Weekly Stock Market Update—February 1, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Weekly Stock Market Update

January 2013’s equity market performance is now in the record books and it was a good one. For the month, the Dow Jones Industrial Average (Dow) and the S&P 500 were up a whopping 5.9% and 5.2%, respectively. An interesting set of circumstances conspired to boost investor sentiment and soothe concerns. At the beginning of the month, Congress was able to finally pass legislation that dodged the “fiscal cliff” bullet. As the month wore on, investors reacted positively to fourth quarter corporate earnings results that were not as dismal as had been feared. The “third leg of the stool” supporting investor sentiment during the month was Congress’ passage of a bill temporarily suspending the government’s borrowing limit until May 19th. These events, taken together, eased investor anxiety and pushed the S&P 500 over the psychologically important level of 1,500 for the first time since December 2007.

This past week remained busy with corporate earnings. Nearly half of the S&P 500 companies have now reported their earnings. Investors have seen a “picture” of fourth quarter results that were better than anticipated prior to the beginning of earnings season. The current blended rate of earnings growth (which combines actual company results with estimates for the companies yet to report) is now up to 3.8% year/year. At the beginning of earnings season, before any companies reported their actual results, the estimate was for earnings to grow by 2.8%. The better results have pushed that original estimate up. As we roll through the second half of earnings season it will be interesting to see whether the trend of better earnings holds or is reversed. If the trend continues, the blended growth rate will continue to rise.

On the revenue front, the “picture” is similar. At the beginning of the reporting season, estimates were for the S&P 500 companies to generate revenue growth of 1.9% year/year. But, companies have reported better revenue trends than expected and the blended revenue growth rate has now risen to 2.4%. Given the difficult macro environment in which these companies are operating, this incremental increase is noteworthy.

Equity investors closed out January feeling upbeat after the heady performance gains. However, we caution that the markets may be challenged to hold onto or build on this momentum in the near future. When information from earnings season starts to wind down, investors will turn their attention back to Washington. The budget deal reached at the start of the year dealt with taxes, but acrossthe- board spending cuts were pushed back. These decisions must still be addressed and have the potential to stir up uneasiness–mainly because of their potential to exert negative pressure on the economy. Negotiations could be protracted, along with increasing market volatility. They will bear watching.

Current Week Month of Feb. YTD
Dow Jones (INDU) 0.83% 1.08% 7.05%
S&P 500 (SPX) 0.72% 1.01% 6.24%
Nasdaq (CCMP) 0.95% 1.18% 5.31%
MSCI EAFE (EAFE) 0.45% 5.29%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CATERPILLAR INC (CAT) Reported fourth quarter operating earnings of $1.46 per share, below the consensus estimate of $1.69 Unchanged
NEXTERA ENERGY INC (NEE) Fourth quarter operating earnings of $1.03 per share were above the Street expectation of $0.95, and earnings guidance for full year 2013 was in line with analysts' estimates Unchanged
EMC CORP/MA (EMC) EMC reported fourth quarter operating earnings of $0.54 per share, below the Street estimate of $0.52 Unchanged
SOUTHERN CO/THE (SO) Fiscal fourth quarter earnings of $0.44 per share were $0.05 higher than the consensus estimate Unchanged
HESS CORP (HES) Fourth quarter adjusted earnings of $1.20/share were in line with the consensus estimate. In conjunction with the earnings release, management announced it will exit its refining business and divest its oil storage terminal network. Separately, HES reported that Elliott Associates, L.P. is seeking regulatory approval to acquire shares valued at more than $800 million, and is considering nominating new board Unchanged
QUALCOMM INC (QCOM) QCOM reported strong fiscal first quarter earnings of $1.26 per share, topping the Street estimate of $1.13, and raised its earnings guidance for second quarter and fiscal full year 2013. Separately, the company announced CFO William Keitel will retire in March, to be replaced by George S. Davis, current CFO of Applied Materials (AMAT) Unchanged
ABBVIE, INC (ABBV) AbbVie issued a guidance range for 2013 earnings of $3.03- $3.13 per share, in line with analysts' expectations Unchanged
MICROSOFT CORP (MSFT) MSFT announced the release of Office 365 Home Premium, an upgrade to the company’s Office product line, a cloud service that includes the full set of Office applications. Users can access the revision of the Office applications, for up to five devices, on a subscription basis. Unchanged
INVESCO LTD (IVZ) Fourth quarter earnings of $0.45 per share were $0.02 below the consensus estimate Unchanged
CHEVRON CORP (CVX) CVX reported Q4 2012 earnings of $3.27, easily topping the Street expectation of $3.03 per share Unchanged
NATIONAL OILWELL VARCO INC (NOV) NOV announced fiscal fourth quarter operating earnings of $1.49/share, $0.05 higher than the consensus estimate Unchanged

