2013 is now in the history books and it was a very good year. Now all thoughts will turn to projections for 2014.
Monday saw the lowest intraday range for the Dow in almost 7 years with only 28 points separating the high from the low. On Tuesday the market started off bullish but went dormant from 11:AM until 2:15 when a large sell program hit the market to knock the indexes almost into negative territory. For a while it appeared the indexes were going to close negative as is the seasonal norm. At 3:15 a monster buy program hit to send the indexes to new highs and that is where they closed the year.
The afternoon decline was blamed on a sharp selloff in treasuries when the yield on the ten-year spiked to 3.036% and the highest level since July 7th, 2011. An even larger yield spike occurred when the 30-year yield rose sharply from its lows of 3.898% to 3.974% and the highest close since August 2011. The sharp rise in yields on the last day of the year is a warning for 2014 but once the bond market closed the equity markets recovered.
I am afraid that is going to be a continuing story for 2014. Every time yields tick up to new multiyear highs the equity market may pause to take a breadth. However, as long as the economy continues to improve the long term direction for equities will be up. The market can handle higher interest rates as long as the fundamentals are improving.
The rising 30-year mortgage rates should put some urgency under everyone considering a new home purchase. The longer they wait the more it is going to cost and the harder it will be to qualify.
The Dow ended the year with a +26.5% gain. It was the strongest year for the Dow since 1995. The 52-week low for the Dow was 12,883 on December 31st, 2012. It never traded down in 2013. The same was true for the S&P with a 1,398 low and the Nasdaq at 2,953 on December 31st, 2012. It is extremely rare for the indexes to not trade lower during the year. Historically the market trades up in the first quarter then dips in the late summer before rallying to new highs by year end. We never got that significant midyear decline.
Seventeen Dow 30 components set new highs in 2013 along with 246 S&P-500 stocks with new highs. Boeing (BA) was the biggest gainer in the Dow after hitting $74 on December 31st and ending today at $136. Netflix (NFLX) was the biggest gainer in the S&P after hitting 88.90 one year ago and closing at $368.16 today. The biggest loser in the Dow was IBM and Newmont Mining (NEM) won that distinction for the S&P.
Netflix said it was testing a cheaper subscription service for $6.99 a month that allowed the content to be watched on only one screen at a time. The current subscription of $7.99 allows watching on two screens. They also have a three screen plan for $9.99. Netflix is trying to find was to combat Amazon and their increasingly discounted service. Amazon allows its Prime subscribers to download thousands of videos for free. Analysts warned that trying to compete with Amazon on price was a losing game and could hamper Netflix ability to raise prices in the future. Netflix is also hoping the $6.99 service will help them compete if Amazon unveils a standalone video service in the future. If Amazon does unveil a standalone plan we could expect a serious decline in the price of NFLX shares.
IBM's revenue has fallen for six consecutive quarters and despite adding $20 billion to its buyback program and boosting its dividend the stock declined as investors worried the trend would continue. IBM is currently suffering from the NSA spy scandal and foreign buyers of computer equipment are postponing purchases or going with other non-U.S. vendors to avoid "backdoors" thought to be in U.S. made equipment. IBM will eventually overcome this problem. The company is still on track for $20 earnings in 2015, up from $15.25 in 2012. Earnings in Q3 were $3.99 and -3 cents below estimates. The company trades with a PE of 12 and as the "dog of the Dow" for 2013 I believe it will be a winner in 2014.
Gold was another big loser for the year. Gold started the year at $1,686 and it was all downhill from there. The lack of inflation, the disappearances of problems in Europe, no U.S. participation in the Syrian war, improving relations with Iran and a general lack of geopolitical hotspots meant there was no reason to hold gold as a hedge. Tax loss selling in December knocked it back to the July lows. A $30 intraday drop on Tuesday to $1,181 came within $2 of the July low at $1,179. However, it did rally to close at $1,202. That allowed gold to close the year with a -28.03% loss.
This is the first losing year for gold in 13 years and the worst percentage loss in more than 30 years. Analysts are split on the fate of gold in 2014. Most agree as long as inflation remains dormant gold will remain lackluster. However, almost all agree that the end result of the Fed unwinding its stimulus policy will result in higher inflation and higher gold prices.
Quite a few analysts still believe gold will rally in January. Historically gold sells off in Q4 and rebounds in Q1. Tax loss selling in December in addition to fund dumping normally pushes prices lower. Funds don't want to show gold in the portfolio at year end unless it is in rally mode. However, once the calendar turns over they will add it right back in as a hedge against the unknown risks ahead.
The economics were mixed again but there were very few traders around to care. The ISM Chicago (PMI) for December declined from 63.0 to 59.1 and a three month low. New orders declined slightly with the gap between new orders and inventories rising from 7.7 to 16.8, which is positive for production. The employment index fell to a six month low and barely over 50 and that suggests weak hiring in future months despite a strong auto sector in the Chicago area.
Consumer confidence for December rose from 72.0 to 78.1 as holiday cheer, rising home prices and another decent payroll report helped to improve the outlook. Even with the sharp gain the headline number remains below the 82.1 cycle high in June. The present conditions component rose from 73.5 to 76.2 but the expectations component positively exploded from 71.1 to 79.4.
Auto buying plans remained flat at 12% of respondents but home buyers rose sharply from 5.0% to 6.9%. Those planning on buying appliances rose from 45.8% to 49.3%. The jump in home buying plans is a result of the rising mortgage rates. If you don't act quickly your rate could be a lot higher.
