MorningWord 12/17/13: As we head into year end there is always the talk about exactly what stocks portfolio managers at large mutual funds and hedge funds are willing to keep on their books. What they will or won’t sell because of taxes and what they want to be set up to own in the New Year. A lot of this conversation is just that, and as an individual investor it is really hard to get your arms around some of the goofiness that goes on at the end of quarters/years. For instance, we often hear the term window dressing where portfolio managers gun their biggest winners, or stocks that they know they can push around into the end of the year. Put quite simply, the higher a stock is at the end of a reporting period, the larger the return for the PM and the greater the potential for him/her to get paid! And who really cares if they end up getting too long into Dec 31st as they can just sell in the New Year that extra portion and they will have 51 weeks to make back that performance (assuming that it is even down as year end and new year are historically very strong periods for equities). I don’t mean to sound cynical, these are all practices that go on, not sure there are laws or even rules against it if done in a manner consistent with their prior investing/trading style.
Which brings me to rotation. In just the last week, it appeared that some investors did a little re-positioning, out of consumer staples like CL & PG (XLP down 2.5% from Dec 9th highs) and into some lagging industrial stocks like CAT & DE that are each up at least a couple % in that same time period. This all makes sense to me as staples have gotten expensive for what many deem to be a defensive sector given their healthy dividend yields and non discretionary nature of their products vs those companies levered to the reflation of global growth which many investors see as a key theme for 2014.
And then there are the outright contrarian plays where it is hard to find many reasons to get long into the new year aside from the fact that the performance has just been downright atrocious for this past year (and years prior). I am speaking of stocks pinned to the price of gold, or the cost of getting the shiny metal out of the ground. Last week Enis added GG to his investment portfolio, as he wanted to focus on the fundamentals of one gold miner that he thinks will make it outperform its peers on a reversion trade. His analysis made a lot of sense to me and I merely bought the GDX, the ETF on all of the miners, of which GG is the largest component at 11.5%. I can’t think of many reasons why the miners should go up, but that’s one more indication of weak sentiment. With the ETF sitting within a few % of the 5 year lows, I decided just to hold my breath and buy some last week at current levels. While there is a very good chance the macro factors adversely affecting the price of gold continue into 2014, I love the set up for a rip your face off short squeeze on the slightest (unexpected good news).
In a raging bull market like we are in right now, albeit one we could be in the latter stages of, investors sticking with what has worked for most of this year will need to rotate into some fairly unloved names or sectors to get outsized returns as the likelihood of closing your eyes and getting 20% plus with the broad market index is likely to become increasingly more difficult.