The Independent Market Observer

12/31/13 – What Will Be Different in 2014

December 31, 2013

2013 is over. There was a lot of good (have you looked at the stock market?) and a lot of bad (think Washington, DC). There were lots of highs—the stock market again—and lows, such as the EU’s decision to hit Cyprus depositors. Overall, it was a pretty typical year in many respects, although of course we get different highs and lows every year.

2014 will be different. 2013 started with angst and a broken budget; 2014 starts with a smoothly negotiated (if rather minimal) budget deal. 2013 started with worry about fiscal collapse and an exploding deficit; 2014 starts with the deficit projected to decline to below the growth rate of the economy. 2013 started with zero growth; 2014 starts with the most recent quarterly growth figures above 4 percent.

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12/30/13 – Housing Market Slows – A Healthy Development

December 30, 2013

One of the drivers of the current recovery has been the housing market. After prices dropped significantly during the financial crisis, they have since largely recovered (per the chart below). They remain below the previous peaks, but that is not a bad thing.

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12/27/13 Problems Get Solved – Annual Progress Report

December 27, 2013

I was reviewing the posts I made last December, and it occurred to me that many of the problems we were worrying about then have largely been solved, or at least are on their way there. I think we all have short memories and tend to look more at the now than at the recent past, so it’s worth highlighting some of the very real improvements that occurred in 2013.

The biggest relief, of course, was the successful passing of the date for the Mayan apocalypse. No doubt you were all as worried as I was about the impending end of the world, but, ultimately, my decision not to sell everything and head for the hills was vindicated. We are still here.

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12/26/13 – The Wolf of Wall Street – Recommended Book List

December 26, 2013

No, I have not seen the movie yet, although I hope to this week. I have, however, read the reviews, as well as an interview with the person at the center of the story, the perpetrator if you will. Sounds like quite a story.

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12/24/13 – Christmas Cheer

December 24, 2013

I have always loved Christmas. But as I grew older, as much as I loved it, I think I lost much of the spirit. Now that I have a four-year-old son—who is wrestling with the stress of being good under the eye of the “Elf on the Shelf,” eying presents under the tree, and baking cookies with his mom—I find myself recovering much of what I had lost. This is wonderful, but, as a father, I also find myself reaching deeper into the meaning of the holiday.

The idea of sacrifice is at the heart of both Judaism and Christianity, and the notion of a father sacrificing his son is fundamental. Christmas itself, where the Christ child is born into the world, is the start of just that sacrifice. I literally cannot fathom making that kind of sacrifice—of giving up my son. At the same time, I understand just how much I would sacrifice for him.

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12/23/13 – That ‘70s Show – How the Economy May Grow in the Next Decade

December 23, 2013

After writing about how growth could slow going forward, based on my own analysis and supported by several even more pessimistic analysts, notably Jeremy Grantham and Professor Robert Gordon of Northwestern, I have been spending some time thinking about how the argument is wrong.

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12/20/13 – Gratitudes for the Season

December 20, 2013

As I wind down into the Christmas week, I wanted to reflect on some of the things I’m grateful for.

Family Day

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12/19/13 – The Beginning of the End (of Fed Stimulus)

December 19, 2013

“This is the way the world ends

Not with a bang but a whimper.”

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12/18/13 – The Problem of Accounting

December 18, 2013

Accounting is commonly perceived as cut and dried. I once had dinner with an interior decorator, who, upon discovering I was in finance, said with some pity, “Well, you can still be creative, right?” My answer, of course, was that if we’re too creative, we go to jail. That pretty much ended the discussion (and got me in trouble on the way home).

My quip aside, accounting involves significant questions of judgment and adjustment. Take Enron, for example. The case was largely a matter of how the accountants reflected the business reality through the legal structure and financial statements. Although it was ultimately concluded that the statements didn’t reflect reality, both the internal financial managers and auditors agreed, at least initially, that the methods used were acceptable.

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12/17/13 Taper Tantrum, Phase 2

December 17, 2013

The last time that the Federal Reserve (Fed) was widely expected to start reducing, or “tapering,” its bond purchase program, earlier this fall, interest rates increased and the market tanked. Widely referred to as the “taper tantrum”—a term I wish that I had invented—the drop was quickly reversed when Fed officials came out and reassured the market that, in fact, they had no intentions of pulling back, ever. Really.

That was then. Since that time, the economy has shown improved growth, interest rates have ratcheted back down, and the stock market has recovered and powered up to new highs. With the recent good economic news—much higher levels of GDP growth than expected, higher employment figures and lower unemployment, and very positive business surveys, among other highlights—the Fed is at a point where a taper pretty much has to start soon. Maybe not this week, but soon. The budget deal in Washington also makes a taper more likely because the last reason for the Fed to continue its stimulus was worry about fiscal policy disruption.

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12/16/13 – How Much Has the Government Grown?

December 16, 2013

I got some interesting feedback the other day from a Commonwealth advisor who was commenting on a piece I’d written about the economic recovery. His point of view is fairly common and can be summarized as follows: “The fact is that the sheer size of government has doubled over the past 10 years.” He made other points, but they hinged on government growth being out of control. A fair point, if true, but before we get too far into it, I thought it would be useful to see how much government actually has grown.

Let’s look at employment first. We can see from the following chart that total government employment is up by 322,000, or 1.5 percent. Over the same time period, the U.S. population—a reasonable comparative metric—is up by 8.2 percent, so government employment has grown much less than population.

