Ho- Ho – Ho and What’s Next in 2014

Is the Congressional Budget deal the news that the Fed has been waiting for to begin to taper their bond buying purchases? Dallas Federal Reserve Governor Richard Fisher has been out in front leading the charge that Congress is not doing enough to support the economy and that the Fed cannot go it alone. Pressure on stocks this week has been all about the Taper.  The following is from a speech by Richard Fisher of the Dallas Fed on  12/9/13.

In my view, the Federal Reserve has supplied more than sufficient liquidity to fuel economic recovery above and beyond a reduction of unemployment from its current level of 7 percent. As I just said, money is cheap and liquidity is abundant. Indeed, it is coursing over the gunwales of the ship of our economy, placing us at risk of becoming submerged in financial shenanigans rather than in conducting business based on fundamentals.

I used to say that the United States was the best-looking horse in the global glue factory. Now, I firmly believe we are the most fit stallion or filly on the global racetrack: Our companies are the most financially prepared and most productively operated they have been at any time during the nearly four decades since I graduated from business school. What is holding them back is not the cost or the availability of credit and finance. What is holding them back is fiscal and regulatory policy that is, at best, uncertain, and at worst, counterproductive.

Against that background, I believe that the current program of purchasing $85 billion per month in U.S. Treasuries and mortgage-backed securities comes at a cost that far exceeds its purported benefits. 

The calendar is very important to Wall Street. The flow of money has its own heart beat. Money managers are influenced by the calendar for various reasons. The most relevant to 2013’s calendar close may be their own compensation. In late 2013 money managers may choose to protect gains in a sharply rising stock market as to protect bonus money allocated to them based on performance. The turn in the calendar in 2014 may entice managers to raise cash levels early on in the year as to not suffer any outsized losses at the start of 2014. A large loss early in 2014 would make for a tough slog all year. However, missing out on some upside early on in the New Year would be far easier to make up for on the performance side. Always keep an eye on the calendar. Seminal changes tend to take place at the turn of the year.

Bonds may be the story in 2014.  We have watched the yield on the 10 year US Treasury with great interest in the last few months. Taper Talk has led the yield on the 10 year to rise towards the psychologically important 3% level. The 10 year has an outsized influence on the economy as mortgages are predicated on its yield and the Fed will be loath to see a yield north of 3%. A higher yield may slow the housing market and the economy. Can the economy continue to grow with a +3% yield on the 10 year? We may find out in 2014. As of right now most money managers believe that the 10 year will yield between 3.20% and 3.50% by the end of 2014. We are currently at a 2.87% level. Rates above 2.8% have put pressure on stock prices. Watch the 10 year.

Seasonality trends have not worked very well in 2013 but here is a final word on seasonality in 2013 by way of Arthur Cashin and his daily letter.

WSJ’s Steven Russolillo in Thursday’s Morning MoneyBeat:

 Don’t Fret About the Early December Weakness: The bulk of the December rally typically occurs in the final 10 trading days of a year, a trend that bodes well considering the Dow is down 1.5% this month. Historically the Dow is flat, on average, in the first two weeks of December. It then averages a 1.5% gain in the final 10 trading days of the month.

 Santa Claus Is Good for Stocks: The Dow has risen in the five days before Christmas 65% of the time, including 10 of the past 12 years, averaging a 0.5% gain. The last five days of the year are typically even better for stocks: The Dow has risen 79% throughout this timeframe, averaging a 1.2% gain.

We expect the market to have gains again in 2014 but there is room for a correction along the way which would help consolidate the market’s recent gains. The market is ripe for a correction as this current bull market is now over 4 years old. Any push above 3% on the 10 year may the event that causes it. The internals of the market have eroded a bit as small caps have begun to lag the broader market, margin debt is striking at highs not seen since 2007 and short interest is hitting lows not seen since that peak.

Happy Holidays and Merry Christmas!!

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear. – Nelson Mandela

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.


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