Weekly Stock Market Update—February 8, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer
Week in Review
Stocks struggled to extend January’s strong momentum this week, as some days’ gains were mostly offset by losses posted on other days. With the tone of fourth quarter corporate earnings season news now mostly factored into investor psychology, new earnings reports are having less of an impact. Conversely, investors seem to be re-focusing on macro concerns that have plagued the markets: Europe, the debt ceiling, and sequestration.
On Monday, the Dow Jones Industrial Average (Dow) and the S&P 500 declined by 0.8% and 0.7%, respectively. In the U.S., December factory orders came in at 1.8%. Although much improved from the decline reported in November, orders came in below the expectation for a 2.3% rise. Meanwhile, on the international front concern resurfaced about political uncertainty in Spain and Italy. Spanish Prime Minister Mariano Rajoy is facing pressure to resign in response to a corruption scandal in which he has denied any wrongdoing. In Italy, former Prime Minister Silvio Berlusconi, one of the top candidates in this month’s general election, is seeing a resurgence in popularity, which could threaten the reforms implemented by the current government.
The markets reversed course on Tuesday, with the Dow rebounding by 0.7% and the S&P 500 gaining 1.1%. A report from CoreLogic, a real estate data provider, noted that U.S. home prices rose 8.3% in December, bolstering hope for a recovery in real estate. In Europe, a measure of manufacturing and service businesses rose to a 10-month high in January, also fostering hopefulness.
With little new news to influence stocks in either direction, stocks drifted down modestly on Wednesday and Thursday. The most notable news was that initial jobless claims declined by 5,000 in the prior week–to 366,000, but came in higher than the expected reading of 360,000. The week ended with stocks rising moderately on Friday (Dow up 0.3% and S&P 500 up 0.6%) in reaction to data which showed: 1) Chinese exports grew more than expected in January and imports climbed 28.8%; 2) German data showed a 2012 surplus that was the nation's second highest in more than 60 years; and 3) U.S. economic data showed the trade deficit shrank in December to $38.5 billion from $48.6 billion in the prior month. Equity investors cobbled these data points together to speculate that the economies in these regions might be firming. Also aiding sentiment, European Union leaders agreed to a seven-year budget to reduce spending.
The pace of earnings season will begin to slow down after next week. Through Friday, 336 of the S&P 500 companies have reported their fourth quarter earnings. Results continued to come in mostly better than expected this week, resulting in a blended earnings growth rate of 5.2% versus the blended rate of 3.8% at the end of last week and a forecast of 1.9% growth at the beginning of the quarter. In the final quarter of 2012, companies were able to beat a low expectations hurdle of estimates that had been drastically lowered throughout the latter part of 2012.
Although it would be nice to see stocks go up every month the way they did in January, it is not surprising to see the market take a breather like the one this week. The question will be whether momentum from the enthusiasm of earnings season can prevail versus the looming pressure that will be applied by macro concerns such as Europe, the debt ceiling and negotiations on spending cuts (ie.; sequestration).
|Current Week||Month of Feb.||YTD|
|Dow Jones (INDU)||-0.03%||1.05%||7.02%|
|S&P 500 (SPX)||0.38%||1.39%||6.64%|
|MSCI EAFE (EAFE)||-1.44%||-0.85%||4.40%|
Updates to the Equities Buy List:
|Company Name||News Event||Impact to Our Company View|
|ORACLE CORP (ORCL)||Announced its intent to acquire Acme Packet (APKT) for approximately $1.9 billion (net of APKT’s cash), or $29.25 per share. APKT provides session border controller equipment (SMB’s) used by wireless carriers and businesses as part of their voice-over IP networks. The transaction is expected to close before the end of June 2013.||Unchanged|
|PRAXAIR INC (PX)||Announced the acquisition of NuCO2, Inc., a seller of beverage grade carbon dioxide, for $1.1 billion. The company plans to finance the deal with long-term bonds. NuCO2 currently supplies bulk beverage packaged carbonation systems to restaurant chains, convenient stores, and entertainment locations. The deal is expected to close by the end of first quarter 2013.||Unchanged|
|WALT DISNEY CO/THE (DIS)||Reported fiscal first quarter operating earning of $0.79 per share, compared to $0.80 a year ago, yet better that the Street expectation of $0.76/share||Unchanged|
|SOUTHERN CO/THE (SO)||Fiscal fourth quarter earnings of $0.44 per share were $0.05 higher than the consensus estimate||Unchanged|
|PRUDENTIAL FINANCIAL INC (PRU)||PRU reported fourth quarter operating earnings of $1.69 per share, below the consensus estimate of $1.74||Unchanged|
|PHILIP MORRIS INTERNATIONAL (PM)||Adjusted fourth quarter earnings of $1.24 per share were above analysts' estimates of $1.22||Unchanged|
|COSTCO WHOLESALE CORP (COST)||Costco reported January warehouse sales grew 4%, slightly better than the consensus estimate of 3.9%||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|
|INTEL CORP (INTC)/ APPLIED MATERIALS INC (AMAT)||On 02/08/2013 we removed Intel (INTC) from the large cap equity buy list, replacing with Applied Materials, Inc. (AMAT)||Sell/Purchase|
Fixed Income Update
U.S. Treasury yields started the week following the same pattern that has existed for the last three weeks. Selling pressure in the Asian session pushed yields higher while investors pushed yields lower in the NY session. The 10-year note yield reached a high of 2.05% on Monday but then promptly moved down to 1.97% as domestic investors came in. This pattern broke down somewhat as the rest of the week lacked the Asian selling. Without that, investors have gradually pushed yields lower by 2 to 7 basis points this week.
Maybe next week will provide more direction as the Treasury sells $72 billion of 3- year, 10-year, and 30-year debt. Additionally, what has been brewing internationally with regards to currencies may influence the bond markets more. Maybe not quite a currency war but definitely some battles have broken out with Japan in the spotlight. Japan has been actively guiding their currency lower while the EU is now getting worried about the strength of their currency. This should be a major topic of conversation at next week’s G20 meeting in Moscow.
|EMERSON ELECTRIC CO (EMR)
|Reported quarterly earnings||Buy / Buy|
|WELLS FARGO & CO (WFC)
|Sold $2 billion in 10 year debt||Buy / Buy|
|INTL BUSINESS MACHINES CORP (IBM)
|Sold $2 billion in 2 and 5 year debt||Buy / Buy|
February 8, 2013
|Current||Last Week||Week Change||Last Year||Year Change|
|5-Year Exp. Inflation||2.30||2.36||-0.06||1.91||0.39|
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