The Coteau 1/14

The Coteau

The View from Bannerstone Capital

by Biff Robillard

Haggis, Bupkiss and Shale Gas 

The problems of victory are more agreeable than those of defeat, but they are no less difficult.

–Winston Churchill

Now we know what a polar vortex is. Oh, happy day! It somehow reminds me of haggis. I was perfectly happy before I knew haggis. If I ever experience another polar vortex or haggis it will be too soon. Nonetheless, I did raise a glass (okay, two glasses) mid-vortex to the genius of Mark C. Honeywell. His contribution to human welfare by way of the modern furnace thermostat was never more manifest than at 3 a.m. at -27F. The weather a scant foot outside our bedroom could have literally killed us. The solemn aftermath of the Auburn defeat by Florida State could not diminish my profound appreciation

Photo Not Taken in Key Largo

The first five trading days of January are over. Yippee! The bulls got bupkiss. We lost about a half of a percent on the S & P 500 for all the trouble. It’s like a letter from the IRS: It may not be bad, but how good can it be? There likely is something to the old axiom about the first five days of January correlating to the month and the year (and you will read this one a dozen times in various media in the coming weeks: “As goes January, so goes the year”). Bulls should root for an up first five days and an up January. Please don’t confuse this with science. Last year, though, the first week eviscerated the rather thunderstuck bears. It was a harbinger for a remarkable year. If you watched an NCAA bowl game you saw the Bud Light ads with the marvelous tag line “It’s only weird if it doesn’t work”. Superstition has a place. You decide.

First, a brief recap of 2013: It was solid, butdon’t get too used to it. If you’re bored, go back and read the January 2013 edition of The Coteau at the website. Lucky 13, Hemingway, gold . . . well, I don’t want to spoil it for you.

Let’s move on to the subject at hand: 2014.

U.S. Stocks? Net, higher. Expect fireworks and stand back a little when they start.

 Emerging markets? So-so. Some disappointments.

 Bonds? Yields higher, prices lower. Easy. Expect bonds to be like a toothache: unlikely to kill you, but could, and just no fun. Bouts of volatility with a reluctant trend higher.

 Gold: an inexorable retreat to the back pages amidst a dull bear market. Same with silver.

 Commodities? Headwinds abound, mostly mild. Demand is likely okay. Production has generally grown a lot in every category for a decade. As interest rates rise, storage and opportunity costs rise. The elders at Cargill posted it in their conference room: “The Cure for High Prices

is High Prices“.

 Dollar: up. The long U.S. dollar bear market of the George W. Bush era has exhausted itself. Bear markets in the greenback spell

bull markets for many commodities and vice versa. China’s voracious demand has, as it inevitably must (think Herb Stein quote here), evolved. Not a wholesale rout, perhaps, but not a big opportunity either. Art? Collectible cars? Bitcoin? It’s frothy, if you ask me.

2014 may very well be the

Year of Living Prosperously. The economy is likely to deliver more jobs, more income, and generally growing optimism. I suspect the roaring equity market of 2013 was discounting 2014’s improvement in the real economy. It will be harder to get a reservation. Book your summer rental now.

I expect the real economy could outperform the virtual Wall Street economy, a role reversal of sorts. Expect to hear less about fat cats.

The actual arrival of prosperity often surprises, and disappoints, equity investors with low-ish returns. Pick any explanation you like, but I gravitate toward the discounting properties of markets in general. Anticipation moves markets; eventual realization . . . not so much. Price peaks before optimism, just as they trough before pessimism. Buy on the rumor. Same old story.

Janet Yellen may be special in many ways. She is our first female Federal Reserve Chair. I will let society at large sort out Chairman, Chairwoman or Chairperson. I couldn’t care less. I sure hope the House of Saud read the

Wall Street Journal when not napping or counting their money. We “let” women drive and run the Federal Reserve in America. What a country! But Janet is likely not so special as to be spared the “weak until proven strong” test new Fed Chairs seem to face historically. That test is almost surely coming. If it comes, it will upset markets temporarily. The crowd seems convinced the test will be “taper-nomics” and that is the way to bet. But don’t bet it all that way.