2013: Year in Review

December 29th, 2013

Like most years, 2013 will leave behind its winners and its losers. Stock market participants were (for the most part) rewarded for their bullishness, especially those who have been overweighted to US stocks. Even owners of European stocks had an excellent year, which may surprise you given the mostly bad news we’ve been hearing about the financial condition of European countries. Emerging markets, however, were not as kind to investors and have been basically treading water for 3 years now since their incredible two-year recovery from the 2008-2009 bear market. Investors in fixed-income (bond) and hybrid (convertible bonds, MLPs, commodities, etc.) also had a rough time for much of 2013.

2013 YTD (as of 12/23/13) performance (by asset class):

So why not invest only in US stocks?

I’ve been asked a few times recently—given how significantly US stocks have outperformed the rest of the world over the past year—why even bother investing in other regions of the world? The answer to this question boils down to two basic investment principles: diversification and not chasing performance.

Followers of our newsletter know that diversification allows an investor to reduce his or her risk (which is measured in part by the volatility of a portfolio of assets) up to a certain point without reducing return. This applies both to diversification among asset classes and to diversification within asset classes. Active investors such as KCS do tend overweight or underweight certain asset classes, sectors or countries based on our future risk and return expectations, but that doesn’t mean putting all your eggs in one basket.

For example, within the equity (stock) portion of your portfolio (which could be nearly 100% for a young, aggressive investor), you can choose from 10 major sectors (and sub-sectors within each sector) and dozens of countries. Unless you are clairvoyant (and no one is) you should never buy only technology stocks or only American stocks. The same goes for the fixed income portion of your portfolio (which could be very high for a conservative investor), as there are a number of sub-classes within fixed income—investment-grade corporate (US/foreign), municipal, high-yield, convertible, mortgage-backed, etc.—and it almost never makes sense to invest in just one of these.

Chasing performance is not an advisable long-term strategy either. Companies, funds and other investable entities tend to revert to the mean (average) over long periods of time—so all things being equal you should expect outperformers to become underperformers in the future and vice versa. While occasionally a fund has a great manager or a company has excellent management that does unusually well for an extended period of time, there has never been a single fund, company or asset class that hasalways outperformed the competition.

Chasing performance can get you into deep trouble. Say you decide to throw in the towel on diversification and invest only in US stocks. Chances are, it won’t be long (perhaps as early as next year) before international stocks start to outperform our own. For example, in 2006, international equities returned +26.3%, while the S&P 500 was up only +14.8%, trailing overseas markets by -11.5%. Investors do this all the time: jumping into a hot asset class just as it’s about to lag (or even tank). Remember 2000? That’s when everybody piled into the NASDAQ, just a few short months before it plummeted -80%. Don’t follow the lemmings: create a diversified portfolio and rebalance periodically to keep it that way.

There are tables showing how different asset classes performed in each year, and they make the argument for diversification by showing how the winners change over time in an unpredictable fashion (we can send you one if you wish). Diversification helps keep you from making the wrong decision on where to invest, and helps ensure that your investments never dramatically underperform. You may miss a huge win, such as by investing a large portion of your portfolio into a stellar performer like Google, but you’ll also avoid decimating your nest egg by doing the same thing with a company like Blackberry.

Concluding our Consumer Discretionary Series

As some of you may recall, we have been extra-bullish on consumer discretionary stocks for over a year now. We devoted the second part of our November 2012 KCS eNewsletter (scroll down to the section entitled “Hey American consumer, you can afford to live a little now”) to a discussion about consumer discretionary stocks and why we thought they would outperform other sectors over the next year or so. We followed that up with an August 7, 2013 blog that monitored the sector’s performance, and showed that the global consumer discretionary ETF was the top-performer of all sector ETFs (from 11/16/2012 – 8/7/2013). We again promised to revisit the consumer discretionary stocks in late 2013 to update their status and to hold ourselves accountable in case consumer discretionary stocks took a hit.

We are pleased to report that as of today (December 23), the iShares S&P Global Consumer Discretionary Sector ETF remains the top performing sector since we first wrote about them on November 16, 2012. We believe this is at least partially due to the thesis we laid out in the original KCS eNewsletter. We opined that since Americans were spending a record-low percentage of their salary on food, energy and financial obligations, more income would be put towards discretionary items that people had been holding off purchasing for so long. Did we also need some luck on our side? Sure. Another recession (which we still believe to be a few years off) would have hit the consumer discretionary sector hard and caused their stocks to tank.

A proper investment prediction (which we make only rarely) requires both a start date and an end date. People tried to take credit for “predicting” the 2008 market rout if they wrote a bearish article in 2003 or even earlier, even though the market climbed for years prior to the eventual collapse. It’s a lot easier to predict a market decline “at some point in the future” than to predict that the S&P 500 will fall 10-15% within the next 3 months. In fact, I can promise you that at some point in the next decade or so, stocks will decline in excess of 30%. But when that will happen, and how much they will climb before and after, is anyone’s guess.

