2014 Fearless Forecasts – Looking Back and Gazing Ahead

Each year in my January newsletter (“News and Views”) I make a number of predictions about the stock market, the domestic economy and maybe a few key trends. At the same time, review the accuracy, or lack thereof, of my Fearless Forecasts from the prior year. So let’s first see how my prognostications from last year panned out before I make this year’s prognostications. The forecasts are in black and the actual results are in red.

  1. I think the broad markets will be only modestly higher in 2013. Put me down for an 8% gain for the Dow Jones Industrial Average, which means a closing price of 14,156. That, coincidentally, would be six points below the all time high of 14,164.53 from October 9, 2007. I think the S&P 500 will lag the Dow this year, limiting the S&P to a gain of only 6%, which means a closing price of 1,508. As usual, the market will not rise in a straight line. Indeed, there will likely be two corrections of between 5 – 10%. But again, investors who hold tight will be rewarded. I was right about the direction of the market, but not the magnitude. The DJIA finished up 26.5% and the S&P 500 ended up 29.6%. There were three corrections of between 5 – 10% (they were each around 6%). Buy and hold was definitely the way to go.
  2. I’m confident the Fed will leave short term rates unchanged for the entire year; they’ve already declared as much. I also believe that there will be no more “quantitative easing” plans as the risks of inflation outweigh the concerns about deflation. I think the yield on the 10-year Treasury will stay in a range of 1.50% – 2.00% and the 30-year bond will remain roughly 1.00% higher than the 10-year. Mixed result here. I was correct that the Fed would leave short term rates unchanged and that there would be no more QE. The 10-year Treasury broke above 2% in June, establishing a new trading range between 2.5% – 3.0%. The 30-year bond yield did indeed remain about 1% higher than the 10-year. 
  3. I think the value of the dollar will be lower by the end of the year, after finishing 2012 around 80. Countries all over the world are attempting to devalue their currency in order to bolster their exports and the U.S. is no exception. I expect the dollar index to trade between 73 – 83. I wasn’t too far off. The dollar finished the year right where it started, around 80, after trading as high as 85 and as low as 89 with a primary trading range between 79 and 83. 
  4. I think slower global economic growth this year will limit demand for West Texas Crude, thereby keeping the price down a bit. That being said, I think the price of WTIC will stay for much of the year between $80 – $100, although it wouldn’t surprise me to see it briefly drift as low as $70. This prediction was reasonably accurate as the price traded between $90 – $100 for much of the year, with a three month spike during the summer. There was very little downside movement.
  5. The price of gold has moved higher in each of the last 12 years, even as the rate of growth slowed a bit last year, and I’m confident it will go higher again this year. My upside target is about $1,850 per ounce while the downside is about $1,600. The primary trading range will probably be something like $1,650 – $1,750. I think the price of silver could test $40 per ounce again, but will likely remain in a tight trading range between $26 – $36. I don’t see silver going much lower than $25. Unfortunately, I could not have been more wrong with my predictions for the precious metals sector, which completely tanked last year, as the price of gold plunged almost 30%. Silver fared even worse, finishing the year down about 40% from the high. This one hurt.
  6. The housing market will continue to rally in 2013. Average prices will slowly rise throughout the year as inventory remains very tight. Interest rates will remain historically low, although they will likely be higher by the end of the year. This was mostly correct. The housing market, as represented by the HGX housing index rose 23% in the year. Housing starts increased 11%. New home sales rose 17% but existing home sales were flat. Prices in both new and existing markets rose nicely. Interest rates, although higher than 2012, did remain historically low in 2013.
  7. I think the average rate of GDP growth over the next four quarters will be around 2.0%, which is slightly lower than 2012. Q4 2012 may be the high water mark as the first half of 2013 could struggle to reach 1.75%. The average rate of growth of GDP for the last four quarters was exactly 2.0%, although the good news was that the rate of growth increased all four quarters, accelerating nicely in the second half of the year after a very laggard first half. 
  8. For the third year in a row, job growth, or the lack thereof, will continue to be one the most important domestic stories of the year. The unemployment rate will likely top out around 8.0% and will fall to only 7.5%. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 14%-15% range. The other big story will of course be the federal deficit. There was solid improvement on the employment front last year. The unemployment rate fell from a high of 7.9% to a low of 7.0% in November, while the U-6 fell from 14.4% to 12.7% over the same period. And the fight over the deficit caused a government shutdown. 

