The stock market has started the New Year in fine shape, relieved that President Obama’s threat to raise taxes to the moon on capital gains and dividends were thwarted with the deal agreed to on New Year’s Day.
As the charts above illustrate the Dow Jones Industrial Average gained 3.8%,
while the NASDAQ Composite moved higher by 4.8%
last week, which included the first three days of 2013.
The Markets & Economy
Besides the outcome of the tax rate dispute between the President and the Republicans, the big news last week was a rather ho-hum employment report on Friday. It showed that the unemployment rose to 7.8% in the final month of 2012, as just 155,000 non-farm payroll jobs were created. For the entire year the average monthly gain was 153,000, which was the same as the economy achieved in 2011. In other words there hasn’t been any pick up whatsoever in the jobs market in this country.
Once one considers the growth in the work force from demographics, as well as immigration, this pace of job creation is not enough to lower the unemployment rate, and yet it has fallen over the past year. The reasons for this are not good. People have given up, and the participation rate in this country continues to fall. Thus people are still alive and needing income, but have given up looking, so our government simply no longer counts them amongst the unemployed.
This trend is evident by one look at the chart below which shows the employment to population ratio in this country. It has collapsed and that is very bad news for our economy and society. Even worse, the mirror image of this chart is the record number of Americans joining the ranks of the disabled and participating in such government support programs as food stamps.
These programs were once the mainstay of our economic support system, but have now become imbedded as a way of life for many millions of Americans who are not even counted in the employment reports thus in my opinion rendering the reports useless.
Counter intuitively though, this news continues to be supportive of stock prices for many companies which can borrow very inexpensively (and deduct that interest expense), and increase their dividends and earnings (often through job reductions). Accordingly, the lack of growth is hurting society but not necessarily asset prices. This can go on for a while, but growth must return or this country risks losing its soul much like what has happened in Japan.
It is no coincidence that the birth rate in this country is now below the levels necessary to replace the population, and the lowest in my lifetime. If you remember nothing else from this piece about where we are as a society, then remember that. This trend if not reversed will augur in the decline of this country over time as certain as the days are long in summer.
What to Expect This Week
Earnings season will be upon us, and this could cause some problems for stock prices. Retailers had a poor holiday season, the hurricane in the northeast was disruptive, and it is impossible for me to figure out its impact on the economy and earnings etc…
The latest read out (see chart below) from the Economic Cycle Research Institute shows its continued strength despite their own assessment that the US economy has entered a recession.
The upward move in stock prices after the fiscal cliff non-resolution has left the market vulnerable to negative news. With the earnings season upon us and the President and Congress due to battle over the next sixty days, I remain cautious.
SYMBOL: BIIB
Shares of Biogen Idec traded lower last week after the Company announced its experimental drug for ALS, or Lou Gehrig’s disease, failed to help patients in an important Phase 3 study. The shares were trading down nearly 10 points in the premarket, but closed down only around 2 points. This drug was viewed as something of a longshot by most analysts on Wall Street, but would have been very beneficial to patients as there are currently limited alternatives for patients with ALS.
There had been some early excitement about the prospects of this drug given its positive data results in both Phase 1 and 2 studies. The Company has currently stopped work on this experimental drug, but is staying committed to the ALS market. Biogen has started a partnership with Duke University and other academic centers in hopes to bring a new drug to the market in the next five years.
We are encouraged that the shares rebounded strongly later in the week, showing that Wall Street didn’t think this drug was likely to head to market. The reason we own Biogen is their industry-leading position in the multiple sclerosis market, and that remains robust for the Company. This does take away a little of the near-term upside in the share price, but we still expect the shares to reach at least $175 within the next 12 months.
Three-Month Chart
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