Pay Attention To The January Effect - 2014 Not Looking Good
I'm watching how the major U.S. markets perform this month which may again signal their direction for the year. The January Effect has been a fairly good market predictor, as the 14 Januarys since 1970 with the S&P 500 finishing at least 3.75% higher resulted in a higher year-end every time. In fact, 25 years out of 28 since 1940 with +3.75% January gains ended the year with a higher S&P.
If this were just coincidence you would think an efficient market would have traded ahead by now, thereby ending its apparent reliability. Reasons behind this trend continuing are that tax sensitive investors crystallize gains and losses by selling stocks before year-end, often bought back a month later. Year-end bonuses mean that many are flush with cash in January, when considering retirement plan contributions and new investments. Earnings Season full-year reports flow in January, also showing how good or bad the holiday selling season was, and providing forward estimates.
Companies often understate guidance for that stock price bump as Better Than Expected sales and earnings are reported. If a Meet looks likely, many will even lower guidance mid-quarter to make sure they get that Beat. Analysts factor this in, creating huge surprises and panic selling on even a minor Miss. Look at Best Buy's (NYSE:BBY) big turnaround last year, quadrupling from ~$11 to ~$45. Last week BBY got killed after reporting slightly down holiday sales, -$13.10/share or -35% from $37.57 to now $24.47. We wait to see if profit margins/earnings were sacrificed to get sales/market share.
So how is this major-market predictor looking for 2014, as we go into the last week of January? While there's still time to catch-up, it's not looking anything like a repeat of 2013: S&P 500 +29.6% from 1,426.19 to 1,848.36, Dow Jones Industrials +26.5% from 13,104.14 to 16,576.66, and NASDAQ Composite +38.3% from 3,019.51 to 4,176.59. The S&P was also up 13.4% in 2012.
You might say last year was an anomaly, but in our May 22, 2013 article, Follow The Money Flows-Or Lead?, we questioned the Sell In May And Go Away crowd's rationale; even after the market's +20% move from November 2012. Instead of repeating recent summer sell-offs, examples from Dow Theory to Buffett values were shown as why 2013 might be-and was-different, stating that it actually felt more like the mid-1990's which had several hot summer rallies.
However the odds of a string of three double-digit years in a row are low, and forget about two +30% years. Even the most optimistic recognize that at least a significant pullback is likely near. Without a strong S&P 500 finish this month, I doubt we'll even see the mediocre single-digit gains that many analysts are calling for this year. For me, more cash and defensive Hard Assets look timely.
For January 2013: the S&P was +5.0% from 1426.19 to 1498.11, the Dow +5.8% from 13,104.14 to 13,860.58, and NASDAQ +4.1% from 3,019.51 to 3,142.13. For January 2014 to yesterday's close: S&P -0.25% from 1,848.36 to 1843.80, Dow -0.98% from 16,576.66 to 16,414.44, and NASDAQ +1.18% from 4,176.59 to 4,225.76. So far it's looking flat to down for the major U.S. markets.
There Absolutely Is Inflation - Repackaged & Renamed Shrinkflation
Inflation is a general rise in prices, while Deflation is the opposite. Inflation reduces buying power which hurts the economy as we can't buy as much. This usually results from excessive money printing with more cash in circulation that competes for goods, pushing prices higher. If you believe the government's stats that claim there's no real inflation, I'm going to convince you otherwise.
Regardless of the Taper Talk, governments continue printing huge amounts of currency to support a weak economy, resulting in unsustainably high spending and debt levels. This has not trickled down to the real economy, which is still so fragile that if the money tap is turned off they know we're headed into another recession, or worse. This only works as long as interest rates and inflation stay down.
If there is no real inflation then your standard of living should not have changed. Unless you lost your job, which many have, you should be able to buy about the same amount of stuff. The 2013 Consumer Price Index (NYSEARCA:CPI) of 1.5% says so, and certainly doesn't indicate any meaningful inflation threat. Then why does it seem like we can only buy less now and that there is inflation?
The CPI is based on a basket of hundreds of consumer goods and services. Price changes are factored in, but the CPI does not usually reflect product resizing. Most don't notice that everything actually costs more today, as you are paying the same for less. That's what they want, it's called Shrinkflation. This helps companies maintain profit margins as commodity prices rise, and governments continue to claim no inflation to avoid higher interest rates and higher pension payments-indexed to the CPI.
Getting less of an item for the same price is no different than raising the price, except that you now have to buy it more often. This trick, really a lie, seems like a monthly ritual for some products in an attempt to maintain key price points, knowing that we have neither the time nor energy to keep up on all the unit value shopping math. Here is just a small sample observed at my grocery store:
Weights of family size bags of potato chips often vary up to 33% at usually the same price point. The bag size stays the same and most don't notice there's fewer chips because of extra packaging air, and with the weight hidden underneath. My potato chips value rule of thumb is a penny per gram which seems to work for several food products for some reason. Chips are a metaphor for hidden inflation.
