Sunday, December 28, 2014

Assessment of Keystone's 2014 Predictions

It’s that time of year to assess Keystone's predictions from one year ago. The task always provides comic relief. Keystone expected the SPX to finish lower this year but it continues higher fueled by the central bankers. And now, it is time to see how far off Keystone was on his prognostications.

Summary: The predictions in the table are not bad at all with the exception of the SPX targets. Overall, Keystone's predictions for 2014 turn out to be about 66% correct; better than most other folks can achieve. Perhaps the 2015 Predictions, to be released in a couple days, will fare better.

Keystone's 2014 Predictions
It’s time for another year of predictions that will provide for laughs in December 2014. Analyst and trader consensus is expecting the SPX to move above 2000 in 2014. Perhaps they will prove correct, perhaps not. The power of the central bankers, especially the Fed and BOJ, can never be underestimated. Keystone’s prognostications this year is for the broad indexes to place a multi-year top a la 2000 and 2007, either in January, or in April-May. (SPX moves above 2K but no multi-year top unless it is the current top)
Keybot the Quant, Keystone’s trading algorithm, navigates successfully through each year so simply reference Keybot’s status in the left margin if you ever want to know the current market direction. Keystone continues to hold short positions and inverse ETF’s betting against the markets but those trades are under water to begin the new year. Market bears should receive a turn at bat in 2014.
The consensus expects Treasury yields to move higher and inflation to rear its head in 2014. Keystone continues to consider the disinflationary and deflationary scenario as far more likely. All of 2013 was disinflationary and deflationary despite the bullish stock market.  Keystone’s prognostications for 2014 are provided in greater detail below. The predictions circle the globe from Japan to China to Europe, and then back to the States. Many of the predictions go against the main stream consensus. The predictions make for great bedtime reading—guaranteed to put you to sleep. (Treasury yields do indeed move lower proving the consensus wrong again in 2014)

SPX High for 2014: 1880 (current 1850-ish high may serve as the top) (will end about 200 handles higher in fairness low is about 1740)
SPX Closing Price for 2014 (SPX Begins at 1848): 1575 ($105x15) (400 handle miss)
SPX Low for 2014: 1480 (250 handle miss)
Dollar Range ($USD):  77-85 (79-90)
Dollar Closing Price ($USD): 83.50 (90-ish)
Dollar/Yen Range (USD/JPY): 94-107 (100-122)
Dollar/Yen Closing Price (USD/JPY): 97 (120-ish)
Euro Range ($XEU): 1.24-1.38  (1.22-1.40 dead-on)
Euro Closing Price ($XEU): 1.28 (1.22)
10-Year Note Yield Range ($TNX): 2.05%-3.05% (1.90%-3.00% dead-on)
10-Year Note Closing Yield ($TNX):  2.50% (2.25%)
30-Year Note Yield Range ($TYX): 3.25%-4.00% (2.70%-4.00%)
30-Year Note Closing Yield ($TYX):  3.50% (2.81%)
Unemployment Rate % Range:  6.1-8.0% (5.8%-6.7%)
Unemployment Rate % December 2014: 7.8% (5.8%)
GDP Average During 2014:  +1.5% (+3.5, -2.1, +4.6 and +5 is an average of +2.75%)
WTIC Oil Range ($WTIC): 70-105 (55-107 dead-on)
WTIC Oil Closing Price ($WTIC): 83 (55)
Brent Oil Range: 98-118 (56-112)
Brent Oil Closing Price: 103 (60-ish)
Natty Gas Closing Price ($NATGAS): 3.10-4.50 (2.98-6.50)
Natty Gas Closing Price ($NATGAS): 3.20 (3.00)
Gold Range ($GOLD): 1050-1550 (1140-1380)
Gold Closing Price ($GOLD): 1250 (1200-ish)
Copper Range ($COPPER): 2.3-3.7 (2.8-3.3)
Copper Closing Price ($COPPER):  2.75 (2.84-ish)
Commodities Range ($CRB):  220-300 (234-315)
Commodities Closing Price ($CRB):  275 (234)
China Growth Rate % Average for 2014: +6.7% and weakness will be evident (it is hanging in there at about +7% and weakness is evident with commodity demand dropping)

The universal consensus by analysts is that about 117 in earnings and a 17 multiple will yield a SPX 1990 and higher. The earnings are pumped higher by buybacks reducing the number of shares rather than healthy earnings, therefore, earnings should be 10% to 30% lower. Adjusting the numbers would be an SPX of 1390-1790. Lack of proper earnings will be an issue in 2014. Keystone’s target for 2014 is SPX 1575, 105x15, and 2015 should be much lower numbers for the SPX. How about that? You are getting 2015 predictions already as well. Keystone is obviously the only analyst calling for weaker markets in 2014. (incorrect call on equities; buybacks continue to fuel stocks and the central banker liquidity continues pushing all asset classes higher)
The path of the SPX this year is based on the weekly and monthly charts. The weekly chart is content with never seeing another price high here on out, however, the monthly chart wants to see the SPX come back up after a sell off occurs to begin the year in January-February. The price behavior in the first half of 2014 may be similar to the 2007 top from the summer time into the market top at October 2007. This was a 5-month event. Thus, the SPX will top out with a multi-year top during the first-half of 2014 either in January, or April-May. (no multi-year top, yet)
