Weekly Stock Market Update—August 2, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Stock market action started on a slow note this week, with investors taking a cautious stance prior to the mid-week release of some important data and commentary. It felt like the summer doldrums had set in. On Wednesday, the anticipated information arrived:

  • Comments from the Federal Open Market Committee (FOMC) meeting. Equity investors have been seeking clues as to when the Federal Reserve’s (Fed) stimulus program might be scaled back. The Fed eased investors’ minds Wednesday when it re-affirmed that these activities will continue unchanged until the labor market improves substantially. The Fed also downgraded its outlook for economic growth slightly–to “modest” from “moderate.”
  • Release of second quarter GDP data. The first view of how the overall economy fared during the second quarter was released, with U.S. GDP coming in at 1.7%, better than the consensus estimate of 1.0% growth. The offset to the apparent better than expected number was the fact that first quarter was revised down from 1.8% to 1.1% and fourth quarter 2012 was revised down from .4% to .1%.
  • Employment information. ADP’s monthly payroll report showed that private sector employers added a better than expected 200,000 jobs in July.

With concern about GDP data and possible Fed moves out of the way, stocks shot up sharply on Thursday. The Dow rose by 0.8%, closing at a new high of 15,628, while the S&P 500 gained an impressive 1.2% and broke through the 1,700 level for the first time. The day’s rally was influenced by Wednesday’s news, as well as the following: 1) comments from European Central Bank (ECB) President Mario Draghi that the ECB’s rates will remain at their present level or lower for an “extended period”; 2) improved data on global manufacturing activity–in both Europe and China; 3) the Institute for Supply Management’s (ISM) manufacturing index for July came in at a much better than expected reading of 55.4, and up significantly from the level of 50.9 reported for June; and 4) initial jobless claims declined more than expected, falling by 19,000 in the prior week–to 326,000.

The market lost momentum on Friday but still closed in positive territory. The Bureau of Labor Statistics (BLS) reported disappointing news that non-farm payrolls in July rose by 162,000–well below the expectation for 185,000 jobs to be added. In addition, revisions were made to May and June data to show a net reduction of 26,000 jobs compared to what was originally reported. While disappointing news, the Fed’s comments that stimulus will be maintained until the employment picture improves implies that any tapering actions are not in the immediate future after this news.

During the week, the stock market closed out one of its best months of 2013, with the Dow rising by 4.1% and the S&P 500 gaining 5.1%. Much of this relief rally came in reaction to increased clarity from the Fed about its timeline for reducing economic stimulus activities. With the flow of news and information likely to slow in the coming quiet summer weeks of August, the market may finally start to enter the summer doldrums.

Current Week Month of August YTD
Dow Jones (INDU) 0.65% 1.02% 21.17%
S&P 500 (SPX) 1.10% 1.43% 21.33%
Nasdaq (CCMP) 2.13% 1.75% 23.05%
MSCI EAFE (EAFE) 1.43% 2.24% 12.56%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
NEXTERA ENERGY INC (NEE) NEE posted Q2 2013 earnings of $1.46 per share, vs. earnings of $1.26/share in the year ago quarter, well above the consensus forecast of $1.28/share. Revenue increased 4.5% (y/y) to $3.8 billion, matching the consensus estimate. Separately, the company announced its subsidiary, Florida Power & Light (FLP), was awarded the Sabal Trail Transmission contract to build a natural gas pipeline in central Florida. NEE will invest approximately $1 billion in the project, taking a one third stake in the project. Additionally, the company won a contract for a second pipeline, the Florida Southeast Connection project, which is expected to cost $550 million. Unchanged
CATERPILLAR INC (CAT) CAT announced that it will repurchase $1 billion of its common stock under an accelerated stock repurchase transaction. Unchanged
EXPRESS SCRIPTS HOLDING CO (ESRX) ESRX reported second quarter earnings of $1.12 per share, $0.02 above the Street's estimate. Revenue of $26.4 billion exceeded analysts' expectations of $25.5 billion, yet lagged Q2 2012 sales of $27.7 billion. Unchanged
JACOBS ENGINEERING GROUP INC (JEC) JEC posted fiscal Q3 2013 earnings of $0.83 per share, $0.02 below the consensus estimate. Revenues grew +11% (y/y) to $3.1 billion, better than the consensus estimate of $2.98 billion. Unchanged
MOSAIC CO/THE (MOS) Russia's fertilizer company Uralkali announced it would exit the potash cartel, Belarus Potash Company (BPC), to produce potash on its own, and lower selling prices. On 8/01/13 we sold Mosaic (MOS). Sell/Seeking Replacement
HESS CORP (HES) Adjusted second quarter earnings of $1.51 per share, beat Wall Street estimates of $1.41/share and compared to earnings of $1.72 in the year ago quarter. Separately, the company has agreed to sell its energy marketing business to Centrica PLC for $1.3 billion. The sale is expected to close in 4Q 2013. Unchanged
AMERICAN TOWER CORP (AMT) AMT reported Q2 operating earnings of $0.25 per share, below the consensus estimate of $0.52. Revenue rose +19% (y/y) to $808.8 million. Management reiterated the midpoint of its 2013 outlook for rental and management segment revenue, and raised the midpoint of its EBITDA growth guidance. Unchanged
SOUTHERN CO/THE (SO) SO reported second quarter operating earnings of $0.66 per share, $0.02 below the consensus estimate. Revenues increased 1.6% to $4.3 billion, in-line with expectations. Unchanged
PIONEER NATURAL RESOURCES CO.(PXD) PXD announced Q2 operating earnings of $1.10 per share, $0.01 below the consensus estimate, but up from earnings of $0.78/share a year ago. Total revenue increased to $1.18 billion, up significantly from $649 million last year. Management revised its production growth guidance to 14%-16%, from 12%-16%. Unchanged
INVESCO LTD (IVZ) IVZ reported second quarter earnings of $0.50 per share, below the Steet expectation of $0.51, and compared to EPS of $0.41 a year ago. Unchanged
PROCTER & GAMBLE CO/THE (PG) PG reported fiscal fourth quarter earnings of $0.79 per share, beating analysts' estimates of $0.77/share, and compared to earning of $0.82/share a year earlier. Revenues rose 2.2% to $20.7 billion, above estimates of $20.6 billion. Unchanged
MYLAN INC (MYL) Second quarter EPS of $0.68 per share topped the Street's estimate of $0.67/share. Revenue grew 1.4% to $1.70 billion, slightly below the consensus estimate of $1.73 billion. Unchanged
CHEVRON CORP (CVX) CVX reported Q2 2013 earnings of $2.77/share, below the consensus forecast of $2.96 per share. Revenue fell 8% (y/y) to $57.4 billion, yet exceeded the Street estimate of $56.0 billion. Unchanged