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12/13/13 – Right and Wrong

December 13, 2013

One of the things I do every day is look back at the previous day and think about what I could have done better. Not so much how I failed (although that occasionally comes up) but whether I did the best I could, and what I could do better.

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12/12/13 – Raising the Minimum Wage

December 12, 2013

I’ve been saying for some time that wage growth will be faster next year than this year, and, per the chart below, we can see that it is, in fact, accelerating. It certainly isn’t where we would like it to be, but the trend is in the right direction. Note also that this is in real dollars, reflecting actual gains in purchasing power and not inflation.

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12/11/13 – The Federal Budget Deal and 2014

December 11, 2013

I want to be excited about the new federal budget deal, I really do. I get it: it’s big news that we actually have an agreement—for two years even! We can look forward to an absence of catfights, reduced uncertainty, and less of all the good things that go with minimally responsible government.

And yet, I can’t help but feel depressed that such a minimal agreement warrants front-page news in both major national papers. What does this say about our governance? The other thing that worries me is the extensive caveats in those stories—how the deal may well not pass since the conservative Republican elements in the House are dead set against lifting the sequester spending cuts, while many of the more left-leaning Democrats are dead set against the spending limitations and letting extended unemployment benefits expire.

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12/10/13 – 2013 Vs. 2007: A Comparison

December 10, 2013

One of Commonwealth’s affiliated advisors, Tom Hine, sent in a question, basically asking, How does now compare with 2007? To quote him directly: “Many of us who are long-term optimists like myself need a dose of reality, because back in 2007/2008 many people felt the same way—yet clearly there were some flashing yellow lights!”

I couldn’t agree more. As I’ve written before, we tend to forget what actually happened very quickly, overweighting more recent experience simply because we remember it better. With that said, let’s look first at the real economy and then at the financial markets.

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12/9/13 – The Stock Market in 2014

December 9, 2013

I’ve been working on gathering my thoughts for the market in 2014. This is a very useful exercise, in that it forces us to really think about what goes into stock prices, what those assumptions should be, and how they interact.

There are three key variables here: the growth rate of the economy as a whole and the level and change in profit margins (which together will determine corporate earnings growth), and the level of price multiples (or how much investors will pay for a given level of earnings). The fourth variable, what happens in Washington, DC, factors in as well, of course, but that’s a subject for another day.

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12/6/2013 – Emerging Markets Worth a Closer Look

December 6, 2013

I’ve talked over and over about the importance of valuations in investing, and Peter Essele, CFA®, a portfolio manager in Commonwealth’s Asset Management group, does a great job of putting that idea to work with the following post. Thanks, Peter!

This year has been an interesting one for investors, especially those with a more global bent to their portfolios. As of yesterday’s close, the S&P 500 and MSCI Emerging Markets Index have returned approximately 26 percent and −3.9 percent, respectively, so far this year. That’s almost a 30-percent difference! To illustrate this, we put together the following chart, which shows the 12-month difference in returns between the S&P 500 and MSCI Emerging Markets over the last decade.

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12/6/13 – Ending the Year on a Good Note: Employment Up, Budget Deal Possible

December 6, 2013

Another surprisingly good economic stat came out today: Employment increased by 203,000 for November, higher than the expected 185,000. Unemployment decreased to 7 percent for the headline U-3 number, while the underemployment rate, the U-6, decreased by a full 0.6 percent to 13.2 percent.

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Market Thoughts for December 2013 Video

December 6, 2013

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12/5/13 – Better and Better for the Economy—But Stocks Aren’t Cheering

December 5, 2013

It’s been a very interesting couple of days for the economy and the markets. I’ve pointed out before that, in fact, the economy and the stock market are only loosely connected; good news for one isn’t necessarily good news for the other, and that is now being illustrated very well.

The other key point that we’re getting a much closer look at is the conflict between a recovering economy and the likelihood of continued Federal Reserve support. There is an implicit assumption in current market valuations, in my opinion, that we will get both revenue and EPS growth (which to some extent requires economic growth) and continued Fed support of lower interest rates (which to some extent requires economic weakness). You see the problem here.

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12/4/13 – The Pension System Starts to Stop

December 4, 2013

“If something cannot go on forever, it will stop.” — Herbert Stein

I’ve been using this quotation in speeches for years. Like several of Churchill’s, it is so wise in its generality that it just keeps suggesting itself.

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12/3/13 – More About Money: Chinese Currency Hits A Milestone

December 3, 2013

I spent a week or so recently writing about the problem of money, concluding with a discussion of the dollar’s reserve currency status. There, I noted that, in the next 10 years or so, the dollar would remain the dominant reserve but that other currencies, particularly the euro and the yuan, could also become major reserve currencies if they addressed certain shortcomings.

Per Bloomberg today, the yuan has passed the euro to become the second-most used trade finance currency. Use of the yuan was 8.66 percent in October, up from 1.89 percent in January 2012, while use of the euro dropped from 7.87 percent to 6.64 percent.

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12/2/13 – Cyber Monday Begins

December 2, 2013

I hope everyone had a great holiday. I certainly did, as my sister and her family hosted us for a wonderful Thanksgiving dinner and very fun weekend. Thank you, Beth and Kevin, and thank you, Jake, Jesse, and Max.

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