trailing the developed markets and a catch up is due at some point. Remember, not all emerging markets are equal and this year, pay attention to Asia rather than Eastern Europe and Middle East.

Europe is two years behind the US with the central bank giving away free money game. So, its equity markets may have more cards to play as they were late coming to the table.

Commodities could also be a comeback story, as they have been an area of the markets we all loved to hate in the past few years. Global economic recovery can trigger a run on industrial commodities and transportation stocks. Watch for themes supporting global recovery until summer months or the end of the bull run whichever comes sooner, go defensive if the anticipated pull back occurs, and go back to your seats in fall or the bounce back whichever is first.

With fracking, the US is turning into an oil exporting country, which translates into low energy and overall industrial production costs. Add the fact that the employment costs are rising in China, you get a reversal of the trend that had shipped jobs to overseas. I sincerely hope fracking won’t have lasting environmental damages that will prove true an old adage from an Indian Chief: Money won’t mean anything after the last fish is caught, but the economic future of the US is surely promising as a result of this and the demographic trends similar to the post World War II era. While the rest of the developed world population has been shrinking, the US has been able to manage population growth with the help of immigration. The cultural implications may keep some folks out of their comfort zone but the economic implications have been favorable.

Iran is being pulled back to the global system. I am not an international political science expert but one can call me a political junky and as far as what I’ve gathered, it seems like Asad’s presence in Syria will be tolerated by the US, as the alternatives have proven to be even worse options, like Al Queada dominance for instance. Can someone say unintended consequences? It’s a reversal of the US policy in Syria. The agreement it seems will result with Iran stopping the progress on the nuclear warhead development and being more transparent about it. In return, it will be allowed to keep its 40,000 troops in Syria to help Asad win his war while Iran continuing to sell oil to the international markets. An interesting twist in the conflict between the Sunni camp with the Saudis-Kuwait-Turkey-Katar-US coalition against the Shia camp with Russia-China-Iran-Syria coalition.

It seems like Putin has saved Obama from the Syrian dilemma by arranging this deal with Iran, which of course the neo-conservatives along with the Israelis are all up in arms about. I will leave politics to the experts but lower oil prices and a more stable Middle East in the short term are logical conclusions. Remember my thoughts on commodities? Well, keep oil out of that potential comeback story and if you are looking into buying baskets, make sure oil allocation is low.

Put your trust in the market itself more so than forecasts. Monitor market moves and be ready to react because 2014 will not be as easy as 2013, but again who thought 2013 was going to be easy? Just remember how troubling the fiscal cliff alone was, or fights on Obamacare and yet sometimes things did turn out to be better than expected.

One final thought before a suggestion for your New Year’s resolution. In my last market letter, I have suggested that a bull run is a possibility until the fiscal negotiations in February. I am reversing that statement as the Congress, thanks to Republicans’ realization of how damaging this can be to their political careers, has already shown signs of a much easier tone and some agreements have already been made. A pull back is still a possibility in that period but not as much as I have previously anticipated. The other big risk I have also talked about was tapering, FED’s reversal of the bond purchase program. This too is appearing to be of less concern as the FED has been doing a great job managing expectations around this issue. A decent part of this action is already priced in the markets. Tapering may slow the markets this year no doubt, but probably not as heavily as previously thought. Also, say hi to your new FED Chairwoman, first woman in that post, San Francisco’s own Janet Yellen.

2014’s Financial Resolution:

I don’t believe in New Year’s resolutions because I think meaningful change happens instantly when you’re ready and it’s impossible to schedule for it. Once you have had enough of the unwanted and you can’t accept it anymore, once the conditions are ripe for a change, that moment instantly shifts your gears towards the wanted.

All that said, I do think every year, you should have at least one financial goal to accomplish and I suggest you look into your estate planning this year.

Estate planning involves finding answers to questions such as: “If something happens to me, are my assets going to be handled exactly the way I want them to be and in the most tax efficient way? If I get into a coma, what happens then?”

I am a Certified Financial Planner and I understand estate planning enough to talk about them, but ultimately you should meet with a trust attorney and put everything in writing until it feels right. A good trust attorney will walk you through different kinds of scenarios and help you make the right decision. If you have further questions on this, I would be happy to answer or point you to the experts in this field.

Hope you have enjoyed reading my Newsletter. Please feel free to forward it to your friends and family and don’t forget to email your questions or comments to: bbakan@shieldwm.com

 Disclosure

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy.

The information provided is not intended to be a tax advice. Investors should be urged to consult their tax professional or financial advisers for more information regarding their specific tax situations.

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