That said, we are officially scaling back our extra-bullish feelings on the consumer discretionary sector. While we’re not yet ready to underweight consumer discretionary stocks in our portfolios, we do expect some reversion to the mean as we discussed above. In 2014, it’s likely that one of the other sectors will be the top performer. In part because we haven’t yet completed our investment plans for 2014, we’re not making any predictions here as to which one that will be.

Thank you to all of our loyal readers for your support; we hope you find these newsletters to be helpful and informative. Please let us know if you have any questions, comments or anything else you’d like to share with us.

Happy holidays and happy New Year!

Adam

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Adam Bragman
Director of Business Development – Kenfield Capital Strategies (KCS)

Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

Ending the year on a high note

December 28th, 2013

Toward the end of the year the thoughts of investors turn to predictions instead of sugar plum fairies. One group claims that there will be a big sell-off for tax purposes in December, causing a downturn in prices. A second group contends that few will sell in December during a rising market, since they will want to defer taxes by taking any profits in the following year.

Yet another group thinks it doesn’t matter since the market will correct back to the mean in January. Each group has historical data to support its position.

And isn’t that really the wonderful thing about the market? Like horse racing, you really can’t be sure who is going to win, who will be right or wrong and what circumstances will cause what results.

Did you see the article in the Oct. 6 L.A. Times business section on actively managed mutual funds? Most of the expertly managed funds did not do as well as investors that just put their money into market indexes. And of course they took out fees as well, in spite of lagging the market.

I have a different point of view. I don’t really worry too much about whether my portfolio is up or down, or whether it is ahead or behind the various indexes. My concern is with yield. My underlying principal is that the value might be up or down, but whichever it is it will probably be the reverse in time. So yes, I have a few positions, like GDX and copper, which are down now and have been declining regularly over the past year. But I write covered calls on them and end up with a decent yield on my cost. Eventually they will come back.

When I do hit something really good, like I did this year on Bank of America, Green Mountain Coffee, and Whirlpool, I take a profit and move on to something else. I try to keep diversified in a number of different ways so that every few months something hits so that I can continue to take realized profits on a regular basis, even if they are, for the moment, offset by unrealized losses. I balance realized positions between some losses and gains, even if I re-buy 30 days after a close, to limit taxes.

Finding new exciting positions is fun. For covered call option writing I try to maintain positions in very solid stable stocks so that I can benefit from the call premiums without high risk of losing the option profits back in capital losses. So I keep stocks like Coca-Cola, Target, Procter & Gamble, Wal-Mart and McDonald’s.

At the same time I look for trends. Right now I see natural gas pipelines and MLPs as a trendy position that is looking really good. I see natural gas as something that will be more and more in use. And the high yields these investments offer puts them right into my investment model. KMI, LNG, SE and SEMG are good candidates for natural gas investment. Master Limited Partnerships offer some possible tax advantages, and ACMP EPD, PAA and WES look like good candidates.

I suggested to my broker buying EPD, but he convinced me that the exchange-traded fund MLPFX, which holds significant positions in EPD, but is diversified with other natural gas companies, is a better and safer way to go, and I agree with him. So in the long run I made the biggest commitment into MLPFX.

Other than natural gas, I’ve been looking at chemicals and drugs. RPM International (RPM) is up pretty high, but still seems like a good long-term investment. For option writers it looks like selling a two-part straddle, the 40 calls and the 40 puts might be fun. You collect in $2,500 on 10 positions, and you have a 5-point window.

I watch recommendations from option experts selling their systems on websites. Like the mutual fund gurus they don’t seem to do too well, but they rarely mention the results of their suggestions. I saw one on Terry’s tips last month, suggesting call spreads on Nike. They were right that Nike was a good stock, but they underestimated its power, and it broke through the call positions, and went up quickly from 69 to 77, creating a big loss in the short call spread. What they forget to tell the investor is that if you are going to put on option positions, you, or someone on your behalf, has to watch them every day and roll them up or down if there is a lot of price movement.

So what do I think about the market at year’s end? Last week I took most of my profits off the table in anticipation of the possibility of a December decline. Put another way, as mountain climbers say, “I did it just because it was there.” The S&P was up about 27 percent for the year. I think a lot of other investors will also take their profits and run. The market seems a bit oversold to me, so I’m pretty sure there will be a correction sometime in the next three months, and I’ll put my cash back in at that time.

And while I’m a touch negative for the short run, I think 2014 will show solid economic growth, especially in the leading companies in each area, and I intend to be fully invested throughout most of 2014. Happy holidays.

Merv Hecht,
Santa Monica Daily Press

Do as I say, not as I do

December 27th, 2013

For years I’ve been telling people not to buy individual stocks because if that one company goes down you can lose all or most of your investment. If, instead, you invest in an index, an ETF, or a basket of related stocks, if one of the companies goes down you are only lightly impacted.

But last month I started buying individual stocks. Why? I guess I’m getting older. For whatever reason, I’m getting desperate for immediate income. I’m not willing to get that in the bond market because interest rates have no place to go but up, and when they do the value of bonds will go down. And short-term bonds, which are somewhat immune to that effect, don’t pay enough interest to be worthwhile.

