January 2013 - Money Morning - Only the News You Can Profit From

Stock Market 2013: Does January Barometer Signal Dow at 15,140?

The stock market ended January 2013 with the Dow Jones Industrial Average up nearly 6%, the best month since October 2011.

The Dow closed Jan. 31 at 13,860.58, up 5.77% this month. The Standard & Poor's 500 Index closed at 1,498.11, up 5.04% so far this year.

That's good news for investors. The theory is that the stock market's performance in the first month of the year sets the direction for the following 11 months.

At this rate, evaluating a few market indicators, here's where we could be by 2014.

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Can Retail Stocks Survive the Death of the Shopping Mall?

As consumers do less shopping in physical stores and more shopping on the Internet, retail stocks will need to evolve or face extinction.

And if tech entrepreneur Marc Andreessen is right, they don't have much time. In an interview with PandoDaily's Sarah Lacy, the co-founder of Netscape and renowned Silicon Valley venture capitalist unabashedly predicted the demise of brick-and-mortar stores by the end of the decade.

"Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice," Andreessen said. "Malls are going under, and there's more to come. These chains are much closer to going under than you think."

He reasons that the superior business model of online retailing will undermine brick-and-mortar rivals.

"Retail chains are a fundamentally implausible economic structure if there's a viable alternative," he says. "You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20% to 30% in revenues. It just doesn't make any sense for all this stuff to sit on shelves. There is fundamentally a better model."

As extreme as it sounds, the transition is already well under way in some retail categories.

Online retailer Amazon.com (Nasdaq: AMZN) played a major role in undermining the business of two of the country's largest bookstore chains, Borders, which went out of business in 2011, and Barnes and Noble Inc. (NYSE: BKS), which recently announced plans to close a third of its stores over the next decade.

And the popularity of online video streaming such as that offered by Netflix Inc. (Nasdaq: NFLX) torpedoed video rental giant Blockbuster, which filed for bankruptcy in 2010 and was eventually bought by Dish Network Corp. (Nasdaq: DISH).

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Why the January 2013 U.S. Jobs Report May Surprise You

The U.S. employment picture is expected to show continued signs of improvement when the Labor Department releases January's U.S. jobs report Friday morning.

Projections are for nonfarm payrolls to have gained 168,000 employees during the first month of 2013.

While a decent number, the tally won't be enough to budge the nation's 7.8% unemployment rate.

Forecasts from 90 economists polled by Thomson Reuters range from a 75,000 gain on the low end to a 200,000 gain.

In December, the number was a surprisingly robust 155,000. Over the past two years, the average has been 153,000 per month.

"We started the year on a pretty solid footing. I think the report is going to be a little bit better than what most people think," Steve Blitz, chief economist at ITG Investment Research, told the International Business Times.

But a number of factors could skew data in the U.S. jobs report. Here's what you should watch for.

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Yen Carry Trade is Back, But with a Difference

Japanese Prime Minister Shinzo Abe and his government's success in jawboning the yen lower against the U.S. dollar have revived an old hedge fund favorite – the yen carry trade.

A carry trade is when an investor borrows a currency with low interest rates, such as the yen, and uses it to buy assets in another currency with a higher interest rate, such as the Australian dollar.

The yen carry trade had fallen out of favor with traders after the "Lehman Shock" of 2008 as governments attempted to deal with the financial crisis by cutting short-term interest rates and initiating successive rounds of quantitative easing.

In the post-Lehman world, global interest rates converging on zero and massive balance sheet expansion by central banks to combat sluggish economies and deflation have become the norm. As a result, the yield spread between the currencies being borrowed and the currencies being used to purchase higher-yielding assets has fallen, making the trade riskier and less attractive.

Now that the new Abe government in Japan has succeeded in talking the yen down to two-and-a-half year lows and seems to be looking to push the yen even lower, traders are once again using short-term yen borrowings to fund short-term purchases of assets in other, high-yielding currencies such as the Norwegian krone or the perpetual favorite, the Australian dollar.

"Using the lowest yielder, the yen, to fund purchases of the Australian dollar could generate a 3% annual yield spread, without leverage and before the expenses of any investment fund used to put on the trade," writes Hamlin Lovell in the CFA Institute's Inside Investing publication.

And David Harden, senior commercial dealer at Global Reach Partners, told CNBC Europe, "Not only is the yen losing ground because of Abe's comments and monetary policy. But also, we're seeing risk appetite improving across the globe and so the yen is weakening because it was a safe-haven currency and now it's being sold because people are buying risk again."

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Facebook Stock Downgrades Keep Pouring In

They say third time's the charm, but no such luck for Facebook stock, which fell even though the company's third earnings report since going public beat expectations.

