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Sudden Storms

November was a cold and snowy month, and depending on where you live, it was a record-breaker.  According to The Weather Channel, between November 17-21, Buffalo received 88 inches of snow.  While parts of the country were thawing and shoveling themselves out, Wall Street escaped unscathed, with stock prices up 2.45% in November (as measured by the S&P 500), the 8th month prices have closed higher.  January, July and September were the only months this year with negative returns.  In each instance, the fall-off in prices created an attractive entry point.  The age old adage “buy on the dips” proved a worthwhile investment approach.  Year to date, stock prices are up 13.98%, and unless something unexpected takes place in December, 2014 will be remembered as a lucrative year to have invested in the U.S. stock market.

The sudden storm that hit the East Coast the day before Thanksgiving didn’t seem like much, but it led to pockets of havoc between Maine and Florida.  Volumes of flights were cancelled with no capacity in the system to re-book travelers on acceptable flights.  Lost power led to many candle-lit dinners and in some instances, a return to a “rustic” lifestyle.  The disruption did not last long, but spending on Black Friday fell.  Bargain hunters spent about 10% less this year than last, and this was most likely a result of the weather.  In contrast, Cyber Monday saw sales leap 17% over last year, to over $2.0 billion, according to comScoreInc.  It looks to me as though the consumer is alive and well – whether in a mall, or online, the shopping will get done.  Online market share growth is irreversible and will ultimately lead to higher retail spending, due to the simplicity, comparative information and ever faster shipping – and just wait until drone delivery is available.

There is another storm taking place.  This one is in the oil patch, and it does not look like it will be resolved anytime soon.  Oil prices have been trending downward since June.  At the recent OPEC meeting, it was decided not to cut supply, and as intended, prices fell off a cliff.  Saudi Arabia appears to want to hold on to market share by pressuring marginal cost producers.  The advent of shale oil in the U.S., alternative energy sources and falling demand has made the U.S. more energy independent than any time since the mid 1900’s.  Of course, there are forces at play here.  Recent heavy handed acts by Russia and the importance of oil (US $) revenue to its economy cannot be underestimated.  For history buffs, considering Europe’s reliance on Russian oil and gas, there are unpleasant echoes of Neville Chamberlain and the Sudeten.  In my opinion, if you cast about for black swans, this is the place to look.

Closer to home, early November saw the Republicans take control of the Senate winning 10 of 13 races.  This storm, so to speak, may lead to more fiscal wrangling and political brinksmanship in Washington DC.  Important as this election was, according to the United States Election Project, this was the lowest voter turnout in over 70 years.   It’s hard to fathom the apathy in light of our desperate need for fiscal policy.  The Federal Reserve has largely used up its monetary tool box.  While the economy is growing, it’s in fits and starts.  Employment numbers have faltered.   Without good jobs and improving wages, we could easily see growth forecasts reverse, taking stock prices along for the ride.

No doubt, there is a lot to worry about and at some point there will be a shock to the markets.  At that time, the question will be whether it’s another buying opportunity in a trending market, or the time to pull in our horns and lower exposure to risky assets.  If the trend in the US economy falters, or cannot counter low growth in Europe and China, this too will be good cause for us to take a more conservative stance.  As I said last month, I think the expected return from all asset classes (stocks, fixed income, MLP’s and REIT’s) needs to be adjusted downward.  The upside is lower while the downside remains.  I expect reasonable returns, but I also think more caution is needed.

Best wishes to you and your family for a wonderful holiday season.  I hope you are healthy and safe with as many family and friends around you as you can possibly manage.  If we do not talk beforehand, have a happy new year and let’s hope the coming year is nothing less than a great one.

Bruce Hotaling, CFA

Managing Partner

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