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The Tide Comes In
Market Outlook 2013
New Castle Investment Advisors, LLC
Presented April 2, 2013
This presentation is not a recommendation to buy or sell any securities
for discussion purposes only
2012 Market Review
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Bull Market Continued in 2012
S&P 500 up 16%
MSCI All Country ex-US Index up 19%
7-10 Year Treasuries up 3.7%
Real Estate up 17.6%
Gold up 6.9%
Commodities up 3.5%
How Did We Do in 2012?
• “S&P 500 Up 12-15%, maybe more…”
• Overweight Industrials, Health, information
Tech—two of the three best sectors.
• High Yield and medium grade corporate debt
outperformers.
• Treasuries—uncertain. 10-Year Treasuries
began at 198bps and ended at 178 bps.
2012 In Perspective
• More Political Stalemate—fiscal cliff: tax rates
basically unchanged, tax code more complicated,
Estate and Gift Tax exemption at $5 million; 20112012 payroll tax eliminated.
• FED Announces it will buy $45 billion in treasuries
per month in addition to the $40 billion of
mortgage backed securities it already was buying.
QE-Infinity? Announces no rate increases until
unemployment hits 6.5% and/or inflation above
2.5%.
The Globalization of Quantitative
Easing
• Liquidity Everywhere—Europe still has
problems but ECB Mario Draghi announces
third q “bazooka,” essentially indicating ECB
will buy unlimited sovereign debt and do
“whatever it takes” to hold the euro together;
• Japan announces its own quantitative easing
program--2012;
• Bank of England Announces Easing--2009
China and the LDM
• Hard Landing, asset bubble, inflation—all
predicted. Didn’t happen. Leadership
transition smooth. Q4 GDP accelerated to 8%,
full year growth of almost 8%.
• LDM, debt levels lower than DM, greater
productivity, limited inflation. Poised again for
out-performace in 2013.
2013 Key Themes--US
• Continued political two-step—positive for
market;
• Interest Rates stay low;
• Benign inflation;
• Continued FED accommodation;
• Housing Market continues upward;
• Corporate balance sheets strong, profitability
high
• Consumer balance sheet very good and
improving.
2013 Key Global Trends
• Fear of Eurozone disintegration continues but
it holds—pockets of strength.
• China does well. GDP 7.5%, reforms
implemented.
• Japan still problematic but recent monetary
moves from Bank of Japan depressing Yen will
mean better economy and stock market.
• Emerging markets continue to shine.
US Stock Market in 2013
Key Drivers for Upward Movement
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Improving Employment Numbers.
GDP Growth Estimates likely low.
Stabile Energy Prices—likely going lower.
FED Ease Continues.
Improving Housing Market.
No Major Economic Policy Changes.
US Market Valuation—Is it
Overvalued?
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Dividend Discount Model says No.
P/E Multiple Says No.
E/P Multiple Says No.
Options Market Says No.
Conclusion: Market Has Room to Grow—But
Expect Increased Volatility and Correction(s).
The Trend is Your Friend
• US Corporate Profits—all time high.
• Cash on Corporate Balance Sheets—all time
high.
• Business Investment, accelerating since 2009.
• Share Buybacks—increasing.
• Loan Growth—in last 50 years, never has been
a recession when loan growth is expanding.
General Market Overview
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Overweight equities--also look beyond US.
Weight Mega-Stocks more.
Key Sectors: Tech, Health, Energy.
Start paring Duration on Fixed Income holdings.
Gold—probably flat.
Commodities—could surprise.
REITS/Timber—good.
Prediction on S&P 500: up 20%-plus year-over-year.
But VIX, or market volatility will pick up and at least
one market pull-back of 10% or more.