The Bull Should Keep On Running
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
The Dow Jones
Industrial Average closed Friday at 16,458, just below its all time
high and 237
points, or 1.5%, from when I wrote to you last month. In fact, most of
the major averages are at or near record levels. For the last few
months I've written that I believe the rally will continue, and there's
nothing to dissuade me from that opinion right now. This rally
certainly won't last
forever, and we're destined for a correction at some point, but I think
correction remains at least a few months away. So my suggestion is to
stay invested and enjoy the ride.
I believe the most important factor underpinning
this rally is the Federal Reserve. As long it maintains its
accommodative monetary policy, the stock market should continue to move
higher. Although the Fed has announced its intention to taper their
bond buying program, the more important detail is that it has renewed
its pledge to keep rates artificially low into 2015 and beyond. That
means the party should continue.
As we look at the chart of the DJIA, there doesn't
appear to be anything to worry about. The trend is wildly bullish yet
RSI is at a reasonable level and MACD is turning positive. Support
would come in at the last peak, around 16,145.
The chart of the Dow Jones Transportation
Average looks even better as it continues its upward trajectory with
ever higher highs after modest dips. This is an almost perfectly
bullish chart. And yes RSI is not oversold and MACD too is reasonable.
Last month I suggested that a dip below 7,100 would be a
point. The way things are going, I'd say to be a buyer if it falls to
Now that interest rates, at least temporarily, have
stabilized, the Dow Jones Utility Average has recovered a bit and has
moved just past the midpoint of the recent trading range. Last month I said 'it's not
time to abandon utilities just yet as support hasn't
been broken." If you took that advice you made some money. It looks to me now like the
index is primed to head even higher. If bond yields (see below) stay
under 3.0% I think the utility average could test resistance at 510.
As you can see, as the year ended the 10-year Treasury yield tried again, and failed
again, to pierce resistance at 3.0%. Looking ahead, I
have no doubts that the yield will continue to rise, but it might take
a little while for that to happen. In the near term, probably through
the first quarter or two, I'd expect rates to remain in the trading
range delineated below. The only thing that changes this thesis is if
the Fed changes their interest rate policy sooner than
2013 was an historic year for the
stock market as the broad averages achieved record high levels
and percentage gains not seen since the 1990's. Not surprisingly, in a
year of such spectacular results, growth outpaced value and small caps
outperformed large caps. Even Europe and the rest of the developed
world enjoyed gains of better
than 20%. The only laggard was the bond market, with actually lost 2%
for the year. Anyone who was paying attention, or reading this
newsletter every month, knew that was coming. I expect we'll see more
of the same in 2014.
Name of Index
Dow Jones Industrial Average
Large-cap tech stocks
Russell 1000 Growth
Large-cap growth stocks
Russell 1000 Value
Large-cap value stocks
Russell 2000 Growth
Small-cap growth stocks
Russell 2000 Value
Small-cap value stocks
Europe, Australia, Far East
US government bonds
Barclays High Yield
High-yield corporate bonds
* Return numbers
include the reinvestment of dividends
According to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended December 11 was 326,000, a decrease of 2,000 from the prior
week's revised figure. The four-week average of 335,000 is about 10,000
lower than the tally from a month ago. According to the
seasonal average, about 3.03 million people continue to collect
unemployment insurance, which is an increase of about 170 million
people. That's a little disturbing.
non-farm payroll employment report in December was a huge
disappointment as the number of jobs created was far below
expectations. I expect these numbers were anomalous and will
be revised significantly
higher over the next two months. The
establishment survey reported that a paltry 74,000 jobs were
the month, while an additional 38,000 jobs were added through revisions
to the results for November. The
household survey reported that the unemployment rate fell to
6.7% while the more
comprehensive U-6 "underemployment"
rate rose to 13.0%. 11.0
million workers were
unemployed (about the same as the prior month)
while the labor force
fell to 62.8%, matching the lowest level since February 1978. What this means is that people
are finding it impossible to find a job and are simply dropping out of
the labor force.
continued to be unemployed longer than 27 weeks, and since they didn't
get jobs it appears they've simply given up trying to find work. The
adjusted number of people who could only find part-time work inched
7.8 million and the number of
marginally attached workers rose to 2.4 million. The
number of people holding multiple jobs declined to 6.9 million. The
average hourly wages for blue collar workers
moved higher to $20.35 while the average work week dipped
to 33.6 hours.