SPX drops to the 1550-1680 area January-March, a quick drop of -5% to -15%, then a V bottom and spike back up to 1750-1850 in April-May, then down for more extended correction of -10% and more, potentially -20% or more, into summer time, with a multi-year top occurring for equities either in January-February or April-May. The behavior during 2014 should mimic the behavior during the Fall 2008 and August 2011 crashes. Equities will then move sideways with a downward bias through the back half of the year and finish lower on the year, down about -15%, about 275 handles, to end the year at 1575. (incorrect the swoon led to a historic Fed and central banker-induced recovery from October to the end of year)
Volatility (VIX) will run consistently higher in 2014. (it has perked up)
The 18-year cycle is the most reliable stock cycle and markets remain in the secular bear until 2018 give or take a year or two. Sharp and strong countertrend cyclical rallies usually occur within the secular bears; the 2003-2007 and 2009-2013 rallies are examples. The secular bear will start to reexert itself in 2014. Equities will finish lower on the year. (secular bear that ends 2018 still not exerting itself, yet)
Traders will be disappointed that the January seasonality does not point to a bullish year ahead (first day of January, the first week, the month of January, and the year will all be down). (January down but stocks recovered during the year)
Traders will realize that the central banker easy money is no longer helping since the economy is not improving and the massive debt is hurting the country. This creates a bit of a panic upon realization that the Fed is between a rock and a hard place, like a deer in the headlights. Markets will move sideways to sideways lower for the remainder of the year. (traders still believe in the Fed)
Treasury yields will not move higher as everyone expects. The 10-year yield may move to 3.25%, 3.05% is called out as the top above, but that would be as high as it goes. The expectation is for the 10-year yield to move sideways to sideways lower all year long. Traders will realize the scenario about yields moving higher due to a stronger economy is not occurring. Traders will buy Treasuries as the year moves along, sending yields lower, as the global economy weakens and deflation takes control. Global traders will seek Treasuries as a safe haven keeping yields in check. (good prediction)
Inflation will remain on a milk carton in 2014. Wages will remain flat and inflation cannot exist without wages rising. The current ongoing disinflationary and deflationary period, that the Fed continues to desperately try and prevent, will remain in place. The Fed will ultimately fail with their Keynesian policies. (inflation remains absent and no wage growth)
The arguments over whether or not higher rates mean a healthier economy will be moot since the economic data will weaken in Q1 and yields will not rise. Since rates will remain subdued, traders and analysts will be surprised that stocks actually sell off. Yields and stocks will move in the same direction in 2014, both up together, and both down together, with down experiencing a healthier portion of the attention during 2014. Down stocks and down yields are reflective of disinflation and deflation. The concept that the economy remains in a disinflationary and deflationary funk will become more obvious to everyone. Cash is king in deflation. This behavior means that the grand 5-year experiment by the Fed with easy money Keynesian policies will be a failure. (inflation is not occurring as stocks trade at record highs)
Yellen will pause the tapering of stimulus very early in the year since economic data will weaken in Q1. At the least she will hint that she will stop the tapering in the near future. Her dovishness will help stocks recover from the initial sell off in January-March. She will try to time her money pumping with the BOJ pumping that will occur in April. As time moves along, traders will begin to worry since tapering is on standby and everyone starts to realize the Fed is not helping the economy anymore and only hurting the country. The move to pause or increase QE will signal that the Fed has gotten it wrong, just like during the Great Depression, and then the real trouble begins. (collusion of central bankers is the story with a tag-team approach to global money printing that keeps the party alive)
Yellen will be tested early in the year as all new Fed heads are tested. This will coincide with the markets selling off in January-March and her dovish deeds will help create a market bottom in March-April. (yes, but Yellen talks dovishly and pumps the markets all year long)