So where can I get an immediate bang for my buck? Two answers: high-yield dividend stocks and sometimes a short-term investment in some company that you have reason to believe will move up for a short-term gain.

I don’t want to overstate my success on this. We just got back from our 50th law school reunion and we noticed the success of the Harvard endowment fund. And I watch Warren Buffet’s progress. Both did a lot better than I did so far this year. Of course I didn’t even begin to match the increase in the S&P index for the year. But a major reason for that is that in spite of my fears about bonds, I still keep between 30 to 40 percent of my portfolio in either cash (waiting for a big dip in the market as a buying opportunity, which has not happened this year) and short-term bond funds. I do that because it’s just good sense not to put all your investment money into equities.

So only about 65 percent of my portfolio was in equities this year, and that’s the main reason I can’t compete with the S&P index in profitability on the whole portfolio. Nevertheless, I’ve done really well this year, with nice profits on almost all of my picks. I’ve recovered my losses on Apple from last year, and my only really negative holding has been GDX, the gold mining company index. It doesn’t hurt to hold a small amount of a gold-related stock because it acts as a hedge against a major downturn. But I think silver would have been a better choice, and at some point when my gold calls expire I expect to take the loss on gold and buy silver instead. Silver has doubled in value over the past four years, but is now well below its recent high.

Many professional advisors are currently warning that the market is in a bubble, and ready for a big dip. That might be true, and I’m keeping about 20 percent of my investment portfolio in cash right now in case it’s true and a buying opportunity arises. But I want income. So here are a few of the positions I’ve taken.

TransCanada (TRP) pipelines. I’ve heard that the U.S. is going to start exporting natural gas. This should improve the position of pipeline companies. So I’ve bought into several of them, like TRP. I also plan to own some SPX, the natural gas pipeline index. TRP’s current price of $45 is right in the middle of its 52-week range, and at this price pays a 4 percent yield. In the same line of thought, I also bought TLP, a master pipeline company paying a 6 percent dividend; EPB pipelines, paying a 6.3 percent dividend; and KMP, paying 6.4 percent.

Kimberly Clark (KMB). This is a company with a lot of good brands, and with the economy picking up all around the world, especially in Europe, they should stand to benefit from this. The price of $108 is at the high end of the 52 week range, so I would buy this stock by selling naked puts below the current price, and either continue to pick up premiums if the stock stays strong, or acquire the stock in a dip.

Waste Management (WM). I’ve owned this from time to time, and in good periods, as it cycles up, I try to pick up a few dollars in short-term capital gains. At $43 a share, it pays a 3.4 percent dividend. This price is also toward the high end of the 52 week cycle, but the dividend is good, the company seems very stable and is in an area that seems to me to be pretty recession proof. I don’t see waste declining over the next few years.

So, now we’ll have some interesting positions to talk about over the next few months.

Merv Hecht,

Santa Monica Daily Press

December Fed Tapering

December 25th, 2013
At its eighth and final meeting of the year, the Federal Reserve’s (Fed’s) policymaking arm, the Federal Open Market Committee (FOMC), announced that it will begin scaling back its bond-buying program known as quantitative easing (QE). This is the beginning of the infamous taper that has garnered so much press this year. Citing less fiscal drag and the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions,” the Fed will now buy $75 billion per month in QE—$10 billion less than the current monthly $85 billion.
Ahead of the meeting, most market observers believed there was a slightly lower probability of a December taper than a delay until early 2014. So, in that regard, Wednesday’s action by the Fed was a small surprise.  However, the big surprise was the market’s reaction: stocks, as measured by the S&P 500 Index, experienced sharp gains to all-time highs and the bond market movement was relatively muted.  This is a far cry from the extreme “taper scare” we experienced during the spring/summer that sent stock prices down and bond yields higher with the mere mention of the word “taper.”
There are many reasons why the market reacted so positively to the decision to taper this week.
· First and foremost, the market was better braced to handle tapering given the continued improvement in the labor market and fewer potential fiscal headwinds caused by Washington, D.C. in 2014.   When the market first began to digest tapering back in the spring/summer of 2013, the view by many was that “tapering” meant “tightening.” In other words: a taper would be the beginning of the Fed withdrawal of its accommodative policies of keeping interest rates low, boosting the economy, and fueling recovery in the job market. However, the Fed was clear in its statement this week that a taper does not equate to tightening and that if the economy weakens (or if inflation does not accelerate) it could do more QE, if needed.
· Secondly, the Fed accompanied its announcement to taper with language promising to keep rates lower for longer. It was this “enhanced guidance” from the Fed that was the real catalyst for the market’s positive reaction.  Previously, the Fed had signaled that at an unemployment rate below 6.5%, it would begin to entertain the prospects of removing its “ZIRP” (zero interest rate policy).  However, in this week’s statement, the FOMC altered its time horizon of maintaining exceptionally low interest rates to “well past the time that the unemployment rate declines below 6.5%.”   Therefore, the Fed essentially signaled a path of lower interest rates for longer than previously indicated.
· Lastly, the market was so fixated on whether the Fed’s actions this week would be hawkish (either through tightening or tapering) or dovish (very accommodative), it missed that the Fed actually had a different “animal” on its mind.  Instead of being a hawk or a dove, the Fed’s statement was a bull—as in a very bullish and confident assessment of the economic landscape.  The FOMC statement noted the “underlying strength of the broader economy.”  This rosy view of the economy provides a much-needed boost of confidence for many market participants and investors that the U.S. economy is indeed getting markedly better.
In a sense, the Fed made somewhat of a “trade” with the market.  On one side, the Fed reduced QE by $10 billion per month.  While on the other side, the Fed delivered a very bullish and confident view on the economy and signaled that it would keep interest rates lower for longer.  When the market looks at this “trade,” it sees it as a good one.  The market is more than willing to give up $10 billion in purchases now (via the taper) in exchange for a bullishly confident Fed that is likely to keep rates lower for longer.  After all, it is the Fed’s zero interest rate policy, not its soon-to-be tapered bond purchases, that has the biggest impact on maintaining lower rates and boosting economic growth.
In short, the Fed delivered a holiday surprise for the market—instead of the perceived lump of “taper” coal, the market got a bullish forecast by the Fed via a signal that it will remain “highly accommodative” with low interest rates for a longer period of time.   We view Wednesday’s decision by the Fed as reaffirming our overall constructive view on markets and the economy in 2014. We continue to believe that 2014 marks a return to a focus on the fundamentals of investing rather than reading the tea leaves in policy statements or assessing the veracity of politicians’ threats.  That is one of the best presents we as investors could receive.
Best Regards,
Westside Investment Management

