Dow To 14,000 and Beyond?
February 1, 2013
by Frank Holmes
of U.S. Global Investors
Dow To 14,000… and Beyond?
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
If you’ve been a hibernating bear lately, you’ve missed a ton of positive news, as U.S. construction spending rose, ISM manufacturing data beat expectations and the country added 157,000 jobs. In addition, the JP Morgan Global Purchasing Managers’ Index rose to 51.5, staying above the expansion level for a second month in a row. The strengthening data, as well as improving investor sentiment, helped the Dow hit 14,000 for the first time since 2007.
For the month of January, U.S. stocks experienced the best month in more than two decades. Per the Stock Traders’ Almanac market indicator, the “January Barometer,” the performance of the S&P 500 Index in the first month of the year dictates where stock prices will head for the year. Let’s hope so. As Adam Shell from USA Today writes, “While there's no guarantee that what happens in the first month of a new year will continue for the remaining 11 months, history is on the side of investors.”
Shell asked for my thoughts on this trend and I told him that sentiment has improved in part because several uncertainties have been removed from the market. Read the rest of the story here.
Sentiment among individuals, advisors and traders has experienced a sudden spike recently, says BCA Research. Its latest Bloomberg numbers show that 53 percent of those surveyed expect equities to be the best-performing asset class over the next year. This represents a “17-point jump over the previous poll in November, and the highest reading in the four-year history of the survey,” says BCA.
My anecdotal experience this week at the World Money Show in Orlando, Florida supports the view that investors are going “all-in” for equities, as the exhibit hall and conference rooms were packed with thousands of enthusiastic investors looking to gain insights. We enjoyed good conversations and I’m happy to have contributed a few ideas at the general session that attendees could immediately put into action.
As a result of the sentiment that rose faster than the summer heat in the Sunshine State, it’s common to question if the market has climbed so high that it might correct and revert to a long-term mean.
Take a look at the oscillator to see today’s incredible shift in context with its historical moves. Using 10 years of data, the S&P 500 Index has moved one standard deviation from its mean over the past 60 trading days. The MSCI Emerging Markets Index is only about a half of a standard deviation from its mean over the same time frame. These charts indicate that the indices are not at extreme levels, like the low we experienced in 2009 or the high a few months later. Rather, the stocks are moving within their normal band of volatility.
This gauge has been a reliable indicator for our investment team, as markets that enter the extreme territory have historically reverted back to their mean. However, don’t panic if a correction should occur, as it would be healthy and reflective of the normal volatility inherent in both U.S. and emerging markets.
BCA believes, “equities should outperform Treasurys over a cyclical horizon of two-to-three years.” The research firm points to the relatively strong earnings season in the U.S. and the Federal Reserve’s ongoing monetary stimulus, “which should provide a tailwind for stocks.” Here are three more reasons to be positive on equities:
1. U.S. businesses and households are deleveraging
After hitting a peak, you can see in each of the charts below that there has been progress in bringing down the levels of debt across businesses as well as individual households. Less debt gives consumers and companies more confidence to invest, spend and hire.
2. New Home Sales Should Increase
Home builders have become increasingly optimistic, as measured by the NAHB Homebuilder Sentiment Index, which has climbed significantly higher in recent months. Historically, new home sales have eventually followed, which is positive for employment, commodity demand, collateral stimulation, cars and appliances.
3. Inflation Remains Low
As you can see in the chart, inflation remains low in Japan, Europe, the U.S. and the U.K., with core consumer price inflation falling below 1.5 percent, according to BCA Research. Even though many developed nations are printing money and are experiencing the “most extreme monetary stimulus in modern times,” inflation is stable.
So will the Dow go beyond 14,000? Although you can’t predict how hot the weather will be this summer, the clouds appear to be parting to reveal the sun today. Make sure your asset allocation positions your portfolio to shine.
- The major market indices all finished higher this week. The Dow Jones Industrial Average rose 0.82 percent. The S&P 500 Stock Index increased 0.68 percent, while the Nasdaq Composite gained 0.93 percent. The Russell 2000 small capitalization index closed the week with a 0.66 percent gain.
- The Hang Seng Composite Index rose 0.98 percent; Taiwan jumped 2.39 percent, while the KOSPI rose 0.57 percent.
- The 10-year Treasury bond yield rose 7 basis points this week, to 2.02 percent.
Domestic Equity Market
The market ended higher for the fifth week in a row and the S&P 500 had the best January since 1989, rising 5.18 percent. Earnings have generally been well received and mutual fund flows have picked up as investors appear more confident in global economic growth.
- The telecom services sector led the way this week with AT&T and Verizon both rising by 4.4 percent. The telecom service sector has been a laggard in January and as investors look for places to put money to work this sector became a good candidate.
