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MARLTON CAPITAL ADVISORS KNOWLEDGE AND EXPERIENCE YOU CAN TRUST

Monthly Newsletter: December 2013

2013 Year in Review

It has been an exceptional year for the U.S. and global equity markets. As of December 31, 2013 major

U.S. and global indices performed as follows: Dow Jones @ 26.5%, Nasdaq @ 38.3%, S&P 500 @

29.6%, Wilshire 5000 @ 31.4%, Russell 2000 @ 37.2 %, Japanese Nikkei @ 56.7%, Hang Seng @ 2.9%,

Shanghai Composite @ -6.7 %, Deutsche DAX @ 25.5%, CAC 40 @ 18.0%, FTSE @ 14.4%, and

Emerging Market EEM @-3.6%.

In the year 2013 MCA group of model client investment portfolios delivered returns between 25.1% and

29.5% on an annual basis1. The outstanding performance is due to a successful execution of our

investment strategy of applying technical/statistical analysis, prudent due diligence in the study of the

macroeconomic outlook of the U.S. and global markets, and valuations expectations. MCA long-term

investment goal for our clients is to consistently execute and produce a 12 - 18% annual return with

strong risk management and oversight.

Executive Summary of Market Currents:

The Federal Reserve announced that it will begin tapering its asset purchasing programs.

“The Fed Statement is being viewed as a very dovish tapering – small reduction in purchases, indication

weakening of unemployment trigger, conditional on 2% inflation, no date for end” Citi currency analyst

Steven Englander explained the market surge on the day of the announcement. The reduction in purchase

is very small. The Fed has said that it would not consider raising rates until the unemployment rate falls

significantly below 6.5% and as long as inflation is super-low. There is no target date to ending QE, even

though the taper has begun.

Even in light of the Fed’s action JP Morgan chief U.S. equity strategist Thomas Lee says U.S. stocks are

“in a classic bull market.” He expects part of the upside to come from better earnings in 2014 (with

earnings growth accelerating to 9% from 6%) as well as further expansion in the price-to-earnings

valuation multiple (to 15.7x from 14.5x). Thomas Lee recently highlighted that as part of a classic bull

market that we are currently tracking very closely there is a 1 in 3 chance of 2014 delivering gains similar

to those of 2013. There is also a strong case that the money which has flowed into developed markets

during 2013 will start to switch into emerging markets in 2014.

Tobias Levkovich of Citi revised his 2014 forecast from 1,900 to 1,975. However, he does highlight that

we may witness a choppier markets. In his view with high chance of increased volatility, political

headwinds, the pull forward of equity returns into second half of 2013, and euphoric investor sentiment

justify the potential for a 5% to 10% correction in the first half of the year.

Nomura’s Bob Janjuah, a famous bear, believes the market will continue to climb through the first quarter

of 2014. In his view the market will shave anywhere from 25% to 50% between the second and fourth

quarters of 2014.

1 Annualization Method:

Annualized Return = ( YTD Portfolio Return ) x( 365 Days )

( Number of calendar days from the first portfolio investment activity to the end of the year )

702 Jonathan Lane, Marlton, New Jersey 08053 2

All the important investment headlines this past month and 2014 forecasts:

S&P 500 has best year since 1998. What’s next? – Giovanny Moreano of CNBC.

S&P 500 will finish 2014 at 1,900, implying 5% upside from today’s levels. But investors should

be prepared for a 10% correction during the same time frame – Goldman Sachs Investments.

Sam Stovall, chief equity strategist at S&P Capital IQ pointed out that great market years are

usually followed by good ones. His forecast of 1,895 represents a 5% gain from current level.

Citigroup has a 1,900 target for the S&P 500 for 2014 – A cooling optimistic outlook.

S&P 500 will be at 2,000 sooner than you think – Piper Jaffray’ Craig Johnson.

2,014 in 2014 for S&P 500 suddenly a popular call – John Stoltfus of Oppenheimer.

Financial Advisors are cautiously optimistic for 2014 – CNBC Poll.

Now where do stocks go from here? Here’s a hint: Ho ho ho! – CNBC.Com.

Is the Next Great Rotation into Emerging Markets? – SeekingAlpha.Com.

Fed’s Dreaded Taper may not hurt after all – CNBC.Com.

Pimco’s Mohamed El-Erian’s 2014 Playbook – Emerging markets are looking more attractive.

