The Edmond Sun


January 25, 2014

THE ASTUTE INVESTOR: 2014: Play it again Sam

EDMOND — “Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought,” said economist Rudi Dornbusch.

Call me old-fashioned but I’m just not buying the “everything is better” story. 2014 will be full of surprises and even more challenging than 2013. This bull market is getting pretty old and nothing goes straight up forever. During the past 110 years, except for the unusual decades of the 1920s and 1990s, a bear market has come along an average of every 4.4 years. The last one began December 2007 — six years ago. You know this thing is headed south at some point. You just don’t know when.

Having said that, it now looks like the next slowdown for the economy and markets likely will take place in late 2014 or 2015. As much as I hate the Fed’s quantitative easing, it has probably bought another positive year for the stock market and risk assets, but at a terrible cost in the future. In many ways, faith in the Federal Reserve today is roughly equivalent to faith in the words “dot com” in 1999. Be careful.

For now, it’s all about earnings. S&P recently posted an update to its 2014 EPS (earnings per share) forecast. The forecast for 2014 as-reported earnings was $106 in late December. Now it’s about $120 — up 13 percent from the previous forecast just a few weeks ago and up 20 percent versus the 2013 estimate of $99.42.

If the forecasters are right, then the P/E (price/earnings) ratio at the end of 2014 will be in the neighborhood of 15, less than the long-term average and down considerably from today. This can only be described as a bullish number.

This type of news normally would point to prosperity across the real economy and call for a celebration — but take heed: Prices do not always reflect reality, and analysts’ expectations consistently tend to overstate actual earnings at tops. They also tend to be too bearish at market bottoms. Basically, analysts tend to forecast for the near future more of what has happened in the recent past. At turning points they really miss the boat.

So what’s in store for the markets and the economy in 2014? Nobody knows for sure, but this is my annual stab at it. While I am quite concerned about the next major market downturn, I don’t think 2014 is it. But if the volatility and uncertainly of 2013 bothered you, 2014 will drive you crazy. Here are my predictions:

• No. 1: I think the market will see a 10 percent correction sometime this year, probably before summer, but recover to finish the year up 8 percent. That would put the Dow around 18,000 and the S&P 500 around 2,000 sometime during the year. Even a correction to 1,700 on the S&P, the current 200-day moving average, would only be an 8 percent correction.

• No. 2: Interest rates on bonds will rise, but not substantially.  That means no bond market crash - yet.  Rates on the 10-year Treasury bond will range between 2.8 and 3.8 percent.

• No. 3: Gold is not dead, but certainly on life support. Gold likely will have a short term rebound to $1,400 before falling to $1,000. Sorry gold bugs.

• No. 4: Barring a big blow-up in the Middle East, oil will trade between $80 and $100 a barrel but will trade more toward $80 for much of the year on slowing global demand, increased supply and easing tensions with Iran. When, not if, the real estate bubble in China bursts, oil could fall even further.

• No. 5: Despite fear of a collapsing U.S. dollar, the dollar actually will rise in value against most other currencies as other countries try to devalue their currencies to make their exports cheaper. This is the 21st century version of trade wars.

• No. 6: U.S. GDP growth is likely to slow in the first quarter as consumer spending slows and the reality of disappointing retails sales hits home. The Federal Reserve and new Fed Chairman Janet Yellen will panic and crank up the printing presses again to slow the current tapering process of reducing bond purchases.

• No. 7: U.S. demographics will continue to be a drag on economic growth and consumer spending as the baby-boomers on average are now past peak spending years and are beginning to spend less, save more and reduce debt. This trend will be in place for at least the next decade.

• No. 8: Forget about employment. The news will always be bad. At this stage of the economic cycle, we should be generating a robust 400,000 jobs a month, not a paltry 200,000. Still, that’s better than 100,000 a month, or none. Yes, we may grind down to 6 percent unemployment, but that will be just because more people gave up looking, not because they got a job. The employment participation rate, the lowest since the ’70s at 62.5 percent, will not change in any significant amount in 2014.

I still think there is a major crash coming, but it is not likely this year. The most likely catalyst for the next crash will be global triggers in major fault-lines like southern Europe and China. China is the next major domino to fall, but trouble in southern Europe and a fall-off in U.S. real estate could add to the problems.

So what should you do with your investments this year? My advice is to tread very carefully and get defensive later in the year if the Dow gets near 18,000. Take advantage of the move up this year and be prepared to protect yourself when the time comes … and I think that is coming sooner rather than later. Thanks for reading.