Fixed Income Update

It was a fairly volatile week in the bond market as 10 year U.S. Treasury yields rose and fell 10-14 basis points depending on the day’s economic data. There was plenty of data for market participants to react to. Many of the economic releases this week beat survey expectations including ADP Employment change, second quarter GDP, manufacturing growth and initial jobless claims. Throwing a wrench in the generally positive data was the non-farm payrolls report that disappointed on the downside at the end of the week.

It is important to keep perspective, and separate the facts from the noise. Let’s look at what the Fed has actually outlined as objectives that may be indicative of a QE wind down (i.e. tapering) and compare them to the actual economic numbers reported.

Inflation

  • Fed objective for PCE Core: 2%
  • Actual PCE Core: 1.2%

Unemployment rate

  • Fed objective: 6.5%
  • Actual current rate: 7.4%

GDP Growth

  • Fed objective for average growth for the first half of the year: 2.2%
  • Actual average growth for the first half of the year: 1.4%

The Fed’s latest policy statement that was released this week reiterated these points again. The Committee asserted that economic activity is expanding, but at a modest pace and inflation persistently below 2.0% could pose risks to economic performance, with the caveat that they anticipate inflation will move towards the 2.0% figure in the medium term. So, where does that leave us?

The actual objectives set out by the Fed clearly are not yet reached and it is our view that stronger data and a more robust pace of growth is going to be required before we see any action toward tapering. It appears that the corporate bond market agrees with this view as we saw spreads to Treasuries narrow in July after a June sell-off that was arguably overdone.

For the week, Treasury yields were mixed, decreasing 1 to 2 basis points on the shorter end of the curve, while increasing 4 to 7 on the long end.

Company Spotlight

PFIZER INC (PFE)
A1/AA/A+
Reported quarterly earnings. Buy / Buy
MERCK & CO. INC. (MRK)
A2/AA/A+
Reported quarterly earnings. Buy / Buy
OCCIDENTAL PETROLEUM CORP (OXY)
A1/A/A
Reported quarterly earnings. Buy / Buy
CORNING INC (GLW)
A3/BBB+/A
Reported quarterly earnings. Buy / Buy
CONOCOPHILLIPS (COP)
A1/A/A
Reported quarterly earnings. Buy / Buy
PROCTER & GAMBLE CO/THE (PG)
Aa3/AA-/#N/A N/A
Reported quarterly earnings. Buy / Buy
INTL BUSINESS MACHINES CORP (IBM)
Aa3/AA-/A+
Sold $2.15 billion of fixed and floating rate debt. Buy / Buy

August 2, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.08 0.07 0.01 0.22 -0.14
Taxable MMF 0.02 0.02 0.00 0.17 -0.15
2-Year Treasury 0.30 0.32 -0.02 0.23 0.07
5-Year Treasury 1.36 1.37 -0.01 0.61 0.75
10-Year Treasury 2.60 2.56 0.04 1.48 1.12
30-Year Treasury 3.69 3.62 0.07 2.55 1.14
5-Year Exp. Inflation 1.94 1.84 0.10 1.83 0.11
2-Year Agency 0.43 0.41 0.02 0.34 0.08
5-Year Agency 1.76 1.63 0.12 0.93 0.82
10-Year Agency 3.36 3.22 0.14 2.13 1.23
2-Year Corporate* 0.78 0.76 0.02 0.81 -0.03
5-Year Corporate* 2.37 2.25 0.12 1.67 0.70
10-Year Corporate* 3.96 3.82 0.14 2.86 1.10
30-Year Corporate* 4.93 4.81 0.12 3.96 0.97
2-Year Municipal** 0.60 0.61 -0.01 0.45 0.15
5-Year Municipal** 1.52 1.53 -0.01 0.97 0.55
10-Year Municipal** 3.07 3.08 -0.01 2.12 0.95
30-Year Municipal** 5.01 4.99 0.02 4.07 0.94
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*** $81.93 $81.66 $0.28 $83.36 -$1.43
CRB $283.77 $284.46 -$0.69 $294.50 -$10.73
Gold $1,307.90 $1,321.50 -$13.60 $1,588.60 -$280.70
Crude Oil $106.79 $104.70 $2.09 $87.13 $19.66
Unleaded Gasoline**** $3.00 $3.00 -$0.01 $2.54 $0.45

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