Market Week: December 25, 2013

December 24th, 2013

The Markets

Fed frenzy: The Fed’s announcement last week that the long-anticipated tapering of its economic support will begin next month triggered a nearly 300-point leap in the Dow on Wednesday. Coupled with final passage of a two-year federal budget and encouraging economic data, that pushed the Dow industrials and the S&P 500 to fresh records after a two-week losing streak. Meanwhile, bond investors, who had been anticipating Fed tapering for months, left the benchmark 10-year Treasury yield essentially unchanged.

Market/Index

2012 Close

Prior Week

As of 12/20

Week Change

YTD Change

DJIA

13104.14

15755.36

16221.14

2.96%

23.79%

Nasdaq

3019.51

4000.98

4104.74

2.59%

35.94%

S&P 500

1426.19

1775.32

1818.32

2.42%

27.49%

Russell 2000

849.35

1107.05

1146.47

3.56%

34.98%

Global Dow

1995.96

2379.65

2435.48

2.35%

22.02%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

2.88%

2.89%

1 bps

111 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The Federal Reserve Board finally dropped the other shoe, and investors were relieved. The board’s monetary policy committee announced that it will cut its $85 billion monthly bond purchases by a modest $10 billion starting in January. Reductions will be split evenly between Treasuries and mortgage-backed securities, and the committee promised that the tapering process will be done in modest increments driven by ongoing economic data. The statement also indicated that the Fed’s target rate could remain at its current low level even after unemployment falls to 6.5%, especially if inflation remains low. Most members don’t expect to see a rate increase before 2015.

· U.S. economic growth continued to accelerate during the third quarter as gross domestic product rose more than previously thought. Initially estimated at 2.5%, GDP was up 4.1% from July through September. That’s the strongest growth since Q4 2011, and far stronger than the 2.8% seen a year earlier. A 2% increase in consumer spending and 4.8% growth in business spending helped drive the higher quarterly figures. The Bureau of Economic Analysis also said after-tax corporate profits rose 2.4%–slightly less than Q2’s 3.5% increase, but a dramatic 8.6% improvement over Q3 2012.

· A federal budget covering spending through late 2015 passed both houses of Congress and was signed by President Obama, eliminating the specter of another government shutdown. The next battle is likely to come in February, when the temporary suspension of the U.S. debt ceiling is scheduled to expire.

· November manufacturing data was generally encouraging. Industrial production rose 1.1% during the month, fueled in part by the fourth consecutive month of higher manufacturing output. The Federal Reserve said that was the largest increase since November 2012’s 1.3% and pushed industrial production above December 2007’s pre-recession high. Business productivity also improved; according to the Bureau of Labor Statistics, it rose at an annualized rate of 3% during Q3 as output increased 4.7% and hours worked rose 1.7%. Manufacturing data from the Empire State and Philadelphia Fed surveys showed little change in manufacturing conditions in either region, with both growing at roughly the same pace as in November.

· Consumer prices were unchanged in November, according to the Bureau of Labor Statistics. That put the consumer inflation rate for the last 12 months at 1.2%, slightly higher than October’s 12-month figure. Significant cuts in gas and natural gas prices offset November increases in other areas, primarily housing, airline fares, recreation, and used cars and trucks. Not counting food and energy, the Consumer Price Index rose 0.2%.