Cereal weights dropped ~15% even as prices rose, to pass on higher grain costs. When looking at historic bread prices, it took 40-years from 1930-1970 for a loaf of bread to go from 9-25 cents. In less than a decade bread has gone up more, tripling from around $1 to $3/loaf. Grain inflation is further revealed through the 33% shrinkflation of an average bread loaf dropping from 675g to 450g.
Sugar to dairy costs have driven all treats higher in price-down in size. You may have noticed candy bar sizes have dropped 10-15%, and family size ice cream has dropped 25% from 2L to 1.89L to 1.5L but sold at the same $2.99. Compared to the old 2L ice cream this works out to $3.99 or +33% more.
Inflation is more obvious with raw meat, fruit and vegetables. Many must be finding it hard to afford even the smaller bags of apples or potatoes, as floor space devoted to single-size fresh foods keeps growing. I'm not talking about exotic foods, I paid $4 for one green pepper and one tomato recently. Heads of lettuce were going up so much they had to-and did-figure out how to shrink it.
Core CPI itself is a form of shrinkflation as it excludes volatile food and energy prices. This makes no sense, as everyone needs food and energy, which always consumes a significant portion of our income. Name any grocery store item and it has gone up in price, down in size, or both recently. Not just food, paper towel manufacturers advertise 25% thicker rolls while reducing the number of sheets. Toilet paper sheets have dropped from 280 to 140, now offering higher priced double-rolls of 280 sheets.
They keep claiming no inflation but it's significant and everywhere. Since the recession most home and auto insurance rates increased ~50% as regular underwriting losses were harder to offset with bond or stock market gains. Gasoline, furnace oil, power, water and cable bills are up around the same amount. With the way auto repairs and parts like tires keep going up it's no wonder why many dealers don't bother showing a car's price anymore, instead advertising just the financing cost per week.
I'm concerned about a stock market driven to new highs based on earnings without meaningful revenue growth. Cost cuts and efficiencies only go so far, profits are not sustainable without higher top-line sales. Recent P/E Multiple expansion may contract again soon as investors lose patience over the lack of real growth. The Main Street economy may play catch-up to Wall Street's rosy predictions, but where's the evidence? GDP, employment, income, spending and debt levels all still look anaemic.
Gold & Uranium
We haven't seen 1970s style price inflation yet because all the trillions of stimulus dollars, euros and yen have mostly stayed with the banks. With stock markets now higher and the economy seemingly improving, the government's next step will be to get the banks loaning more. A decade ago easy mortgages drove housing prices and easy credit cards drove consumer spending. I'm not saying they will be as reckless this time, just that lending drives currency circulation which creates inflation.
Much of the inflation shocks of the 1970s resulted from skyrocketing oil prices, from a few dollars to $40/barrel. Oil is such a major input cost that it drives the price of virtually everything higher. Also, the U.S. moved off the Gold Standard, allowing the dollar printing presses to accelerate unchecked. By 1980 inflation hit 14%, mortgage rates soared to 20%, and there was double-digit unemployment.
The good news is that investors also have places to hide, to avoid the ravages of inflation. Holding physical gold is the most obvious, time tested and safe. Frequent traders may find so-called paper-gold ETFs more practical, like the SPDR Gold Trust (NYSEARCA:GLD). I focus more on silver and iShares Silver Trust (NYSEARCA:SLV), as silver is also considered real money while levered to the price of gold.
Platinum, Palladium and other precious metals (even diamonds) are also hard assets that may provide some inflation protection. However, their value is more closely tied to the economy and industrial demand, whereas gold and silver may provide a better economic and dollar hedge. The dollar left the Gold Standard in 1971 at $35/oz. and by 1980 gold hit new all-time highs then of $850/oz..
Massive expansion of the money supply is the reason why gold skyrocketed from $260/oz. in 2001 to over $1,900/oz. in September 2011. The price of everything shot up significantly as the dollar lost purchasing power, and the price of gold more than kept up. However, nothing goes straight up without periodic corrections and gold fell -28% in 2013, ending its streak of 12 consecutive higher years.
Gold is now $1,240/oz. which is around the average producers all-in cost per ounce. On the way down last Spring we wrote that gold should find support at around $1,200/oz. and did last July. Gold then bounced to around $1,400/oz. as many proclaimed gold's bottom was in, supporting this with technical charts of a bullish reverse Head & Shoulder (H&S) pattern. Our October 23 article, Gold: Rally Or Retest $1,200; 35 Stocks For Your Bottom Fish Radar, shows this but also points out a bearish H&S gold chart and that gold may not be-and wasn't-done testing its lows.