Overall this was a very positive report with buying plans increasing significantly and the headline number surging. Assuming the normal January dip is manageable we could see some new highs in Q1. Historically confidence declines when the credit card bills show up in January.
The only material report for the rest of the week is the ISM Manufacturing on Thursday. Expectations are for a minor decline but after the sharp drop in the Chicago ISM we could be in for a negative surprise. The market will probably ignore anything that is released since traders will be hung over and listless until the following Monday.
In stock news Hertz Global (HTZ) rallied +10% after news broke they had adopted a poison pill plan after noticing "unusual and substantial activity" in the stock price. The company said it detected unusual options activity suggesting an activist investor had used options to take a position in the shares. Under the plan Hertz will issue one preferred share purchase right for each share of common stock at the close of business on Jan 9th, 2014. The rights will not be exercisable until 10% of Hertz stock is acquired by one person or a group, excluding passive investors, in which case the threshold is 15%.
Dan Loeb's Third Point fund said it acquired a position of less than 5%. CNBC reported that Keith Meister of Corvex Management recently met with Hertz and then raised his stake in the firm. JP Morgan raised its price target saying third party investors are eager for Hertz to divest its capital intensive equipment rental business. After a divestment the free cash flow would dramatically increase.
Hertz gained significant pricing power when it acquired Dollar Thrifty in July for $2.3 billion. That consolidated the industry to three major players. The FTC required hertz to spin off Advantage Rental in order to acquire Dollar Thrifty. In November Advantage filed for bankruptcy. The remaining dominant players including Enterprise and Avis have raised prices at the strongest pace since the recession as they lock in their profitability.
The Tuesday gain pushed Hertz to a new high.
Now that 2013 is over we have to concentrate on the outlook for 2014. Historically whenever the markets had a great year it was followed by a good year. 2013 was the definition of a good year with monster gains in every index. The Nasdaq, Russell and Transports really stood out among the broad indexes. But look at the Biotech at +50% and the brokers at +70% for the real winners.
The challenge now is avoiding a monster bout of profit taking in 2014. We know for sure there are a lot of funds just waiting for the calendar to roll over so they can begin rotating out of some of these monster winners.
If the market roars off in 2014 like it did in 2013 we could avoid a wholesale dumping by fund managers but the rotation will eventually come. Very few managers will dump stocks in a rising market but they will watch for the tell tale signs of momentum slowing.
The late January pothole will be the weak Q4 earnings and once into February we will be faced with the debt ceiling battle all over again. Both sides are already sending up sound bites of their positions so we know it will be ugly. There may be an eventual compromise so it doesn't muddy the water and cost the republicans the gains they got on the Obamacare disaster. Time will tell.
I am not going to spend a lot of time today on determining market direction since all signs point to a strong first week. The Investment Company Institute (ICI) said on Tuesday that bond redemptions through December 23rd totaled $80 billion and represented 2.3% of bond-fund assets. That was a record withdrawal and easily beat the $62 billion in outflows in 1994. That was 10% of invested assets. Bond funds saw inflows in the beginning of the year and it was not until May that withdrawals began. Since June withdrawals have been about $175 billion or 5% of assets so the full year number of $80 billion is somewhat misleading.
In all of 2013 exchange traded and mutual funds took in about $162 billion and the most since 2000 according to Bloomberg and ICI. Since the beginning of 2009 bond funds took in $1.1 trillion so there is plenty of money available to shift into equities. With the 10 and 30 year treasuries finishing at two-year lows on Tuesday we can bet that January will see a monster shift by bond holders into equities.
That should power stocks higher for at least the first couple of weeks. Year end retirement contributions are not likely to be going into bonds and those bonuses are going to be headed for equities in hopes of a repeat of 2013.
With the economy slowly improving and the fiscal drag in Washington pushed to the sidelines for the next two years the only bricks in our wall of worry are the earnings and debt ceiling. I don't know if the market would know how to act if there was nothing to worry about. They say bull markets climb a wall of worry and that wall is crumbling. The thought is almost scary because the lack of external stimulus could put the market to sleep.
The S&P has sprinted for 80 points since December 18th and it came very close to resistance at 1,850 today with a high of 1,849.44. If the first week of January works out like everyone expects that resistance level should be left in the dust. Support is 1,840 and a breakdown there could easily trigger a lot of yearend holdovers into selling.
The Dow powered through short term resistance at 16,500 to close at 16,576. There is no clearly defined resistance to slow it down other than simply extreme over bought conditions. I went out to the monthly chart on the Dow to get a longer term perspective but that resistance was a 16,000 and well behind us. The market can remain irrational far longer than we can remain liquid if betting against it.
The Nasdaq chart is the only one with any semblance of normalcy. The Nasdaq is using prior uptrend resistance as support and not straying too far from that level. The +22 point gain today was a new 13 year high but only by a couple of points. Support is 4,150 and there is no material resistance.
The Russell 2000 failed to reach a new high and closed well off its highs. The uptrend resistance is proving to be strong and fund managers appeared satisfied to keep their window dressing in place as 2013 ended. The Russell is the index I am worried about. The lack of advancement over the last four days suggests nobody is buying but everyone is holding. Were they holding for their yearend statements? If so then lookout below if we get some market weakness next week. Resistance is 1,165 and support 1,158. Not a big range so the spring is coiled pretty tight.
I think we need to cross our fingers and toes and hold our breath for the rest of the week. Volume will be light so any material order flows should push it around a lot. Real trading will not begin until Monday but you never know what is lurking in our path for the day after New Years. It could be very volatile or a much needed siesta.
Enter passively, exit aggressively!
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