Forget About 2013

You might think I am joking when I say “forget about 2013”– but I’m not. Earnings multiples are never based upon current year estimates–but the future. We want to know what the S&P will earn in 2014, then extrapolate a reasonable and historically consistent PE ratio to derive targets. Already, analysts are looking ahead.

“Our baseline forecast remains unchanged — slow growth in most of 2013 as tax increases and government spending cuts offset the private sector improvement, followed by a substantial acceleration in 2014 as fiscal policy turns more neutral,” Hatzius wrote.
Source

That’s right pumpernickel faces–the economy is going to FARGIN’ (god help me) skyrocket in 2014, allowing us to rip out the entrails of our neighbors and festoon our fences with their guts.

This is how the market is going to play out, to the exact detail.

Feb- +1-3%

March- +0.5-1.5%

April- (-1-3%)

May (-2-5%)

June +3-6%

July +0.5-1.5%

August (-3-6%)

September (-3-6%)

October +4-8%

November +3-6%

December +1-3%

Volatility is the biggest loser and XIV will close out the year at new highs. Not all stocks will go up, as dislocations cause disruptions and that means earnings will be messy. But if you stick to names of a larger market cap nature that correlate well to the market, you will do fine.

According to the palm readers at Goldman, 2014 is the year we ramp. As far as I can tell, there are no grave risks to this rally. Some believe the sequester will cause stocks to trade down. I believe the only thing that puts this rally at risk is if “the Fed put” comes into question. That can happen if we get a new hawkish Fed Chairman, or if the unemployment rate approaches 6.5%. Bernanke said they’d consider removing excess liquidity should the unemployment picture firm up.

My biggest failures over the past two years, the only reasons why I made single digits and not 35%, is due to poor risk management. If I moved up the market cap ladder after making big returns, I would have made an additional 60% over the past two years. Therefore, if you see me selling low cap stocks, despite liking them, in favor for big cap–do not be surprised.

For the third year in a row, I am up huge (+15%) in the first two months of the year. Unlike the past when hubris controlled my compass, I endeavor to keep these gains by steadily moving up the market cap ladder, ignoring my inner Henry Fool–discarding him to the trash heap of society, melting his face off with a flame thrower.

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