S&P 500 to hit 1,825 in 2013 and 2,075 in 2014 – JP Morgan’s Thomas Lee.

Nobel Prize economist Robert Shiller warns of U.S. stock market bubble – CNBC.Com.

Credit Suisse – U.S. equities face an ironic headwind that will lead to underperformance in 2014.

The Forces that usually trigger Bull Market Corrections are non-existent – Brian Belski of BMO

Capital Markets.

Global Equities to rally another 13% by year-end 2014 – Citigroup Research.

Overbought? No sweat, thanks to ‘Bernanke-care.’ – Jeff Cox of CNBC.

Yellen to be more dovish than ‘Helicopter Ben’ – CNBC Survey.

Ben Bernanke backs Yellen – Taper depends on U.S. Economic Data and Outlook.

Are Emerging Markets Re-emerging? Invest for the long-term and be prepared for volatility –

Russ Koesterich of Seeking Alpha.

The Global Financial Crisis is Over – Nomura Securities.

Dow 18,000 Fair Value on Forward Earnings – Jeremy Siegel of The Wharton School.

Dow could rise 10% or more in 2014 – Jeremy Siegel of The Wharton School.

Keep Buying Stocks at all-time Highs – U.S. Trust Investment Research.


What Bubble? We are still buying U.S. Stocks – UBS Wealth Management.

U.S. bank stocks could rally 35% in 2014 – RBC Capital Markets.

2014 is Year of the Horse – According to Research Firm Jefferies, China, the world’s second

largest economy, will release its full potential into multi-year bull run.

India tops China as most Attractive Investment Destination – Ernst & Young. This is due to

sharp depreciation of rupee and opening up of new sectors to foreign investments.

Citi’s Tobias Levkovich pointing out indicators which suggest that there is an 83% probability

losses occur in U.S. stocks over the next 12 months.

Would you rather position for old leaders, or old laggards? – Michael Gayed in Seeking Alpha.

Three reasons Ralph Acampora is worried about 2014 – He fears that a year-end rally could set

stocks up for a painful 2014. Tapering could come sooner than everyone thinks and fundamentals

will come back to the fore.

We’re in a worse position than in 2008 – Marc Faber

Bank of America: ‘It’s Getting Frothy, Man!’ – Michael Hartnett of BofA Merrill Lynch

‘Clear Sailing’ for Stocks through 2013 into 2014 – Stephen Weiss of Short Hills Capital.

Plunge in U.S. shares coming in early 2014; S&P is going nowhere, except down – Societe

Generale. SocGen expects 10-year U.S. Treasury yields to reach 4% by December 2014.

I can’t find anyone to refute my arguments that America is in a ‘QE Trap.’ – Nomura Securities

“We are in a massive speculative bubble.” – Marc Faber.

“Wall Street Is Already Raising Its 2014 Stock Market Forecasts”- Sam Ro of Business Insider

At this point, we do think we need to see more earnings growth for the rally to continue. YTD earnings

growth for the S&P 500 companies was only about 4-5% when the S&P 500 rose 30%. We suspect that

any upcoming pullback will just be part of a larger consolidation process within the current bull market

and will therefore represent another great buying opportunity.

As of December 2013, our group of portfolios is net-long emerging markets. It is our view that the S&P

500 and Emerging Markets will continue to rally in the early weeks of the year.

Macro View, Valuations & Commentary:

Despite perceptions of slow global growth, U.S. Fed tapering, and equity market volatility, many of the

risk assets have maintained double-digit gains during 2013. Is correction risk fading? Throughout the

year each minor drop in the U.S. equity market has presented buying opportunities.

As of the end of the month the S&P 500 has outperformed 2011, 2012 and 2013 gains. While it is

possible we may experience some slide during this Spring 2014, investors still have unprecedented

support from the U.S. Federal Reserve’s accommodative monetary policies and asset purchases. The


climate is still positive for stocks. However, investors should brace for an end to support from the

Federal Reserve, and position for an eventual rise in interest rates.

Dow and S&P 500 broke records amid slow-growth economy. We recognize that equity prices are

artificially high. Global central bank policies either are going to jeopardize financial markets or simply

drive prices to a level beyond imagination. The answer, though, could be both. The central banks have

been compelled to undertake unconventional measures. Even the top strategists cannot identify with

certainty whether the Fed and its global brethren are the salvation or the doom of capital markets.

