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Staying defensive in a market with runaway valuations

By Sherman Lee

The S&P 500 Index (SPX) returned +1.81% in Q1-2014 compared to +2.71% in the same quarter last year. During the first quarter, the market broke record highs when the S&P 500 reached an intraday high of 1,883.

With the S&P 500 near all-time highs, inquiring minds want to know whether this bull market is about to end or will there be more market gains to come?

In my opinion, the improving U.S. economy and the Federal Reserve's quantitative easing program likely will continue to support the bull market rally.

According to the Bureau of Economic Analysis, real gross domestic product (the output of goods and services produced by labor and property) increased at an annual rate of 2.4 percent in the fourth quarter of 2013 compared to a 4.1 percent increase in the previous quarter. In contrast, the SPDR S&P 500 ETF (SPY) increased 10.5% and 5.3% over the same periods, respectively.

While economic conditions are on the mend, investors now face upcoming monetary challenges. Recently the Federal Open Market Committee released a statement outlining for further measured reduction in asset purchases from $65 billion per month to $55 billion per month starting in April 2014.

During the volatile first quarter, I was a net seller of stocks (albeit in a minor way) as the market rebounded from January lows. During pockets of weakness, I was able to acquire two new positions and added to one existing position.

The larger of the two positions purchased was C.H. Robinson Worldwide, Inc. (CHRW), a third party logistics company. The company provides freight transportation, services and logistics solutions to companies of all sizes, in a range of industries.

C.H. Robinson also operates through a network of 276 offices, which the company calls branches, in North America, Europe, Asia, South America, and Australia. It has developed global transportation and distribution networks to provide transportation and supply chain services worldwide.

In addition to transportation, the company provides sourcing services such as the buying, selling, and marketing of fresh produce through its network of independent produce growers and suppliers.

Corporations have strengthened their balance sheets and increased profits, and the market appears to have reflected these positives with higher stock prices. Some may argue that the market has overshot by rewarding many companies with outstretched multiples. We live in time in which Facebook paid $19 billion for WhatsApp.

In this dotcom-era like climate, I remain defensively positioned with large cash reserves and short-term fixed income investments.

Having said all that, I will end with these parting words from Warren Buffett, "It’s only when the tide goes out that you learn who’s been swimming naked." To learn more about Prudent Value, please click here.

DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Sherman Lee

Sherman Lee

Prudent Value is an independent, fee-based registered investment advisor to individuals, high net worth individuals, trust programs, and charitable institutions.

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