· Housing starts saw a strong increase in November, jumping almost 23% over the month; the Commerce Department said that put them almost 30% ahead of the previous November. Building permits, an indicator of future activity, slowed 3.1%, but were almost 8% higher than a year ago. Meanwhile, the National Association of Realtors® said that November’s 4.3% drop in sales of existing homes was the third straight month of lower sales and represented the first year-over-year decline in more than two years. However, the NAR also said the $196,300 median home price was up 9.4% from last November.

Eye on the Week Ahead

The holiday-shortened week leaves investors only a few trading days in 2013 to make any adjustments to their portfolios.

Key dates and data releases: personal income/outlays (12/23); durable goods orders, new home sales (12/24).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Shining a Light on Solar Power

December 22nd, 2013
Today we’re discussing the future of solar energy as an alternative energy source and also as an investment opportunity. First we’ll evaluate the technology itself, and only then look at the investment opportunities that come with it. Solar power’s share of US energy consumption may increase by 10x over the next decade, but this doesn’t ensure that all companies in the field will be successful or make for an attractive investment. Or take the unlikely scenario in which solar power gains no traction over the next decade—one or two companies may still find growth opportunities and reward their investors.
In general, profiting from a new “hot” technology is a two-part process: first you have to identify the technology that stands to experience unexpected revenue growth, and then you have to find companies that stand to profitably share in this revenue growth. The key word is unexpected: if analysts expect major growth in a company’s earnings, this will already be reflected in the stock price. There are, however, situations where investors ignore or misinterpret the future, and this is when opportunities often present themselves to investors.
Solar energy today
During the first 8 months of 2013, the US Energy Information Administration (EIA) estimates that 64.6 quadrillion Btu (British Thermal Units) of energy were consumed in the US. Only 6.3 quadrillion Btu (9.7%) of this consumption was from renewable energy sources, and only 0.21 quadrillion Btu (0.3% of total energy consumption; 3.3% of renewable energy consumption) came from solar power. Even wind power, a small contributor to the overall energy market, was consumed to the tune of 1.1 quadrillion Btu (1.7% of total energy consumption; 17.4% of renewable energy consumption), which is small in the scheme of things but is 5 times greater than solar power consumption in the US. One would not be exaggerating to say that solar energy is still in its infancy.
For solar power to become more prevalent, end users (both residential and commercial) have to be able to justify its cost. Lower costs and various incentives have already helped solar become more popular and should help spur continued growth in solar power. A key driver has been the Federal Solar Tax Credit, which allows homeowners to take a 30% tax credit on the purchase price of a residential solar system.
At the same time, almost all costs related to installation and usage have decreased—panels are less expensive, financing is cheaper and some states even offer rebates and other financial incentives for end users. Another driver of solar popularity will be solar companies working with homebuilders to create “solar-ready” households. Let’s say a system costs $15,000 to install (after rebates and tax credits). It’s much easier for a home buyer to justify paying $515,000 instead of $500,000 for a solar-ready house (knowing they can save a lot of money over the long-term) than it is for a current homeowner to pay $15,000 out of pocket for an installation.
People worry that “going solar” will take them off the electrical grid and expose them to problems with solar technology, which is relatively new compared to electric power. In reality, almost all solar end users remain “on the grid,” and continue to have access to electric power when needed. Also, because solar energy is renewable, if you generate more power than your house or commercial building requires, you can sell that power back to the grid and earn credits on your electric bill. As solar-powered buildings become more prevalent, people’s fears will decrease and more people will be willing to implement solar power to save money over the long-term.
In short, as solar power becomes more economically viable, the fact that it is “green” becomes a bonus rather than a driving force in its implementation.
Investing in solar technology
If you believe the solar story, you can either go solar yourself and/or invest in companies that stand to gain from its growth. While there are many companies (public and private) involved in solar power, we’ll look at three key players in the US market: First Solar (NASDAQ: FSLR), SunPower Corporation (NASDAQ: SPWR) and SolarCity Corp (NASDAQ: SCTY), with market capitalizations of $5.3 billion, $4.6 billion and $4.3 billion, respectively. While these three companies have all done well over the short-term, a quick look at the performance of the Guggenheim Solar ETF (NYSE/ARCA: TAN—note the clever symbol) below shows how relatively cheap solar stocks are at the moment. Keep in mind that TAN invests in solar companies all over the world and not only in the US.
First Solar, a designer and manufacturer of solar modules, went public in 2006 at $20, with a current share price of $54.20. If you think the stock has almost tripled thanks to consistent year-over-year gains, let’s just say it hasn’t gone quite the way. The stock soared as high as $311/share in May 2008 and fell below $12/share as recently as June 2012. It has made up quite a bit of ground over the past year or so thanks to its acquisition of General Electric’s (NYSE: GE) solar panel technology (cadmium telluride intellectual property).
Sunpower Corp., which also develops and manufactures solar-electric power products, went public in 2005 at $18 and is trading today just above $28/share. Like First Solar it has experienced some major volatility over time, reaching a price of $133 in December 2007 and falling below $4 in July 2012. Sunpower has some new projects in the pipeline, including a 250 megawatt (mw) California Valley Solar Ranch project in central California and a nearby 579 mw plant being built for Warren Buffett’s company Mid-American Solar. SunPower is increasing its presence in the leasing market, where a financing company purchases panels and leases them to end users, allowing homeowners and other end users to “go solar” without putting any money down up front.
SolarCity Corporation is quite popular with investors partially due to its chairman, Elon Musk, who many of you know from his involvement in Paypal and Tesla Motors (NASDAQ: TSLA). SolarCity went public in December 2012, so it hasn’t gone through the price swings that First Solar and Sunpower endured. After an IPO price of $8/share, SolarCity’s stock price has shot up to over $51 in less than one year! (Quite a return for those smart (or lucky) enough to get in on the stock a year ago.)
We may be adding solar energy exposure to our more aggressive accounts. Don’t hesitate to give us a call if you want to discuss solar energy investing or if you are considering going solar yourself and want to perform a cost/benefit analysis.
This is neither a recommendation to purchase any of the stocks mentioned in this article nor any other solar stocks.
Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)
Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

