2015 Investor Preview

January 4th, 2015
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Sungarden Investment Research Article of the Week

by Rob Isbitts, Sungarden Investment Research

2014 is nearly behind us. And since we tend to not want to do things the way the Wall Street herd does, our 2015 outlook is formatted this way: we list a group of potential scenarios, and then assign our "best guess" probability that they will happen next year. This is about considering the possibilities, not making outright predictions. Big thanks to Sungarden analysts, Mark Jakupcik and our new addition Mike Ratelle.

Follow up:

  • The price of oil (WTI) trades below its 2014 year-end price for most of 2015 (35%)
  • The price of oil (WTI) trades above $80 a barrel for most of 2015 (35%)

For the statistics fans in the audience, yes we are saying that three possible things can happen here, and they are all about equally likely in 2015 (call us wimps!). Regardless of what happens, it will have a noticeable impact on the economy. And eventually, that will flow through to stock prices. And while market reactions to events like this can be violent at times (witness the near halving the in the oil price this year), the flow-through into markets in general likely plays out over a longer time period.

  • The Nasdaq Composite Index continues to outperform the NYSE Composite Index by a wide margin, 10% or more (60%).

Let's put it this way: we think there is another monster stock market decline out there. If it occurs, it will be driven by the same things that drive every major decline we have seen - leverage and investor hubris. We don't know when enough of that will accumulate to trigger a collapse, and we don't obsess about when it will happen. What we do is constantly seek a balance between many possibilities, and let our disciplined investment process be the guide. We see our role with our clients not as predictors of events and specific time frames. Rather, we are about sizing up the possibilities, weighing them intelligently, and allocating capital without much regard to the calendar. Nasdaq vastly outperforming NYSE has in the past been a warning sign of trouble to come. But when? Who knows. One thing our clients know is that we have already contemplated and plotted our approach should the bottom fall out after six generally strong stock market years.

  • 10-Year U.S. Treasury rates rise noticeably (by 1% or more) before the Federal Reserve actually announces any increase in short-term rates (55%)

You could set an annual clock by us. We've been expecting rates to fly higher for a few years now. And yet they keep declining. But something else is happening, which makes the long-term result here inevitable: the more rates fall, the less yield (and total return) that is available going forward. Rates can only go to zero. They are darn close to that now. So the upside for bond investors is puny, likely for a very long time. That's why we prefer to balance our stock portfolios with securities that move inversely to the broad stock market (i.e. a "long-short" approach to investing), rather than forcing ourselves to own high-quality bonds, which we believe strongly are a progressively less helpful asset to investors.

  • Europe and Japan drag the rest of the globe into recession (20%)

This is a major concern because of the implications it could have on the overall market. And while during 2014, Europe's economic issues did not bleed over into the U.S. to a large degree, we think that is more likely to happen if the Eurozone's latest round of sneezing turns into a full-blown flu. But more importantly, "recession" is just a word. The truth comes out in how Europe and Japan's consumer weakness impacts global businesses. And today as opposed to decades ago, it is a lot easier to find a business operating globally than limiting themselves to their domestic market. For some businesses, they can find replacements for their weak areas (i.e. other geographic markets). For others, they get hit more directly. This is one of the most important considerations in our analysis of individual companies for our portfolios.

  • Sungarden's investment decisions throughout the year will be highly dependent on the factors listed above (10%)

While it is fun to consider what may or may not happen in the year ahead, and we know many investors think in 1-year intervals, we have much more in consideration when making decisions. Our approach is about finding an ongoing balance between potential reward and potential loss. Our stock selection process seeks a balance between a core group of companies we expect to hold for years, and others that we may "rent" during the course of the year. Rather than force ourselves to fit some macroeconomic or global market view (as do many investment firms), we look at investing as ongoing, evolutionary process. We aim to hedge out major losses and then make as much as we can for our clients...but the former is always a priority over the latter. We look forward to sharing our thoughts with you again next year!









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