According to Martin Feldstein of Harvard University – Long-term interest rates were unsustainably low

earlier during the year, implying bubbles in the prices of bonds and other securities. When interest rates

rise, as they currently are, the bubbles will burst, the prices of those securities will fall, and anyone

holding them will be hurt. To the extent that banks and other highly leveraged financial institutions hold

them, the bursting bubbles could cause bankruptcies and financial-market breakdown. The Fed has

indicated that it will eventually end its program of long-term asset purchase and allow rates to rise to

more normal levels. Although it has not indicated just when rates will rise or how high they will go, the

Congressional Budget Office (CBO) projects that the rate on ten-year Treasuries will rise above 5% by

2019 and remain above that level for the next five years. Rising rates erode capital value of fixed income,

creating a difficult dichotomy for investors to navigate.

With higher capital gains and dividend tax rates, revenue growth due to be sluggish, the idea of paying a

premium multiple for earnings should be restricted. However, with low rates on Treasury securities and

the interest rate risk presented by the Fed’s monetary policy, long-term investors are enticed to own

equities as the only source of higher yields.


© Marlton Capital Advisors © Marlton Capital Advisors

Earnings Q1 Q2 Q3 Q4 EPS FY Growth S&P Close P/E

2011 22.56 24.86 25.29 23.73 96.44 15.1% 1,257.6 13.0

2012 24.24 25.43 24.00 23.15 96.82 0.4% 1,426.2 14.7

2013 25.77 26.36 26.92 28.20 107.25 10.8% 1,848.4 17.2

2014 28.46 29.96 30.90 32.19 121.51 13.3%

Data as of 12/26/2013 S&P Capital IQ

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Current Market Information & Our Views:

The S&P 500 is well ahead of itself as related to its earnings growth. While earnings have grown

only modestly over the past few quarters, stock prices have surged, sending what could be a

distorted message to investors. As of December 31, 2013, the S&P 500 have seen a 29.6% jump

in 2013 alone even as earnings in the past two quarters have grown little. That trend disrupted a

formerly symbiotic relationship between earnings and stock prices and is indicating that the S&P

500 is potentially in for a substantial pullback with Fed’s tapering in 2014.

BlackRock’s Investment Directions for 2014: The U.S. and global economy are slowly moving in

the right direction. A combination of less fiscal drag and stronger consumer balance sheets

should allow the U.S. economy to edge past the post-recession 2% level to around 2.5%. Global

growth should accelerate to around 3.5%. Interest rate will stay low for longer time period. Seek

greater growth opportunities abroad. Stick with stocks ……for now.

Peter Schiff of Euro Pacific Capital expects S&P 500 to peak around 1,900 during the first half of

2014 and ultimately tapering will be the scapegoat to the pullback. His forecast is 1,900 close for

S&P 500 for 2014 with significant weakness during third quarter.

According to Bank for International Settlements, not only has the debt of households, firms, and

governments increased as a share of GDP in most countries since 2007, but debt-service ratios are

now higher in most rich countries than the 1995-2007 average-despite low interest rates. The

country with the highest debt ratio is Sweden.

The U.S. Federal Reserve is set to begin tapering in January 2014. Since the pace of tapering is

data dependent, it is likely to be a major driver of a stock market correction in case of the

economy showing signs of faster than expected improvement resulting in a pickup in the pace of

asset purchasing reduction by the Fed.

The U.S. Federal Reserve released an improved outlook for unemployment, with its range of

estimates falling below 7% in 2014 and 5.8-6.2% in 2015. The Fed forecasts also showed that

more members see an early 2015 move to raise the target Fed funds rate, slightly ahead of what

the markets had been expecting. The Fed expects GDP growth to be 2.0-2.3% this year before

accelerating to 2.9-3.1% during 2014.


Domestic critics say the central bank’s vastly expanded balance sheet risks future inflation. But

Bernanke has noted that inflation is forecast to remain at or below 2% target for the foreseeable

future. As investor, the divergence does create concerns.

Trends in US core retail sales, ISM index, non-defense capital goods orders, export/import

growth, labor force participation rate, and industrial production are still improving. According to

Deutsch Bank, for the US economy to improve the following has to take place: (1) the global

manufacturing and CAPEX soft patch doesn’t last beyond 4Q13; (2) the dollar to appreciate only

gradually and oil prices stay stable; (3) some green shoots appear in Corporate Tech spending;

and (4) interest rates rise only gradually as soft patch fears dissipate.