Those waiting for all the money on the sidelines to come into the market will continue waiting. The reason the money is not put to use in the stock market is that people are using it to live on, perhaps plan for a child’s college education and other living expenses. The wealthy have become wealthier courtesy of Chairman Bernanke but the average person is struggling. Joe Sixpack was stuck paying the bill to bailout the banksters and the Fed, that consists of ex-GS employees (it is all incestuous), is only concerned about making their wealthy friends wealthier. Folks sitting in leather chairs each day behind mahogany desks are very out of touch with the common person. Money sits on the sidelines since folks need that money to live on. (money does remain on the sidelines although the end of year sees a large influx of money into funds)
Social unrest will increase in the US as the gap between rich and poor expands due to the Fed’s policy of protecting the rich. (very prescient)
Markets will be weak in 2014 since the main drivers in the market peter out. The Fed and BOJ easy money will lose its luster. The ECB will have trouble implementing stimulus. China’s economy will finally decelerate. The buybacks that pumped stocks in 2014 will fade. The Russian and Chinese wealthy that have pumped asset bubbles in art, collectibles, vintage cars, real estate, vineyards, etc…, are all in. Traders realize that there are no more buyers remaining to push markets or asset bubbles any higher, and the money on the sidelines stays on the sidelines. Down is the path of least resistance for stocks. (the ECB will be pumping the markets and the buybacks continue so these drivers send stocks higher)
A lock limit down or flash crash event will occur in equities this year on par with the 5/6/10 Flash Crash. (there are numerous mini flash crashes and software failures not as big as 5/6/10, yet)
A major geopolitical event/s such as war, terrorism, and/or a pandemic will occur this year. Traders and analysts will comment on how the economy was doing well until the event happens and blame the event for the failure of the economy even though the global economy is already weak under the surface. (Ebola was a threat but it is contained, so far)
A dirty (nuclear radiation) bomb will be detonated somewhere in the world, possibly France or the US. (incorrect)
Congress and the President will play their baby games during February with the debt ceiling limit creating angst in markets and contributing to the market sell off early in the year during January-March. (the early part of the year was weak then stocks recovered)
Japan will try and create ‘shock and awe redux’ in April 2014 weakening the yen to pump Japan and US markets. It is only briefly successful helping the Japan and US stock markets move higher from mid-March into May where another market top occurs that may or may not be above the top in January-February. Markets will not see these highs again for months and years. (it plays out with more BOJ stimulus pumping stocks into the end of the year)
Japan is a troubled nation due to the ongoing Fukishima nuclear disaster, the worst environmental disaster in the history of the world. Japan stocks should be avoided. The country will be labeled as radioactive and its products, food, etc… will not be trusted by its own citizens as well as other countries (like China is labeled as placing lead in all their products). This negative connotation will greatly hurt Japan. The Japan government is preventing any negative news from Fukishima hitting the main stream press but this media blackout wall will crumble as the year moves along. Everyone will realize that Japan and the Pacific Ocean is being poisoned daily by radiation from Fukishima. Radiation effects will also impact the west coasts of Alaska, Canada, Washington State, Oregon, California and Mexico’s Baja peninsula. The nuclear disaster and radiation contamination sours the mood of all global citizens as reality sets in over the severe gravity of the situation. (the contamination from Fukishima continues but it is all swept under the rug; the EWJ Japan shares stumble sideways all year long; the NIKK is up)
Japan’s JGB’s explode higher in yield signaling the BOJ losing control. JGBS is a potential play. (Japan yields continue to drift lower)
China’s long-awaited hard landing finally arrives in the first half of 2014 and shock waves are felt around the world. (it's in progress at end of year)
China-Japan relations will continue to strain over the Japan islands dispute but China will be preoccupied by the hard landing occurring and Japan will have trouble handling Fukishima. The island dispute will continue, however, since China wants the oil in that region, but somewhat calmer heads will prevail in 2014 concerning the island dispute since both will have other fish to fry. (situation is calmer but both sides remain at odds)
North Korea will not be an issue although they will continue to rattle their saber. (Sony cyber attack)
The ECB becomes much more active and innovative pursuing QE type stimulus measures which will weaken the euro but Draghi and European markets will face difficult challenges. (true and yet to play out)
Emerging markets will languish all year long due to the China slowdown but in general, some emerging markets will fare better by the end of the year than the developed equity markets. (dead on with China's SSEC recovering into year end)
