Weekly Stock Market Update—March 29, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The U.S. equity market had a volatile holiday shortened week but ended on a high note. As a result, the Dow Jones Industrial and S&P 500 indices ended at record highs for the week and the quarter.

Macro events (i.e. Cyprus), as well as a mixed bag of economic events are what drove the volatility in the equity markets for the week. When news regarding Cyprus’ bailout were positive or economic news was better than expected, the markets improved. When uncertainty rose regarding Cyprus or worse than expected economic news came out, the markets deteriorated.

By the end of the holiday shortened week, the situation around Cyprus appeared to be resolved (at least in the short run). Cyprus will receive bail out money from the EU and IMF while depositors with balances over 100,000 Euro will be forced to accept losses. The loss for large depositors looks like it will be approximately a 60% loss.

On the U.S. front, the market is building hope that the economy is gaining momentum and should propel stock prices higher. This is curious since the actual economic news released during the week showed more results that were weaker than expected versus stronger than expected.

One of the items that continues to be discussed (or trumpeted) by the media in support of higher stock prices is the discussion about the “Great Rotation”. After the financial crisis of 2008-2009, many retail investors pulled their money out of the stock market and put it into the bond market. The theory behind the “Great Rotation” is that, with virtually non-existent yields in the bond markets, retail investors will now move their money out of bonds and back into stocks. Many market analysts believe that the positive flows into the equity markets during the first three months is the start of the retail investor returning to the equity markets. So far, the data shows that the flows into the equity markets have been people moving money out of cash and into equities. This may be due to the large cash dividend payments received at the end of the year and year-end bonus payments. So far, the data shows that retail investors have still been putting money in to bonds as well as stocks, as evidenced by the positive flows to both stocks and bonds. If the “Great Rotation” story is truly going to unfold and fuel a continued rally in stocks, money will have to start being withdrawn from bonds and moved to stocks.

Current Week Month of March YTD
Dow Jones (INDU) 0.46% 3.86% 11.93%
S&P 500 (SPX) 0.83% 3.75% 10.61%
Nasdaq (CCMP) 0.72% 3.49% 8.51%
MSCI EAFE (EAFE) -0.53% 0.91% 5.30%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
MOSAIC CO/THE (MOS) MOS reported fiscal third quarter operating earnings of $0.88 per share, in line with the Street expectation. Net sales rose 2.3% to $2.24 billion, modestly below analysts estimates of $2.29 billion. Additionally, the company is considering plans to repurchase shares in the fourth quarter 2013. Unchanged

Fixed Income Update

Cyprus remains high on investor’s list of worries as their banks finally opened but with strict capital controls. Instead of taxing all deposit holders, those with less than €100,000 will be spared but others were not so lucky. Large depositors in Bank of Cyprus are likely to face losses around 60%, while the large depositors of Laiki (Popular) Bank are likely to be fully wiped out. What continues to affect the psyche of investors and depositors alike was the comment by the head of the Eurogroup, Jeroen Dijsselbloem, that the bail in could be a template for future actions. Additionally, investors are disturbed at the lack of coordination and communication on a Cyprus plan/execution that was more than 6 months in the making. Cyprus banks re-opened on Thursday and deposit holders were surprisingly calm.

For all the headlines that Cyprus has received, Italian politics and month end window dressing are what really have moved the interest rate markets this week.

It’s been a month since Italy held a general election, but it is only now that the market has realized it is unlikely to have a viable government any time soon. This was punctuated by comments by Bersani and his doubts that he has not been able to find common ground with the other parties to form a government. The concern will be that new elections will have to be called and Beppe Grillo could emerge as the winner adding to concerns about fiscal sustainability given the recent comments by the Five Star Movement calling for renegotiation of the Italian debt as well as for a referendum on EUR.

Markets were closed on Friday for Good Friday. The holiday shortened week saw yields decline by 1 to 8 basis points.

Company Spotlight

GENERAL ELECTRIC CO (GE)
Aa3/AA+/#N/A N/A
Issued $1.4 billion in 5 year fixed and floating rate notes. Buy / Buy

March 29, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.10 0.10 0.00 0.25 -0.15
Taxable MMF 0.07 0.07 0.00 0.25 -0.18
2-Year Treasury 0.24 0.25 -0.01 0.34 -0.10
5-Year Treasury 0.76 0.80 -0.03 1.01 -0.25
10-Year Treasury 1.85 1.93 -0.08 2.16 -0.31
30-Year Treasury 3.10 3.15 -0.05 3.27 -0.17
5-Year Exp. Inflation 2.33 2.33 0.00 2.05 0.29
2-Year Agency 0.32 0.33 -0.01 0.43 -0.11
5-Year Agency 0.94 0.98 -0.05 1.27 -0.34
10-Year Agency 2.29 2.36 -0.07 2.80 -0.52
2-Year Corporate* 0.68 0.69 -0.01 1.24 -0.56
5-Year Corporate* 1.66 1.71 -0.05 2.41 -0.75
10-Year Corporate* 3.06 3.14 -0.07 3.84 -0.77
30-Year Corporate* 4.35 4.40 -0.05 4.83 -0.48
2-Year Municipal** 0.43 0.45 -0.02 0.52 -0.09
5-Year Municipal** 1.07 1.08 -0.01 1.26 -0.19
10-Year Municipal** 2.33 2.35 -0.02 2.50 -0.17
30-Year Municipal** 4.05 4.05 0.00 4.32 -0.27
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*** $82.98 $82.38 $0.60 $79.19 $3.79
CRB $296.39 $294.70 $1.69 $305.94 -$9.55
Gold $1,594.80 $1,606.10 -$11.30 $1,652.20 -$57.40
Crude Oil $97.23 $93.71 $3.52 $102.78 -$5.55
Unleaded Gasoline**** $3.11 $3.05 $0.06 $2.98 $0.13

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