Whence Wall Street’s Recent Optimism? (Or Is That a Bubble on the Horizon?)

If one can have a detached position on the economy, then watching the Dow Jones can be an amusing sport.  As a rule, many on Wall Street have a compulsion to find reasons to be tentative or depressed.1  They seem to view each calendar year as an Olympic cyclist and his strategy.  The plan is to be very cautious, stay very close to the competition then put on a frantic burst of speed just prior to the finish line to pull out a win.  The main difference with the Stocks and Bonds “cyclists” (pun intended) is that their burst to victory for the year doesn’t have to happen in the fourth quarter.  It could be a day when a “triple-witching Friday”2 occurs three days before Company XX announces its earnings for the quarter AND if those earnings are at least 2.5% over projections AND if consumer confidence is above the seasonally adjusted unemployment rate by a factor of at least 4-1/2, AND if…  (I’m making some of this up, but you get the point.)

Indicators  Causing  Optimism

Since those who watch the Dow and its cousins tend to be negative when the real world seems rather positive, you can understand my concern over their budding exuberance when things are still not looking good for average citizens.  Last Friday, it was reported that the Dow Jones and S&P 500 were off to their best starts in 24 and 16 years respectively.  This “January barometer” coupled with the Yale Hirsch expression, “As the S&P goes in January, so goes the year” explains why many view 2013’s outlook with optimism.3

One of January’s market drivers was that “the so-called ‘fiscal cliff” of tax increases and automatic spending cuts was avoided and the debt ceiling debate has put on hold until May.So, we have a whole three months to kick up our heels and enjoy the good times?  Hmm.

Currency  Markets

So, what else is out there which we can use to gauge the financial (mis)fortunes of 2013?  Maybe there are sources of optimism that we’ve overlooked.  The yen continues to be at its 2-1/2 year low against the U.S. dollar  🙂  , but the Euro hit a 14-month high against the dollar  😦  .4    The price of gold remains at $1,650+ per ounce and considering it took until 2006 for the yearly average price to top $500, the dollar has quite a retracing to do if we are to look for strengthening.Oh, well.

Labor  Statistics

The official unemployment rate is steady at 7.9%. Yes!  But, of course, that statistic is aided by the fact that more workers are no longer looking for work, thus aren’t part of the number.  Therefore, the “true” unemployment rate is 11.8% by one estimate.6  Crud.  There are many underemployed workers as well.  37% of college graduates who are working are in jobs not requiring more than a high school diploma. More crud.  And that’s bad for those without college degrees, too.  Forget this category.

Food  Prices

OK, let’s look at other factors, maybe we’ll find a reason for rising optimism.   Ah, food.  The price of wheat is starting to drop toward more normal levels after spiking last July-November thanks to the last year’s severe drought.8

-Grain-

But the overall picture, while not as bad as it appeared in August of last year still is not pretty according to the following: “yields and production of many field crops, particularly corn and soybeans, remain far below levels that would have been expected under more normal growing conditions. What had started out as a promising year for U.S. crop production, with favorable planting conditions supporting over the high planted acreage and expectations of record or near-record production, is seeing some of the driest and most unfavorable growing conditions in decades.”Not only that but, “’Corn is important,’ said Bill Lapp, president of Advanced Economic Solutions, a commodity and economics consultancy in Omaha. ‘In a normal year, corn is more than half of all the corps we produce in the U.S. So when we have a bad corn crops it affects virtually all food products that the average American consumes… next year, the price of vegetable oil will most likely increase. So will the price of wheat, rice, oat and barley.'”10   Rice is a major grain and it’s facing uncertainty because of an unexpectedly big increase in imports by China for which there are conflicting explanations.11,12  Moving right along.