- Technology was also strong this week led by market heavyweights such as Apple, Dell and Qualcomm. The sector wasn’t universally strong but overall posted a good week.
- Valero Energy was the best performer in the S&P 500 this week rising 17.7 percent. The company reported a very strong quarter that handily beat expectations and prospects remain favorable.
- The consumer discretion sector was the worst performer as some homebuilders failed to live up to expectations and dragged the whole group down with them, such as Lennar and PulteGroup. Other key laggards in the sector include Time Warner Cable, Amazon and Ford.
- The materials sector also declined for the week with the chemicals complex seeing broad-based loses, with Dow Chemical and LyondellBasel pacing the losses with lackluster earnings reports.
- Constellation Brands was the worst performer in the S&P 500 this week losing 15.1 percent. The company was involved in the Anheuser-Busch InBev’s acquisition of Grupo Model which antitrust authorities now oppose.
- Earnings will begin to wind down next week but there are still notable names that will report including Walt Disney, CVS Caremark, Allstate and Visa.
- After the best January in more than 20 years a pullback would almost be expected.
The Economy and Bond Market
Treasury bond yields rose again this week as economic news was positive and the FOMC meeting was uneventful. The two key pieces of economic data out this week was the ISM manufacturing data, which showed ISM jumping to 53.1 and at a nine-month high, and the unemployment report which showed the economy continued to create jobs at a modest but stable pace.
- The January ISM manufacturing index hit the highest level in nine months and is viewed as key barometer for the direction of the economy.
- Nonfarm payrolls grew 157,000 in January and payrolls were revised higher for November and December. The unemployment rate ticked higher to 7.9 percent due to an increase in the overall labor force.
- Durable goods orders surged 4.6 percent in December driven by a strong auto and improving housing market.
- Consumer confidence unexpectedly slumped in January and was the weakest since November 2011. The increase in payroll taxes that took effect at the beginning of the year was cited as a primary driver.
- Fourth quarter GDP declined 0.1 percent (annualized), which was well below estimates. The market shrugged off the data as the superstorm Sandy impact was a good part of the disappointment, which should reverse in the first half of the year.
- Eurozone lending fell for the eighth-straight month in December.
- The debt ceiling debate appears to be pushed into May, allowing the market to focus on economic fundamentals.
- While some Fed members expressed concerns over continued quantitative easing, the Fed still remains committed to an extremely accommodative policy until the economy improves.
- Globally central banks are increasing their simulative policies, with Japan’s recently elected prime minister vowing to take on deflation and deflating the Yen.
- The economy appears to gaining momentum and bonds have sold off, the risk for bondholders is that this trend continues.
For the week, spot gold closed at $1,658.95, down $25.35 per ounce, or 1.82 or percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 6.86 percent. The U.S. Trade-Weighted Dollar Index gained 0.24 percent for the week.
- Peak gold has been a topic recently in the media as the senior gold miners find it difficult to grow. The U.S. Geological Survey recently reported that U.S. mines produced 230 metric tons of gold in 2012, down from 234 metric tons in 2011. Similarly, silver production was down to 1,050 tons in 2012 from 1,120 tons in 2011. Lower gold and silver production should ultimately lead to higher prices.
- The sentiment towards the junior mining stocks at the Mineral Exploration Roundup conference which just finished in Vancouver was bleak. Veteran financiers of the junior miners commented they have never seen it this bad. From a contrarian viewpoint this is a positive. We have heard gold fund redemptions have been much worse for our Canadian peers who been forced to sell stocks at rock bottom prices.
- Progress has been made by troops from France and African nations in their effort to oust al Qaeda-linked rebels from Mali’s north. French-led air and ground strikes against rebel positions in central and northern Mali have regained control over a number of villages previously controlled by the rebels. This is positive for miners, such as Randgold which has a substantial part of their assets located within Mali.
- Global gold holdings in exchange-traded products are poised for the biggest monthly decline in more than a year as the global economic recovery has curbed demand for the metal. Assets had contracted 0.8 percent going into the end of January, the largest decrease since December 2011. For just the largest U.S. listed gold trust, assets fell 1.7 percent in January.
- While accelerated silver coin purchases in January from the U.S. Mint caused a sellout of production before month’s end, the same momentum may not extend into February as some of the demand can be attributed to coin dealers looking to replenish inventories of newly minted coins.
- India’s gold imports soared by 15 percent to 75 tonnes in January as bullion traders across the country were rushing to buy gold before the import duties on gold imports were kicked up by 50 percent from 4 to 6 percent on January 21. This had the effect of taking away a lot of physical demand for the metal in the last 10 days of the month and hence lower prices prevailed.
