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January 02, 2013

Large Cap and Value to Start 2013; Models Put in Mixed 2012 Performance

There are no changes to the signals from Northlake’s models for January. For the second consecutive month, the Market Cap model favors large caps. The Style model remains on a Value signal, as it has since August 2012. As a result of this month’s signals, there will be no changes to client investments based on the models. Positions in the S&P 500 (SPY) and Russell 1000 Value will be maintained (IWD).

January will mark the fifth month in the last six that the Market Cap model has recommended large caps. This follows a long period where the model rarely favored large caps. In fact, since an 11 month run for large caps to finish 2007, the Market Cap model has only favored large caps in two other months prior to the recent shift. While you should never outguess your model, I believe this could be the start of a period where large cap remains in favor. The economy and monetary policy have stabilized along with the markets. GDP growth is slow but consistent and interest rate and inflation look set to remain low for several years. In addition, the dollar has weakened somewhat especially relative to the euro as the European Central Bank has taken steps that have defused the sovereign debt crisis. This backdrop favors large caps which can easily finance their balance sheets, grow modestly, and take advantage of scale in global markets. As an aside, I still see lots of potential potholes in the market outlook that could create the quick, sharp, short drops we have often seen these last few years. I like being in mode stable large caps when volatility is high.

The Style model changed little for January and remains with a strong value signal. There was a small shift toward growth as the U.S. dollar is now down slightly on a year-over-year basis. Growth companies, particularly those in technology, do a lot of business outside the U.S. and benefit from increased competitiveness and currency translation when the dollar is falling.

The models put in a mixed performance in the fourth quarter and 2012. The Style model did well in both periods. For the fourth quarter, the value signal gained approximately 1.5% against a loss of one half of one percent for growth and 1% for the S&P 500. For 2012, the Style model earned over 15%, about 2% ahead of the S&P 500.

The Market Cap model matched the market in the fourth quarter but lagged for 2012, gaining over 10% but trailing the S&P 500 by about 3%. Most of the miss occurred in the second quarter when mid caps lagged the June rally that followed the worst month of the market, a decline of 6% in May.

SPY and IWD are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. SPY is short position in the Entermedia Funds, serving as a hedge against long positions. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at January 2, 2013 12:21 PM in Models