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Tuesday, December 24, 2013

Market Thought... Obama speaks of 2014 US economic growth

Whatever your political preference, throughout President Obama's terms, when he has spoken of markets, it paid to listen. (When he spoke of healthcare, it paid to ignore :) A couple of days ago, he made a similar declaration: 2014 will be a breakthrough year for the US economy.

Good thing too because Goldman Sachs conveniently declared caution on the Emerging Markets.

Looks like the US will pick up the slack for Global GDP. But there are a few wild cards, and interesting scenarios brewing for 2014.

1. China's ability (or willingness) to promote moral hazard. Knowing China's central government's tight control, its only a matter of timing.  (Maybe they will wait until the Muni-like set up is ready to take action and allow the needed flush out of the weak players.) But a popular chinese think tank still declared a 7.5% GDP growth target for China. (IMO, seems a bit optimistic.)

2. Japan winds down their currently successful stimulus, and the Europeans enact theirs.  Other than Germany, the EU country-states are horrible condition with respect to unemployment.  The EU needs to do more.  While GDP declines have seemingly stopped, the GDPs need to grow. IMO, the Euro is still way too high.

3. 2013 was a year where the Fed successfully pushed market players into equity markets. With the treasury rising, to facilitate a robust US economy, equity markets will have competition again. 3-4% on treasuries are pretty healthy.

4. Robust US economic growth means more Fed tapering. If robust employment figures continue, assuming a $10billion tapering each month would be the Fed stops its bond purchases by June/July 2014.


I have little doubt 2014 will be a great economic year for the US. But my concern is how the growth will effect markets.  Right now the SP500 is trading at very high trailing multiples. (Above the traditional-high end.)  The above factors traditionally lead to multiple compression.

The SP500 is predicated on a very simple equation: "reported earnings" x "trailing multiple".

Consensus estimate "reported earnings" are about 108 for the end of 2014. (Although I have heard estimates as high as 122, which imo is aggressive as it represents a +20% eps.)

108 multiplied by a 15-17 multiple is 1,602 - 1,836.  Given the market's willingness to trade near 18 over the last 6 months, we can not ignore the potential 18 multiple. But the above factors should mitigate an abnormally high training multiple.

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