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Despite the performance of the Dow and S&P 500 in the first week of trading, Mark Hulbert writes that “hope is not a strategy”. In fact, looking back to 1896, when the Dow was up the first five days of January, it was up 70 per cent of the time the rest of the year and the average gain was 6.93 per cent. Whereas, when it was down in the first five days of the year, it was up 58 per cent for the rest of the year with an average gain of 6.2 per cent.
The January Barometer which argues that if the stock market is up in January, it will stay up the rest of the year and vice-versa. “Unlike the first five days indicator, the differences associated with the January Barometer turn out to be statistically significant. Yet even here there may be less than meets the eye. Notwithstanding the Barometer’s overall record, it was a big disappointment prior to 1940. Over the first four decades of the last century, in fact, your odds of making money in a given year were actually greater when January was a losing month than when it produced a gain.”
ECRI’s Imaginary Recession Is In Its Seventh Month (Advisor Perspectives)
ECRI’s weekly leading index (WLI) has been controversial ever since ECRI said the U.S. was falling into a recession back in 2011 and then saying the recession has begun last year. ECRI’s Lakshman Achuthan also said the business cycle peaked in July 2012. But the WLI is now at 128.3, from 126.6 last week and the WLI annualized growth indicator is up 5.1 per cent. In a new piece Doug Short of Advisor Perspectives writes:
“The Fiscal Cliff is behind us, although Debt Ceiling brawl is drawing closer. However, the Big Four Economic Indicators continue to show expansion with the exception of the lagging Real Manufacturing and Trade Sales report. But the more immediate indicator to watch is December Industrial Production, out next Wednesday, the 16th. The November data was a strong rebound after zigzagging lower from August to September. A reasonably good December number will further undermine ECRI’s claim that the US has been in a recession since July.
“ECRI can take some temporary solace in their use of the lagging Manufacturing and Trade Sales, which won’t include November data until the end of January. But the November strength exhibited by Personal Incomes and Industrial Production and the (steady albeit slow) growth in Nonfarm Employment certainly undermines their recession call. My take is that “recession” that ECRI says began in July has about as much substance as my imaginary friend, Bill Harris, when I was a three-year-old.”
PIMCO’s Mohamed El-Erian says the trillion dollar coin could work if it helped avoid “political brinkmanship” and forced Congress to “deal once and for all with the oddity of having to consider both annual budgets and disconnected debt limits”. But he warned that this also stands the chance of exacerbating Congressional discontent and could make the rest of the world think the U.S. had “lost its way”, thereby hitting stock, bonds and the U.S. dollar.
Gary Shilling’s Most Profitable Investment To Date (A. Gary Shilling)
Treasury bonds have been Gary Shilling’s best investment and he continues to favour them because a) economic growth is likely to be slow in coming years; b) the fed is determined to lower long term interest rates; c) deflation is likely; d) attractive to pension funds that are looking to match their long-term liabilities with similar assets; e) they are a safe haven; f) China’s efforts to the cool the economy will probably cause a hard landing; and g) central banks continue to purchase treasuries.
“Once again, we’re deliberately listing this theme first, not because of nostalgia, although it has worked for us for 31 years on balance, and has been our most profitable investment over those three decades. Instead, it’s because we expect further appreciation with 30- year Treasury bonds, and because so few other investors believe our forecast has any chance of being realised.”
Photo: A. Gary Shilling
Long only equity mutual funds saw inflows of $8.9 billion this week, the biggest weekly inflow seen since March 2000. Many analysts now expect a “great rotation” out of bonds and into equities in 2013.
But this week also saw strong inflows into bond funds.
Citi’s Tobias Levkovich expects such a great rotation. Bank of America’s Michael Hartnett writes that massive inflows and the bullish sentiment are contrary indicators, but don’t guarantee a correction. A correction would require a catalyst, but there needs to be a dip in January, without one he says “risk of a much larger correction later in the quarter grows”.