Weekly Stock Market Update—April 5, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The primary topic on equity investors’ minds this week–and what influenced much of the market’s behavior–was data on the U.S. employment picture. A trio of disappointing data dampened investors’ spirits–and the market’s performance. Initially, the mid-week ADP employment survey for March showed that the private sector added fewer jobs than expected (158,000 added compared to the expectation for 200,000 and well below the 237,000 added in February)–and the slowest pace in five months. This report triggered an increase in uncertainty about the true health of the labor market and what picture the all important jobs report might paint at the end of the week. The level of concern continued to increase Thursday after initial jobless claims also disappointed, rising by 28,000 last week–to 385,000–and much higher than the expected level of 353,000. Fears were confirmed Friday when the government’s March non-farm payrolls report also fell short of expectations. The Bureau of Labor Statistics reported that a mere 88,000 jobs were added in March. Although positive growth, the additions fell far short of expectations for 190,000 new jobs and came in well below the 268,000 jobs added in February. The unemployment rate also carried a dismal message. Although the unemployment rate fell to 7.6% from 7.7% in the prior month, this decline was largely due to people dropping out of the work force.

Economic data was no help to sentiment either, as reports painted a mixed picture. While construction spending in February rose by a better than expected 1.2% (versus a 2.1% contraction in January) and February factory orders increased by 3.0% (versus a 1.0% decline in January), news from the Institute for Supply Management (ISM) was disappointing. In March, the manufacturing index fell to 51.3 from 54.2 last month and the non-manufacturing (services) index declined to 54.4 from the prior 56.0. Both were below expectations.

Last week, the S&P 500 closed the first quarter of 2013 on a positive note. The index rose by an impressive 10.6% during the first three months of the year. The stock market has now recaptured its losses from the financial crisis and the Great Recession. This year’s strong rally has been driven by hope and optimism about the housing market, the labor market, the economy, and corporate earnings– and all the while supported by the Federal Reserve’s stimulative actions. However, evidence of improvements in these areas needs to be seen in order to sustain the hope and optimism. This week’s data fell short of that role. Next week, first quarter’s corporate earnings season will kick off with the first few reports coming out during the week. Investors are in need of some good news and will be looking hopefully toward corporations for better news to offset the increase in concern and uncertainty that occurred this week.

Current Week Month of April YTD
Dow Jones (INDU) -0.06% -0.06% 11.87%
S&P 500 (SPX) -0.98% -0.98% 9.52%
Nasdaq (CCMP) -1.92% -1.92% 6.43%
MSCI EAFE (EAFE) -0.87% -0.87% 4.36%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CISCO SYSTEMS INC (CSCO) CSCO increased its quarterly dividend to $0.17 per share from $0.14, bringing the yield to ~ 3.3%. Unchanged
AT&T INC (T) The board board authorized the repurchase of up to 300 million shares and is in addition to two other authorizations approved in 2010 and 2012. Unchanged
HESS CORP (HES) The company announced it has entered into an agreement with OAO Lukoil to sell its Russian subsidiary Samara-Nafta for approximately $2.05 billion. Unchanged
PNC FINANCIAL SERVICES GROUP (PNC) PNC increased its quarterly dividend to $0.44 per share from $0.40 per share, for a yield of approximately 2.68%. Unchanged

Fixed Income Update

It was a busy week in the bond market as market participants returned back from the long Easter weekend. In general, domestic data (including ISM, jobless claims, construction spending and nonfarm payrolls) missed analysts’ expectations. International news failed to inspire confidence as the European Central Bank (ECB) provided rhetoric but little changes to their existing accommodative plans and Japan’s central bank announced a major increase in bond purchases in an effort to double the monetary base by the end of 2014.

Yields continued their recent trend of declining, thanks to weaker than expected U.S. economic news, continued concerns about Europe and a new round of easing from the Bank of Japan. All of this led market participants to believe that the Federal Reserve would continue its policy of quantitative easing (QE). If the weak economic data wasn’t enough to support the market participants expectation that QE is here to stay (for now), we also heard from several Fed presidents on the speaking schedule affirming just that. Treasuries extended gains (lower yields) on Friday, fuelled by the big miss on non-farm payrolls. We saw the 10yr UST move 17 basis points, beginning the week at 1.88%, ending at 1.71%.

There was purchasing activity every day this week, sans Friday, from the FOMC totalling just over $10.0 billion and targeted to the intermediate and long end of the curve. On the supply side, auction sizes were announced for next week, which will see a new $32 billion 3 year note, as well as re-openings of a $21 billion 10 year note and a $13 billion 30 year bond. The auction sizes announced were unchanged from last offering.

Fannie Mae (FNMA) reported earnings this week, and it warrants mentioning. The company earned $17.2 billion in 2012, including $7.6 billion within the fourth quarter. This was the largest quarterly and annual profit in the firm’s history. This is compared to a $16.9 billion net loss in 2011. The fourth quarter earnings release was previously delayed last month so the company could evaluate whether or not any of its $58.9 billion in deferred tax assets (DTA) would be released. DTA, in this case, are the losses carried forward from previous periods but have yet to be recognized on the income statement. As stated in the press release, FNMA “determined that the factors in favour of maintaining the allowance outweighed the factors in favour of releasing it.” We saw agency spreads narrow 2bps on the news.

Company Spotlight

UNITED TECHNOLOGIES CORP (UTX)
A2/A/A
Placing on hold due to valuation concerns. Buy / Hold
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Issued $5 billion in 3, 5, 10, and 30 year debt. Buy / Buy

April 5, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.10 0.10 0.00 0.27 -0.17
Taxable MMF 0.06 0.07 -0.01 0.23 -0.17
2-Year Treasury 0.23 0.24 -0.02 0.34 -0.11
5-Year Treasury 0.68 0.77 -0.08 1.01 -0.32
10-Year Treasury 1.71 1.85 -0.14 2.18 -0.48
30-Year Treasury 2.87 3.10 -0.23 3.33 -0.45
5-Year Exp. Inflation 2.25 2.33 -0.08 1.99 0.26
2-Year Agency 0.30 0.32 -0.02 0.43 -0.13
5-Year Agency 0.87 0.94 -0.07 1.28 -0.41
10-Year Agency 2.20 2.29 -0.09 2.82 -0.62
2-Year Corporate* 0.67 0.68 -0.01 1.28 -0.61
5-Year Corporate* 1.59 1.65 -0.06 2.46 -0.87
10-Year Corporate* 2.98 3.06 -0.07 3.89 -0.91
30-Year Corporate* 4.25 4.34 -0.09 4.92 -0.67
2-Year Municipal** 0.42 0.43 -0.01 0.52 -0.10
5-Year Municipal** 1.03 1.07 -0.04 1.26 -0.23
10-Year Municipal** 2.28 2.33 -0.05 2.53 -0.25
30-Year Municipal** 4.02 4.05 -0.03 4.33 -0.31
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*** $82.55 $82.98 -$0.43 $80.08 $2.47
CRB $288.28 $296.39 -$8.11 $306.49 -$18.21
Gold $1,579.00 $1,594.80 -$15.80 $1,630.10 -$51.10
Crude Oil $93.06 $97.23 -$4.17 $103.31 -$10.25
Unleaded Gasoline**** $2.87 $3.11 -$0.24 $3.02 -$0.15

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