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1403 Newsletter 1Q14

Submitted by WL1 on Wed, 03/12/2014 - 12:12

1. Market overview

The " Teflon " stock market remains largely insensitive to negative news. The 5 % stock market correction at the end of January , was promptly recovered over February to modest records highs. The economic news was nonetheless distressing and the conflict in Crimea seemed to derail the stock market train for a second. The outlook for U.S. growth is now edging towards 3.5 % and corporate profits are expected to accelerate to 16% over 2H14 after a 5% outlook for 1H14. The strong US economy should support the dollar, but this theory has left the building. I do not know what today 's economy professors teach, but most of the theory has been turned upside down by the central bank interventions. Stock markets rise on bad news because more money will be printed. A few years ago, European investors panicked that the Euro would melt away and exchanged them for Krones and Dollars. Today, the Euro stands tall like a crusader castle in the currency basket. However, the economy is still in the doldrums, with 7,300 layoffs in two months in Belgium alone. The U.S. printing press also aims to raise inflation. This should reduce the huge debt mountains in a pleasant way. The other and tougher strategy would be to reduce spending or raise taxes, but all politicians want to avoid that. The Inflation plan is however based on old and flawed economic theories that assume limited supply elasticity. Due to globalization and technological change, there is now an almost unlimited supply potential. In fact, the current low interest rates are pushing down prices instead of up. I spent the last holiday period at home and also stimulated the economy with some discretionary purchases. Through the internet , I have bought a TV , pool table and GSM. They cost up to 75 % less than similar devices from several years ago. The central banks plan to inflate the government debt away is doomed to fail due to the increased productivity multiplied by low interest rates. Weak companies are surviving and spoiling the recovery potential. The mountain of debt will not decrease, while company profitability will eventually fall. Worse, the low interest dictatorship pushes a lot of money out of safe havens into risk assets like stocks at a time the profit margins are peaking. Only Madame Soleil can predict when this stock market trend reverses. Meanwhile investing has become an activity for day traders and a new asset bubble is inflation itself. After 2 blow-ups in the last 15 year, one would assume a learning effect and expect the current asset inflation strategy to retrace its steps carefully. 

2. Investment strategy

I hold a portfolio of mainly European restructuring stories which is 80 % hedged with Nasdaq shares (QQQ). The US technology sector is the most overvalued market segment. Hot stocks like AMZN, GOOG, FB, NFLX and TSLA are reminiscent of the late 2000 technology boom. Their business models are not resilient enough to warrant their valuations. Recently bought or added names are Alstom, BAM, D'Ieteren, Sodastream, Tessenderlo and Umicore. With this strategy, I expect a total return of 5-6% for this year. This return can be realised by the outperformance of the valuation stocks, by a Nasdaq correction or both at the same time.