The Last Leg

“Good Sense is a Thing all need, few have, and none think they want.” – Benjamin Franklin, Poor Richard’s Almanack

Yes, it’s that time of year again. Time for the Santa Claus rally, time for opening presents, time for returning them. Time for thinking about New Year’s resolutions, like not blowing $500 on a year-long gym membership and then giving up after two visits. Time for the last, holiday editions of MarketWeek for 2014.

It’s also that time of the market cycle for equities, as evidenced by the crew at market channel CNBC. As its merry band tries to set a new record every week for the number of times they tell you the stock market is at all-time highs (I reckon it’s about 50-100 times a day), ask yourself this question: do you want to be buying things whose prices are at all-time highs, or at all-time lows?

Any normal person would respond with the former answer, but the stock market makes normal people do abnormal things. If by chance you were to stumble on a deserted, pristine beach with no trace of human visitation, human nature makes us wonder if it’s safe to go into the water. By contrast, seeing a packed, crowded beach makes us immediately assume the water is safe, though the truth is that is much more likely to be tainted with effluent. At least the sharks won’t get you, you may think, but sharks only kill about four people a year anyway. Compare that with toasters, which take about four hundred souls a year to the great beyond. Toilets injure close to 40,000. Maybe you’re worrying about the wrong things.

If you bought equities the last time the stock markets were making all-time highs every week, you’ve earned about 4.25% annually over the last eight years, which is less than what you could have made by buying ten-year treasury bonds at the same time. Of course, most people bailed out in 2009 and 2010, then began to creep back in 2012, so they’ve made next to nothing and most likely a lot less over the period.

That’s not to say equities are about to fall off the cliff next week. On the contrary, I think that there could be another ten percent left in this bull market before it gives up the ghost. When that comes I only wish I could say – it could be in six months or it could be in sixteen. Does Russia default? Do energy junk bonds start to crater? Does the public get equity mania again? I don’t know the sure answers to those possibilities, but I do know that the U.S. business cycle is getting old. It’s been over seven years since the last peak and cycles rarely last more than eight. I also know that the equity market rarely believes the cycle can end until the whole world knows it’s over, and that the financial economy is way, way ahead of the real economy.

They don’t ring a bell at the top or the bottom of markets, but usually there are some jingly sounds floating in the air notwithstanding. Increased volatility, for one, with the kind of ferocious snap-backs we had in October and December. It’s classic late-market behavior. Or the number of articles pompously informing us of the folly of timing the markets. The more you see of those, the more you know that time is running out; it just hasn’t run out yet.

I wish my readers a happy and safe New Year’s Eve!

The Economic Beat (in holiday time)

Which report did Wall Street focus on the most last week? Why, the best one of course. Third-quarter GDP – a period nearly three months behind us – was revised upward to an annualized, seasonally adjusted rate of 5.0%. Beware the spinmeisters, because the economy is not growing at 5%, one annualized, seasonally adjusted, rebound quarter notwithstanding. 2014 is going to come in at half that rate – or less.

The other reports were mostly short of estimates, on the weak side, and apply to this quarter. Eh, data schmata, it’s the second half of December so buy stocks and tell everyone how great everything must be.

The housing market is staggering into the end of 2014: existing home sales had a big monthly drop of 6.1% in November, with the year-on-year rate easing to 2.1%. It was a polar vortex month, though, so the unseasonably warm December might gain some of it back. According to federal agency data, prices of existing homes are up 4.5% over the last year; on a nominal basis, that’s in line with the very long term average. New home sales fell by 1.6% on the month, worse than it looked coming on the top of small downward revisions for the last three months. The year-on-year growth rate has fallen all the way to 1.6%.

New orders for durable goods fell by 0.7% (consensus was for a gain of 3.1%) and the year-on-year rate is virtually zero, at plus 0.3% (factor in inflation and units are negative). The big miss suggests a positive revision could be in store for next month, but so far the quarter is looking weak for this category.

Personal income rose by a better-than-expected 0.4%; the growth in real disposable income over the last year is 2.5%. Nominal consumer spending is up 4.0%, right in line with the 4% trendline of nominal GDP.

Weekly job claims were essentially unchanged. I don’t know why the adjusted number fell by 9,000, or why the previous week went unrevised when actual claims rose, but I read claims as being unchanged and if anything probably have risen on an adjusted basis, given that they rose as a percentage of workers on both an adjusted and unadjusted basis. It is what it is.

Next week is also holiday-shortened with a smattering of data, of which the ISM manufacturing survey on Friday is the most prominent. The Chicago PMI comes two days earlier, but since it has come under the ownership of a stock exchange it no longer has the same influence (or credibility). Other reports include Case-Shiller and consumer confidence on Tuesday, pending home sales on Wednesday and construction spending Friday.