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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 91, No. 5

Dear Client:

Washington, Jan. 31, 2014

Some companies are in a bind over privacy. They don’t want to cooperate with the NSA… National Security Agency…and its data sweep of nearly every phone call and e-mail in the U.S. But they want to use private info themselves, to help identify and target potential customers. In the end, firms won’t have it both ways.

ECONOMIC FORECASTS

PRIVACY Expect to see more privacy safeguards… Starting with limits on the government. Congress doesn’t have to act until June 1, 2015, when the phone monitoring statute expires. Congress won’t end the NSA’s data mining. There’s too much worry about terrorism for that to happen and too many friends of the NSA with powerful committee assignments in Congress. But lawmakers will alter the program a bit, with limits on how and when the NSA can gain access to private data, added transparency about its use and more controls over eavesdropping on allies.

GDP growth

NEW

At least 2.7% in ’14, up from 1.9% in ’13

Interest rates By end ’14, 10-year T-notes at 3.5%; 30-year mortgages, 5%-5.5%

Inflation Rising slightly to 1.8% in ’14, up from 1.5% in ’13

Unemployment Bouncing around a bit, but about 6.5% by end ’14

Crude oil Trading from $90 to $95/bbl. through March

Consumer confidence Up modestly as hiring improves; weak incomes still a drag Complete economic outlook at

Many U.S. technology companies will suffer, kiplinger.com/outlooks losing cloud storage contracts with foreign clients and taking heat from stockholders if they don’t persuade Congress to change the law or take protective steps themselves...moving servers outside the U.S., for instance. Even businesses with lucrative government contracts will step up the fight. They fear lost income from overseas more than retribution from politicians. Microsoft is already making noise about moving cloud services abroad. Dropbox, too. Though the storage firm’s servers are in the U.S., 70% of its clients are based abroad and are increasingly worried about U.S. intelligence programs that gather private info. Makers of routers and servers are also concerned about the prospect of losing sales. And companies worry that lost sales may prompt lawsuits by shareholders who see complicity in corporate dealings with the NSA, even under subpoena. Getting businesses to change their own data use policies will take longer, even as corporate tracking of purchases and other purposes become more intrusive. One reason: Many consumers seem to grudgingly accept the annoyance and seem resigned that they can’t do much to fight the trend. Soon, though, the tools for data analysis will be within reach of even small firms, and use will mushroom. So, too, will the potential for misuse, as more personal data is amassed on the sly. Until those changes come…years from now…encryption services will grow, allowing consumers to add a layer of protection to e-mail, social media and the like. It won’t end data mining, but it will make private information harder to get.

Consumers can also monitor usage policies and skip services that overreach. For now, though, it’s best to figure that your private data isn’t truly private.

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BUMPY MARKETS

Has the five-year bull market run its course? We think not. A 10% correction may be in the cards, but expect stocks to end the year up. Bull markets have often lasted longer and produced even more spectacular gains than the 160% rise since March 2009. And even at today’s prices, the S&P 500 is 15 times estimated 2014 earnings...average for the forward-looking P/E ratio over the past 30 years and below the average of 16.5 times for the past 15 years. Don’t let tremors along global economic fault lines spook you, either. Consider the fears of Asian contagion that recently rattled stock markets... sparked by a disappointing report about private manufacturing activity slowing in China. A wave of worry that other emerging markets would be weakened… or perhaps were already weaker than thought…pressured currencies and stocks. The U.S. wouldn’t suffer too much even in a worst-case scenario… an abrupt slowing of China’s growth. Export demand would be trimmed a bit, nipping GDP growth slightly. Multinationals’ profits wouldn’t grow as fast, though, bolstering the odds that stockholders would see a correction before year-end. Similarly, disquiet about potential deflation in Europe isn’t warranted. Yes, deflation can be a pernicious enemy, smothering demand and growth. And consumer price inflation of a scant 0.7% in the euro zone is less than half of the 2% target set by the European Central Bank for healthy economic growth. But that’s more or less the same place the U.S. has been in for two years. And deflation hasn’t taken root. Moreover, the ECB is taking steps to combat the risk, much as the Fed did in the U.S., though less aggressively. Neither case is cause for grave concern, merely for watchfulness.

