Wall Street's Best Minds

TUESDAY, JANUARY 7, 2014

Nuveen Bob Doll's 10 Predictions for 2014

By ROBERT C. DOLL

Among the Nuveen chief equity strategist's bets: Cyclicals will best defensive stocks.



1. The U.S. economy grows 3% as housing starts surpass one million and private employment hits an all-time high

After several false starts, the economic recovery which commenced in mid-2009 will likely show some broader and stronger growth in 2014. The litany of hopeful signs includes the housing recovery, falling oil prices, acceptable job growth, easing lending standards, low inflation, all-time high net worth, rising capital expenditures, less fiscal drag, and improving non-U.S. growth. Among other improvements, these forces should result in stronger housing starts and an all-time high in private employment.


2. 10-Year Treasury yields move toward 3.5% as the Federal Reserve completes tapering and holds short-term rate near zero

We expect the bear market in bonds that began some eighteen months ago to continue as interest rates slowly normalize. While the Fed will keep policy rates anchored close to zero, the long awaited tapering process will likely be completed during the course of 2014. A big question for the bond market, and for the economy and markets in general, is the inflation rate. While no significant rise in inflation is likely, it is also likely that that by the end of 2014, it will be clear inflation has made a bottom. Unfortunately, from this very low level of interest rates, not much capital depreciation in bonds caused by rising rates is required to offset coupon earned, causing many parts of the fixed income market to end 2014 with negative total rates of return.


3. U.S. equities record another good year despite enduring a 10% correction

On the back of very strong equity market performance in 2013, it is hard to conclude that equities haven't "stolen" some 2014 returns. Accordingly, while we think equities will experience further upside in 2014, we expect gains to be less ebullient and more volatile. With the significant rise in valuation (P/E ratios) in 2013, we expect that market gains will depend more on earnings growth than further multiple expansion. While expectations of high single digit or low double-digit percentage gains are not unreasonable, we also think a noticeable pullback some time during the year is likely to be caused by overbought and deteriorating technical conditions. We would use pullbacks as buying opportunities as most fundamentals continue to improve.


4. Cyclical stocks outperform defensive stocks

After a long run of defensive stock leadership (consumer staples, healthcare, telecom, and utilities); cyclical stocks (consumer discretionary, energy, financials, industrials, technology and materials) asserted themselves early in the second quarter of 2013. For earnings and valuation reasons, we expect cyclicals to continue to outperform. Stronger U.S. economic growth, a rise in capital expectations, and some improvement in non-U.S. economies should be supportive of this conclusion as well. We find the geographic and size forecasts much more difficult since many cross-currents exist. We prefer free cash flow yield to dividend yield and dividend growth over dividend yield.


5. Dividends, stock buy-backs, capex, and M&A all increase at a double-digit rate

Corporate America has a lot of cash flow, and in many cases, underleveraged balance sheets – and, potentially, great places to use the cash. With some reduction of fear and uncertainty and improvement in confidence, we expect that more cash will be "put to work" in 2014. As a result, we think that dividends, share buy-backs, capital expenditures, and mergers and acquisitions will experience noticeable increases in 2014. Dividends and buy-backs have been increasing in recent years, but we expect the largesse to spread to businesses reinvestment (capex) and buying the company "down the street." Pent-up demand and aging of plant, equipment and technology argue for increases in those key areas.


6. The U.S. dollar appreciates as U.S. energy and manufacturing trends continue to improve

Currency direction is one of the most difficult areas in the capital markets to get right. Along with improved and broadened growth, as well as technical support, we believe the developing U.S. energy and manufacturing stories are dollar positive. Due to an abundance of cheap natural gas and increasing energy production, U.S. energy is already providing a positive impact on the U.S. trade deficit and promises to enhance U.S. job additions and economic growth. The increasing desire by U.S. and non-U.S. companies to manufacture in the United States for labor, cost, infrastructure, and stability reasons has a similar salutary dollar impact.



7. Gold falls for the second year and commodity prices languish

In our opinion, the mystery is not that gold finally came down – the mystery is that it took so long. The preoccupation with gold was originally related to a concern about the viability of the financial system, and the concern about inflation with so much money being "thrown" at this system. As neither of those circumstances occurred, gold still traded above $1,500 per ounce for some time before falling last year. Now the added headwinds of improving global growth and a reduction in systemic threats, some rise in real interest rates, and likely dollar improvement, all put further pressure on gold's allure. In addition, the lack of strong global economic growth and abundant supply for many commodities likely argues for trendless, but volatile (as usual) commodity prices.