The numbers failed to charm Facebook Inc. (Nasdaq: FB) investors who expected the report would offer more to like, and analysis who found plenty of concern in the expenses.

The social networking giant posted earnings per share of 17 cents, better than the consensus of 15 cents. Revenue came in at $1.59 billion, up 40% year over year, and ahead of forecasts for $1.53 billion. However, fourth quarter profit slumped 79%, dragged down by higher costs.

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Fitch Avows MetLife's Debt – Analyst Blog

On Tuesday, Fitch Ratings affirmed all the debt and credit ratings of MetLife Inc. (MET) and its operating subsidiaries, reflecting its dominant market position and financial flexibility amid the low rate interest environment. Accordingly, Fitch asserted the issuer default rating (IDR) of “A” for MetLife, while the financial strength ratings (FSR) were maintained at “AA-” […]

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Paul Krugman May Be the World's Last Flat Earth Economist

Nobel Prize-winning economist and New York Times columnist Dr. Paul Krugman is at it again.

A favorite of the Keynesian crowd, he claimed earlier this week that fixing the deficit is important but added that "doing it now would be disastrous." He also observed that the 10-year U.S. debt situation isn't really all that bad.

At least he's consistent. I'll give him that.

For five years now Dr. Krugman has argued that increasing U.S. government spending is vital to our nation's recovery. And for five years he's been dead wrong.

Since this crisis began, the United States has spent trillions…more money than any nation in history. In the process, it's gone from being the world's biggest creditor to the biggest debtor of all time.

In fact, our national debt is now so high that people literally can't count the zeros. So most have thrown up their hands in exasperation and given up trying.

Now, to be perfectly clear, I don't believe Dr. Krugman is stupid. Far from it – you don't win Nobel Prizes for being an idiot. However, I do believe that he's trapped in the past–an acolyte of sorts to failed economic policies and doctrine that dates to the 1930s.

Some people, like University of Chicago Finance Professor John H. Cochrane, are more pointed, noting that if Krugman were a scientist, he'd be akin to a "flat-earther," an "AIDS-HIV disbeliever" or somebody who believes the continents don't actually move.

This makes him very dangerous in the scheme of things because Dr. Krugman's solution is that "we" just haven't spent enough money…yet.

I don't know how he can make that argument with a straight face.

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Why Commodities Investors Can Expect Sunnier Days Ahead

During the current commodity supercycle, there have been occasions-too many to count-when investor psyche has been damaged by reports about slowing U.S. growth, a hard landing in China or a debt crisis in Europe.

Yet just behind the gloom, significant and positive trends are taking hold, causing the storms to start dissipating.

I often say that government policies are precursors to change, which is why we follow the monetary and fiscal actions closely as they can have a significant impact on asset prices.

You have to go back about 16 months when Brazil kicked off the latest global easing cycle by cutting interest rates by 50 basis points. Since then many developing countries such as the Philippines, China and Colombia, as well as developed nations of Japan, the European Central Bank, the U.S. and the U.K. have joined forces in a world-wide synchronized stimulation of the economy.

Last summer, Mario Draghi indicated that the ECB would do "whatever it takes" to save the euro. In the fall, the Federal Reserve agreed to buy $85 billion a month in Treasuries and mortgages, amounting to $1 trillion a year.

And just recently, Japan announced that, in addition to pumping $1.1 trillion into the markets through 2013, the central bank will keep an open-ended approach to buying assets through 2014.

Historically, central banks' policy actions occur after there's been some economic deterioration. Several months later, the stimulative measures work their way through the global economy.

This has been the case with China, which has been showing remarkable improvement in its export-oriented HSBC Purchasing Managers Index. The PMI is a measure of health of companies in China, as it includes output, new orders, employment and prices across numerous sectors.

This month, the Flash PMI came in at 51.9, beating market consensus, which was at 51.7. The PMI stands at a two-year high, as you can see in the chart below.

The Fed Delivers Unmistakable Message After Two-Day Meeting

The Fed delivered a clear message Wednesday after its two-day meeting: Don't expect the easy monetary policies to end anytime soon.

The Central Bank's official policy statement, the first of 2013, said interest rates would remain near zero, at ¼%, and the aggressive $85 billion-a-month bond-buying program would continue for a "considerable time."

Word of the Fed's decision came just hours after a Commerce Department report showed gross domestic product had declined for the first time since the Great Recession, slipping 0.1% in the fourth quarter.

The GDP's first decline in 3 1/2 years had led economists to predict the Fed would stick to its easy money policies for the time being.

"There is no hint that they are giving any thought of backing off current policy and their current stance," Wells Fargo's senior economist Mark Vitner told Bloomberg.

"Growth has slowed and inflation is running below expectations. To the extent the Fed's decisions are data dependent, all the relevant data suggest they should continue to ease."

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