U.S. Comfortable 3.2% GDP growth in late 2013 bodes well for the coming year, ECONOMY with no repeat of Uncle Sam’s Oct. shutdown likely and the budget sequester moderated this year. Between the two...a trimming of about one percentage point from the pace of growth in late 2013. Moreover, unwarranted inventory accumulation doesn’t seem to be a problem...gains in real final sales are keeping pace with it... while the breadth of export gains suggests continued growth on that front as well. A pace of 3% or so in the first quarter is a good bet. Harsh weather may continue to dampen construction gains in early 2014, but they will bounce back. We look for GDP growth to average at least 2.7% for the year, maybe more. Another good year for home builders ahead, in fact...with the long strain of the housing bust finally in the rearview mirror. New-home construction will climb by 16% or so as builders respond to tight inventories. Chalk up the big drop in starts in Dec. to unusually cold, snowy weather. Once it dissipates, starts will rebound. Remodelers in particular are poised for good growth, as increased optimism about home prices renews owners’ interest in enlarging and upgrading their abodes. Tempering the upbeat outlook: Rising costs of materials…lumber, drywall, plaster and so on. And the growing need for skilled workers will push wages higher. Look for the SEC to turn its magnifying glass on accounting fraud in coming months. Regulators’ investigations of run-of-the-mill accounting misdeeds… misleading reports, fraudulent bookkeeping, etc…took a backseat in recent years as government regulators focused on Ponzi schemes and other big, high-profile crimes. Helping financial sleuths: New analytical tools along with whistle-blowers. Capital reserves will get especially close scrutiny. Expect SEC investigators to carefully check both how firms determine the amount of reserves that are required and whether the revenue is accurately represented on companies’ financial statements. Remember, your subscription includes The Kiplinger Letter online


RETAIL Despite worry and anger over data breaches at Target and Neiman Marcus… Retailers will deter any new legislation and rules requiring stiffer measures to make customers’ credit card and personal information less vulnerable to theft. To be sure, top retail execs are having to face the music in congressional hearings, but breaches would need to continue on a wider scale for voters to demand action. There’s much dispute over who’s more at fault…retailers or bankers… when hackers obtain confidential data and, thus, who should bear the brunt of meeting new rules. With retailers and bankers pointing fingers at each other, lawmakers face a difficult task sorting out what’s what and what should be done. The road to a solution is a rocky one…one Congress will sidestep until it can’t. BUSINESS Good news for start-ups and tech companies fighting to protect their ideas: LAW Congress will pass patent legislation this year, dealing a long-awaited blow to so-called patent trolls…persons or companies that assemble and hold a portfolio of patents and look for businesses to sue for infringing on any patents they control. They account for nearly two-thirds of patent lawsuits, and newbie firms are easy prey. The Innovation Act will make it costlier and more difficult to file a lawsuit and will allow defendants to recoup costs of defending themselves…a notable change that will encourage more defendants, worried about costs, to challenge trolls in court. HEALTH More states will be pressed to join the expanded Medicaid program in 2014. CARE And more of them will receive waivers from Uncle Sam to add some flexibility, such as charging more for those who don’t follow wellness plans or adding copayments for nonurgent trips to the emergency room. (But states don’t have to participate.) Likely to come on board this year: Maine, N.H., Pa., Va., Ind., Mo. and Utah, bringing the total to 33 states that will have opted in. Eventually, all but a handful will sign up after lobbying by hospitals, insurers, consumer advocates and physicians. Under Obamacare, the federal government picks up all of the costs through 2016. Then 95% until 2020, and 90% after that. The influx of federal money…$443.5 billion through 2019…is designed to provide Medicaid coverage for about 16 million people. Medicare Advantage plans will continue to drop doctors from their networks as they look to cut costs while trying to improve efficiency and the quality of care. The plans, which serve as alternatives to traditional Medicare, are in line for big cuts under Obamacare. They must also meet higher care standards to qualify for bonuses. Still, enrollment is expected to grow, though out-of-pocket costs will rise and some optional benefits…vision coverage and gym memberships, for instance… may be dropped. But the plans have some advantages over original Medicare, such as a cap on out-of-pocket expenses and coverage for prescribed medications. Hospitals will soon greatly expand their use of wireless medical devices now that the government has set aside more airwaves for the use of such equipment. Wireless sensors attached to patients will monitor blood pressure, heartbeat, neonatal conditions, etc., and send the data to a centralized hub for quick analysis. CLEAN State regulators will shine a bright light on possible water pollution risks WATER in the wake of the chemical spill in W.Va. that shut down water supplies for 300,000 people and closed scores of businesses. As part of the coming scrutiny, environmental cops will conduct more inspections and test more samples than usual. Agencies overseeing heavy industry in the Ohio River Basin will be especially active. Operators of drinking water systems are going on high alert, too. The spill in W.Va. was a strong reminder that many water sources are vulnerable to pollution from chemicals that aren’t always strictly regulated. And many older water networks aren’t designed to filter or detect certain chemicals that only recently came into use. Makers of equipment for spotting contaminants can expect a bump in sales. For instant online access and searchable archives, go to kiplinger.com/start