-Beef-

Global beef prices may hit record highs this year due to a “lethargic world economy” and because beef production has been flat for the last six years.  We won’t be immune to rising prices in the U.S. because last year’s drought caused ranchers to reduce their herds which may have helped the supply last year, but means less beef this year.  If a summer drought returns, then we’ll expect more of the same.  However, even if more normal rainfall occurs, we’ll still be looking at up to 9% less beef production. Drought conditions still impact cattle feeding regions and heifers may be held back to help replenish downsized herds.13… Next

-Fish-

The New England Fishery Management Council agreed last week to “decreasing the overall quota of Gulf of Maine cod by 77 percent, and by 61 percent for Georges Bank cod, for fishing years 2013 to 2015…The cuts will take effect May 1.”  The 2012 interim action which reduced catch limits by 22% expires April 30.  The National Marine Fisheries Service denied a request for another.14  This is not to say that the outlook is necessarily bad for fish everywhere.  However, this won’t help.

Energy

Our gasoline price situation might be looking better for a while.  Canada is having trouble with the Keystone project as noted by:  “a 730-mile line called the Northern Gateway that would carry crude from landlocked Alberta to the Pacific port of Kitimat—is mired in political and public opposition, focused in the province of British Columbia.” However, we also have the following:  “The U.S., the destination for over 98% of Canadian crude exports, has been boosting its own output, making America’s future appetite for Canadian oil less certain.”15   So, we should be producing more of our own oil after all, which may help prices.  Of course, before we become elated, let’s remember that Iran continues its misbehaving.  That, plus the on-going Arab Spring (or Summer, Fall…) throws the uncertainty card into the mix which keeps Wall Street awake at night.

Natural gas production continues its increase.  November 2012’s total was 49.8% above that of September 2005, which was the low point over the last 16 years.16  The consensus seems to be that the increase will continue, helping our economic situation some.

Banks  and  Taxes

Banks are supposedly going to be more helpful in the lending markets.  This is essential for a recovery.  They also took some criticism at the World Economic Forum in Davos, Switzerland recently.17  While the focus was on many international banks; the pain has a way of spreading to people worldwide.

Meanwhile, President Obama has nominated Jacob (Jack) Lew to be Secretary of the Treasury.  He had the unfortunate task of taking over Citigroup’s Alternative Investments unit (CAI) in January 2008.  While he didn’t create the mess, many are wondering if he did anything at all to help.  The terrible mortgage bets at CAI and others parts of Citigroup led to a $45 billion bail-out.  “The greatest irony is that given Mr. Lew’s crisis-era resume, he bears a remarkable resemblance to the bankers who President Obama says created the financial crisis and deserve federal investigating.”18 

The new estimate for ten years of Obamacare is now $1,165 billion.  Add to that are the expected $45 billion in payment penalties by uninsured citizens and $130 billion in penalties paid by employers.19  Not included in this is the effect of any significant alien amnesty program.

Conclusion

I’ll start with this rosy outlook: “With Europe sliding into a recession and China’s economy slowing to a 7-8% GDP rate, the U.S. economy may be the strongest engine during the mid-cycle transition due to expanding domestic natural gas resources, manufacturing strength, available workers, easier credit and improving consumer confidence.”20

“Available workers” is a category no one will question.  The issue is how soon will they reap the benefits of this news: “Strong earnings reports…helped push the Dow Jones Industrial average to its eighth gain in nine sessions…DuPont, Verizon and Travelers Cos., three of the 30 stocks that make up the Dow, closed higher after reporting their financial results for the final quarter of 2012… Jack Ablin, chief investment officer at BMO Private Bank in Chicago, said traders have been encouraged… ‘Granted, we have diminished expectations, but companies are doing a decent job beating on the profit side…The U.S. has been pulling this wagon by itself for the last couple years, and now we’re facing some austerity measures.’”21  Tell us about austerity measures!

Improving consumer confidence?  Then where did this come from: “The (Consumer Confidence) Index now stands at 58.6 (1985=100), down from 66.7 in December. The Expectations Index declined to 59.5 from 68.1.22

All of us certainly hope Wall Street’s optimism will be vindicated somehow.  It’s just a little difficult when analyzing these factors.  And we also have the ominous reminder that as more money keeps being printed and if the economy does pick up some day, we have to be cognizant that inflation is waiting in this wings… Did that bubble just get bigger?