Market strategist Mike O’Rourke – There is a good deal of risk in the stock market that many

investors are ignoring. He expects S&P 500 to go lower than 1,500 with Fed’s tapering. In his

view the recent rally has been purely a multiple-expansion rally.

Market strategist Nicholas Colas – It’s time to get bearish on stocks. He thinks market is at the

inflection point, stocks have been overextended.

Citi’s chief economist Willem Buiter is out with his latest missive: Europe is in a bubble and

investors are becoming increasingly frantic. He emphasizes that liquidity, extraordinarily low

interest rates, and increasingly frantic search for yield drive much of the equity improvement.

On October 24, 2013, in its latest World Economic Outlook (WEO), the IMF warns of “Growing

Pains” in Emerging Markets as a new risk. Emerging market economies have generally been hit

hardest as recent increases in advanced economy interest rates and asset price volatility,

combined with weaker domestic activity have led to some capital outflows, equity price declines,

rising local yields, and currency depreciation. IMF revised growth outlook for all BRIC (Brazil,

Russia, India, and China) nations, as well as for emerging markets as a whole to 4.5% and 5.1%

for 2013 and 2014, respectively.

In a research note to clients, on December 22, 2013, Goldman Sachs has a clear warning for

investors: Emerging markets will continue to disappoint. The Bank recommended that investors

with a moderate tolerance for risk reduce their exposure by one-third, from 9% to 6% of overall

portfolio. The Bank predicted the strong possibility of significant underperformance over the

next five to ten years.

Barron’s research report suggested that Indian shares may still offer value despite rally. The

appointment of new RBI governor Raghuram Rajan conspired to spark a 20% rally in Indian

stock market since September.

Forget a slowdown, China’s economy set to accelerate. Seeking Alpha: China’s trade surplus

rises to high of almost 5 years at $33.8B in November 2013. Exports climbed to 12.7% on year

vs. +5.6% in October, exceeding +7.1% forecasts.

Bank of America-ML: Emerging markets poised for further rally in 2014. Allocations towards

emerging market stocks remain stubbornly low despite elevated Chinese growth expectations.

One in five global fund managers are still concerned over whether China may face hard landing.

Pimco’s Ramin Toloui – It’s still important to differentiate within the Emerging Market universe.

Pimco CEO Mohamed El-Erian – Emerging markets are in a better position than they were in the

late 1990s, even with the recent plunge in places like India, Turkey, and Indonesia. The

governments have very strong reserves, so they have cushions.


According to NYSE, as of November 30, 2013, the margin-debt now stands at $412.5 billion

compared to $381 as of July 2007. Other than ample liquidity in Japan and the U.S., we don’t

have the volume or catalyst to go above those levels as of now.

Byron Wien of The Blackstone, the veteran strategist has written extensively that 2013 profit

margins are peaking. That was the case for Alcoa, Coca-Cola, and United Parcel Service.

The S&P 500 is up 29.6% due mostly to P/E multiple expansions as it soared from 14.7 as of December

31, 2012 to 17.2 as of December 31, 2013.

Technical Overview & Outlook:

Can this strength continue technically month after month into 2014?

With S&P 500 at current level of 1,848.36 (as of December 30, 2013), the index is up 29.6% over the

previous year and trades at 17.2x with ttm EPS estimate at $107.25. We believe S&P 500 will continue

its upward momentum into January 2014 and will end the month above current level.


There is plenty to dislike about the current rally. Momentum indicators flash warning for stocks. And as

the market moves higher, the expansions of the number of both NYSE and Nasdaq stocks making new

highs is expected, but that has not been consistent with what we saw this year as even when new highs

were contracting often the market continued to march on. The market is getting a little ahead of itself.

© Marlton Capital Advisors

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© Marlton Capital Advisors

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Since the beginning of October we have been witnessing a rotation out of small-cap stocks. This is a sign

that the appetite for risky assets is diminishing. When put in context, combined with many of the other

factors we have been highlighting, it should certainly be given some cautious consideration.


Risk Management & Oversight:

What is next for stocks? Debt-ceiling, Fed’s tapering, new Fed chief, ‘Hindenburg Omen.’ Janet Yellen

is expected to be even more dovish than Bernanke. The market is still very complacent as noted on the

volatility index ($VIX).

