Thursday, January 02, 2014 - Back in the Groove

Back in the Groove

by Sinclair Noe

DOW – 135 = 16,441
SPX – 16 = 1831
NAS – 33 = 4143
10 YR YLD - .04 = 2.99%
OIL – 2.93 = 95.49
GOLD + 17.50 = 1224.00
SILV + .57 = 20.11

I'm back. We'll try to settle into the groove here, starting with a look at the daily economic news.

Financial data firm Markit said its final US Manufacturing Purchasing Managers Index rose to 55.0 last month, beating November's 54.7 reading. So, manufacturing ended the year on a high note, growing in December at the fastest pace in 11 months.

Signs of strength in both the manufacturing and services sector as well as stronger job growth across the economy contributed to the Federal Reserve's decision in December to begin tapering, slowing its monthly bond purchases. I had expected the Fed would wait to begin the taper. I was wrong. It wasn't really a shocking development because we knew they would eventually taper, it was just a matter of timing. The taper hasn't actually started yet, it's only been announced.

One area where we're starting to see some impact is in mortgage rates, now at the highest levels since September. The average rate for a 30-year fixed mortgage was 4.53% this week, up from 4.48%. And Freddie Mac also reports the average 15-year fixed rate climbed to 3.55% from 3.52%.

While a jump in mortgage rates has slowed demand, buyers continued to push prices higher. According to the most recent S&P/Case-Shiller home price index, prices in 20 US cities rose 13.6% in October from a year earlier. Some of the price increase is because there are fewer foreclosures, which typically are sold with discounts. And earlier this week, the National Association of Realtors reported contracts to buy previously owned homes rose 0.2% in November, the first increase in six months, after a 1.2% drop in October that was larger than initially reported.

Meanwhile, Eurozone manufacturing also posted its strongest growth since May 2011, but there were some significant divergences with Germany posting solid growth and France showing a decline.

A separate report showed the ISM  factory index fell to 57 in December from the prior month’s 57.3, which was the highest since April 2011. Readings above 50 indicate expansion.

Russia retained the title of the world's top oil producer for 2013. For a while, the US overtook the top spot from Russia. The Russian oil output rose to a post-Soviet high of 10.51 million barrels per day in 2013, up almost 1.4 percent from 2012. We've seen a huge increase in domestic oil production, but Russia's economy relies on oil revenue and as oil prices declined, the Russians responded by boosting output.

In the US, small businesses increased their borrowing in November. The Thompson Reuters/PayNet Small Business Lending Index, which measures the volume of financing to small companies, rose 1% in November from a year earlier. That would seem to be a leading indicator of continued economic expansion, and maybe an early signal of increased hiring ahead.

Applications for unemployment benefits declined last week to the lowest level in a month. Jobless claims fell 2,000 to 339,000. The number of people continuing to receive jobless benefits dropped by 98,000 to 2.83 million. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Those job-seekers rose by about 58,000 to 1.39 million in the week ended Dec. 14. Those extended benefits lapsed Dec. 28 as Congressional Democrats failed in a last-ditch effort to prolong the assistance before the House adjourned earlier in the month. Senate Democrats have pledged to consider a measure to reinstate the aid next week as lawmakers return to Washington.

The expiration of the extended benefits will leave about 25 percent of jobless Americans collecting unemployment insurance payments, down from 38 percent. Since 1946, when data was first collected, the share of unemployed receiving state or federal aid has never dropped below 30 percent.

Thirteen states raised their minimum wage yesterday. Those boosts will provide the country's low-wage workforce with some relief. But in many areas they won't be enough to bridge the gap between what people are paid and what they need to cover basic expenses. None of the states raised their minimum wages as high as $10.10, which is the wage proposed last year by Senate Democrats and later supported by President Obama.

Also yesterday, the Affordable Care Act went into law. Health insurance companies can't turn away anyone because of their medical histories or pre-existing conditions. Prices can't be higher for people with chronic ailments, or for women, and older individuals can't be charged more than three times what younger customers pay. Basic benefits like hospitalizations, prescription drugs and mental health care must be covered. Annual and lifetime limits to essential coverage are gone. And nearly everyone must obtain health coverage or face a tax penalty under the individual mandate.

More than 2.1 million people have signed up for Obamacare. Also, states report 3.9 million people signed up for Medicaid, which is expanding coverage in 25 states and the District of Columbia. Enrollment surged in December as the deadline for January coverage approached.

There are still problems with the website; it's working better than before, but that's not saying much. Some consumers still can't navigate their way, others will find the insurance they chose isn't in place, and others, whose polices were canceled because they didn't meet standards, will suffer lapses in coverage if they couldn't complete applications in time. But it's official now. You can't really undo 2.1 million insurance policies.

The S&P 500 finished 2013 with 30% gains, after posting all time highs for the first time since 1999.  The Dow average climbed 27 percent in 2013 for its best performance since 1995.

The first trading session of January has proven profitable for investors over the previous five years, with the index gaining an average of almost 2 percent that day since 2009. Three rounds of Federal Reserve stimulus and better-than-forecast corporate earnings have helped the S&P rally as much as 173% from a 12-year low in 2009.

Last January, the Dow posted a 5.7% gain for the month, and the S&P was up 5% for January 2013. And we were off to the races. There is a theory that the movement of the S&P 500 during the month of January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 was up at the end of January compared to the beginning of the month, proponents would expect the stock market to rise during the rest of the year. The theory comes from the Stock Traders Almanac.

Officially, the Almanac says every down January since 1950 has been correctly called by its Barometer and has a long-term batting average of almost 80%. In some instances a month seems like too long to wait. In those cases it’s possible to make a call after only five days, thanks to a predictive power that’s been almost 90% accurate over the years. You also look to history which says great years tend to be followed by good years. We end up seeing an average increase of 10% in the year following gains of 20% or more 80% of the time.  2013 was only the 6th time since 1929 that stocks finished the year at their annual high, a rarity that has historically preceded price gains in subsequent years by an average of 8.5%. Of course, if you want absolute certainty, you'll have to wait 12 months.

And even if the January Barometer does work, which it probably does, well, you've still got to be in the market, or get out of the market, depending on the signal. There's some old investing wisdom that says that “being right and making money are not the same thing.”

Those of us lucky enough to own stocks are a bit wealthier than a year ago, at least in theory, and depending on exactly what we own, and of course, on paper.  At least part of the rally in stocks has been driven by signs of a resilient, if not exactly booming, economy. It is a far better thing for stocks to be rising than for them to be falling. Despite the steady stream of good news out of the stock market, the majority of Americans still think the economy is getting worse, not better. Of course, only about half of Americans own stock, and that includes those in retirement accounts; they rely on wages, which haven't really budged.

Over the next few weeks and months, we'll likely hear a rash of good news about the economy; or is it a flurry of good news; maybe a passel of good news? No, I think it's more like a rash. The pessimism of 2013 was overdue, so we might expect undue optimism in 2014. And once we find a particular narrative, we'll fit the facts around it. You need to look beyond the headline growth figures. Once the monetary stimulus is exhausted, we'll probably need a new narrative for monetary policy. We still need to see improvement in the labor force. We still have enormous problems in Washington, and the budget issue will be front and center in the coming weeks. We'll need some new technology to lift us to whatever place we need to go. Maybe we'll find it. I hope so.