The Fed would love to taper talk gold lower and will try, but the longer gold stays above $1,200/oz. the more likely it will instead turn higher again. The fact is they still print $75B/month for QE3 bond purchases. Even if the money tap turned completely off and you only considered the currency already issued, applying their own inflation rate to gold's 1980 high would put gold around $2,500/oz. today.
As we look for junior and intermediate precious and base metal stocks to feature this year, we also continue to focus on our expected renaissance in uranium. We have written many times about several uranium miners from majors producers Cameco (NYSE:CCJ) to junior explorers Fission Uranium (OTCQX:FCUUF), which just announced its most aggressive $20M 90-hole winter drill program to expand zones and test new targets at PLS.
The value of uranium is tied to both the energy and mining markets. As the world's energy demands continue to grow, nuclear is the only environmentally safe commercial choice to bridge the gap away from burning dirty and depleting fossil fuels to renewable technologies. U3O8 is an extremely efficient, low cost fuel, and nuclear reactors have been providing reliable power since the 1950s.
More reactors are in the works today than even before the March 2011 Fukushima Daiichi nuclear accident. As of January 3 there are 435 operable, and by 2030 this will more than double with 71 now under construction, 172 planned and 312 proposed worldwide. While over 19k died from Fukushima's tsunami and earthquakes, none have died from radiation. Regardless, high-flying uranium mining stocks prior to then still crashed. Fear vs. Facts won and have created today's extremely low prices.
Uranium is mined and therefore indirectly affected by gold sentiment. Funding any type of mine has been extremely difficult, further depressing uranium stocks. Many uranium mines have closed and expansion plans have been cancelled until prices double. However unlike gold, U3O8 is consumed with current mined supply not even meeting demand. Secondary supply of ~24Mlbs./year from recycled Russian warheads ended last year, and any stockpiles left over after Fukushima will now go to Japan's 50 operable reactors-the world's 2nd largest fleet-which begins restarts this year.
So I'm looking for fewer Momo Plays like on our Mid-Day Market Movers Hot Sheet, and to position more into beaten-up hard assets like gold and uranium miners as both an inflation hedge and to offset the blow of any sudden major U.S. market sell-off. Uranium's up-cycle peaked 6-months prior to gold's top in 2011, and it appears uranium's timing is now ready to cycle higher first.
Uranerz Energy Update
Uranerz Energy (NYSEMKT:URZ) has been our most featured stock since 2010 and was one of the best performing uranium stocks prior to Fukushima. While the whole sector has been down to dead for almost three-years, Uranerz has been busy completing construction of its first ISR uranium mine, called the Nichols Ranch project. The company controls over 80k acres in the prolific Powder River Basin of Wyoming, which surrounds two of the world's largest uranium producers.
Last month we noted that Uranerz' news-flow and investor attention should pickup again after its relatively quiet construction phase ends, and as production begins. In December the company had two significant news releases: hiring Cameco Resources president Paul Goranson as its new president, COO and director, and the closing of its US$20M state bond loan.
Permitted for up to 2Mlbs./year and with purchase agreements already in place with Exelon (NYSE:EXC) and another major utility to buy Uranerz' uranium at levels set when U3O8 was much higher; my understanding is that initial production can start within weeks. The Deep Disposal Wells are ready and all plant equipment is working. All permits are in place and they are just waiting for a positive conclusion of NRC inspections. Operations manuals and new employee training is underway and everything should be ready for the big day when production starts.
From URZ' January 9 release: Uranerz Provides Update on its Nichols Ranch ISR Uranium Project
"Uranerz Energy Corp. is pleased to report that it has completed the infrastructure, electrical hook up and initial testing of two deep disposal wells which are now ready for use at the Nichols Ranch ISR Uranium Project, located in the Powder River Basin of Wyoming, U.S.A. The Company is also in receipt of all permits and approvals for their operation. The two deep disposal wells were required to be operational prior to commencement of uranium recovery operations. The deep disposal wells will be used to remove non-hazardous liquids from the in-situ recovery ("ISR") uranium mining process.
The Company's primary focus over the past year has been on construction of the processing facility and installation of the monitor, production, and deep disposal wells for ISR operations at Nichols Ranch. The initial wellfield and processing facility are now substantially completed. Final adjustments are being made to the automated control systems. Talented field and operations personnel have been employed and are carrying out start-up training. The Company must complete a pre-operational inspection with the U.S. Nuclear Regulatory Commission prior to the start of uranium recovery operations. Completion of this inspection is expected in time to allow uranium production to commence in the first quarter of 2014.
The Nichols Ranch facility will serve as a platform for the potential future development of the Company's other Powder River Basin properties with possible enhanced economics for adjacent and satellite projects."
Uranerz Energy's stock quietly bottomed on November 13 at US$0.80 per share and volume has been steadily rising since, closing yesterday at US$1.55 +$0.13 on 1.2M shares traded with a market-cap of US$133M. URZ' 52-week high is US$1.64, pre-Fukushima high ~US$6 and all-time high ~US$7.