- J.P. Morgan’s recent 2013 Gold Industry Report sees further gold price consolidation supported by further upside from monetary stimulus in the U.S., Japan and Europe. They expect gold to trade toward $1,800/oz by mid-year. Polymetal’s CEO, Vitaly Nesis, noted that gold prices may even rise to above $2,000 as investment demand from central banks continues to be robust. Thomson Reuters GFMS estimates central banks’ gold purchases increased 17 percent to 536 metric tons last year, the most in 48 years.
- The pickup in economic activity and industrial demand in China and the U.S. gives silver a solid footing in 2013. Demand for physical silver for industrial use could approach record levels in 2013. Silver producing stocks beat the senior gold miners in price performance this week.
- Noted market historian, Don Coxe pulled in the reins from his weekly conference calls and monthly research piece Basic Point with the close of 2012. His last comment on the gold space was, “The rapid expansion of the monetary base by the Federal Reserve, the expansionary policies of the European Central Bank, and the impending yen flooding by the Bank of Japan makes it almost impossible to conceive a more bullish long term environment for gold. Good gold stocks should be the core investment for almost any long term oriented portfolio.”
- Credit Suisse’s Fixed Income Research considers it not surprising that demand for gold increased substantially during the tumultuous financial markets of the last five years. However, in 2013 the acute phase of the crisis has likely passed, together with the fear trade. With global growth improving and inflation contained, the downside risks are building for gold and the 2011 gold high could prove to have been the peak for the U.S. gold price in this cycle.
- A sharp decline in gold production has been looming for many years on senior gold miners. Few large deposits have been discovered in recent years making it impossible to sustain current production rates. Undeniably, lower production rates in the near future will lead senior producers to intensify their efforts to secure high quality assets. However, asset sizes will likely remain too small to stave off production declines.
- Junior companies with high grade lower capital expenditures should benefit from this scenario but those junior tiered companies that have a business model of gathering large tonnage low grade deposits which require significant capital may find themselves at the end of the line.
Energy and Natural Resources Market
- Oil prices gained this week with Brent rising to the highest level since October 2012, reflecting renewed optimism about economic growth, U.S. dollar weakness and the Fed's pledge to maintain its asset purchase program. Tensions in the Middle East added to price action on reports of Israeli strikes on the Syrian-Lebanese border.
- China's oil demand rose by 4.2 percent in 2012, making it the weakest growth rate since 2002. However, demand in the final four months of last year recovered sharply to average growth of 9 percent compared with growth of just under 2 percent in the first eight months.
- In the U.S., new orders for durable manufactured goods increased by 4.6 percent month-on-month in December. The rise, the seventh in the last eight months, was well ahead of average forecasts of about 2 percent.
- Japan’s manufacturing purchasing managers’ index (PMI) increased by
2.2 points month-on-month in January. This marked a four month high and was the strongest month-on-month rise seen since May 2011.
- The price of natural gas headed for its second-straight weekly loss, as cold weather at the start of February may fade by the month, cutting demand for the heating fuel.
- Chilean copper production fell about 2 percent year-over-year to about 513,000 tons in December, according to government data released this week.
- The price of platinum declined this week as investors rotated funds into the palladium market, pushing the metal to a new 52-week high.
- January has proved to be a good month for commodity index returns. This is in line with historical norms. Indeed since 2003, index returns have delivered positive returns 75 percent of the time in the first month of a new year. History would suggest this strength will continue throughout the first quarter so long as signs of global reflation remain intact.
- Central banks were net buyers of gold through 2012 as a whole, the latest IMF data shows, continuing a trend of recent years. The outlook is promising, as traditional central bank sellers look set to hold onto their gold reserves, while a number of forex-rich central banks in emerging markets add to theirs.
- A combination of supply worries and resurgent Chinese demand may prove to be a catalyst for the price of thermal coal, with floods interrupting Queensland production and higher industrial activity in China driving demand for power generation.
- The Hess Port Reading, New Jersey, refinery closure adds to an already sizable list of refineries around the world that have been mothballed in recent years. Closures peaked in 2012 with 1.6 million barrels per day of capacity that was permanently shut. More than 60 percent of U.S. refinery closures have been located in Petroleum Administration for Defense District 1 (PADD 1).
- Antofagasta’s announcement this week of a significant increase in its operating costs has brought the issue of inflation in copper mining costs back into focus.
- U.S. consumer confidence fell to a 15-month low in January, with the Conference Board's latest index reading reported at 58.6, down from 66.7 in December. The drop was attributed to the impact of an increase in payroll taxes and respondents' assessment of current labor market conditions and outlook also deteriorated.