Overall, this is a much more dismal report than I'd expected after a
number of promising months in a row. We'll see if this is the beginning
of a new trend or simply a one-off outlier. I expect it's the latter,
and things will improve next month..
The Congressional Budget Office (CBO) estimated
that on a net present value basis, the Treasury reported a federal
budget surplus of $44 billion in December, which means that three
into fiscal 2014 the cumulative deficit is $182 billion, $111 billion
less than the same period in the prior year, thanks to higher tax
receipts (up 8%) and lower government expenditures.
Census Bureau reported that the U.S. trade
deficit of goods and services was $34.3 billion in November, a decrease
of $5.0 billion from the prior month. This is the smallest monthly
trade deficit since October 2009. I've been saying for a while that I
expected the improving economy to help the deficit, and if Congresss
would approve the exportation of petroleum products,
could potentially have a trade surplus.
The National Association of Homebuilders/Wells
Fargo Confidence Index gained four points in December to reach 58. The
index rose eleven points from the beginning of 2013 to the end, and has
remained above 50 for the past seven months. According to NAHB Chairman
Rick Judson, "this indicates that an increasing number of builders have
a positive view on where the industry is going."
The Census Bureau reported that privately owned housing
starts fell 9.8% in December, after surging 23.1% in November
(revised), to a seasonally adjusted
annual rate of 999,000 units, leaving them only 1.6% higher than a year
ago. New building permits fell 3.0% from the prior
month but remained 4.6% higher than the year before. The trend is
beginning to move in the wrong direction.
The Census Bureau reported that on a seasonally
adjusted annualized basis, 464,000 new homes
were sold in November, down 2.1% from the huge gains posted in October,
but still 16.6% higher than a year ago. The estimate
of the number of homes for sale is a slim 167,000, which represents
a puny 4.3
months of inventory at the current rate of sales. The median sales
price rose by $10,700 last month to $270,900, which is above the
moving average price of $262,408. I would expect harsh weather to
diminish sales in December and January.
The National Association of Realtors reported
that on a seasonally adjusted annualized basis, 4.9 million existing
homes were sold in November, a decrease of 4.3% from October
which was also 1.2% lower than a year ago, which is
disturbing. It's also worrisome that existing home sales, and average
selling prices, have declined for five months in a row. The
estimate of homes
for sale held steady at about 2.1 million, which represents
of inventory at the current rate of sales. The median sales price
dipped to $196,300, which is below the still rising 12-month
$209,217. As I mentioned above, I don't expect any real progress until
the weather improved in March or April.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded in December for the
straight month as the index dipped slightly to 57.0, still
among the highest levels of the year. At the same time, the ISM index
non-manufacturing activity fell to 53.0, which still marked growth,
albeit slightly slower, in
the service sector for 47 consecutive months.
Conference Board reported that it's index
of Leading Economic Indicators (LEI) increased 0.8% in November,
following a slim 0.1% increase in October. According to Ataman Ozyildirim, Economist at
"The LEI continues on a
broad-based upward trend, suggesting gradually strengthening economic
conditions through early 2014. Improving labor markets and new
orders in manufacturing, combined with
strong financial indicators, drove November's gain. However, consumers'
outlook for the economy and the drop in housing permits continue to
pose risks in 2014."
According to the Bureau of Economic Analysis, the "final" estimate of
GDP growth for Q3 2013 was a surprisingly robust 4.1%, up from the
advance estimate of 2.8% and second estimate of 3.6%. Much of this
improvement is due to large inventory build ups, a benefit that's
unlikely to be repeated in future quarters, and an increase in state
and local government spending. Still, this is
a solid improvement over 2.6% growth achieved in Q2, the meager 1.1%
growth generated in Q1 and the anemic 0.4% growth in Q4 2012. It even
managed to surpass the robust 3.1% growth from Q3 2012.
The Federal Reserve reported that in November
the amount of total outstanding consumer credit grew at a slower 4.75%
annualized rate, holding at around $3.08 trillion. This is, by
the highest number I've noted since I first started reporting this
statistic in 2007. And it appears that the money may finally be
down to parts of the retail sector, which is showing signs of
The Conference Board's Consumer Confidence Index, which had declined
for three months in a row, rebounded strongly in December, gaining over
six points to finish the year at 78.1. Says Lynn Franco,
Director of The Conference Board Consumer Research Center "Consumer
confidence rebounded in December and is now close to pre-government
shutdown levels (September 2013, 80.2). Sentiment regarding current
conditions increased to a 5 1/2 year high (April 2008, 81.9), with
consumers attributing the improvement to more favorable economic and
labor market conditions. Looking ahead, consumers expressed a greater
degree of confidence in future economic and job prospects, but were
moderately more pessimistic about their earning prospects. Despite the
many challenges throughout 2013, consumers are in better spirits today
than when the year began."