1 – Of course, not all qualify for medication.  Sensible companies look at the overall picture and don’t micromanage themselves into a frenzy.  Pioneer Investments issued a guide early in the last decade which examined the previous 73 years and gave one “good” reason per year which suggested investors should be wary and avoid the market.  Yet, its portfolio had outlasted all of the ups and downs occurring in those ensuing decades.
2– “Definition of ‘Triple Witching’
An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December.
This phenomenon is sometimes referred to as “freaky Friday”.
Investopedia explains ‘Triple Witching’
The final trading hour for that Friday is the hour known as triple witching. The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell. If you are a long-term investor, triple witching will have a minimal impact on you.  (www.investopedia.com)
3 – Adam Shell, USA Today, as reported in the Cincinnati Enquirer, 2/1/2013.  The article also gave comments from the CEO of U.S. Global Investors and a strategist at UBS.
4 – Daniel Bases and Wanfeng Zhou, Reuters, 2/1/2013
5http://www.nma.org
6 – Markos Kaminis, Seeking Alpha web site, 2/4/2013
7 – Annalyn Kurtz, www.economy.money.cnn.com, 1/28/2013
8www.futures.tradingcharts.com
9 – “U.S. Drought 2012: Farm and Food Impacts,” from www.ers.usda.gov
10 – Abby Elin, “New USDA Crop Report: Production Estimates Bad for Corn, www.abcnews.go.com, 8/10/2012
11 – This increase in spite of the claim by Concepcion Calpe, senior economist with the Food and Agriculture Organization of the UN in Rome, “The country does not appear to be facing rice shortages, as China’s production has been growing uninterruptedly since 2003, reaching levels above estimated consumption and resulting in bulging stocks.”  She said (lower) prices were the main reason for China’s increased imports. (www.ft.com, 11/27/2012)
12 – “Some analysts believe the buying spree is being driven by soaring demand from Chinese consumers.  They say that even though China has bolstered production for nine years in a row, it isn’t enough to feed its population… this could spark worries about whether there is enough of the staple to go around, keeping prices elevated.” (Carolyn Cui, Wall Street Journal, 1/8/2013)  Note:  According to the WSJ graph, China’s rice in storage is about 40% less than it was in 2002-03.  So, what is it? Lower prices [which will change], not enough for their people, or something up their sleeves?
13 – Annalyn Kurtz, quoting Rabobank which is a Dutch financial firm which focuses on agriculture , www.economy.money.cnn.com, 12/14/2012
14 – Jennifer Keefe, www.fosters.com (a service of the Foster Democrat), 2/3/2013
15 – Paul Vieira, “Canada Pipeline Hits Slippery Patch,” Wall Street Journal, 1/9/2013
16 – www.eia.gov
17 – “There have been plenty of negative headlines and investigations over the last year that show banking in a far harsher light… HSBC has been fined for allowing money-laundering and Standard Chartered has been penalized for dealing with Iran.  Even (CEO) Dimon’s own bank (JPMorgan Chase) has suffered an embarrassing $6 billion trading loss on complex derivatives.” (David McHugh, AP, Cincinnati Enquirer, 1/24/2013)
18Wall Street Journal, “Review and Outlook: Treasury Gets a Citibanker”, 1/28/2013
19 —  Alex Rogers, www.swampland.time.con, 2/5/2012
20 – TCW Funds 2012 Annual Report for TCW Relative Value Large Cap Fund, Management Discussions section.  In its discussion of TCW Value Opportunities Fund,  it said, “”According to economists at UBS, domestic energy production and price developments from sustained shale gas extraction could begin to boost U.S. annual real GDP growth by around 0.5% per annum over the next five years.  By way of comparison, economists have estimated that the information technology boom boosted U.S. annualized real growth by 1.6% per annum in the second half of the 1990’s.”
21 – Daniel Wagner, Associated Press, Cincinnati Enquirer, 1/23/2013
22www.conference-board.org, 1/29/2013

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