- The HSBC China January Final Manufacturing PMI was 52.3 versus 51.5 in December. The final reading was higher than HSBC's preliminary January PMI of 51.9, announced January 24. The new orders sub-index climbed to a two-year high of 53.7.
- Truck demand has been rising since October 2012 and dealers are fully de-stocked with inventory sometimes less than one month’s sales in January, Chinatruck.org reported.
- There is an 80 percent chance that A-shares will rally around Chinese New Year according to historical data, CICC reported.
- The Philippines GDP grew 6.8 percent in the fourth quarter, and was up 6.6 percent for 2012, boosted by private consumption and investment. CLSA has raised the Philippines GDP growth to 5.5 percent from previous 4.8 percent for 2013.
- Taiwan’s GDP growth was 3.4 percent for the fourth quarter, exceeding market expectation and improving from 1 percent in the third quarter. For 2012, Taiwan’s GDP growth was 1.3 percent, which is highly dependent on trade since domestic demand is soft.
- Hong Kong’s December retail sales value growth beat expectation and was up 8.8 percent. Jewelry, watches and clocks sales were up 9.3 percent due to money inflows from China.
- Korea’s January exports grew by 11.8 percent versus market expectation of 8.9 percent, after a 5.7 percent decline in December. Imports rose by 3.9 percent in January after falling 5.2 percent in December. Headline inflation in January was steady at 1.5 percent.
- Thailand inflation came in at 3.39 percent in January, versus market consensus of 3.5 percent.
- Unemployment has fallen to new or near-record lows in Brazil (4.6 per cent), Chile (6 per cent) and Colombia (10 per cent). No wonder domestic consumption is soaring: Got a job, will spend.
- Eastern Europe follows Germany’s green shoots: manufacturing PMI improved in January, particularly in Hungary where it surged to 55.9, a 10-month high.
- The internet has shown a flurry of attention to the ad campaign below from the Eastern Poland Economic Promotion Program. The kid could be right as Poland was named one of the best emerging markets in the world, according to Bloomberg Markets Magazine, with 21 percent GDP growth projected from 2013 to 2017.
- The China official January PMI was 50.4, indicating the industrial activities are expanding. The reading was lower than 50.6 in December and market expectation of 5.09, due to slowing activities approaching and during the Chinese New Year holiday season. In spite of lower January PMI, the new orders sub-index in the official PMI inched up to a nine-month high of 51.6, which might be the driver behind the Shanghai A shares index’s’ overnight gain of 1.41 percent. The National Bureau of Statistics of China (NBS) said on Friday that it had expanded the sample size for the official PMI survey to 3,000 firms from the previous 820 across 31 industries in January, which makes month-over-month comparison difficult.
- Indonesia headline inflation edged up to 4.6 percent in January from 4.3 percent in December. This was largely due to heavy rains, which caused disruption of food distribution and crop failures.
- Turkey’s hopes for a second upgrade to an investment grade rating were dashed after Moody’s issued a statement leaving the sovereign rating unchanged.
- Colombia's peace talks are resuming in Cuba amid acrimony over the rebels' insistence on their right to take police officers prisoner, in a clear reference to last week's capture of two police officers. For years investors have been unable to exploit Colombia’s large-installed capacity due to the uncertainty surrounding the FARC.
- The chart above shows key leading indicators are moving in the same direction that points to restocking in China. CEBM, an economic research firm in China, also recently conducted an inventory survey among industrial sectors, and discovered inventories were low in general, which supports improving CPI numbers.
- With the right mix of policy measures, Indonesia could repeat Turkey’s hat trick--control currency appreciation, curb loan growth, and improve competitiveness of the export sectors. And, Indonesia’s macro challenges do not even look as stretched as Turkey’s were back in 2010-2011.
- The two-day summit of Latin American Community of States (CELAC) and the European Union last weekend ended with a final declaration that calls for guaranteeing legal certainty for investors and avoiding protectionism. "We have a good final declaration that spoke about the need to avoid protectionism and guarantee legal certainty for investment," said European Commission President Jose Manuel Barroso.
- Latin American policymakers are manning their defenses ahead of what could be a new battle in the "currency wars" as flows of hot money put unwelcome upward pressure on their currencies.
- Property prices rose 1 percent month-over-month in January due to developers’ optimism that the government didn’t further tighten the housing market in the last year, according to a Soufun.com report. This faster price increase can eventually invite tougher government policies in tightening the market.
- Continued decline of unemployment in Russia belies weakness in real wage growth. It is increasingly driven by shrinking labor force due to persistent demographic contraction of the working age population, rather than strong labor demand. This keeps unemployment down even despite labor demand and the broader economy being close to stagnation.
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