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Year in Review
2013 in Perspective,
from the January 2014 issue
America is back, baby! That must be the conclusion being drawn from the soaring U.S. stock markets in 2013. The heavyweight S&P 500 had an impressive 29.6 percent gain, the best since 1997, and the not-so-dowdy Dow managed 26.5 percent, the finest vintage since 1995. Not to be outdone, the shiny Nasdaq blossomed by 38.3 percent and the small-cap Russell 2000 was hot on its trail with a 37 percent outing.
It seems that, after years of equivocation, U.S. investors finally went "all in" and pushed their chips into stocks. Well, not everybody — those fuddy-duddy bond admirers lost about 2 percent and the gold bugs were squashed with a 28 percent humiliation.
Canada played the familiar role of the placid northern neighbour; the TSX composite had a less exuberant 9.6 percent rise. Not bad, really, but still in the back half of the global parade, entering the stadium behind Serbia and just ahead of Ecuador.
The two Asian giants had very different records, both of which defied expectations. After two decades of economic stagnation and miserable equity returns, Japan's Nikkei exploded to a 56.7 percent gain, its best annual showing in over 40 years. Abenomics, a sort of "QE on steroids" introduced by Prime Minister Shinzo Abe, hasn't been able to give the slumbering economy much of a jolt, but it did weaken the yen, increase exports and enliven investor confidence.
Meanwhile, mighty China, already the world's second-largest economy, kept expanding at a clip in excess of 7 percent, far ahead of any G20 country. But government efforts to contain a property and credit bubble led to a sour investing mood, and the 6.7 percent drop in the Shanghai index was about as appetizing as a plate of overcooked broccoli. After an extended period of being overvalued, an excellent opportunity to buy some assets in this leader could be shaping up.
In our own little neck of the woods, 2013 produced very satisfying results. The President's Portfolio hit a 49.4 percent humdinger, and judging from emails and renewals, subscribers also enjoyed robust profits. Intertape was the MVP by far, but the bench strength was deep, with takeovers of Stewart Enterprises and VIST Financial and powerful strides by ATS Automation, Alpha Pro Tech, Bank of America, Integrated Silicon, Fidelity Southern and Magic Software.
Particularly heartwarming was the comeback of Yahoo! We're used to our picks eliciting guffaws from the peanut gallery, but the amount of abuse hurled in the direction of our Internet property surprised us. An overwhelming consensus held that it would join Netscape, Alta Vista and Pet.com in tech hell. But Yahoo! is again a market darling, and it has richly rewarded our patience.
Balanced against the winners, the missteps were few and not too painful. The bet on Dover Downs was pulled off the table, and the tough slogging with Torstar was put to an end at a minor loss. Benj is ruing his timing on the leap onto the BlackBerry takeover bandwagon, but there is still a good chance of that one ending more happily than it started.
Looking at the longer-term figures, the flushing of the 2008 turd from the bowl has transformed the five-year return to a gleaming 33.5 percent. Of course, the 10-year record retains that stinker for a 12.5 percent result. The 15-year, which we feel is the best testament to the Contra methodology, clicks in at 18.0 percent.
The VP Portfolio continues as the tortoise to the PP's hare. It ended 2013 with $394,926 in the kitty, good for a 15.3 percent increase and up 58 percent since its inception. Bellatrix Exploration surged on some huge deals, Cangene attracted a takeover offer and Jean Coutu combined generous dividends with solid capital appreciation for a pleasing outcome.
Unfortunately, some troubled holdings from previous years exasperatingly lost even more ground. Will Gravity, Santonia and/or International Datacasting finally rebound in 2014?
The degree of frothiness in U.S. equities has taken even the perma-bulls by surprise. If corporations were handily growing their top lines, unemployment was low and salaries healthily rising, then it would all make perfect sense. The reality is that aggregate demand remains weak, joblessness stubbornly high and the median wage earner is falling further behind. Changes in technology and income distribution handily explain this contradiction.
Before you think, "There go those Contra Guys again, complaining about fat cats making too much money," we will point out that many leading economists are grudgingly changing their views and now admit that the extreme and accelerating income disparity is undermining economic growth. Even the new Federal Reserve chief, Janet Yellen, has testified that most productivity gains are going to the one percent, which is working at cross purposes to monetary policy.
Aside from any moral judgment, it is simply inefficient and reduces the velocity of money.
With labour costs contained and advances in computing, corporate profits have increased their share of the economic pie. But with weak demand, business is loath to invest in increased capacity. These conditions led to companies plowing a whopping $500 billion into their own shares in 2013. That is sufficient to distort the demand side of the equation and push prices up a long way.
It makes most shareholders happy, insiders get to cash their options at plump premiums, and reduced share counts increase earnings per share, making management look good. It's a win-win-win trifecta!
We are somewhat less enthused, though no doubt also beneficiaries of these circumstances. We would prefer to see gains coming from more concrete fundamentals, and we remain adamant that buybacks at way over book value are a poor allocation of capital.
What will 2014 bring? A positive outlook for the Canadian market is uncertain, given high real estate prices, frothy bank valuations and the possibility of an interest rate increase. Stateside, though, while anything but assured, probability suggests that after a year like 2013, the U.S. market will have double-digit gains once again.
But then, the first five trading days of 2014 contradict that. Who really knows? Not us. After all, there could be another bizarre Cyprus situation out there, just waiting to unfold...
The Contra Guys
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