Why the Economy will be Fine in 2014

[family Christmas shopping]

We only have a few days left until Christmas. We know what that means. If you said, “I bet there are a lot of people scurrying around for last-minute holiday shopping,” you would, of course, be correct. Another answer would be that we have only six trading days left until we ring in the end of 2013 and kick off 2014. Funny how it seems like another year flew by, even though I am sure that you, just like me, felt at times that some days would never end.

Watch out for the wash. While I plan to wax on 2013, which soon will be in the rear-view mirror, I want to remind you, just as I have reminded subscribers to my investment newsletter PowerTrend Profits, not to lose sight of cleaning up trades before the end of the year. That situation means reviewing all of your positions and deciding how to best manage your tax profile — remember, short-term losses match with short-term gains, while long-term gains go with long-term losses. Also remember not to get too cute by selling a position to book the loss only to buy it back in a few days. Selling any security for a loss for tax purposes, and within 30 days before or after purchasing the same security is known as a wash sale, and the Internal Revenue Service (IRS) disallows the claimed loss. You may want to think twice before exiting certain securities if you’re going to position your portfolio to minimize your tax position.

It’s the economy, stupid. Most, if not all of us, are familiar with that phrase – “It’s the economy, stupid” — which is a slight variation on the phrase “The economy, stupid” that James Carville coined as a campaign strategist of Bill Clinton’s 1992 presidential campaign. Well, the phrase and its meaning are as true today as they were back then.

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The government recently reported its second view on 3Q 2013 gross domestic product (GDP) and it was much stronger than expected — coming in at 3.6%, up from the prior 2.8% reading for the quarter. That upwardly revised GDP sounds good, but as I always say, we cannot simply rely on the headline figures. The real scoop is deeper into the figures. Digging into those upwardly revised figures, we find that stripping out inventory growth, which accounted for 1.68 percentage points of the quarter’s growth, the underlying economy grew at 1.9%. That’s down from the 2.0% reading in the initial 3Q 2013 reading.

Yet there are signs to be hopeful when it comes to the domestic economy. Earlier this week, Markit Economics reported its flash reading for the United States’ December purchasing managers’ index, and the findings were very favorable. New orders, as well as new export orders, continued to expand in December, as did backlogs of work and employment.

Turning our gaze eastward, the euro zone also saw a pick-up in economic activity during December, as noted by Markit’s flash euro zone PMI reading for the month. As reported by Markit, “The Markit Eurozone PMI Composite Output Index rose to 52.1 in December, according to the flash estimate, up from 51.7 in November. The upturn brings the rate of growth close to the 27-month peak seen in September and marks a reversal of the easing in the rate of growth seen over the prior two months.” Manufacturing and new orders activity were the highlights of the report as growth in the service sector cooled somewhat. Germany and most of the euro zone saw marked improvement, except for France, where the rate of decline accelerated at the fastest rate since May.

Moving even further eastward, HSBC’s flash manufacturing PMI for China showed a modest dip in the headline figure. As I always tell my subscribers, we cannot simply reply on the headline, because the best data is found in the details that give rise to it. In delving into this particular HSBC report, I found that all of the important order components reached a nine-month high and export orders continued to climb. Here’s a snapshot of what I look at each and every month when assessing the global economy for my subscribers.

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Yes, it has been a strong stock market, but the improving tone of the global economy suggests further improvement ahead. We have to remember, however, that economists tend to be a little too bullish when it comes to their forecasts. As James Bianco, of Bianco Research, pointed out recently, mainstream economic forecasts consistently have predicted higher growth in the coming years than actually gets delivered. As time goes on, economists tend to lower their forecasts dramatically. Here’s a great visual on that when it comes to 2014:

Will 2014 be better than 2013 in terms of economic growth? It’s shaping up to look that way — the question is how much better it will be, and for that, we’ll have to keep watching the data.

The Secret behind Barefoot Cellars Becoming a National Bestselling Brand with Co-founder Michael Houlihan
Joining me on PowerTalk is Michael C. Houlihan, co-founder of wine company Barefoot Cellars, where he was president and CEO for 19 years. During that time, Michael and his partner Bonnie Harvey took Barefoot from a startup and grew it to a business that sold more than a half million cases, making the company a national bestseller when they sold the company to E&J Gallo in 2005. What’s even more amazing is Michael and Bonnie did it all without advertising.

As Michael pointed out, you can have a great product at a great price, but what so many company leaders forget is that they are also in the distribution business. We’ve seen the product and distribution success of other companies that bear this out — The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), Anheuser Busch Inbev SA (BUD), Molson Coors Brewing Company (TAP) and Diageo plc (DEO), which is the home of many top brands of spirits, wines and beers.

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My advice to you is the following — pour yourself a drink and listen up to this edition of PowerTalk.

Listen to my one-on-one conversation with
Michael Houlihan, co-founder of Barefoot Cellars

In case you missed it, I encourage you to read my PowerTrend Brief posted last week about what you can learn from the timing and degree of stimulus tapering. I also invite you to comment in the space provided below.

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