France, Italy, Greece, Portugal and Spain will all drag Europe lower and maintain the ongoing recession and depression across the continent. (the problems persist as an ongoing economic malaise)
Germany will experience sluggish and slower growth. Once this main driver of Europe weakens, fear will grow. (true)
European stress tests will linger on all year long and become more stink-laden over time. The ECB, EU and IMF will try to sugar-coat the stress tests but the stink of perhaps as many as 10% of the banks in serious financial trouble will hurt global markets. (the stress tests are only a minor blip)
The German High Court will accept the constitutionality of the OMT as the politico’s ram it down the German’s throats. This will cause social unrest in Germany. (the angst continues with ECB wanting to go full-blown QE but Germany saying nein)
Europe will have great trouble and angst finalizing the banking union. A framework will be finalized and the facility opened in the back half of the year but it will have operational problems. (everything is watered down over time)
France will be in the spotlight for much of the year. Their economy is a mess and their high Muslim population will lead to social unrest and terrorism in France. (problems persist including farmer protests)
The Middle East turmoil will continue. All countries and regions are dead-set on hating the US and killing each other so conditions will deteriorate likely leading to a larger conflict. (ongoing)
Syria will be exposed for playing games with the chemical weapons agreement. The country will fall into further chaos, Asaad will not make it though the year, and Syria will be a worse mess with warloads fighting to take over regions of the country. The Middle East will deteriorate into many regional wars. (very prescient considering the ISIS Islamic State radicals rise out of Syria and now control large parts of Syria and Iraq)
Israel will strike Iran to destroy nuclear enrichment facilities. (not yet)
Russia, the Saudi’s and other Middle East nations will complain that the US shale oil is hurting prices and their economies. The lower oil prices will destabilize the Russia and the Middle East economies. (very prescient dead-on prognostication with the oil collapse and the Saudi, oil shale companies and Russia drama)
Protectionism will increase as the slowing global economy causes countries to start slitting each other’s throats. (ongoing as tariffs and fees increase)
The Obamacare health insurance law will continue to create headaches and the uncertainty and hassle will hurt the US economy and jobs and weaken the GDP. (Obamacare is a confusing mess but it motors on and the GDP prints +5%)
The GDP in the US will be lower than consensus estimates as the year moves along and the global slowdown takes hold. The inventory build, which created the higher 2013 Q4 GDP, will be exposed since the higher channel stuffing did not lead to more sales and instead businesses must lower prices to unload inventory. (GDP prints +5% in Q4 with an average at +2.75% for the year which is above the say, +2% average consensus for 2014)
Asia loves their gambling casino’s and considering that on-line gambling is on the increase companies like WYNN should do well. (they did then huge flame-out during the year)
The housing recovery will stall. Chinese and Russian investors as well as hedge funds have been buying all the real estate bloating prices into a bubble. (housing is stagnant)
Housing starts will average below one million per month. (no, data is poking above one million)
The cash society will continue to increase as more and more folks work ‘under-the-table’ for cash as well as pay for goods and services with cash to avoid paying any government taxes. This behavior will hurt local, State and Federal government budgets. Politicians will respond by trying to raise taxes even higher which will only create a weaker US economy moving forward. (cash society on the increase)
Violence along the Mexican border will decrease now that marijuana is legalized. Other States will approve pot for recreational use as they see the big windfall profits that Colorado gains without any significant downside as many fear-mongers projected. (things are quiet on the drug-smuggling front with Mexico and Colorado data shows less highway fatalities, less teenage use of marijuana and less violent crime all after pot is legalized)
The Dividend Stock Bubble will burst sending SDY and DVY lower during 2014. Folks will regret that they did not sell long positions. Keystone is shorting the broad indexes (in near-term). (the dividend stock bubble grows)
The Biotech Bubble will burst sending IBB and biotech stocks lower. Keystone is short MYL. The biotech warriors CELG, GILD, BIIB and REGN are all shortable. (it burst a little then regrew to bigger proportions)
Financials will underperform in 2014. Keystone is long FAZ. (bad call, losing trade, financials moved steadily higher despite flattening yield curve (fueled by Fed's easy money))
