Colorado approved the sale of marijuana for “recreational use” starting January 1 this year. Let’s be frank… any state that has ever approved marijuana for any use has essentially approved it for use recreationally. Twenty states have already approved the use of marijuana for “medicinal” use, but we all know that was just an end run for recreational use. Colorado is making a statement. “We don’t care what the Federal Government says. We want to get high. We aren’t going to pretend and call its use “medicinal” when we know the real reason is we just want to get high. Plus we need the tax dollars that the sale of marijuana will generate.”
Like the elimination of prohibition 79 years ago, approval for recreational use of marijuana in all 50 states is ultimately a foregone conclusion although it may take many years. Prohibition in the United States ended in 1934, but many states continued to prohibit the sale of alcohol in some fashion for years after. Some states threw the towel in quickly. Some states gave in gradually… kicking and screaming. Kansas was one of those kicking and screaming states. Growing up in Kansas, I watched the sale of alcoholic beverages evolve very slowly. In the mid 1980s, the Kansas attorney general forced airlines to stop serving alcohol in flights as they crossed into Kansas airspace. Eventually the laws prohibiting the sale of alcohol were slowly peeled away and “liquor by the drink” in restaurants became a reality.
The same will gradually happen with marijuana (although users won’t be smoking in restaurants). The states will individually regulate the sale of it. Each state will ease laws regarding its sale at different speeds and there will be times when users will have to cross state lines in order to purchase marijuana… just like they did for alcohol for many years. But the tax revenue that can be realized from regulating the sale of marijuana will ultimately convince legislators that marijuana should be legalized.
And if every state begins to legalize the sale of marijuana, the federal statutes against the use of marijuana will soon disappear as well.
A Quick Review of 2013
2013 was a great year to be an investor unless you were one of those “doom and gloom” investors who stocked up on gold and other precious metals. The U.S. stock market increased over 30% while the price of gold declined by 28%. Clearly, it was not a good year to be anticipating the end of the financial world as we know it.
It was also not a good year to be expecting or preparing for runaway inflation. Prices of goods and services remained well under control and many commodities became much cheaper.
| Wheat | ↓ 22% | |
| Sugar | ↓ 16% | |
| Soybeans | ↓ 7.4% | |
| Copper | ↓ 7.1% | |
| Corn | ↓ 39% |
The bond market had a rough year as interest rates ticked up dramatically in June. The 10-year Treasury Bond, which had traded with an interest rate as low as 1.65% early in the year, rose to 3% in June. It traded just below 3% the rest of the year. Because of that, bond indexes recorded a small negative return for 2013.
Foreign stock markets of developed nations also did well, but the “emerging markets” didn’t participate at all. With the effects of currency changes factored in, stock markets in emerging nations experienced slightly negative returns.
This past year was a solid, steady good year for the U.S. economy. The potential “Fiscal Cliff” didn’t derail it. Sequestration didn’t derail it. Higher interest rates didn’t derail it. On the contrary, higher interest rates are the consequence of economic growth. And sequestration led to smaller government, which spurred growth in the private sector.
We have experienced positive (albeit very slow) growth the entire year. Unemployment, although still higher than normal, steadily declined throughout the year and now stands at 7%.
What Do We Expect in 2014?
There still appears to be no headline risk on the near horizon. Elections are not until November. The Middle East is relatively quiet. The government faces a potential shutdown again in February, which will never materialize. Obamacare has been kind of kicked down the road as the administration realized pieces of it were just not feasible at this time.
We have trouble seeing another 30% gain in the stock market on the heels of a 200% gain over the past five years. We are not in a panic and “selling everything.” However, we have reduced our equity exposure and have been aggressively writing/selling call options against our stock positions.
Profit margins have been very good for corporations, and we are concerned that those margins are not sustainable. Higher price/earnings multiples combined with smaller profit margins could set the stage for a market setback.
We are NOT anticipating a significant market decline similar to 2008, but we think it will be more difficult to make money in the stock market.
We think the 10-year Treasury Bond will trade above 3% most of the year, approaching 3 1/2%. We don’t see a significant pickup in inflation and/or significantly higher interest rates.
Emerging markets represent relative value. We will look to increase our exposure there.
Bond markets did not do well in 2013, and we see no reason for bonds to outperform in 2014. Having said that, we occasionally find decent value in corporate bonds that have a relatively short duration. In addition, we still feel that municipal bonds, particularly zero coupon bonds, are very attractive and we continue to have an allocation that is higher than we would normally have.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.