NICK MASSEY is a financial adviser and President of Householder Group Financial Advisors in Edmond. Massey can be reached at Securities offered through LPL Financial, member FINRA/SIPC.

Text Only
  • earth day 7.jpg Central community learns about water conservation

    Edmond residents know about rain that falls from their roofs after a storm. Some may not know what kind of important role it plays in the nation’s water supply.
    Tim Tillman, the University of Central Oklahoma’s sustainability coordinator, said UCO has a tradition of innovation in sustainable practices. Tillman said Earth Day, first brought to the campus more than 20 years ago, began that tradition.
    During Tuesday’s Earth Day Fair, Jason Summers, a Coca-Cola account manager for on-premise sales, was giving away rain barrels and educating members of the Central Oklahoma community about the benefits of rain barrels.

    April 22, 2014 3 Photos

  • pic 2.JPG Energy secretary touts CNG fleet conversion

    Oklahoma Secretary of Energy and Environment Michael Teague said the state is leading the way in converting its fleet of vehicles to run on compressed natural gas.
    And, he adds, the state is working to get federal officials engaged in moving its fleet of vehicles in Oklahoma to use CNG.
    Teague made those statements Tuesday during a visit to Champion CNG, 13915 N. Harvey Ave. in Edmond. The visit also coincided with Earth Day.

    April 22, 2014 1 Photo

  • Do White Castle prices tell us anything about the minimum wage?

    The paper looked at how many delicious steamed sliders the minimum wage has been able to purchase over time. The point is that as it notes, in 1981, the $3.35 minimum could buy a whole dozen. Today, at $7.25, it could purchase just 10.

    April 22, 2014

  • Amber waves turning gray as farms lose younger generation

    Jerry Pfeiffer was thrilled when his 25-year-old son Kelsey announced plans to return to the family’s farm in Orlando.

    April 21, 2014

  • Jolley says Oklahoma common sense needed in Congress

    The conservative values that persuaded voters to elect state Sen. Clark Jolley to the state Legislature 10 years ago have not changed, he said. Jolley will bring the same values to Washington, D.C., if voters elect him to the Congressional 5th District, he said.
    More people today are moving to Oklahoma from Texas than vice versa, Jolley said. State government is solving problems, he added. So what the federal government needs is a lot of Oklahoma common sense solutions, said Jolley, R-Edmond.

    April 21, 2014

  • Edmond up 15 percent in sales tax revenue

    City sales tax receipts for April continued a positive with an increase of 6.03 percent over the same period two years ago, City Manager Larry Stevens said last week.
    The amount received in April 2014 represents sales tax collections from the last half of the month of February and the first half of March according to the office of City Finance Director Ross VanderHamm.

    April 21, 2014

  • Smartphone kill switches are coming

    Smartphones need kill switches. It's a relatively easy solution to the pricey (and irritating) problem of smartphone theft. But who would have thought that the big carriers would team up with Apple, Google, Microsoft, Nokia, Samsung and lots of other manufacturers to voluntarily begin adding the technology by July 2015? The cooperative spirit! It makes so much sense!

    April 19, 2014

  • Biggest student loan profits come from grad students

    This week, the Congressional Budget Office projected that the federal government would earn roughly $127 billion from student lending during the next 10 years.

    April 19, 2014

  • Kaiser joins Thunder ownership group

    Tulsa businessman George B. Kaiser has been approved by the NBA Board of Governors as a new partner in The Professional Basketball Club LLC, which owns the Oklahoma City Thunder. Thunder Chairman and CEO Clayton I. Bennett made the announcement Friday. Kaiser is purchasing the ownership interest of Tom L. Ward.
    “We are honored to welcome George Kaiser as a member of the ownership group of the Oklahoma City Thunder,” Bennett said. “George is a well-respected and important Oklahoma business leader, as well as one of the state and nation’s top philanthropists. His commitment to successful business and community leadership is in true alignment with that of the Thunder.
    “I also appreciate the commitment and leadership provided by Tom Ward as a member of our ownership group from the beginning,” Bennett added.

    April 18, 2014

  • Food Bank’s Leadership Council applications now available

    The Regional Food Bank of Oklahoma invites young professionals to submit applications for the nonprofit’s first-ever Leadership Council. The Leadership Council connects young professionals interested in getting involved in their community and state through engagement with the Regional Food Bank of Oklahoma. These dedicated individuals, aged 24 to 35, will volunteer their time and creativity to raise awareness about the issue of hunger and increase the visibility of the Regional Food Bank and its mission of “Fighting Hunger … Feeding Hope” in Oklahoma.

    April 18, 2014