All in all, my forecasts were a bit of a mixed bag, but except for the horribly wrong forecast for gold  I wasn’t too far off last year. And remember, I have no formal training in economics. I’m just someone who closely observes what is happening in the world and tries to apply that knowledge to my investment management business. Anyway, last year is history now; it’s time to look forward, which means a new set of Fearless Forecasts. So without further ado, here we go:

  1. I think the broad markets will again finish higher in 2014. Put me down for a 12% gain for the Dow Jones Industrial Average, which means a closing price of 18,565. I think the S&P 500, with a greater emphasis on tech and growth, could do a little better, finishing up 14%, for a closing price of 2,106. As usual, the market will not rise in a straight line. I expect there will be two or three corrections of between 5 – 10%. One could even be worse than that. But investors who hold tight will be rewarded.
  2. For the second year in a row I believe the Fed will leave short term rates unchanged. I also think the Fed will reduce their bond buying program to at least $40 billion a month by year-end. If they economy is strong enough, they could have it down to zero. The yield on the 10-year Treasury will remain in a relatively tight range of 2.75% – 3.25%.
  3. For two years the dollar index has traded between 79 and 85 and closed the year around 81. Given the reduction in QE, a falling deficit and trade gap, I expect the dollar will be 5% higher, or about 85, by the end of the year.
  4. I think an improved global economy this year will increase demand for West Texas Crude, putting upward pressure on the price. On the other hand, increased supplies from shale drilling will be a drag on prices. Therefore, I expect the price for a barrel of oil to remain relatively range-bound in the $90s for most of the year, with a low of $85 and a high of $105.
  5. After 12 straight years of increases the price of gold fell last year, and fell hard, finishing around $1,200/oz. Longer term, meaning over the next few years, I think gold will move higher. Before that however I think gold will drop below support at $1,200, falling to as low as $1,000.The yearly high is tougher to judge, but I’ll estimate the high to be no better than $1,400.
  6. I expect the housing sector to continue to rally in 2014, albeit at a measured pace as slightly higher interest rates inhibit a faster rate of growth. The volume of new and existing home sales will rise by no more than 5% and average prices will gain slightly less as inventory rises.
  7. I think the average rate of GDP growth over the next four quarters will be around 3.0%, a marked increase from the prior four quarters. I expect the first two quarters to have a higher rate of growth than the second two.
  8. Real job growth, or the lack thereof, will continue to be one the most important domestic stories of the year. The headline unemployment rate could fall as low as 6%, and will likely be no higher than 7%. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 12.5%-13.5% range. The bigger problem is the dismal labor participation rate, which has fallen to a thirty-five year low of 62.8. That measure must improve in 2014. 
  9. Finally, I don’t believe the mid-term elections will do much to change the political landscape. Congress will likely remain divided. I do expect the The Tea Party to be marginalized as the electorate realizes that a hyper-polarized Congress cannot govern at all.

More on Gold

For those of you new to my writings you may be unaware that I’ve been bullish on investing in gold since 2001 when the price was only about $270/oz. In fact, on my first appearance on the Fox News channel in December 2002 (you can view the clip, and all my appearances in the WAM in the Media section of my website: www.waminvest.com), one of my recommendations was Newmont Mining, then trading for $29.34. Today, it’s $57.10 and has been paying dividends for years. For more than a decade I’ve been recommending that my readers buy gold. I starting buying silver about four years ago. I’ve put my money, and that of my clients, where my mouth is as I own a number of gold mining stocks (including Newmont which I’ve never sold), mutual funds and ETFs. In fact, I’d say my clients have had a 10% allocation to gold and silver for years. So I’m no newcomer to this sector play. 

Thanks to the actions of the Federal Reserve I’m more convinced than ever that the prices of gold and silver will continue to rise. It’s reasonable to think that sometime next year the price of gold will surpass $2,000 and silver will be north of $50 as our government, and by extension the Fed, lead us down a torturous path of monetary ruin. Yes, all the quantitative easing policies have helped to prop up the stock market. But while that’s temporarily pleasing, those same policies are likely just inflating the next big bubble that will invariably pop, causing even greater harm than the weak economy they’re purported to stimulate.

Beware the free lunch. Everything that goes up must invariably come down. The same holds true for economic cycles. Busts always follow booms. Recessions clear out the weak and the dying businesses, just like a fire clears out the dead brush in a forest. As long as we (and by that I mean the Fed and our government) plead for useless Federal intervention rather than accept the pain that is normal in any down economic cycle, the future consequences are likely more dire. I’m keeping my gold.

QE3

About 30 minutes ago Fed Chairman Ben Bernanke, as expected, announced another round of quantitative easing (QE3) in a futile attempt to stimulate our moribund economy. This is simply throwing good money ($40 billion per month) after bad. In addition to the aforementioned bond buying program he guaranteed that rates will remain exceptionally low until at least 2015. While this is great for borrowers, it is punitive for the elderly and those living on fixed incomes. Worse, it will likely have little or no affect on the economy in the short run and will undoubtedly add to the growing fiscal crisis that we’re facing. The government, and by extention the Fed, should cease in it’s fruitless efforts to contravene market forces and allow the economy and the stock market to ebb and flow according to their normal market cycles. While the stock market liked the move today, which is good for me and my clients, especially those of us holding gold, I worry about the long term consequences.

