2014 Views and Forecast

General overview:  The most influential force of 2013 was the Federal Reserve. They not only impact the U.S. economy and trading markets but the world as well. I would say there has never been an unelected entity that has wielded more clout than we have seen in 2013.

That will change in 2014. History has borne out that change happens radically and drastically with a newFederal Reservechief. It has not mattered what their bio reads, the first two years of a new Fed chief has always created volatility on many economic fronts. The plethora of problems confronting this 2014Federal Reserveis unprecedented. Astute, educated, experienced leaders rely on historic situations and seasoned characters for guidelines to make calculated formulated guesses. Well Yellen has no history of theFederal Reservebeing this radical in previous decades to rely on for helpful information. She will be a sightless pilot, flying in darkness, over unmapped territory.

The 2014 year will be the year theFederal Reservewill start to lose power starting with an erosion of creditability. The creditability will disintegrate internationally first as it will finally dawn on China that following U.S. protocol for running a democracy is akin to following Amelia Earhart to successfully circumnavigate the globe. People do not like losing money and U.S. Treasurys were the wrong place to be in 2013. China is still at the denial stage of the beating their Treasurys have experienced price wise. All of us know how far friendships extend when money losses mount. Woe to the U.S., another hostile enemy we have birthed, China!

The course theFederal Reservehas established with their quantitative easing is liberal. I would compare QE to a drinking fountain for our economy that is a fire hose. I predict the housing market will hit overdrive in 2014 and 2015. This means all forms of building will escalate until inflation will be spawned that will be like an amoeba on steroids multiplying. Real Estate prices will increase into rural areas from the metro areas. The government is all about politics and the ‘feel good’ warm and fuzziness of asset growth through inflated home prices garners votes. 2014 is an election year; don’t forget, so the 350 pound, 70-year-old trying to wear a bikini will be politically correct. This means the Congress will be giving grand illusions of beauty through tricks, smoke and mirrors, sleight of hand that would make Houdini appear like a little leaguer.

The stock market will be a source of funds for the real estate boom. Once the stock market turns red for just 2 consecutive quarters, monies will flee to buying a $200,000 house for $1,000,000. Has that song played before? Did we learn? I believe virtually every sector of the U.S. will experience double digit gains in housing prices, perhaps high double digit gains in isolated sectors. The timber industry will be the boom industry of the commodities. The surprise for 2014 will be the car industry; it will experience growing pains and contract muscular dystrophy. TheFederal Reservein late 2013 sold their lastGMholdings much like the giant bald eagle mother pushing its off spring out of the nest to fly on its own. This marks a key change in the metamorphosisthe Fedwill experience in 2014 from accommodating to abandoning.

View on the stock market:  Let’s examine some very revealing facts regarding stock market prices. I enjoy being a stock market historian as a phrase that inspires me is as follows: The person who does not study and heed history is doomed to repeat it.

My studies have scrutinized the last full 10 years of January 2004 through December 2013. Each year was analyzed for % decline and actual numerical decline. Extremes were seen in this 10 years that dictate study. First, 2013 had the least % correction of any of the 10 years at approximately 7.53 percent thus establishing a minimum comparison to use. The largest % correction was 2008 with a 49.77 percent loss inter year. This establishes a maximum percentage comparison to use which oddly enough represents a 7 fold difference in severity from maximum to minimum extreme, 49 versus 7. The 2008 point of decline exceeded 730 S&P cash points while the 2013 minimum pullback was a paltry 127 points. Dissecting the extremes to arrive at a means places some unique numbers to consider. The average % decline for those 10 years is 17.5 percent with an average S&P point decline of 228 points. An average point decline of 17.5 percent from 2013 highs places S&P prices at approximately 1525. The least correction for the last 10 years at 7.53 percent equates to a point decline of 138 placing S&P prices at approximately 1710. The greatest correction of the last 10 years, 49.77 percent equates to a point decline of 914 placing S&P prices at approximately 930, WOW!

Here are my predictions based on probabilities. A decline to 1710 in the S&P is above a 90% probability. A decline to the 1525 area is greater than a 50% probability. The interesting probability of a probe toward 900 actually is way above the public perception standing at 25%, alarming or at least it should be.

Enough number crunching, let’s look at the internals. My Cook Cumulative Tick indicator has the greatest divergence ever from where the current prices are trading. The second greatest divergence happened in early 2008 which preceded the 49.77 percent decline. Should the bulls worry? Yes! Secondly, we have gone 7 full months without a 30 S&P point decline day. This is an indicator I post in my daily ritual with horror, literally. The longer the intervals of the 30 point decline, the greater the point declines are. The summer of 1987 was devoid of a 30 point down day for months. When the October crash came we saw a 1 day drop that exceeded 20 percent. A 20 percent down day from the current levels places a one day loss of 360 S&P points. That makes a 30 point one day decline look like a flea having hiccups compared to a whale having a huge vomit.

My first prediction is that we will see a one day drop of at least 100 S&P points sometime in 2014. The 2008 debacle had a one week decline of over 250 S&P points in early October, so the history reality as recently as 6 years ago shows carnage does occur. I would also point out the April 2000 carnage rivals 1987 and 2008 on many comparisons with a  greater than a 100 point down day and a greater overall decline than 1987 and 2008. Oh, by the way, the year 2000 decline represented a change in Fed policy away from accommodation. Ponder that!

My second prediction is that we will see a minus tick exceeding -2000. A comparative perspective would be that 2008 never had a -2000 tick but 1987 did. When you experience that type of environment it is sheer panic, a CRASH with all capital letters. The greatest divergence of all time between the CCT and stock prices places the deteriorating tick into an avalanche potential which is why I think we will see -2000. If you have a weak heart, it will stop.

Bond Review:  The QE stimulus in 2013 resulted in the U.S. Treasurys being among the worst performing markets. China holds large positions in U.S. Treasurys which is a political nightmare for the United States. Normally when a market goes into disfavor it languishes there for many years. Gold, for example, spent decades in a heap of debris, despised by investors and disdained by traders. The highs we saw in bond prices in 2013 will be the highs for decades. Interest rates could surprise to the upside, IF theFederal Reservecontinues its position of inflating inflation. The oldFederal Reserveof decades ago fought inflation; thisFederal Reservethinks it is favorable. OK! If 50 mph is safe, 100 mph is safer, and 150 mph is safest. It does not work that way or has all the economic laws been repealed?

My first prediction is that the long bond prices will trade below the prices we saw before QE was introduced. Horrific losses on the Federal Reserve’s balance sheet, the cover-up will start to be smelled like a rotting corpse out of sight under a tarp.

My second prediction is that Janet Yellen will experience atmospheres so uncomfortable that she will become more hawkish than ever expected. A year that the politically motivatedFederal Reservewill be in a tough cave afraid to peek out, ‘Do not stifle this economy’ will be Congress’ election year mandate while inflation is wildly beyond her safest 150 mph speed. That gray hair will be blowing in the breeze as the car is maxed out speeding with no brakes. The intelligent will witness her quandary, the general public will not understand and Congress will not care once November passes.

2014 will be unique. A dry wood pile awaiting a match to flame uncontrollably. The fire will consume the stock bulls while the real estate bulls will have a party and roast marshmallows. The U. S. Treasuries will become more widely referred to as the Chinese treasuries as our Federal Reserve is mired in a huge balance sheet of red ink as China becomes more irate.

All in all the volatility in stocks will increase greatly. A year where traders will return to the S&P as the Federal Reserve reduces its influence and lose credibility. 2014 will be remembered as the year common sense returns to stock market prices while real estate flourishes.

Traders will be rewarded! Be ready to thrive!