Market Week: December 16, 2013

December 18th, 2013

The Markets

Domestic equities suffered for a second week as end-of-year profit-taking was joined by renewed Fed tapering concerns in light of a budget agreement in Washington and encouraging retail sales. Meanwhile, bond investors seemed to hold their collective breath in advance of the Fed’s upcoming meeting as the yield on the benchmark 10-year Treasury ended last week where it began.

Market/Index

2012 Close

Prior Week

As of 12/13

Week Change

YTD Change

DJIA

13104.14

16020.20

15755.36

-1.65%

20.23%

Nasdaq

3019.51

4062.52

4000.98

-1.51%

32.50%

S&P 500

1426.19

1805.08

1775.32

-1.65%

24.48%

Russell 2000

849.35

1131.38

1107.05

-2.15%

30.34%

Global Dow

1995.96

2419.90

2379.65

-1.66%

19.22%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

2.88%

2.88%

0 bps

110 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· A bipartisan budget conference committee reached an agreement that could mean the end of congressional budgetary standoffs for two years. The agreement, which was passed by the House, is scheduled to be taken up by the Senate this week. The legislation tweaks the sequester cuts that went into effect earlier this year and makes modest reductions in the U.S. deficit over the next 10 years.

· Five regulatory bodies approved adoption of the so-called Volker rule, which is intended to curb certain banking practices that were partly responsible for the 2008 financial crisis. The provisions prohibit proprietary trading by large banks, put limits on market-making and hedging activities, and limit compensation arrangements that encourage the sort of risky trading that led to JPMorgan Chase’s costly 2012 “London Whale” debacle. Banks will have until mid-2015 to comply with the regulations.

· The Commerce Department said retail sales rose 0.7% in November, putting them 4.7% higher than a year earlier. It was the biggest increase in five months and was led by sales of cars and electronics.

· Wholesale prices fell 0.1% in November, according to the Bureau of Labor Statistics. That put the annual wholesale inflation rate for the last year at 0.7%.

· Mary Barra, head of General Motors’ global product development group, was named the company’s chief executive officer. She is the first woman to become CEO of one of the Big Three automakers.

Eye on the Week Ahead

All eyes will once again be on the Fed this week as it meets for the last time this year.

Key dates and data releases: U.S. industrial production, business productivity/costs, international capital flows, Empire State manufacturing survey (12/16); consumer inflation (12/17); Federal Open Market Committee announcement, housing starts (12/18); home resales, Philly Fed manufacturing survey (12/19); quadruple witching options expiration, final Q3 GDP estimate (12/20).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: December 12, 2013

December 11th, 2013

The Markets

Domestic equities managed to shake off five days of losses with a rousing bounce of nearly 200 points in the Dow after Friday’s robust jobs report. For once, investors seemed to be more focused on the positive implications of generally encouraging economic data than on whether good news would accelerate Fed tapering. The S&P 500 and Nasdaq ended the week basically flat, while the small caps of the Russell 2000 had their worst week in a month.

Market/Index

2012 Close

Prior Week

As of 12/6

Week Change

YTD Change

DJIA

13104.14

16086.41

16020.20

-.41%

22.25%

Nasdaq

3019.51

4059.89

4062.52

.06%

34.54%

S&P 500

1426.19

1805.81

1805.09

-.04%

26.57%

Russell 2000

849.35

1142.89

1131.38

-1.01%

33.21%

Global Dow

1995.96

2450.17

2419.90

-1.24%

21.24%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

2.75%

2.88%

13 bps

110 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The addition of 203,000 new jobs in November helped cut the unemployment rate to 7%, according to the Bureau of Labor Statistics. That’s the biggest monthly decline in more than a year, and leaves unemployment at its lowest level since November 2008. The return of furloughed federal government workers was a factor in the improved employment picture, but the labor force also grew, and the number of involuntary part-time workers and those who had given up looking for a job declined. November’s job growth also was higher than the 195,000 new jobs averaged monthly over the last year.