8. Municipal bonds, led by high yield, outperform taxable bond counterparts

Municipal bond mutual funds experienced a record number of weeks of outflow in the back part of 2013. And while fundamentals are arguably mixed, our contention is that the pricing of municipal securities relative to taxable fixed income securities more than take that into account. While rising interest rates (prediction #2) create a headwind for fixed income, we believe the tax-exempt market, especially high yield tax-exempt, is positioned for outperformance. The visibility of Detroit's and Puerto Rico's difficulties has created an interesting opportunity for municipal bond investors. We believe the fall of 2013 was a turning point for state and local governments as politicians and unions have begun to agree to some reduced pension benefits. Additionally, state and local government receipt and outlay patterns are improving.


9. Active managers outperform index funds

Recent years have been disappointing for active manager's ability to outperform benchmarks. With the broadening of the equity market and the reductions of correlations, the ability of active managers to outperform can increase. Whether or not the percentage of outperforms crosses 50% is a debatable issue, but the fundamental support for that outcome seems to be increasing. As cheap stocks outperform expensive ones and companies with improving fundamentals outperform companies with deteriorating fundamentals, active managers have a better chance to outperform. Further, a reduction in the number of active players perhaps reduces the competitive landscape somewhat as well.


10. Republicans increase their lead in the House but fall short of capturing the Senate

In 2013, Washington, D.C. proved to be front and center often and with mixed consequences. We believe that a dovish Fed and a declining federal budget deficit make the Washington backdrop for investors at worst benign, and more likely constructive. The recently negotiated "small ball" deal between Democrat Patty Murray and Republican Paul Ryan will likely reduce the negative focus on fiscal policy. The November mid-term elections will soon dominate Washington with the likelihood of Republicans slightly increasing their lead in the House of Representatives, and increasing representation, but failing to control the Senate. Other dominating issues will likely include the improved economic outlook, continued fiscal restraint, Obamacare, and the loss of global prestige.



Grading My 2013's Predictions

1. The U.S. economy continues to muddle through with nominal growth below 5% for the seventh year in a row


Correct

2. Europe begins to exit recession by the end of year as the ECB eases and financial stresses lessen


Correct

3. The U.S. yield curve steepens as financial risks recede and deflationary threats lessen


Correct

4. U.S. stocks record a new all-time high as stocks advance for the fifth year in a row


Correct

5. Emerging market equities outperform developed market equities


Incorrect

6. After two years of underperformance, U.S. multinationals outperform domestically focused companies


Correct

7. Large-cap stocks outperform small-cap stocks and cyclical companies outperform defensive companies


Half-Correct

8. Dividends increase at a double-digit rate as payout ratios rise


Correct

9. A nascent U.S. manufacturing renaissance continues, powered by cheap natural gas


Correct

10. The U.S. government passes a $2–3 trillion ten-year budget deal


Incorrect

Total Score: 7.5 out of 10

jueves, enero 09, 2014

WHAT IRAN WANTS IN 2014 / PROJECT SYNDICATE

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What Iran Wants in 2014

Hassan Rouhani

JAN 8, 2014
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Newsart for What Iran Wants in 2014


TEHRANWhen I campaigned to become President of Iran, I promised to balance realism and the pursuit of the Islamic Republic’s ideals – and won Iranian voters’ support by a large margin. By virtue of the popular mandate that I received, I am committed to moderation and common sense, which is now guiding all of my government’s policies. That commitment led directly to the interim international agreement reached in November in Geneva on Iran’s nuclear program. It will continue to guide our decision-making in 2014.

Indeed, in terms of foreign policy, my government is discarding extreme approaches. We seek effective and constructive diplomatic relations and a focus on mutual confidence-building with our neighbors and other regional and international actors, thereby enabling us to orient our foreign policy toward economic development at home. To this end, we will work to eliminate tensions in our foreign relations and strengthen our ties with traditional and new partners alike. This obviously requires domestic consensus-building and transparent goal-settingprocesses that are now underway.

While we will avoid confrontation and antagonism, we will also actively pursue our larger interests. But, given an increasingly interconnected and interdependent world, challenges can be addressed only through interaction and active cooperation among states. No country – including big powers – can effectively address on its own the challenges that it faces.

Indeed, developing and emerging economies’ rapid catch-up growth” suggests that their aggregate economic weight is about to surpass that of the advanced world. Today’s developing and emerging countries are likely to account for nearly 60% of world GDP by 2030, up from around 40% in 2000, enabling them to play a much greater role on the world stage.

In such a period of transition, Iran can enhance its global role. The election this year, in which close to 75% of eligible voters turned out, showed how our religious democracy is maturing
Iran’s ancient culture and civilization, long state continuity, geopolitical position, social stability amid regional turmoil, and well-educated youth enable us to look to the future with confidence, and aspire to assume the major global role that our people deserve – a role that no actor in global politics can ignore.

We are also considering how to rebuild and improve our bilateral and multilateral relations with European and North American countries on the basis of mutual respect. This requires easing tensions and implementing a comprehensive approach that includes economic ties.