We believe that investors should be concerned that the recent equities run might be reversed and gains

digested. The rally has gone too far for the time being, especially with Fed tapering materializing in early

2014, probable cuts to 4Q-2013 and 2014 EPS estimates on the horizon and still sluggish international

economies. Some caution is appropriate.

U.S. Federal Reserve & the Decision to Taper

The December FOMC meeting was concluded with a decision to reduce asset purchases to a monthly rate

of $75 billion from the current pace of $85 billion. Both, Treasury purchases and purchases of mortgage-

backed securities, will be reduced by $5 billion. There has been no end-date set for quantitative easing in

place. The Federal Reserve kept unemployment target for the rate hike unchanged at 6.5%. In addition,

it was stressed that inflation will be closely monitored and will be instrumental in the decisions

concerning the federal funds rate.

The Federal Reserve has successfully removed one of the biggest market anxieties. Due to the announced

reduction in asset purchases being smaller than expected, no set date for the end of the QE, and

confirmation of the expectations of the federal funds rate staying low for the next year or two the market

rallied on the news.

Alan Ruskin of Deutche Bank views the emphases on the inflation rate in decision making as very

constructive for risky assets. Similarly, Steven Englander of Citi points out that near-term rates are

guaranteed to stay low enough for sufficiently long for risk to be bought. Michael Gapen, Barclays noted

that the committee is prepared to allow the unemployment rate to drop further in the case inflation

remains below their target.

MCA believes that the taper announcement is constructive for the market. It signals the confidence of the

Federal Reserve in the US economy and labor force recovery. The cautious approach of the committee to

the reduction in asset purchases will allow for a smoother transition away from the assisted economic

growth and may prevent abrupt market corrections along the way. While the risk of a Fed triggered

correction is still present, we believe it has been significantly reduced.


Investing Actionable Plan:

Should you short the S&P 500 or Russell 2000 at all-time highs? If history is an indication, 82% of the

time, the stock market could extend its rally into 2014. It is a challenging strategy when the Fed is

actively supporting the market. However, buying high and selling higher works until you are at the last

new high. As investor, it is good to err on the side of caution.

We are bullish on the U.S. and Emerging Markets for 2014. We believe the macro factors underlying the

market remain positive. The U.S. is healing slower than anyone would like, but healing. China is already

the world’s second largest economy and this fast-growing emerging market is set to take the top spot

within the next 2-3 years.

Global economic growth has doubled from 2003 to 2013. We went from a $37trillion global economy to

a $73 trillion economy in large part due to emerging and new frontier markets. Collectively, it is the

global consumer trend and we can expect this bottom-up burst of consumption to be driven by countries

you’ve likely never even thought about investing in.

Period of Pessimism = Best Time to Buy: Being contrarian or value-driven doesn’t mean we will

necessarily buy anything we can get our hands on during a market downturn. During times of extreme

stress, liquidity is important. You can see the merit of buying during the current emerging-market

downturns and holding on for the potential recovery.

The S&P 500 could shave 5 to 10% from its recent peak between now and late June 2014, if not more.

Citi’s Tobias Levkovich and David Kostin of Goldman Sachs pointed out multiple indicators which

suggest with an 83% probability that losses will occur in U.S. stocks over the next 12 months. Investors

should brace for a pullback in U.S. equity markets as well as emerging markets in the next three to six

months.

U.S. deficit spending and Fed’s stimulus has added significantly to GDP. To a large degree, it is believed

that no amount of Fed accommodation will prevent the continuing of slow growth period in the U.S.

We recommend that long-term investors hold plenty of large-cap US stocks for stability in an unstable

world. We have always been cautious for all our portfolios. Investors can hedge long equities using

active volatility strategies.

On Wall Street, it typically pays to fear the cheer.

Best Regards,

Pat Singkamanand, MBA

Chief Investment Officer/Portfolio Strategist

Macroeconomic Outlook & Technical Analysis


Disclaimer: This document is for information purpose only. It does not constitute recommendations to purchase or

sell any securities and/or service discussed. Opinions expressed herein are strictly that of the author and are subject

to change without notice. Past performance does not guarantee future results. Investment portfolios can be subject to

volatility. There is no guarantee that any investment approach will be successful. Before investing, investors should

carefully consider investment objectives, risks, and expenses.

Knowledge & Experience You Can Trust.

Invest with Confidence. Balanced & Responsible Portfolio Positioning.

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