ENERGY Look for heating bills to rise even more as bitter cold dents fuel supplies. Soaring demand this winter for propane, heating oil and natural gas is also causing bottlenecks in supply chains as producers scramble to fill orders. Propane faces the most pressure. Shortages are developing in many states, sending the average retail price to $4 per gallon, an increase of more than a dollar in just the past month. And despite efforts to speed up truck deliveries of propane, the average price will climb to at least $4.50 per gallon and could go higher by spring. Heating oil, at $4.18 a gallon now, will go as high as $4.50 in coming weeks. Natural gas prices, also climbing, should see the quickest return to normal once the frigid weather abates, with rising output helping the cause. Wellhead prices of over $5 per million British thermal units will slip to $4 to $4.50 per MMBtu. The State Dept. will give a thumbs-up to the Keystone XL pipeline system within months, clearing the way for President Obama to grant final approval for its construction. The president knows he’ll take some heat over his decision from environmentalists, but the pipeline has emerged as a cleaner and safer way than railcars to transport dirty oil extracted from tar sands. Recent train derailments involving oil shipments make the prospect of hauling more crude by rail unpalatable. Once permits are issued, the pipeline will take about two years to build. Many pipe sections are already in place and welders, pipe fitters and other contractors are ready to start work. Building the system is expected to provide about 9,000 jobs. What will Keystone mean for oil prices? Too early to say with any certainty. FOOD Food processors face having to revamp nutrition labels on packaged food, FACTS once a new regulation calling for the first overhaul of labeling in 20 years takes effect sometime before Obama leaves office. The Food and Drug Admin. wants to make calorie and nutrition information on packages clearer, especially by serving size. It’s also looking to make calorie totals and details about sodium and sugar content more prominent. The agency will likely stop short…for now… of requiring that the food industry put nutrition info on the front of packaging, as well as on the side or back, but it may leave the door open for doing so later. Nutrition experts want front-side labeling and some food makers already provide it. THE The Olympic Games in Sochi promise to unveil several new sports stars. WORLD But they’ll also bring a new era of cooperation between Russia and the U.S. in the war on terrorism. Not since World War II will the world have seen a KGB offshoot and the CIA working together as closely as now to keep terrorists from upsetting events. Moreover, behind-the-scenes agreements to conduct mutual surveillance and share security-related intelligence will continue long after the games are over. The partnership is especially bad news for anti-Russian militants in the Caucasus, including Chechnya. Till now, Washington has been reluctant to condemn outright independence-seeking Chechen rebels because of a Cold War bias against Moscow. But with Chechen militants threatening to disrupt the games, the U.S. is turning over a plethora of information about them to Russian authorities. Should Chechen terrorists carry out their threats and bring harm to athletes and spectators, whatever support Chechnya has in the West would quickly evaporate.

Yours very truly,

Jan. 31, 2014

THE KIPLINGER WASHINGTON EDITORS

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