We can begin by avoiding any new strain in relations between Iran and the United States and, at the same time, endeavoring to eliminate inherited tensions that continue to mar relations between our countries. While we may not be able to forget the mistrust and suspicion that have haunted Iranians’ thinking about US governments for the last 60 years, now we must focus on the present and look to the future. That means rising above petty politics and leading, rather than following, pressure groups in our respective countries.

In our view, cooperating on issues of mutual interest and concern would contribute to easing tensions in our region as well. This means countering those in the US and our region who seek to distract international attention from issues in which they are directly involved and prevent Iran from enhancing its regional status. By diminishing the prospects for a permanent negotiated agreement on our nuclear program, such behavior increases the likelihood that the Iran-US standoff will continue.

Our region is grappling more than ever with sectarianism, group enmities, and potential new breeding grounds for extremism and terrorism. At the same time, the recent use of chemical weapons in Syria could haunt the region’s peoples for many years. We believe that, under such circumstances, a voice of moderation in the region could affect the course of events in a constructive and positive way.

There is no doubt that the turmoil in nearby countries affects the interests of many regional and global actors, which need to act in concert to ensure long-term stability. Iran, as a major regional power, is fully prepared to move in this direction, sparing no effort to facilitate solutions. So those who portray Iran as a threat and thus seek to undermine its regional and global credibility should cease – in the interest of peace and tranquility in the region and beyond.

I am profoundly disturbed over the humanitarian tragedy in Syria and the enormous suffering that the Syrian people have endured for almost three years. Representing a people who have experienced the horror of chemical weapons, my government strongly condemned their use in the Syrian conflict. 

I am also concerned that parts of Syrian territory have become breeding grounds for extremist ideologies and rallying points for terrorists, which is reminiscent of the situation on our eastern border in the 1990’s. This is an issue of concern to many other countries as well, and finding a durable political solution in Syria requires cooperation and joint efforts.

So we are pleased that in 2013 diplomacy prevailed over threats of military intervention in Syria. We must build on this headway and understand that Syria is in dire need of coordinated regional and international efforts. We are ready to contribute to peace and stability in Syria in the course of serious negotiations among regional and extra-regional parties. Here, too, we need to prevent the talks from becoming a zero-sum game.

That is no less true of Iran’s peaceful nuclear-energy program, which has been subject to enormous hype in recent decades. Since the early 1990’s, one prediction after another regarding how close Iran was to acquiring a nuclear bomb has proved baseless. Throughout this period, alarmists tried to paint Iran as a threat to the Middle East and the world.

We all know who the chief agitator is, and what purposes are to be served by hyping this issue. We know also that this claim fluctuates in proportion to the amount of international pressure to stop settlement construction and end the occupation of Palestinian lands. These false alarms continue, despite US national intelligence estimates according to which Iran has not decided to build a nuclear weapon.

In fact, we are committed not to work toward developing and producing a nuclear bomb. As enunciated in the fatwa issued by Supreme Leader Ayatollah Ali Khamenei, we strongly believe that the development, production, stockpiling, and use of nuclear weapons are contrary to Islamic norms. We never even contemplated the option of acquiring nuclear weapons, because we believe that such weapons could undermine our national-security interests; as a result, they have no place in Iran’s security doctrine. Even the perception that Iran may develop nuclear weapons is detrimental to our security and overall national interest.

During my presidential campaign, I committed myself to doing everything in my power to fast-track a resolution to the standoff over our nuclear-energy program. To fulfill this commitment and benefit from the window of opportunity that the recent election opened, my government is prepared to leave no stone unturned in seeking a mutually acceptable permanent solution. Following up on November’s interim agreement, we are ready to continue to work with the P5+1 (the five permanent members of the United Nations Security Council plus Germany) and others with a view to ensuring our nuclear program’s full transparency.

The peaceful nuclear capability that we have achieved will be used within an internationally recognized framework of safeguards, and it will be accessible to multilateral monitoring by the International Atomic Energy Agency, as has been the case in the past several years. In this way, the international community can ensure the exclusively peaceful nature of our nuclear program. We will never forgo our right to benefit from nuclear energy; but we are ready to work toward removing any ambiguity and answer any reasonable question about our program.

The continuation of pressure, arm-twisting, intimidation, and measures aimed at cutting off Iranians’ access to a whole range of necessities – from technology to medicines and foodstuffs – can only poison the atmosphere and undermine the conditions needed to make progress.

As we showed in 2013, Iran is fully prepared to engage seriously with the international community and to negotiate with our interlocutors in good faith. We hope that our counterparts, too, are ready to take advantage of this window of opportunity.


Hassan Rouhani is President of the Islamic Republic of Iran.