The end of the 2013 is upon us and it certainly has been quite a year. Reflecting on the prior twelve months is always a good exercise to consider how things turned out versus the way you might have expected them to. In evaluating the major surprises, the most obvious place where the results have turned out far better than nearly anyone could have expected would be with the specific positions of HP and Best Buy (full disclosure- we own both positions for clients). They have been massive winners in a year where there were all kinds of gains to be had. The biggest mistake there is to be so concerned with the potential of a changing business, or "falling knife", and not to recognize the real strength of the cash generation capabilities which are still present, though in decline.
Another area which took me by surprise was the amount other investors would pay up to gain exposure to fashionable areas, certainly in the social networking, cloud, and biotechnology areas, to name a few. There are many ways to invest, and certainly momentum is a strategy plenty apply to their practice. When combined with quantitative approaches, you can see how volatility can appear day after day with stocks which might appear to be outrageously priced. I personally am not a practitioner of momentum, in fact, I tend to try and avoid the "hot" areas of the market as much as possible. Still, you have to admire the bravery (intelligence, obliviousness- choose the one you want) of those who are willing to buy the biotechnology stocks which are already up 200% and have no earnings.
In looking at other noteworthy areas, the relative lack of performance of many large banks certainly has to be pondered. Usually, when the yield curve steepens, money center and investment banks print money hand over fist. As a result, they become favorite targets when there is any indication the economy is strengthening and yields inevitably will rise. All played out exactly the way the textbook outlined it, except for stock strength of the financials. It may be the Volcker rule, it may be lack of leverage, it may be a reduction of fixed income trading and underwriting, but financials have not been big winners in 2013, for the most part.
Turning towards the current market environment, today news that Apple signed its long awaited deal with China Mobile to carry their products provided the market a reason to go up. I find it hard believe Apple still is thought to be in the same class as a Microsoft and a Dell. If you look at industry positioning, you could make a very strong argument there is nobody as well positioned as Apple, though I am sure Sergei and the Google fellows might beg to differ.
Another company which is struggling in the dining space is McDonald's, where the trend towards healthier food is slowing down the traffic for "Happy Meals" and other fast food offerings. In fact, McDonald's is now stuck with 10 million pounds of left over chicken wings because they did not sell very well at the prior price point. In Japan, McDonald's profits have dropped fifty percent compared to the prior year's same period. When the corporate strategy is to copy whatever is working from other businesses, problems eventually will arise. Chicken wings anyone?
In the oil area, the large integrated oil companies got a huge win when Mexico decided to open up their industry for potential private exploration. You have to believe Exxon, Chevron, Shell, and BP are licking their chops just waiting to get involved with Pemex, the national oil company of Mexico.
Much will depend on the kinds of terms which are offered to the majors, but without their expertise, Mexico's oil plans will go unfulfilled. Another interesting development with the large oil companies is they are acquiring the oil trading platforms of many of the large money center banks in the United States. The banks are faced with heightened scrutiny on their commodity trading businesses, and have come to the conclusion they are better off without them. JP Morgan Chase exited the business, and Morgan Stanley just sold theirs to Rosnoft, the national oil company of Russia. A final nugget for the majors is coming in the form of Mary Landrieux, the democratic Senator from Louisiana, becoming a member of the Senate Finance committee. As such, she will be heavily involved in deciding the fate of the Keystone Pipeline, as well as other matters pertaining to oil She is from Louisiana, certainly considered an oily state, so things may be looking up for big oil. A better economy certainly would help demand, too.
Happy holidays everyone, and I hope 2014 is full of health and joy for all readers! Thanks for reading and visiting the blog.
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.