A major bank will experience a significant security breach from computer hackers which will hurt the banks and markets in general. (true, JPM and others)
Young folks will become disillusioned and discouraged with America. The college debt issue will continue to intensify since young folks cannot find proper employment, and must now also support older folks with Obamacare, while they try to pay off student loans. Young folks will drop-out and tune-in, so to speak, like the 1960’s and 1970’s. (ongoing and the young folks are increasingly protesting)
Congress will make an attempt at repatriating multi-national funds abroad so they can be put to use in the US but the move will have little impact on the economy. Many companies are already using this cash as collateral for loans so the positive effects of repatriation will be limited. (Congress put the kabash on the tax inversions)
Deflation will finally receive the respect it deserves and the Keynesian policies by the Fed and other central bankers will be exposed as doing major harm over the last few years. Inflation will remain on a milk carton and not appear for a year or two or more away. Keystone believes the onset of inflation will begin and likely align with the end of the secular bear stock market in 2016-2020. Thus, inflationist proponents may have to wait at least another couple years. (deflation continues to be poo-poohed daily although global deflation continues)
Commodities will be flat in 2014 due to the disinflationary and deflationary global economy. Traders will wish they had hung out in the flat commodities by year end, however, since the broad indexes will all correct far lower off their bloated tops than commodities which have been beaten down. Keystone is long SMN (inverse basic materials). (The deflatonary environment is not biting as yet; the lower oil proces has folks giddy, materials sectors are up like everything else, SMN a bad trade)
Copper will drop and finish weaker this year. (true)
Gold miners should be top performers through 2014 although the outlook for physical gold is sketchier. Companies like NEM, MUX, IAG, KGC, ABX, etc… are favorites. Keystone is long MUX, IAG and NUGT to begin the year. (gold stocks all trail lower in 2014)
High-yield will be in trouble this year and HYG will sell off. (excellent call especially since no one else saw it coming except Keystone)
Telecom will be weak this year even though Treasury yields will not move significantly higher. (sector is flatish and mixed in 2014)
Coffee will be the best performing commodity this year. Do not play SBUX or DNKN. Play CAFE or JO. Keystone is long JO. (CAFE was up 14 to 28 doubling in value and JO up 21 to 43 also doubling)
HLF prints a multi-month or multi-year top at 79.8-82.3 in Q1 and will sell off for the bulk of the year.
Coal stocks may be a buy mid-year or later. (ongoing)
Air pollution stocks will run higher as China seeks to fix their horrible environment.
Global auto sales will be weaker than expected. Luxury car sales will disappoint in 2014. (F and GM lackluster performance in 2014)
Retail sales in the US were pulled forward from 2014 into 2013 so the retail sector will experience lackluster behavior in 2014, finally receiving a pull back from the obscene run higher over the last couple years. XRT and RTH will stumble lower during 2014. Keystone is short RTH. (retail slumps early in the year but takes off vertically in the back half--nothing can stop the American consumer)
Solar stocks will move sideways to sideways lower all year long. (yes, FSLR, TAN lower)
Shippers such as DRYS, DSX, GNK, FRO, etc…, may be a buy about mid-year but not in the first half despite everyone running to buy them to begin the year. The Baltic Dry Index will move lower and then travel sideways. Treasury yields will remain flat to lower verifying the weakness in the shippers. Mid-year, however, the shippers may be a buy into the holiday season. (ongoing, Baltic moving sideways at low levels)
AMZN will have a successful launch of its cell phone. AMZN stock will stay under 400 for the bulk of the year. (AMZN Fire phone is a dud but stock does stay under 400 all year and dipped under 300)
PCLN and GOOG will both fall back below 1000. (GOOGL now at 534 so that would be 1060 pre-split and PCLN got down to 1020--close but no cigar)
Defensive consumer staples companies such as PG, CLX, K, etc.. will outperform the broad indexes but this is not saying much. Most every sector will be beaten as the general equity markets weaken in 2014. (XLP does outperform as traders chase perceived safety and dividend stocks)
The healthcare sector XLV will underperform in 2014. Keystone is short XLV. (Nope, bad trade XLV is at the highs)
Solar flares will increase and coincide with the market tops in January and in April-May. The solar maximus in 2013 was a dud but early in 2014 the sun will make up for lost time. Communications will be affected by the X-class flares and plasma ejections early in the year. (only minor disruptions in 2014 no major events)

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