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

Stock Market Update

The economic data calendar was light this week but the flow of corporate earnings results remained heavy–and was the continued spotlight for equity investors. As a result, most of the market’s behavior this week was shaped by second quarter earnings news. The tenor of results remained mixed, with a number of companies exceeding expectations and others disappointing. This varied picture was not very motivating to investor psychology. As a result, stocks lost some ground. For the overall week, the Dow Jones Industrial Average (Dow) gained .10% and the S&P 500 lost .02%.

Earnings season data has been a driver for stock market performance over the past few quarters. This quarter was no different. However, some sectors have outperformed the market, while others lagged. As the table below illustrates, thus far in the reporting period ½ of the sectors have outperformed the S&P 500 while ½ have underperformed.

Economic Sector Total Return: 6.30.2013—7.25.2013
Consumer Discretionary (cyclicals) +5.0%
Consumer Staples (non-cyclicals) +4.7%
Energy +6.0%
Financial Services +6.0%
Healthcare +6.6%
Industrials +5.4%
Technology +3.7%
Basic Materials +6.0%
Telecommunications +1.6%
Utilities +4.0%
S&P 500 +5.2%

In the coming week, the flow of corporate earnings releases will remain high. Investors will continue to search for signals about the health of corporate America and the economy–and the outlook for things to come in coming quarters. However, with approximately ½ of the S&P 500 companies having already reported (248 through Friday, July 26th), a general perception about the overall quarter has now been set by investors. As such, the likelihood is declining that additional news will change that perception or drive significant market gains from here. As we move into the “doldrums of summer” in August and given the significant gains already achieved by stocks this year, we anticipate that the market is likely to pause, digest earnings season news, and look for the next catalyst for market movement–up or down. Essentially, we think equity investors will move into a “wait and see” mode over the coming month.

Current Week Month of July YTD
Dow Jones (INDU) 0.10% 4.51% 20.39%
S&P 500 (SPX) -0.02% 5.43% 20.02%
Nasdaq (CCMP) 0.71% 6.23% 20.48%
MSCI EAFE (EAFE) 0.62% 6.49% 11.32%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CISCO SYSTEMS INC (CSCO) CSCO announced it will purchase network secruity company Sourcefire for $2.7 billion. The deal is expected to close during the second half of 2013, and be accretive to earnings in fiscal year 2014. Unchanged
APPLE INC (AAPL) Apple's fiscal third quarter earnings and revenue beat Wall Street's estimates on strong iPhone sales. Earnings of $7.47/share were above estimates of $7.31, yet below earnings of $9.32/share in the year ago quarter. Revenue rose 1% to $35.3 billion, slightly better than the consensus estimate of $35.1 billion. During the quarter the company repurchased $16 billion of its common stock. Unchanged
VALERO ENERGY CORP (VLO) Valero reported 2Q earnings of $0.85 per share, short of analysts' expectation of $0.93. Total revenue of $34.0 billion topped estimates of $30.2 billion, yet well below 2Q 2012 revenue of $34.7 billion. Separately, the company raised the quarterly cash dividend to $0.225 per share, from $0.20 per share. Unchanged
CATERPILLAR INC (CAT) CAT reported earnings of $1.45 per share, down from$2.54/share a year earlier, and below the consensus estimate of $1.70. Results were driven by weak demand fromthe mining industry, and steeper than expected inventory reductions by dealers. CAT lowered its FYearnings outlook to $6.50 per share, down fromits previous forecast of $7.00. Unchanged
EMC CORP (EMC) EMC posted second quarter operating earnings of $0.42 per share, and revenue of $5.6 billion, in-line with the Street estimate. Unchanged
PRAXAIR INC (PX) PX reported 2Q earnings of $1.49 per share, $0.01 above the consensus estimate, and compared to earnings of $1.42/share a year ago. Revenue rose 7% year-over-year to $3.01 billion, matching analysts' estimates. Unchanged
QUALCOMM INC (QCOM) QCOM reported 3Q operating earnings of $1.03 per share, in-line with the Street estimate, and better than earnings of $0.85/share a year ago. Revenues rose 35% fromthe year-ago quarter to $6.12 billion, modestly above the Street estimate of $6.06 billion. Unchanged
MEAD JOHNSON NUTRITION CO (MJN) MJN reported 2Q earnings of $0.84, above the consensus estimate of $0.83. Revenues grew 4% (y/y) to $1.06 billion, matching analysts' estimates of $1.04 billion. The company reaffirmed its 2013 guidance range of $3.22-$3.30 per share. Unchanged
STARBUCKS CORP (SBUX) SBUX reported third quarter 2013 operating earnings of $0.55 per share, $0.02 above Wall Street estimates, and compared to earnings of $0.43 per share a year ago. Further, revenues rose 13 % (y/y) to $3.74 billion. The company raised its full year earnings guidance to $2.22 to $2.23 per share, froma previous range of $2.18 to $2.18. Unchanged
ABBVIE, INC (ABBV) SABBV reported 2Q 2013 earnings of $0.82/share, $0.03 better than the consensus estimate. Revenue of $4.69 billion beat expectations of $4.54 billion. Additionally, the company raised its full year EPS guidance, to range from$3.07-$3.13 per share, versus earlier estimates of $3.03 to $3.13. Unchanged