· There were more people than last year in stores over the Thanksgiving weekend, but heavy discounting meant that they spent less. According to the National Retail Federation, the average amount spent by each of the 141 million shoppers–$407–was down from almost $424 last year, though the NRF said it still forecasts a 3.9% increase in total holiday spending.

· The U.S. economy grew faster during the third quarter than previously thought. The Bureau of Economic Analysis said the annualized increase was 3.6%, substantially above the 2.8% initially estimated or the 2.5% growth in Q2. However, much of that growth was the result of businesses increasing inventories by 1.6%. Meanwhile, corporate after-tax profits were up 2.6% for the quarter; that’s reduced from Q2’s 3.5% increase, but 8.8% higher than in Q3 2012.

· The Institute for Supply Management’s U.S. manufacturing index showed a 0.9% acceleration in growth with a reading of 57.3% in November (anything above 50 indicates expansion). Meanwhile, the ISM’s gauge of the services sector showed growth slowing from 55.4% to 53.9% during the month.

· Sales of new single-family homes jumped more than 25% in October, which put them 21.6% ahead of last year, according to the Commerce Department.

· The Federal Reserve’s “beige book” report continued to see “modest to moderate” expansion of the U.S. economy, and some Federal Reserve governors suggested publicly that it is time to let tapering begin.

· Increased U.S. exports of oil, soybean, and collectibles such as art, gold, and diamonds more than offset a slight increase in imports and cut the U.S. trade deficit by 5.4% in October. The $40.6 billion deficit is down almost 5% from a year ago.

· Americans earned less and spent more in October. According to the Bureau of Economic Analysis, personal income fell 0.1% in October; adjusted for inflation, the decline was twice that. Meanwhile, personal consumption rose 0.3%.

Eye on the Week Ahead

Time is running out for a congressional budget conference committee, established as part of the deal to end the federal government shutdown, to come up with a way to avert more budget battles. A report is due Friday.

Key dates and data releases: retail sales (12/12); wholesale inflation, due date for congressional budget committee report (12/13).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: December 9, 2013

The Markets

Domestic equities managed to shake off five days of losses with a rousing bounce of nearly 200 points in the Dow after Friday’s robust jobs report. For once, investors seemed to be more focused on the positive implications of generally encouraging economic data than on whether good news would accelerate Fed tapering. The S&P 500 and Nasdaq ended the week basically flat, while the small caps of the Russell 2000 had their worst week in a month.

Market/Index

2012 Close

Prior Week

As of 12/6

Week Change

YTD Change

DJIA

13104.14

16086.41

16020.20

-.41%

22.25%

Nasdaq

3019.51

4059.89

4062.52

.06%

34.54%

S&P 500

1426.19

1805.81

1805.09

-.04%

26.57%

Russell 2000

849.35

1142.89

1131.38

-1.01%

33.21%

Global Dow

1995.96

2450.17

2419.90

-1.24%

21.24%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

2.75%

2.88%

13 bps

110 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The addition of 203,000 new jobs in November helped cut the unemployment rate to 7%, according to the Bureau of Labor Statistics. That’s the biggest monthly decline in more than a year, and leaves unemployment at its lowest level since November 2008. The return of furloughed federal government workers was a factor in the improved employment picture, but the labor force also grew, and the number of involuntary part-time workers and those who had given up looking for a job declined. November’s job growth also was higher than the 195,000 new jobs averaged monthly over the last year.

· There were more people than last year in stores over the Thanksgiving weekend, but heavy discounting meant that they spent less. According to the National Retail Federation, the average amount spent by each of the 141 million shoppers–$407–was down from almost $424 last year, though the NRF said it still forecasts a 3.9% increase in total holiday spending.

· The U.S. economy grew faster during the third quarter than previously thought. The Bureau of Economic Analysis said the annualized increase was 3.6%, substantially above the 2.8% initially estimated or the 2.5% growth in Q2. However, much of that growth was the result of businesses increasing inventories by 1.6%. Meanwhile, corporate after-tax profits were up 2.6% for the quarter; that’s reduced from Q2’s 3.5% increase, but 8.8% higher than in Q3 2012.

· The Institute for Supply Management’s U.S. manufacturing index showed a 0.9% acceleration in growth with a reading of 57.3% in November (anything above 50 indicates expansion). Meanwhile, the ISM’s gauge of the services sector showed growth slowing from 55.4% to 53.9% during the month.

· Sales of new single-family homes jumped more than 25% in October, which put them 21.6% ahead of last year, according to the Commerce Department.

· The Federal Reserve’s “beige book” report continued to see “modest to moderate” expansion of the U.S. economy, and some Federal Reserve governors suggested publicly that it is time to let tapering begin.

· Increased U.S. exports of oil, soybean, and collectibles such as art, gold, and diamonds more than offset a slight increase in imports and cut the U.S. trade deficit by 5.4% in October. The $40.6 billion deficit is down almost 5% from a year ago.