According to the FDIC, one lonely bank closed in December,
bringing the total for the year to 24, versus the 51
closures in 2012. That's pretty darn close to my target of 25. I would
expect even fewer closings in 2014, therefore I'll likely stop
publishing this statistic as it no longer has any bearing on
economy or the stock market.
The dollar index
has begun heading higher over the past month and appears ready to again
attack resistance at 81.5. The announcement of the taper, as
well as a
budget deal, has boosted the greenback a bit. And as the economy
continues to gain strength, albeit slowly, the dollar may gain
a bit more strength. Still, I don't expect it to get anywhere near the
high from last July.
Was my proclamation last month that the bull market
in gold was finally over actually calling the bottom of the
gold plunge, or is it really over? Is the current upward move simply a
dead cat bounce or was $1,200 the bottom? Only time will tell for sure.
I do think that the price of gold
will be higher a few years from now, but in the near term, I think the
price of gold moves lower.
of West Texas crude has plunged so far this year, and to be honest, I'm
not sure why. Interestingly, the major energy companies, like Exxon,
Chevron, ConocoPhilips, Schlumberger and others continue to do quite
well, regardless of the fluctuating price of crude. That tells me that
the price will likely stabilize around the $100 midpoint of the price
range shown below.
The bull market in the financial sector continues
unabated. The price of the index remains above both moving averages
and refuses to drop below the rising trendline (in blue). All
can do is reiterate what I've been saying for the past year: buy on
weakness, which would be between 21 and 21.5.
After four months of
gains, the index for the housing sector finally broke through
resistance and approached the high level set last May. Another positive factor is
that the 50-day moving average finally move higher than the
200-day average creating the "golden cross", which is very
bullish. This is all interesting in light of the fact that the housing
statistics don't paint quite as rosy a picture. So what's right, the
statistics or the chart?
After taking a breather in December, the
index for the
markets is again moving higher. It has matched the high set in late
October and appears poised to best that level. Last month I wrote that
the chart indicated "that
index could be prepared to move higher again." That's proved correct as
the chart remains bullish.
The Chinese economy, and by proxy its stock market,
remains the fly in the ointment of an otherwise worldwide bull
market. Each time the index seemed poised to move
higher, like September and December, the market simply falls right back
down. And this time it has fallen close to support at the June low of
around 1,850. After forming a Golden Cross only a month ago the moving
averages immediately formed a Death Cross just a few weeks ago. Unless
you're looking for a way to part with your money I'd stay away from
The NYSE Bullish sentiment index is still in solidly bullish
territory, yet not wildly so. It's
been fourteen months and counting since the index last fell into the
bearish range below 63.
I'm remain comfortable with sentiment in the mid-70s because it isn't
wildly optimistic, leaving room for further growth. With RSI
holding at 50
there doesn't appear to be much to worry about right now. In fact,
as I've been writing for months, it seems there is
more room for this bull to run.
Right now 71% of stocks traded on
the New York Stock Exchange are currently trading above their 50-day
moving average, which is not a low number, but not an overly high one
either. From this level there's an equal chance of going higher or
lower. Either way, I don't see anything ominous on the immediate
The VIX is slowly falling to levels of extreme
complacency. Each time it's dropped to 12 or below over the past year
there has been a spike in volatility, usually coinciding with a drop in
the market. Notwithstanding the fact that the VIX has stayed in the
complacent end of the trading range for most of the past year, this is
something to keep our eyes on.
Fearless Forecasts - Looking
Back and Gazing Ahead
year in the
January newsletter I make a number of predictions about the stock
market, the domestic economy and maybe a few key trends. At the same
time, I use this opportunity to review the accuracy, or lack thereof,
of my Fearless Forecasts from the prior year. So first, let's see how
my prognostications from last year panned out. The forecasts are in
black and what really happened is in red.
think the broad markets will be only modestly
higher in 2013. Put me down for an 8% gain for the Dow Jones Industrial
Average, which means a closing price of 14,156. That,
coincidentally, would be six points below the all time high of
14,164.53 from October 9, 2007. I think the S&P 500 will lag
the Dow this year, limiting the S&P to a gain of only 6%,
which means a closing price of 1,508. As usual, the market
will not rise in a straight line. Indeed, there will likely be two
corrections of between 5 - 10%. But again, investors who hold tight
will be rewarded. I
was right about the direction of the market, but not the
magnitude. The DJIA finished up 26.5% and the S&P 500
29.6%. There were three corrections of between 5 - 10% (they were each
around 6%). Buy and hold was definitely the way to go.
confident the Fed will leave short term
rates unchanged for the entire year; they've already declared as much.
