Last year ended very well for us!The New Year has started slowly both because of the weather and because of the middle of the week timing of the holidays.
Last Friday’s employment report for December was the 1st real piece of economic datawhich the financial markets could sink their teeth into,
and the results have most people (not us) confused.
As the graphs above indicate, last week was a slow one in terms of price movement. Neither the Dow Jones Industrial Average nor the NASDAQ Composite has shown much movement this year to date. Both indices showing fractional losses so far this year.
The Markets & Economy
Over the course of the past few weeks, the markets were treated to some news which will play out over the upcoming year. The Federal Reserve Board, at its late December meeting, elected to begin to “taper” its quantitative easing policy. It will now print just 75 Billion dollars per month rather than 85 Billion previously. In DC these days, this is called “austerity”.
In addition, last week the US Senate did confirm Janet Yellen as the next Fed Chairman and she will begin her new duties at the end of the month. While not much is expected to change under her leadership, she is viewed as a dove on monetary policy and her appointment was very political, so I would be amazed to see anything but loose monetary policy as far as the eye can see. Short term, the financial markets are allowing for the tapering policy but longer term, they know they have a friend in Janet Yellen.
Meanwhile back to the economy, the year ended with more happy talk about the US economy and its prospects for 2014. Of course, every year seems to end this way as optimism about the upcoming year is the default position. Once again, it became a game on Wall Street to start predicting when interest rates would be hiked to deal with this booming economy. I have heard this for a long time now and it has never proven itself. Friday’s report on employment once again shows just how wrong that thinking is.
The report itself showed that the unemployment rate fell to 6.7% - this despite the smallest monthly gain in payroll jobs in 3 years (see chart below). Thus it is no longer just people like me ridiculing the data the BLS puts out, but virtually everyone. As everyone now knows, the unemployment rate is falling simply because the government is no longer counting them. This number has now grown to 92 MILLIONAmericans who are of sound health and able to work but simply are ignored.
In the month of December alone the workforce shrunk by nearly 500,000 real live Americans. The absolute number of jobs in this country is still some 1.5 million less than the peak in 2007/08, despite population growth. Unemployment in the younger demographics is getting hit the worst and this represents our future.
The truly scary thing is that this is happening at a time of zero interest rates and a government sector which is still racking up huge deficit spending. It is also the case that our trading partners in Europe and in South America are having huge economic difficulties and are not likely to return to growth in the New Year.
Accordingly, it constantly amazes me that the media is working overtime to convince Americans how good things are “becoming”, but the confidence polls indicate it is NOT working. Obviously, America’s emerging energy independence is very bullish. It acts as a bulwark to our status of having the world’s reserve currency as well as the world’s remaining super power. This, in fact, is so bullish that it is a story that our own politicians fight against and our own media refuse to cover.
Does anyone want to know what our prospects would be if this private sector development had not occurred? This is making America a low cost place to do business again and the corporate earnings results in many industries reflect this (as do our portfolios).
Consequently, when you shake it all out, the global economy isstable but not improving. This means a jump up in growth is not in the cards despite the many predictions. Key to this, however, is that this remains good news for financial markets. A two percent global growth rate is very conducive to rising equity prices. Should a boom materialize then stocks would come under pressure. There is no chance of a boom in 2014.
Risk to economic growth remains to the downside versus the chances of a boom. The monetary authorities globally understand this even if most market pundits do not.
What to Expect This Week
Earnings will start to stream out as the week moves forward. There will also be plenty of economic reports to answer some of the questions raised by last week’s weak employment data. But make no mistake, the employment data trumps anything you will see this week.
Finally, the update from the Economic Cycle Research Institute shows the now very familiar pattern of an economy which won’t die but neither will it take off (see chart below).
This pattern of subpar growth can also be visualized by the chart below which shows the past several years of average monthly job gains. As you can see, there hasn’t been any improvement despite QE and all the happy talk on television.
This is good for markets, not so good for society.
Next Monday, the financial markets will be closed in observance of the Federal holiday celebrating the birthday of Martin Luther King.
As a result, our next update then will one week from tomorrow.
SYMBOL: BIIB
Shares of Biogen Idec are trading at new all-time highs this morning after the Company announced a deal with Sangamo Biosciences last week that should grow its industry leading position in the hemophilia market. Biogen will pay $20 million upfront to Sangamo, and up to $300 million more if drug development goals are met. This is a low-risk opportunity for Biogen to enter the gene-therapy market, and gives them more clout in the healthcare industry in general.
This deal shows that Biogen is in the driver’s seat in developing new drugs in the hemophilia market, and smaller companies desperately want to do business with Biogen. Management is only risking $20 million to enter a market that could be enormous for the Company’s profits in the future. We expect more deals like this from the management of Biogen as they build the top hemophilia treatment franchise in the world.
Wall Street has been applauding this deal, and several analysts have raised their price targets and made positive comments last week. We have been writing about the development of this hemophilia division for the past year, and now others are starting to take notice as the division gets more traction. We expect the news flow from Biogen to remain positive in 2014, and reiterate our $350 price target, although that might be too conservative.
SYMBOL: BA
Shares of Boeing are trading at all-time highs this morning following better than expected news concerning airplane deliveries and labor relations. 2013 was a great year for Boeing, and the Company has never been positioned better for future growth. We are encouraged by the progress management made in the past year, and expect further increases in dividend payouts and share repurchases in the coming year.
Boeing began the New Year by successfully resolving a labor issue by signing a new contract with the members of the International Association of Machinistsand Aerospace Workers relating to the 777 aircraft production. This allows management to control its costs, without having to worry about building new plants or a new labor contract through 2024. Since aerospace is the leading manufacturing industry left in this country, Boeing’s management is getting favorable operating conditions from unions and the government through tax incentives.
Not only are labor issues improving, but demand for new fuel efficient commercial aircrafts has never been better. The management team announced last week that they delivered a record 648 airplanes to customers in 2013, which represents 8 percent growth from 2012. The Company has a backlog of $415 billion in orders for new planes and many investors expect that to swell to over half a billion dollars in the coming months. The Company has also announced several large deals in the past weeks, and the demand for the 787 Dreamliner continues to exceed all expectations.
Boeing has been a core holding for the past several years, and we expect to be shareholders for some time to come. The Company has many favorable business conditions that should lead to solid growth for the next 5 years. The shares are no longer cheap, but we expect that management will continue to exceed expectations in 2014, which should lead to a $175 share price by the end of this year.
SYMBOL: TEVA
Teva Pharmaceuticals announced today that long-time Board member Erez Vigodman is taking over as President and CEO on February 11th. This has been rumored for the past month, and is behind the recent uptrend in the share price. We believe that Mr. Vigodman is up to the challenge of turning around the operations of Teva, and finding new sources of growth for the largest generic drug company in the world.
Mr. Vigodman has been a turn-around specialist in the last two CEO jobs, and his skills should translate well in the pharmaceutical industry. He previously led restructuring at two other Israeli companies - an agrochemical giant and a food producer. We look for him to hire some new executives with experience in the pharmaceutical industry as he looks to bolster sales, while also likely reducing the cost structure at Teva.
We believe there is a lot of value that Mr. Vigodman can unlock at Teva and 2014 should be a much better year for investors than the past couple of years. This Company needed a huge shake-up and we believe Mr. Vigodman will streamline the operations at Teva. Look for the news flow to improve in the second half of this year, which should lead to $55 share price by year end.
© McIntyre, Freedman & Flynn