· Americans earned less and spent more in October. According to the Bureau of Economic Analysis, personal income fell 0.1% in October; adjusted for inflation, the decline was twice that. Meanwhile, personal consumption rose 0.3%.

Eye on the Week Ahead

Time is running out for a congressional budget conference committee, established as part of the deal to end the federal government shutdown, to come up with a way to avert more budget battles. A report is due Friday.

Key dates and data releases: retail sales (12/12); wholesale inflation, due date for congressional budget committee report (12/13).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Iran: Pariah no more?

December 5th, 2013

If one is willing to believe the Iranian government, Iran has agreed to end its development of a nuclear weapon in exchange for economic sanctions relief between $6 billion and $7 billion over the next six months. With this treaty, Iran removes itself from economic isolation and has the opportunity to become a player in the global economy. This won’t happen overnight, but with 157 billion barrels in oil reserves it is likely that companies all over the world will be looking to do business with Iran.

Economic significance of the treaty

Iran will have the opportunity to export oil to the US and other countries it hasn’t been able to do business with for many years. Greater worldwide supply of oil would likely decrease its market price, hurting companies whose revenues are sensitive to the price of oil. Likely beneficiaries of the treaty include companies that provide oil extraction services and equipment, such as Schlumberger Limited (NYSE: SLB) and Baker-Hughes (NYSE: BHI). Companies like Siemens (NYSE: SI) and ABB (NYSE: ABB) that provide infrastructure and related services will also have the opportunity to generate revenues in Iran.

There may be some initial hesitation for US-based companies to start doing business with Iran. Companies overseas, however, especially those in countries that have maintained a relationship with Iran over the years, will likely take early advantage of the opportunity to make money in Iran.

Why it may be good for the US

This treaty would provide a few benefits to the US as well, starting with not having to worry about Iran having a nuclear weapon. Economically, paying less for gasoline and other petroleum products is a good thing. And politically, with a new supplier of oil, we would have far more latitude with countries like Saudi Arabia, who we have played ball with for years because we depend on them for almost 16% of the oil we import.

Only time will tell exactly what the long-term effects of the treaty with Iran are, and even if implementation is possible, but if everything goes according to plan this this treaty would likely end up being a beneficial deal for everyone involved, including the US. The biggest losers are likely to be Saudi Arabia and by extension, Al Qaeda. It may be hard for us to envision a world in which Iran and the US are again allies, but stranger things have happened. Stranger still would be if President Obama’s lasting legacy were a sea change in our relationship with Iran rather than Obamacare.

Stay tuned for more comments on this major geopolitical and economic development as it progresses. And yes, we will be buyers of some of the companies that will benefit from the opening of Iran should it actually come to pass.

Happy holidays,

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Market Week: December 2, 2013

December 2nd, 2013

The Markets

The Dow industrials and the S&P 500 continued to set all-time records with an eighth consecutive week of gains for both. And though the Nasdaq remained far from its all-time high, it finally managed to surpass the 4,000 threshold last seen more than 13 years ago. Meanwhile, the benchmark 10-year Treasury yield remained stable.

Market/Index

2012 Close

Prior Week

As of 11/29

Week Change

YTD Change

DJIA

13104.14

16064.77

16086.41

.13%

22.76%

Nasdaq

3019.51

3991.65

4059.89

1.71%

34.46%

S&P 500

1426.19

1804.76

1805.81

.06%

26.62%

Russell 2000

849.35

1124.92

1142.89

1.60%

34.56%

Global Dow

1995.96

2442.03

2450.17

.33%

22.76%

Fed. Funds

.25%

.25%

.25%

0 bps

0 bps

10-year Treasuries

1.78%

2.75%

2.75%

0 bps

97 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Building permits rose 6.2% in October, according to the Commerce Department, and were almost 14% higher than in October 2012. Data on September and October housing starts, which was delayed by the federal government shutdown, will be available along with November figures on December 18.

· Home prices were up 3.2% in Q3 in the 20 cities measured by the S&P/Case-Shiller 20-City Composite Index. September’s 0.7% gain represented a 13.3% increase from a year earlier, the highest annual growth since February 2006.

· Durable goods orders fell 2% in October. The decline was fueled in part by a nearly 16% drop in new orders for aircraft and parts, the same factor responsible for the previous two months’ worth of increases. However, orders for computers and capital goods also fell, leaving nontransportation orders down 0.1% for the month.

Eye on the Week Ahead

Friday’s unemployment rate–the last before the Fed’s monetary policy committee’s last meeting of the year–and preliminary sales results from the expanded Black Friday retail holiday weekend will likely dominate the week. However, reports from a range of economic sectors, including housing, manufacturing, services, and consumer spending, also will suggest the state of the economy.

Key dates and data releases: U.S. manufacturing, construction spending (12/2); auto sales (12/3); new home sales, balance of trade, Fed “beige book” report, U.S. services sector (12/4); revised Q3 GDP estimate, factory orders (12/5); unemployment/payrolls, personal income/outlays (12/6).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.