Fixed Income Update

After two weeks of gains in Treasuries, we saw a sell off mid-week across the curve, peaking on Thursday after headline durable goods orders came in better than expected and consumer confidence exceeded forecasts. It was a relatively light week for economic news as investors look forward to next week’s FOMC meeting. Speculation is that the Federal Reserve won’t signal any change to its $85 billion a month in bond purchases.

Continued uncertainty over when the Fed will implement an exit strategy may have contributed to the less than average demand for the $99 billion of 2, 5, and 7 year securities sold by the U.S. over the last few days. There are three bidding classes for the Treasury auctions: direct, indirect, and dealers. Of the three investor classes, indirect bidders, the investor class that includes foreign central banks, demanded more than average for all three auctions.

Mutual fund flows showed outflows in government bonds, but a record week of inflows for high-yield bond funds. $5.4 billion was added, as investors search for yield. Municipal Bond Funds and Mortgage Back Securities have seen outflows now for the last 9-10 weeks.

For the week, Treasury yields increased 1 to 8 basis points.

Company Spotlight

UNITED TECHNOLOGIES CORP (UTX)
A2/A/A
Reported quarterly earnings. Hold / Hold
PEPSICO INC (PEP)
A1/A/A
Reported quarterly earnings. Issued $1.7B of fixed and floating rate notes. 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
3M CO (MMM)
Aa2/AA-/#N/A N/A
Reported quarterly earnings. Buy / Buy
WELLS FARGO & CO (WFC)
A2/A+/AA
Issued $5B in a four part fixed and floating rate debt offering. Buy / Buy
WELLS FARGO & CO (WFC)
A2/A+/AA
Issued $5B in a four part fixed and floating rate debt offering. Buy / Buy
AMERICAN EXPRESS CO (AXP)
A3/BBB+/A+
Sold $1.2B in 3 year floating rate notes. Hold / Hold
JPMORGAN CHASE & CO (JPM)
A2/A/A+
Sold $1.5B in perpetual preferred stock. Buy / Buy

July 26, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.06 0.06 0.00 0.23 -0.17
Taxable MMF 0.02 0.02 0.00 0.17 -0.15
2-Year Treasury 0.31 0.30 0.01 0.23 0.08
5-Year Treasury 1.37 1.30 0.07 0.59 0.77
10-Year Treasury 2.56 2.49 0.08 1.44 1.12
30-Year Treasury 3.62 3.56 0.06 2.50 1.12
5-Year Exp. Inflation 1.83 1.94 -0.11 1.72 0.12
2-Year Agency 0.43 0.42 0.00 0.36 0.07
5-Year Agency 1.64 1.59 0.05 0.92 0.72
10-Year Agency 3.23 3.16 0.08 2.09 1.14
2-Year Corporate* 0.76 0.78 -0.01 0.87 -0.11
5-Year Corporate* 2.24 2.20 0.03 1.71 0.52
10-Year Corporate* 3.81 3.76 0.05 2.88 0.93
30-Year Corporate* 4.83 4.78 0.04 3.97 0.86
2-Year Municipal** 0.60 0.61 -0.01 0.46 0.14
5-Year Municipal** 1.52 1.53 -0.01 1.01 0.51
10-Year Municipal** 3.07 3.00 0.07 2.11 0.96
30-Year Municipal** 4.98 4.90 0.08 4.08 0.90
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*** $81.64 $82.61 -$0.97 $82.81 -$1.17
CRB $284.46 $290.92 -$6.46 $297.47 -$13.01
Gold $1,330.30 $1,292.90 $37.40 $1,615.10 -$284.80
Crude Oil $104.67 $108.05 -$3.38 $89.39 $15.28
Unleaded Gasoline**** $3.05 $3.12 -$0.07 $2.57 $0.48

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