Weekly Stock Market Update—April 26, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

The U.S. equities market continues to show amazing resistance to a pullback or correction. Stocks rallied again this week, greatly offsetting last week’s 2.1% selloff. The Dow Jones Industrial Average (Dow) rose by 1.17%, while the S&P 500 gained 1.76%. Much of the momentum in the market this week occurred despite a mixed bag of corporate earnings results and economic data. Market action seemed to be fueled more by positive than disappointing news this week.

First quarter earnings season continued to roll on, with 168 of the S&P 500 companies reporting their results. Continuing a pattern seen regularly for the past few quarters, a number of companies reported better than expected earnings results, while falling short of revenue expectations. Recall that expectations have come down meaningfully between the start of the first quarter and the end of the first quarter. At the beginning of the quarter, analysts had estimated that the S&P 500 companies would generate 4.3% year/year earnings growth. However, by the end of the quarter, that forecast had been reduced to an anemic 1.5% growth rate. As the earnings season progresses, thus far 70% of the S&P 500 companies have beat earnings expectations, while 8% have been in line with estimates and 22% have come in below expectations. With regard to revenues, only 44% of these companies have reported revenue above expectations. The avalanche of earnings reports will continue next week.

Meanwhile, economic data continued to paint a mixed picture. Positive news included: 1) March new home sales rose by a better than expected 1.5%–and improved from the decline of 7.6% experienced in February; 2) the February housing price index increased by 0.7%; 3) initial jobless claims declined by a better than expected 16,000 in the prior week–to 339,000; and 4) the April University of Michigan consumer confidence index came in better than expected, at 76.4,. While evidence of slowing economic activity was of concern last week, it did not phase stocks this week. Disappointing data included: 1) March existing home sales fell by a greater than expected 0.6% and reversed positive growth of 0.2% in the prior month; 2) durable goods orders in March fell more than expected, declining by 5.7% after a rise of 4.3% in the prior month; 3) both the Richmond and Kansas City Fed manufacturing indices came in below expectations; and 4) the first estimate of gross domestic product (GDP) was reported at 2.5%, which came in below expectations for growth of 3.0%.

While some prognosticators continue to expect a market correction, equities certainly showed resilience this week, bouncing back from their biggest weekly loss of the year last week. This occurred even in light of mixed data about the underlying health of the economic environment, both here and abroad. Nevertheless, we continue to believe that the market remains vulnerable to a pullback or correction, given the sharp gains in 2012 and YTD 2013. A surge in concern about a number of macro items (including a slowdown in the Chinese economy, global and domestic economic growth rates, new developments in the European debt crisis and European economy, a possible pullback in quantitative easing actions, etc.) could pressure investor sentiment.

Current Week Month of April YTD
Dow Jones (INDU) 1.17% 1.07% 13.13%
S&P 500 (SPX) 1.76% 0.95% 11.65%
Nasdaq (CCMP) 2.29% 0.41% 8.96%
MSCI EAFE (EAFE) 3.53% 3.62% 9.10%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CATERPILLAR INC (CAT) CAT reported first quarter operating earnings of $1.31 per share, below the Street expectation of $1.40. Management lowered its full year outlook, citing weakness in mining. In conjunction with the earnings release the company announced it would resume its stock repurchase program, and on April 25, 2013, the company entered into an agreement with Citibank to buy back ~$1.0 billion of its common stock. Unchanged
APPLE INC (AAPL) Fiscal second quarter earnings of $10.09/share were above analysts' estimates of $10.00, and revenue results were slightly above expecatations. Management announced a 15% dividend increase and an additional $50 billion repurchase plan. Unchanged
AT&T INC (T) AT&T reported 1Q 2013 operating earnings of $0.64 per share, matching the consensus estimate, yet revenue for the quarter came in below expectations. The company added 296,00 postpaid customers, up from 187,000 a year ago. Unchanged
EMC CORP/MA (EMC) EMC posted first quarter operating earnings of $0.39 per share, missing the Street estimate of $0.40. Unchanged
HESS CORP (HES) The company reported better than expected 1Q 2013 operating earnings of $1.95/share, well above the consensus estimate of $1.59. Revenues jumped 39% (y/y), and the company confirmed it will begin repurchasing shares and increase the annual cash dividend in the second half of 2013. Unchanged
PRAXAIR INC (PX) Frst quarter earnings of $1.38 per share matched the consensus estimate. Unchanged
PROCTER & GAMBLE CO/THE (PG) For the fiscal third quarter, PG reported earnings of $0.99 per share which topped analysts' expections of $0.96, and increased 5% (y/y). The compay raised the low end of its full year earings guidance, yet forecast fourth quarter earning below Wall Street's expectations. Unchanged
QUALCOMM INC (QCOM) QCOM reported second quarter earnings of $1.17 per share, in line with the Street estimate. Revenues rose 23% (y/y) to $6.12 billion, above expectations of $6.06 billion. The company raised its full year revenue guidance, but its outlook for third quarter earnings fell short of analysts' expectations. Unchanged
SOUTHERN CO/THE (SO) Fiscal first quarter operating earnings of $0.49 per share missed the consensus estimate of $0.50, yet increased 16% when compared to the same quarter a year ago. Revenues of $3.9 billion exceeded analysts' estimates of $3.8 billion, and were 8% higher year over year. Unchanged
MEAD JOHNSON NUTRITION CO (MJN) MJN reported first quarter earnings of $0.85, matching the consensus estimate. Revenues grew 5.2% (y/y) to $1.04 billion, slightly above analysts' estimates of $1.02 billion. Additionally the company reaffirmed its annual guidance. Unchanged
STARBUCKS CORP (SBUX) SBUX reported second quarter 2013 operating earnings of $0.48 per share, matching Wall Street estimates, and compared to earnings of $0.40 a year ago. Further, revenues in the quarter rose 11.3 % (y/y) to $3.6 billion, and the company raised its full year earnings guidance. Unchanged
ABBVIE, INC (ABBV) ABBV reported 1Q 2013 earnings of $0.68 per share, $0.01 above analyts' expectations. Additionally, management reaffirmed its full year earnings guidance range. Unchanged
CHEVRON CORP (CVX) CVX announced first quarter operating earnings of $3.18 per share, exceeding Wall Street estimates of $3.08, and compared to earnings of $3.17 a year ago. Revenues of $56.8 billion declined 6% (y/y) and missed analysts' estimates of $67.7 billion. Unchanged
NATIONAL OILWELL VARCO INC (NOV) First quarter operating earnings of $1.29/share compared with the consensus estimate of $1.36. Total revenue of $5.30 billion was modestly below the consensus estimate of $5.38 billion, yet increased 23% (y/y), up from $4.3 billion a year ago. Unchanged

Fixed Income Update

Whether the source is individuals, institutions, or central banks, the constant flow of funds continues to enter the Fixed Income market.

Mutual fund investors as measured by Lipper added $4.76 billion to taxable fixed income funds this week to bring the year to date total to $110.6 billion. Of this group, investment grade corporate funds are getting the lions share. For the last week, these funds took in $2.24 billion. This is the 18th straight week of inflows to this sector. U.S. mortgage funds took in $160.3 million and high yield corporate funds added $520.8 million. The one sector bucking the trend is the Municipal bond sector where there were outflows of $101.8 million. This is the 8th straight week of outflows for municipal bond funds.

Central banks are or will be large buyers too. The Bank of Japan (BOJ) announced earlier this week that they plan to inject the equivalent of $1.4 trillion into the system, as the central bank strives to meet its inflation goal sooner than later. As with similar actions, the aggressive purchases by the BOJ are expected to exceed the supply of new Japanese sovereign bonds. In turn, traditional Japanese bond investors, such as Japanese insurance companies, are seeking other ‘risk-free’ assets abroad. Daichi Life is a perfect example. They have announced plans to buy foreign bonds from a variety of countries. The net effect is a broad global rally in sovereign debt.

Not to be outdone, the U.S. central bank (Fed) continues its open-ended quantitative easing program. For example, in the last week the Fed’s balance sheet increased by $23.5 billion to a record $3.32 trillion. They increased their holdings of Treasuries by $11.2 billion and mortgage backed securities by $9.9 billion. This constant buying is taking its toll by keeping interest rates low and forcing investors into other asset classes in search of return. The chart below shows the net change in the Fed’s balance sheet and the acceleration it has experienced this year.

Chart

Company Spotlight

GOLDMAN SACHS GROUP INC (GS)
A3/A-/A
Sold $1.25B in 5 year floating rate notes. Hold / Hold
MICROSOFT CORP (MSFT)
Aaa/AAA/AA+
Sold $1.95B in 5, 10, and 30 year debt. Buy / Buy
JPMORGAN CHASE & CO (JPM)
A2/A/A+
Sold $2B of 10 year subordinated debt. Buy / Buy
UNITED TECHNOLOGIES CORP (UTX)
A2/A/A
Reported quarterly earnings. Hold / Hold
PROCTER & GAMBLE CO/THE (PG)
Aa3/AA-/#N/A N/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
Reported quarterly earnings. Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Reported quarterly earnings. Buy / Buy
MCDONALD'S CORP (MCD)
A2/A/A
Reported quarterly earnings. Buy / Buy

April 26, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.19 0.16 0.03 0.33 -0.14
Taxable MMF 0.06 0.07 -0.01 0.24 -0.18
2-Year Treasury 0.22 0.23 -0.02 0.26 -0.04
5-Year Treasury 0.68 0.71 -0.03 0.82 -0.14
10-Year Treasury 1.66 1.71 -0.04 1.94 -0.28
30-Year Treasury 2.86 2.89 -0.03 3.12 -0.26
5-Year Exp. Inflation 2.13 2.04 0.10 2.03 0.10
2-Year Agency 0.31 0.31 -0.01 0.35 -0.04
5-Year Agency 0.88 0.89 -0.01 1.09 -0.21
10-Year Agency 2.15 2.15 0.01 2.57 -0.41
2-Year Corporate* 0.63 0.66 -0.04 1.28 -0.66
5-Year Corporate* 1.54 1.58 -0.04 2.34 -0.80
10-Year Corporate* 2.89 2.91 -0.02 3.72 -0.83
30-Year Corporate* 4.12 4.12 0.00 4.80 -0.68
2-Year Municipal** 0.42 0.41 0.01 0.48 -0.06
5-Year Municipal** 1.00 0.99 0.01 1.10 -0.10
10-Year Municipal** 2.12 2.14 -0.02 2.31 -0.19
30-Year Municipal** 3.99 3.99 0.00 4.25 -0.26
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*** $82.50 $82.71 -$0.22 $78.92 $3.58
CRB $285.41 $283.19 $2.22 $303.28 -$17.87
Gold $1,459.10 $1,395.60 $63.50 $1,660.50 -$201.40
Crude Oil $92.98 $88.01 $4.97 $104.55 -$11.57
Unleaded Gasoline**** $2.83 $2.77 $0.06 $2.95 -$0.12

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