Revisiting My 2012 Fearless Forecasts

These were the predictions that I made in the January 19 edition of my monthly newsletter, “News and Views”. All in all, they aren’t too bad after seven months. And you’ll notice that I predicted the Giants would beat the Patriots in the Super Bowl. Got that one dead right.

  1. I think the broad markets will be up in 2012. Put me down for a 10% gain for the Dow Jones Industrial Average, which will finish the year around 13,440. As usual, it won’t be a straight line to get there; there will likely be three or four corrections of at least 5% and up to as much as 15%. But investors who hold tight will be rewarded.
  2. Clearly the Fed will leave short term rates unchanged for the entire year; they’ve already declared as much. I also believe that there will be no new “quantitative easing” plans as the economy improves organically. I think the yield on the 10-year Treasury will stay in a range of 1.75% – 2.50% and the 30-year bond will hold at roughly 1.00% higher than the 10-year. Short rates will likely continue to hover around zero.
  3. Forecasting the direction of the dollar is tough because as bad as things here have been, economies around the world are much worse. So much depends on what happens in the ECU and what happens domestically as our elected officials debate tax policy. Therefore I’m going to forecast, like last year, that the dollar index will trade in a relatively narrow range for most of the year at 75-85.  
  4. The price of West Texas Crude is no longer simply a factor of supply and demand. It also trades on the health of the global economy, sentiment and the relative value of the dollar. That being said, I think the price of WTIC will stay for much of the year between $90 – $110, with outer boundaries of $80 and $120, unless there is a strike on Iran, at which time oil prices could briefly spike to $150.  
  5. The price of gold has moved higher in each of the last 11 years and I’m confident it will do so again this year. My upside target is about $2,000 per ounce while the downside is about $1,450. The primary trading range will probably be something like $1,600 – $1,850. I think the price of silver could test $50 per ounce again while it’s downside is probably around $26.  
  6. The housing market will continue to suffer in 2012. Average prices will remain depressed thanks to foreclosures and short sales. Even historically low rates won’t move this market as only consumes with pristine credit looking to buy conforming homes will be offered mortgages. The jumbo market remains effectively closed.  
  7. I think the average rate of GDP growth over the next four quarters will be around 2.5%, which is better than 2011.  
  8. Jobs will continue to be one the most important domestic stories of the year. The unemployment rate will likely top out around 8.7% to 10.2% before falling, at best, to around 9% by the end of the year. 9.5% might be the best we get. The U-6 measure for unemployment, a more accurate gauge of the true unemployment situation, will likely remain in the 16%-17% range.  
  9. I believe President Obama will defeat Mitt Romney in a relatively close election as a divided GOP is unable to coalesce behind Romney. The Tea Party is marginalized and the Senate remains in Republican control. Fiscal austerity, job creation and tax policy are the main debate points. The electorate forces Obama away from class warfare and back to the middle (ok, that’s my wishful thinking).  
  10. There will be a military strike on Iran by some nation. There will be more unrest in Russia as the population rises against Putin. There will be more violent weather this year, continuing the carnage from 2011. Europe will continue to push their fiscal problems into the future, offering palliative band aid solutions rather than applying the tourniquet. And the Giants will surprise everyone and beat the Patriots again in the Super Bowl (ok, more wishful thinking).

Gold Moving

The price of gold is quietly rising. After peaking last September at over $1,900/oz, the price steadily declined to as low as around $1,534/oz (support level) a few times this year, most recently in May. Twice since then the price has rallied to around $1,635 or so (resistance level). Right now, August futures are around $1,622. So once again gold seems to be heading toward resistance. Should it break through this time, the next resistance level will be at about $1,680. My money is that the price moves higher.

Concurrent with the increase in the price of gold is the even stealthier increase in the price of silver. After falling to a low of around $16.25 in late June, the price of August futures has moved a bit higher, to $28.07. With a little push, the price could attempt to breach resistance at $30/oz.

Do You Own Gold?

For about a decade I’ve been advocating buying gold related securities (stocks, ETF’s and mutual funds). In fact, I suggested buying Newmont Mining (NEM) on my very first appearance on Fox News back in December 2002. I’ve been writing about the benefits of owning gold in my monthly newsletter “News and Views” almost since I started it in August 2003. I put my money where my mouth is as I have a reasonable percentage of my clients’ money in gold and we’ve done quite well over the past decade. The last nine months have been a bit of a struggle as the price has fallen in step with the increase in the value of the dollar. Many investors have fled the shiny metal. Not me. I’m convinced that the price of gold will rise again and reward those with faith and patience. An investment in gold is portfolio insurance and is a hedge against the ultimate debasement of fiat currency. The decade long bull market in gold is far from over.