Every Saturday morning I take a long five to six mile walk with a friend of mine that manages a small hedge fund here in Miami. There are few more gregarious or optimistic individuals on this planet. This non-stop rotund package of a person offers up non-stop economic takes, stock ideas and opinions on everything from currencies, commodities and geopolitical impacts on the markets, and is unlike any other manager I have encountered. The closest thing that comes to mind is if Chris Christie was a trader and downed six cans of Red Bull a day.
I call this character and a half "Manic Mike" and he is a great balance to my usually more cynical self. Our two-hour Saturday walks have become a great source of new ideas, including the origin for my purchase of Avanir Pharmaceuticals (AVNR) in the second quarter of this year, on which I booked an over 200% gain as the company was bought out recently for $17 a share.
Around this time of the year our talks revolve around what is coming in the New Year as far the economy and the markets are concerned. In 2012, we bet $1,000 on whether the economy would produce monthly job creation of 250,000 on average during the year. Last year we went double or nothing on whether GDP would average 3.5% for the year, which made me two for two, although it was much closer than I expected, given the economy contracted in the first quarter. This year we have decided to make the same bet once again.
Manic Mike's reasoning is sound. The mid-terms are over and gasoline prices have fallen dramatically. "Bret, each consumer is going to have $1,000 more in their pocket this year because they are spending less filling their tank. This is going to increase the velocity of money and boost discretionary spending. Look at all the full restaurants and all the skyscrapers going up here in downtown Miami. Construction is booming and job growth is taking off."
My retort goes something like this: "Mike, first of all the average individual gas savings is currently estimated at $550 a year not $1,000. Second, whatever extra income from falling gas prices is going to be eaten up by rent increases, which are at their highest levels in years, and healthcare premiums are also rising much faster than inflation. In addition, the mid-terms change little, as neither side has any interest in working in a bipartisan way and the president has reacted to the election by making additional unilateral actions. The steep fall in oil prices is increasing chances of geopolitical blow-ups in some already volatile countries like Russia and Venezuela. Finally, Europe is at stall speed, China is no longer growing like it has for decades and Japan is in a contraction; where is global demand outside of the United States going to come from?"
I have every confidence that I will win our bet once again this year. The Federal Reserve is estimating GDP growth for 2014 of 2.6% to 3% currently. Their projections have been on the high side for years, but this seems a reasonable estimate, although I think the economy will come in at the low end of that range.
However, I have to give Manic Mike his due. His natural optimism has made his projections of annual returns in the stock market much more accurate than my outlook over the past few years, and this is the point of this little story. A good investor has to possess both his inner "Manic Mike" as well as his "Jaded Jensen" to navigate the markets prudently.
As for projections for market returns in 2015, I have equities returning 5% to 8% in the coming year including dividends, as corporate earnings growth will continue even if GDP fails once again to be robust. Manic Mike believes at least a 15% rally from here is "in the bag" in 2015. Don't be surprised if returns next year end up right dab in the middle of those two outlooks.
At the time of publication, Brett Jensen had no position in any of the securities mentioned.