I also believe that there will be no more "quantitative easing" plans
as the risks of inflation outweigh the concerns about
deflation. I think the yield on the 10-year Treasury will stay
in a range of 1.50% - 2.00% and the 30-year bond will remain roughly
1.00% higher than the 10-year. Mixed
result here. I was correct that the Fed would leave short term rates
unchanged and that there would be no more QE. The 10-year Treasury
broke above 2% in June, establishing a new trading range between 2.5% -
3.0%. The 30-year bond yield did indeed remain about 1% higher than the
think the value of the dollar will be lower
by the end of the year, after finishing 2012 around 80. Countries all
over the world are attempting to devalue their currency in order to
bolster their exports and the U.S. is no exception. I expect the dollar
index to trade between 73 - 83. I
wasn't too far off. The dollar finished the year right where it
started, around 80, after trading as high as 85 and as low as 89 with a
primary trading range between 79 and 83.
think slower global economic growth this year
will limit demand for West Texas Crude, thereby keeping the
price down a bit. That being said, I think the price of WTIC
will stay for much of the year between $80 - $100, although it wouldn't
surprise me to see it briefly drift as low as $70.
This prediction was reasonably accurate as the price traded between $90
- $100 for much of the year, with a three month spike during the
summer. There was very little downside movement.
price of gold has moved higher in each of
the last 12 years, even as the rate of growth slowed a bit last
year, and I'm confident it will go higher again this year. My
upside target is about $1,850 per ounce while the downside is about
$1,600. The primary trading range will probably be something like
$1,650 - $1,750. I think the price of silver could test $40 per ounce
again, but will likely remain in a tight trading range between $26 -
$36. I don't see silver going much lower than $25. Unfortunately,
I could not have been more wrong with my predictions for the precious
metals sector, which completely tanked last year, as the price of gold
plunged almost 30%. Silver fared even worse, finishing the year down
about 40% from the high. This one hurt.
housing market will continue to rally in
2013. Average prices will slowly rise throughout the year as inventory
remains very tight. Interest rates will remain historically
low, although they will likely be higher by the end of the year.
was mostly correct. The housing market, as represented by the HGX
housing index rose 23% in the year. Housing starts increased 11%. New
home sales rose 17% but existing home sales were flat. Prices in both
new and existing markets rose nicely. Interest rates, although higher
than 2012, did remain historically low in 2013.
think the average rate of GDP growth over the
next four quarters will be around 2.0%, which is slightly lower than
2012. Q4 2012 may be the high water mark as the first half of 2013
could struggle to reach 1.75%. The
average rate of growth of GDP for the last four quarters was exactly
2.0%, although the good news was that the rate of growth increased all
four quarters, accelerating nicely in the second half of the year after
a very laggard first half.
the third year in a row, job growth, or the
lack thereof, will continue to be one the most important domestic
stories of the year. The unemployment rate will likely top out around
8.0% and will fall to only 7.5%. The U-6 measure for unemployment, a
more accurate gauge of the true unemployment situation, will likely
remain in the 14%-15% range. The other big story will of course be the
federal deficit. There
was solid improvement on the employment front last year. The
unemployment rate fell from a high of 7.9% to a low of 7.0% in
November, while the U-6 fell from 14.4% to 12.7% over the same period.
And the fight over the deficit caused a government shutdown.