Fixed Income Update

U. S. Treasuries remained range-bound with the 10-year note trading between 2.03% and 1.92%. Selling pressure continues to come in the over-night session due to the changing Japanese monetary policy and improving European sentiment. Buying pressure is more evident in the domestic session as economic data is mixed at best. Interestingly, trading volume has been very heavy.

The biggest concern of the week was the FOMC meeting and the desire for clarification regarding how the market has been interpreting the FOMC minutes released in December.

The market was concerned the Fed would change the conversation and begin to think about unwinding accommodation. Nothing in the announcement previewed such a turnaround. Despite the market’s negative reaction to the December minutes, the Fed didn’t add any clarification to its statement last month about leaving low rates in place until after the economy begins to build further strength. At this point, with inflation well below the Fed’s longer-term objective, the (intended) benefits of QE continue to – at least from the Fed’s perspective – outweigh any risks associated with long-term zero interest rate policy and further growth of the Fed’s balance sheet. Investors are still somewhat skeptical and look for some indications of change.

For the week, Treasury yields ranged from decreasing 1 to increasing 8 basis points. 5-year inflation expectations increased 14 basis points, matching their highest level since mid-September 2012.

Company Spotlight

PFIZER INC (PFE)
A1/AA/A+
Reported quarterly earnings Buy / Buy
MERCK & CO. INC. (MRK)
Aa3/AA/A+
Reported quarterly earnings Buy / Buy
CONOCOPHILLIPS (COP)
A1/A/A
Reported quarterly earnings Buy / Buy
BOEING CO/THE (BA)
A2/A/A
Reported quarterly earnings Buy / Buy
COLGATE-PALMOLIVE CO (CL)
Aa3/AA-/AA-
Issued $700 milion in 30 year debt Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Reported quarterly earnings Buy / Buy
BERKSHIRE HATHAWAY-BLK CEDEA (BRKB)
Aa2/AA+/AA-
Sold $2.6 billion in 3, 5, 10, and 30 year debt. Buy / Buy

February 1, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.08 0.07 0.01 0.26 -0.18
Taxable MMF 0.07 0.08 -0.01 0.19 -0.12
2-Year Treasury 0.26 0.27 -0.01 0.22 0.04
5-Year Treasury 0.88 0.85 0.03 0.71 0.17
10-Year Treasury 2.02 1.95 0.07 1.82 0.19
30-Year Treasury 3.22 3.13 0.08 3.00 0.21
5-Year Exp. Inflation 2.36 2.22 0.14 1.87 0.49
2-Year Agency 0.31 0.31 -0.01 0.32 -0.02
5-Year Agency 1.09 1.09 0.00 1.05 0.04
10-Year Agency 2.46 2.39 0.07 2.58 -0.12
2-Year Corporate* 0.67 0.68 -0.01 1.39 -0.72
5-Year Corporate* 1.75 1.73 0.02 2.35 -0.60
10-Year Corporate* 3.18 3.13 0.05 3.77 -0.59
30-Year Corporate* 4.39 4.35 0.04 4.81 -0.42
2-Year Municipal** 0.48 0.46 0.02 0.54 -0.06
5-Year Municipal** 1.04 1.01 0.03 1.02 0.02
10-Year Municipal** 2.16 2.08 0.08 2.18 -0.02
30-Year Municipal** 3.96 3.92 0.04 4.17 -0.21
Fed Funds 0.25 0.25 0.00 0.25 0.00
Prime Rate 3.25 3.25 0.00 3.25 0.00
Dollar*** $79.17 $79.75 -$0.58 $78.99 $0.18
CRB $305.07 $299.31 $5.76 $310.90 -$5.83
Gold $1,669.10 $1,656.60 $12.50 $1,759.30 -$90.20
Crude Oil $97.65 $95.88 $1.77 $96.36 $1.29
Unleaded Gasoline**** $3.05 $2.89 $0.16 $2.65 $0.40

Note: Agency and Municipal yields are as of the previous business day.
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon