Weekly Stock Market Update—May 17, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Once again, the major equity indices delivered positive performance, making this the 4th consecutive week of gains in excess of 1%. Both the Dow Jones Industrial Average (Dow) and the S&P 500 set new all-time highs throughout the week and at the close on Friday.(The Dow closed at a record 15,354.40, while the S&P 500 closed at a record 1,666.12.) This week’s strength came in spite of mixed economic data and speculation about possible changes the Federal Reserve (Fed) could make to its economic stimulus program. At the beginning of the week, a media article suggested that the Fed could be preparing an exit strategy for its current quantitative easing program. Later in the week, Fed Bank of San Francisco president John Williams commented that the Fed could begin slowing its stimulative bond purchasing activities this summer if the labor market improves. While the market paused initially, the news did not hinder further gains at the end of the week.

Economic data continued to paint a mixed picture. Better than expected reports included: April retail sales, the April producer price index (PPI) and consumer price index (CPI), the May National Association of Home Builders housing market index, April building permits, and the preliminary reading for the University of Michigan’s consumer confidence index for May. Disappointing data, which did not take momentum out of the rally, included: industrial production and capacity utilization for April, April housing starts, regional manufacturing data for May (the Empire State and Philadelphia Fed), and initial jobless claims data from the prior week.

With stocks pushing further and further into all-time high territories, there are two camps of thought: those who believe the market is poised to climb still higher, and those that think a correction is inevitable in the absence of positive catalysts. One thing is certain. With the Dow and S&P 500 up approximately 18% in five short months, increased concern (regarding a number of macro issues, or a potential change in the Fed’s quantitative easing program) could easily trigger a rush to lock in such dramatic and quick gains.

Current Week Month of May YTD
Dow Jones (INDU) 1.67% 3.74% 18.38%
S&P 500 (SPX) 2.14% 4.57% 17.89%
Nasdaq (CCMP) 1.88% 5.28% 16.45%
MSCI EAFE (EAFE) 0.47% 1.06% 12.01%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
HESS CORP (HES) HES management announced the company will separate the positions of Chairman and Chief Executive Officer, electing Dr. Mark Williams as non-executive Chairman of the Board. The Board supported the election of Hess' five new directors after investor group Elliott Management withdrew its five director candidates. Additionally, three of Elliott's director nominees will be added to the 2015 director class. Unchanged
CISCO SYSTEMS INC (CSCO) CSCO reported third quarter operating earnings and revenue of $0.51 per share and $12.22 billion, versus the consensus estimate of $0.49/share and $12.18 billion. Unchanged
APPLIED MATERIALS, INC (AMAT) AMAT reported second quarter operating earnings of $0.16 per share, above the consensus estimate of $0.13, yet down from $0.27 per share a year earlier. Quarterly revenue of $1.97 billion was better than analysts' expectations of $1.91 billion. Management indicated sales would improve modestly in the current third quarter with slight growth across all business segments. Unchanged

Fixed Income Update

Treasury yields experienced a tug of war this week as various economic indicators (domestic and international) showed mixed results.

Yields on Treasury securities (especially longer maturities) increased early in the week as stronger than expected retail sales figures pointed to a strengthening economy. These hopes were cooled off somewhat the next day when German economic sentiment came in weaker than expected along with French and German GDP. As Germany has been the strong link in the European chain and the spread relationship between German bunds and U.S. Treasury bonds is strong, yields on both fell.

Inflation as measured by PPI and CPI was reported weaker than expected. Again this was not just limited to the U.S. but also applied to Europe. Roughly explained, nominal interest rates (interest rates most commonly quoted) are a function of the real rate of interest plus expected inflation. As expected inflation decreases (due to the lower CPI and PPI) interest rates decline, all else being equal.

It is interesting to note that as we enter the summer months that European sovereign debt yields are looking much different than they did this time the last two years. Each of the last few years, stresses grew as some of the weaker European sovereign issuers’ (Greece, Italy, Spain, and Portugal) yields increased to unsustainable levels. These levels could not be maintained and threatened the unity of the Euro. This year, yields are much different. The turning point seems to have been comments from Mario Draghi to do whatever it takes. In just one year, yields on 10 year Greek debt have fallen from 29%to 8%. Portugal has seen its yields fall from 11.75% to 5.17% and Spain’s rates which were once flirting with 7.5% are now at 4.18%. Economic conditions in these countries are still challenged but the major change has been the great amount of liquidity provided by the major central banks across the globe forcing investors to reach for yield and confidence in the ECB to defend the Euro.

For the week, Treasury yields ranged from unchanged to increasing 7 basis points.

Company Spotlight

CISCO SYSTEMS INC (CSCO)
A1/A+/#N/A N/A
Reported quarterly earnings Buy / Buy
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Reported quarterly earnings Buy / Buy
BERKSHIRE HATHAWAY-BLK CEDEA (BRKB)
Aa2/AA/AA
S&P downgraded the firms debt rating Buy / Buy
MERCK & CO. INC. (MRK)
A2/AA/A+
Sold $6.5B in a six-part debt offering. The firms debt was downgraded this week by Moody's Buy / Buy
BANK OF AMERICA CORP (BAC)
Baa2/A-/A
Fitch upgraded the firms debt rating Hold / Hold
AMERICAN EXPRESS CO (AXP)
A3/BBB+/A+
Reported quarterly earnings Hold / Hold

May 17, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.14 0.14 0.00 0.33 -0.19
Taxable MMF 0.05 0.05 0.00 0.23 -0.18
2-Year Treasury 0.24 0.24 0.00 0.30 -0.05
5-Year Treasury 0.83 0.81 0.01 0.73 0.09
10-Year Treasury 1.95 1.90 0.05 1.70 0.25
30-Year Treasury 3.17 3.10 0.07 2.79 0.38
5-Year Exp. Inflation 2.01 2.07 -0.07 1.88 0.13
2-Year Agency 0.31 0.31 0.00 0.44 -0.12
5-Year Agency 0.98 1.00 -0.02 1.07 -0.09
10-Year Agency 2.31 2.32 -0.01 2.35 -0.04
2-Year Corporate* 0.62 0.65 -0.03 1.35 -0.73
5-Year Corporate* 1.62 1.67 -0.05 2.30 -0.68
10-Year Corporate* 3.03 3.07 -0.04 3.51 -0.47
30-Year Corporate* 4.30 4.32 -0.02 4.53 -0.23
2-Year Municipal** 0.43 0.40 0.03 0.47 -0.04
5-Year Municipal** 1.04 1.00 0.04 1.02 0.02
10-Year Municipal** 2.24 2.17 0.07 2.20 0.04
30-Year Municipal** 4.07 3.99 0.08 4.18 -0.11
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*** $84.27 $83.14 $1.12 $81.38 $2.88
CRB $287.60 $288.68 -$1.08 $289.55 -$1.95
Gold $1,357.00 $1,436.60 -$79.60 $1,574.90 -$217.90
Crude Oil $96.06 $96.04 $0.02 $92.56 $3.50
Unleaded Gasoline**** $2.90 $2.86 $0.04 $2.68 $0.22

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