Saturday, December 7, 2013

Where Is The Economy Headed In 2014?

I know it's been a while since posting but given the general level of the markets there really isn't much to discuss.  I have had an exceptionally tough year finding anything to buy. 

I made it my goal to find three solid value investments this year and so far I have only been able to find one.  The ironic thing is I was able to find it only a few weeks ago while the market was making new highs.  This stock is another of what I call value in plain sight but most people won't touch it.  It is making a yearly lows while the rest of the markets are making new highs. 

Given the level of the markets and the lack of easy investment candidates I though I would post some macro comments on the overall health of the economy.  I choose the October Housing Permits number because I believe it is an excellent long term indicator of the overall health of the economy.

October Housing Permits

Here is a graph of Housing Permits going back to the 1960s (Recessions are highlighted in grey).



Source: Federal Reserve Bank of St. Louis (click for larger image)

As you can see in the above graph, every recession in the past 63 years occurred 1-2 years after a severe drop in housing permits.  Moreover, housing permits tended to bottom at around 800k per year. 

This makes sense when you think about it because once a permit gets issued, a house gets built.  The new homeowner then spend money on new appliances, televisions, window coverings, decorations, furniture, landscaping and builds a fence.  All this crap comes from Home Depot, Costco or Pier 1 Imports.  These effects spill over for a couple of years after the permit is issued.  An increase in housing permits means an increase in overall economic activity that touches nearly all areas. 

Perhaps this is why Buffett has bet big on housing and housing related companies. 

Given the relative level of housing permits, and the fact that October reached a pre-recession high means that their is a low likelihood of a recession in the coming year.  Once this indicator starts to roll over, watch out. 

Probability of Recession Predicted by Treasury Spreads

For reinforce the above graph, we can look at forward treasury spreads to see if it is predicting a recession.  The graph below compares the 10 year treasury with the 3 month treasury looking 12 months ahead.  As you can see in the graph below, nothing to report at this time. 


Source: Federal Reserve Bank of New York (click for larger image)

Conclusion

So what can we expect in 2014?  Likely more slow and steady growth as we've seen for the past few years.  What will the markets do?  Who knows.  One report I read (Click here) showed that whenever the market is up 30% year over year, as it was in November, the market was up 18 out of 18 times in the following 12 months. Will that happen again?  Don't know and don't care...  All I worry about is finding cheap stocks... and if I do that the results will take care of themselves. 


Best Regards,

Kevin


Disclosure: none