Winter Letter {Part II}

Today is the second installment of our winter letter recently sent to our clients.

One thing we can say is that stocks no longer appear to be cheap, yet they are not expensive by historic measures either.  Today they appear to be fairly valued which is where they have traded for the majority of my twenty-eight years in this business.  It is possible that 2014 could be a year of consolidation.  We are using an earnings range in 2014 for the S&P 500 of $117-121 and a mid-point of $118.75.  Our price cone of probability for this year is $1,900-2,100.  That is a price appreciation potential of roughly 3-6%, 5-8% roughly with dividends around our mid-point.  We will introduce a 2015 estimate of $123-128 for the S&P 500.  Please note that there is no guarantee that any of these estimates will be met. 

Part of the reason why stocks could potentially keep advancing is we may finally see US economic growth post GDP growth above 3%.  Here are a few reasons why.  One of the quiet economic stories is the revolution we are seeing in energy production.  Advances in both technic and technology mean that we are becoming more energy independent while also lowering the cost of manufacturing here.  Last year we produced more crude oil than we imported, the first time we’ve done that in nearly two decades.1.  2014 could also be the turning point for housing.  Basically we haven’t been producing housing at a replacement rate for population growth.  This could be changing, as there is increasing evidence that individuals have made large strides in repairing their own personal balance sheets.  Real consumer net worth is also at an all time high. Certain types of consumption such as automobiles should benefit.  US auto production is expected to exceed 15.6 million units in 2013, the 2^nd year in a row where we’ve produced more than 15 million vehicles.  It is expected that auto makers will have to produce 16.5 million units this year just to keep up with demand!2.  Housing and autos are huge economic multipliers.**

We’ve discussed in past letters how governmental research spending {the kind of spending usually resulting from conflicts such as a major war or an era like the Cold War} can impact economic growth.  We are now seeing the benefits of this research entering the civilian workplace from our most recent conflicts. We call this the era of miniaturization {think your PC morphing into your iPad}.  It is impacting virtually every industry and business field.  The best evidence of this was how much time the press spent last year discussing drones.  Miniaturization is spilling over into fields as diverse as computing, farming, medicine and your home. This sort of innovation continues to spur productivity, which tends to spur more economic growth.  Take a look around your house sometime and see how many technologies or devices you have that didn’t exist 5-10 years ago.  Remember that there are jobs related to each of those items. 

1. USA Today: US Producing More Oil Than It Imports

2.  Autoblog.com:  US Auto Production Expected to Hit a 14 Year High in 4th Quarter.

**     I have posted charts that contain the data supporting much of the basis for my believe that things are getting better in previous posts on this blog below.  You can see them by scrolling down on the blog.

As of this writing Mr. English held positions in ETFs related to the S&P 500 in client and personal accounts.