Climbing the Wall of Worry – Alpha Select Update for March 2014

Chart___SPXBy David Nelson, CFA

Investors certainly climbed the Wall of Worry this month shrugging off a Russian invasion, China’s Debt Bubble and a Fed Head who stumbled in her debut performance before the press. Despite these concerns markets sit just shy of all-time highs.

My post over the weekend, The Worm Has Turned talked about the change in market leadership as growth gave way to value. Despite yesterday’s end of quarter markup, we’ve seen a clear rotation to lower multiple stocks. This doesn’t imply growth is dead or anything of the kind but what it does say is that price momentum on its own, isn’t going to make you money in the long run. Did it ever?

The major theme this quarter has been the weather and its effect on earnings and economic data. We’ve all given witness to the massive winter storms that hit large segments of the nation. For us here in the Northeast, it’s a winter I’d like to forget. Retailers were hardest hit with many saying traffic dried up reporting same store sales well below expectations. While I’m certain weather played a role, I doubt it’s the whole story. I suspect we hit a speed bump especially as the Fed continues the taper and unwinds quantitative easing.

Get Out of Jail Free

Ok! So we get a pass on Q1. Every CEO has a Get Out of Jail Free card this quarter and won’t hesitate to use it. As we head into the reporting season guidance will be key. Severe weather started during the fourth quarter 2013 and carried through the first half of Q1. As a result, I expect a number of companies to come up short. Yes, analysts have reduced estimates but surprisingly, quite a number of them leave estimates unchanged preferring to adjust after the report. This may hold consensus artificially higher. While some industries can’t make up the lost revenue others should see some payback.

The Fed

In her debut performance as the new Fed Chair Janet Yellen came out with a more hawkish tone than markets were prepared for. The reaction in treasury markets was violent with traders aggressively selling 3-5yr paper fearing the Fed was moving up their time table of the first rate hike.

She turned that theory upside down yesterday morphing into a dove with statements like; “The Federal Reserve takes its inflation goal very seriously.” Yesterday, traders immediately deciphered the code bidding stocks higher, confident she was trying to walk back some of her more hawkish comments made during the last meeting.


The ongoing crisis in the Ukraine and Russia’s annexation of Crimea dominated the news cycle for most of March. Every report of troop movements or statements from the Kremlin caused gyrations in world markets forcing investors to take cover. The knee-jerk reaction sell-offs to geopolitical events often prove incorrect forcing investors to buy back at higher prices once the dust settles.


Despite the impasse in the Ukraine I believe the biggest risk for world equity markets is China. President Xi is clearly trying to unwind years of excess in their financial system. I discussed China’s first defaults and the amount of bonds coming due over the next few months with’s Debra Borchardt last week. You can see the pace of maturities picks up during the next couple of months peaking in July. China is an opaque society. They let us see what they want us to see.

Sector Performance


Earlier this year I appeared on CNBC’s Closing Bell with host Bill Griffeth and said the one sector I would avoid in 2014 would be Utilities. WRONG! As you can see in the sector performance chart for Q1, Utilities (XLU) topped the list even beating out last year’s winner Healthcare (XLV). Consumer Cyclicals (XLY) brought up the rear as the only sector to lose ground this quarter. The rest of the sectors came in close to the S&P performance plus or minus a little.

Emerging Market Signs of Life?

Probably the most notable observation in March was the rally in the MSCI Emerging Markets iShares (EEM) from deeply oversold levels. As you can see in the relative performance weekly chart going back to 2011, (EEM) had a sharp turn this month vs. SPDR S&P 500 (SPY). Remember this is a relative performance chart. The turn upward means (EEM) outperformed (SPY). The nearly 6% move blew away the small returns in the S&P 500.


The beginning of something? Maybe. I’ve been a bear on emerging markets for the last several years and with good reason. My concerns on China and Brazil have proven problematic for the index, especially considering these two countries represent 30%. Whether it is the beginning of a Bull Market or just another Bear Market Rally, it needs to researched. It’s important not to fall into the trap of being so in love with your thesis that you operate with blinders on.

SPX_Cons_Est_2014_03_31Outlook for 2014

I still stand by my projections made at the start of the year. My base case is that the S&P 500 will likely track earnings growth. Consensus estimate for the S&P has barely changed since last month’s report. It currently comes in at $117.37 for 2014 down from $117.40. That would represent close to 8% growth over 2013 getting us to 1994 in the SPX. I like round numbers so let’s call it 2000.

The Good the Bad & the Ugly

Realized Gains & Losses

Boeing (BA) was the biggest realized gain as I sold the remaining position locking in a +66% return. I sold full positions in Viacom (VIAB), Gilead (GILD), Micron (Micron) and Pembina (PBA) with gains of +22.7%, +26.9%, +8.9% and 5.2% respectively. As I mentioned in last week’s post Gilead was sold on the heels of the House Sub-Committee’s letter to the CEO of the company questioning the pricing of one of their drugs.

In the loss column we have Carnival (CCL), Jones Lang Lasalle (JLL), Comcast (CMCSA), Verizon (VZ), and Constellation (STZ) with returns of (-4.6%), (-4.3%), (-3.2%),(-3.1%) and (-1.2%) respectively. Carnival was sold early in the month as soon as I saw the Chairman had sold 15 million shares. I will be certain to revisit Comcast after the close of the Time Warner Cable deal. They appear to be running on all cylinders but the stock has underperformed the market ever since the deal was announced. I’ll stand aside for now.

Click Here to see all Alpha Select Closed transactions for the last 12 months


Energy was the clear winner this month with our positions in Valero (VLO), & Helmerich & Payne (HP) up +9.8%, +9.3%. Our purchase earlier this month of Precision Drilling (PDS) has been a stand out up over +10% in just a few weeks. From inception (Dec 2013) HP is up over 32%.

JP Morgan (JPM) led our financial holdings delivering a +8.5% return. Several other names in the Alpha Select Portfolios came in with mid-single digit returns.

The sole loser in March was the queen of the internet Google (GOOG) falling (-7.3%). Google sits just above very important support at 1100.

Looking Ahead

There’s a lot of news to digest this month as we head into earnings season and the all-important employment numbers on Friday. Please feel free to call with any questions. I’d love to hear from you. It gets lonely on that wall.