Blog : December Bulls Were Right; Obamacare Ball Drops

by Ed Zwirn on January 3rd, 2014

Maybe growth really is picking up;

Plus, why bigger Wonder Drug production runs are coming (see farther down).

It was common enough, as the market for everything from penny stock to blue chips scored impressive gains late last year, to question whether or not we had been in the midst of a market bubble, a question I've tried to tackle in previous investment blogs. The argument went that the market, being bolstered only by the Fed, would collapse as soon as the Fed began to withdraw its support.

But it turns out that investors were justified when they rejected this "house of cards" take on things and propelled the Dow and other market indices to new all-time highs in December.

The more information we get about economic conditions which prevailed in the U.S. toward the end of last year the more conformation we get about the bullish atmosphere which prevailed at that time. Whatever the stock market trend may prove to be going forward, the boom in stocks which occurred last year--particularly late last year--did not constitute an irrational bubble waiting to burst but was in fact driven by fundamentals.

We've seen the jobs market, if not accelerate, at least continue its sluggish recovery. More strikingly, we've seen evidence of accelerated growth in December's Q3 gross domestic product estimate, which showed the economy growing 4.1%, its fastest pickup in almost three years.

That being said, Thursday's Commerce Department report on construction spending can only further bolster the contention that things are really picking up and the stock market hasn't gotten too far ahead of itself yet. According to the report, U.S. construction spending rose by a higher-than-expected 1% in November. This is the fastest uptick for this indicator since March 2009 and a slight gain from the respectable 0.9% gain (upwardly revised from 0.8%) posted in October.

Parsing the Commerce report, we see that this gain is being driven first and foremost by the private sector (no surprise given the extent of recent government spending cutbacks). And the category of private construction spending making the greatest recovery is the housing sector. Residential construction rose 1.9% in November, after falling in October. Total private construction spending rose 2.2%, while public spending fell 1.8%.

Spending on single-family homes has increased 18.4% year over year, while spending on apartment buildings is up 36.3%.

To put this into perspective, the U.S. is now seeing a level of homebuilding not equaled since shortly before the 2008 financial crisis.

This has obvious implications for companies that feed directly off the construction sector. Each new home creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to National Association of Home Builders.

More importantly, growth of construction is a significant forward-looking bullish indicator (since it shows that builders are confident of an abundance of buyers going forward) for the broader economy. If we see many more key reports like this one, maybe the Q3 GDP figure was not a fluke, and you can look for economists to start raising their baseline predictions for U.S. economic growth in 2014.

The Doctor Is In

Like many other Americans, I spent New Year's Eve at the home of some neighbors drinking and watching on TV as the clock counted down to the annual descent of the ball at Times Square. I managed to get a chuckle even out of my neighbors, a quarreling married couple, by making statements like "20 seconds until my Obamacare kicks in."

Like many of my compatriots, I work independently (freelance) for a living and have had to pay privately for my own coverage over the years. I make out much better under the new system than I had before, not only on a raw price basis but also because of the relative level of certainty and security it provides me going forward.

I bring this up not because of any impact coverage for people like me will have on small-cap stocks. I may marginally increase my health care spending as a result of this better coverage, but I have been fortunate enough over the years to have been able to afford to pay my own way when necessary.

But there are many Americans for whom Obamacare will mean entry into world of medical resource consumption for the first time. Governments in states like New York and California, which have allowed the Medicaid expansion provision of the law to take effect are busily conducting outreach to urban and rural poor, many of whom haven't seen a doctor in years.

Whatever your political take on the healthcare law, the sudden injection of millions of new consumers into the already lucrative healthcare sector is going to have significant long-term impacts. Companies waiting for test results and drug approvals may stand to have an even higher upside from these results. At least to the extent that Obamacare gains traction, the latest wonder drugs will undoubtedly enjoy much greater production runs than they would have otherwise.