All in all, my forecasts were a bit of a mixed bag, but except for the
horribly wrong forecast for gold I wasn't too far
year. And remember, I have no formal training in
economics. I'm just someone who closely observes what is happening in
the world and tries to apply that knowledge to my investment management
business. Anyway, last year is history now; it's time to look forward,
which means a new set of Fearless Forecasts. So without further ado,
here we go:
think the broad markets will again finish higher in 2014. Put
me down for a 12% gain for the Dow Jones Industrial
Average, which means a closing price of 18,565. I think the S&P
500, with a greater emphasis on tech and growth, could do a little
better, finishing up 14%, for a closing price of 2,106. As
usual, the market
will not rise in a straight line. I expect there
will be two
or three corrections of between 5 - 10%. One could even be worse than
that. But investors who hold tight
will be rewarded.
the second year in a row I believe the Fed will leave short term
I also think the Fed will reduce their bond buying program to at least
$40 billion a month by year-end. If they economy is strong enough, they
could have it down to zero. The yield on the 10-year Treasury will
in a relatively tight range of 2.75% - 3.25%.
two years the dollar index has traded between 79 and 85 and closed the
year around 81. Given the reduction in QE, a falling deficit and trade
gap, I expect the dollar will be 5% higher, or about 85, by the end of
think an improved global economy this year
will increase demand for West Texas Crude, putting upward pressure on
the price. On the other hand, increased supplies from shale drilling
will be a drag on prices. Therefore, I expect the price for a
barrel of oil to remain relatively range-bound in the $90s for most of
the year, with a low of $85 and a high of $105.
12 straight years of increases the price of gold fell last
year, and fell hard, finishing around $1,200/oz. Longer term, meaning
over the next few years, I think gold will move higher. Before that
however I think gold will drop below support at $1,200, falling to as
low as $1,000. The yearly high is tougher to judge, but I'll estimate
the high to be no better than $1,400.
expect the housing sector to continue to rally in
2014, albeit at a measured pace as slightly higher interest rates
inhibit a faster rate of growth. The volume of new and existing home
sales will rise by no more than 5% and average prices will gain
slightly less as inventory rises.
think the average rate of GDP growth over the
next four quarters will be around 3.0%, a marked increase from the
prior four quarters. I expect the first two quarters to have a higher
rate of growth than the second two.
job growth, or the
lack thereof, will continue to be one the most important domestic
stories of the year. The headline unemployment rate could fall
as low as 6%, and will likely be no higher than 7%. The U-6 measure for
more accurate gauge of the true unemployment situation, will likely
remain in the 12.5%-13.5% range. The bigger problem is the dismal labor
participation rate, which has fallen to a thirty-five year low of 62.8.
That measure must improve in 2014.
I don't believe the mid-term elections will do much to change the
political landscape. Congress will likely remain divided. I do expect
the The Tea Party to be marginalized as the electorate
realizes that a hyper-polarized Congress cannot govern at all.
Thinking and Doing
You should have a pretty good idea of what I'm
thinking right now. I believe the market is headed higher, albeit in
fits and starts. I think a budget deal, some stability out of
Washington, a growing economy and an accommodative Federal Reserve will
all conspire to keep the bull market powering ahead. Add to
that the healthy
corporate balance sheets and a generally good business climate, and you
have a recipe for stock market gains.
Following that thinking,
my clients and I finished the year virtually fully invested,
with only about 3% in cash. And since year-end I've put another
$300,000 of cash to work buying one new stock and filling in a few
other existing positions. The new stock is a leading food retailer
that's dropped 20% recently. I thought it would make a wonderful
addition to our portfolios. Our holdings remain tilted more
towards value than growth, so we expect to mildly underperform
bullish markets while capturing most of the gains. On the flip side, we
should be more sheltered from some of the downside. I'm happy to make
that deal. I prefer to own companies that dominate their sectors, pay
and can weather any
economic crisis. Owning those stocks will tend to generate solid
returns year in and year out. Our portfolios are built to
last for years, if not decades. My clients and I will be able to sleep
well at night with our stocks; can you say the same?
It has been a brutal winter so far in the Northeast
and I'm already dreaming about Spring and warmer weather. As I finish
writing this we're preparing for another winter storm and arctic blast.
It has been no fun around here since Thanksgiving. I'm heading to San
Francisco this weekend to celebrate the 50th birthday of one of my
great college friends. We all turn 50 this year. How quickly that
milestone has descended upon us. Next weekend I'm competing in a local
swim meet. Then in February I'll get out of town for a bit to a warmer
destination. I'm counting the days until that trip.
That's it for this month. As always, I thank you,
readers, and remind you that this newsletter is for you. I have been
writing News and Views for ten years now. If you'd like to read
any prior edition, simply go to my website and click on the link to my
newsletter archives. I hope you have learned something about our
economy and our stock market, and that you will continue to follow
along with me in the future. If you have any thoughts or suggestions on
how to make it better, please let me know. And if you'd like to speak
with me about your investment needs, or if you know someone that might
benefit from my guidance, I'd be pleased to be of service. Simply give
me a call or drop me an email.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.