Weekly Stock Market Update—September 6, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

“Back-to-school” season started on a surprisingly positive note during the holidayshortened week, with the Dow Jones Industrial Average (Dow) and the S&P 500 rising by 0.8% and 1.4%, respectively. Pre-occupation with “Fed Watch” and a possible U.S.-led strike on Syria continued to dominate investor attention. Updates on these two situations are as follows:

  • “Fed Watch:” On Wednesday, the Federal Reserve (Fed) released its Beige Book assessment of recent economic activity. The Fed noted that conditions continued to improve over the past quarter and characterized economic growth as “modest to moderate.” The upbeat comments suggested that the Fed may be close to scaling back its economic stimulus program. The case for tapering was also bolstered by some better than expected economic data during the week, which included: 1) ISM manufacturing data for August; 2) August ADP private employment data; 3) initial jobless claims in the prior week; and 4) ISM nonmanufacturing (services) data for August. However, Friday’s disappointing news that August non-farm payrolls came in below expectations (169,000 jobs were added, fewer than the 180,000 that had been expected) clouded speculation about the Fed’s possible timeline. Uncertainty remains in place and speculation continues to be influenced by new economic data.
  • Syria:Early in the week, influential Republicans John Boehner (speaker of the House) and House Majority Leader Eric Cantor expressed support for a military strike against Syria. This came as President Obama sought congressional authorization for action. Wednesday brought news that the Senate Foreign Relations Committee approved a resolution authorizing limited U.S. military intervention. The Senate approval sets the stage for a debate and vote in the full Senate after Congress returns from its summer recess on September 9th. Equity investors initially took some comfort from this news because it provides a temporary delay to any possible use of military force. Nevertheless, uncertainty (a detestable state of mind for equity investors) is keeping the equities market on pins and needles.

This week, the stock market showed surprising resilience in the face of two highly uncertain events. With next week marking the return of congressional officials, news on possible military action in Syria is likely to take center stage.

Current Week Month of September YTD
Dow Jones (INDU) 0.80% 0.80% 15.95%
S&P 500 (SPX) 1.40% 1.40% 17.78%
Nasdaq (CCMP) 1.97% 1.97% 22.31%
MSCI EAFE (EAFE) 2.18% 2.18% 11.07%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
VERIZON COMMUNICATIONS (VZ) VZ reported that it had entered into an agreement to acquire Vodafone Group PLC’s (VOD) 45% stake in Verizon Wireless, for $130 billion, using a mix of cash and common stock to fund the transaction. The deal is expected to close during 1Q 2014 and be immediately accretive to earnings. Separately the company increased the quarterly cash dividend to $0.53 per share, from $0.52/share. Unchanged
MICROSOFT CORP (MSFT) MSFT has agreed to acquire Nokia’s Devices and Services business for approximately $7.2 billion. The purchase will be paid using offshore cash. The transaction is expected to close in early calendar 2014, and be accretive, on a non-GAAP basis, in fiscal year 2015. Further, Nokia's President and CEO, Stephen Elop, will transfer to MSFT when the transaction closes. Unchanged
APPLE INC (AAPL) Apple will host a media event in the U.S. on Sept. 10, where it is expected to present the latest version of its iPhone. The company has also set up an event in Beijing on Sept. 11. Separately, AAPL announced it will expand its iPhone recycling program, allowing users to sell older models for discounts on new devices. Unchanged
HESS CORP (HES) HES announced that it has authorized an increase to its quarterly dividend to $0.25 per share, up from $0.10/share. Unchanged
COSTCO WHOLESALE CORP (COST) COST reported August same store sales increased 4%, which includes a 2% combined negative impact from foreign exchange and gas price inflation. Results topped analysts' expectations of 3.8% growth. Net sales for the month of August increased 7% to $7.95 billion. Unchanged
AMERICAN TOWER CORP (AMT) AMT has agreed to buy private real estate trust, Global Tower Partners ("GTP"), for a total purchase price of $4.8 billion. The acquisiton will add ~5,000 towers in the U.S. (including key markets such as New York, San Francisco, and Washington D.C.) and Costa Rica. The transaction is expected to close in 4Q 2013. Unchanged

Fixed Income Update

The prospect for military intervention in Syria lessened this week as President Obama has left the decision to Congress. With this, the flight to safety bid in U.S. Treasuries weakened and investors again turned their attention to the outlook of Fed tapering. The 10-year Treasury note reached a high of 3.00% in early Friday morning trading before the release of the all-important employment report. Yields came off their highs after this report came in weaker than expected.

The Fed has stated that the unemployment report and inflation are two of the main statistics they are monitoring to give it guidance on continued future asset purchases. The survey of economists for non-farm payroll for August was an increase of 180,000. The actual number was reported at +169,000 which indicates slightly weaker job growth. The real change occurred to July’s number. This was originally reported at +162,000 but was revised down by 58,000 to +104,000.

Although these numbers do not support a reduction in asset purchases outright, they are not weak enough to change the general consensus that the Fed will begin to taper its asset purchases by $10 to $15 billion as early as this month.

Investors are supporting this view by their actions. Mutual funds that invest in fixed income continue to see outflows. Funds that invest in mortgage-backed securities (16 weeks in a row) and funds that invest in municipal bonds (15 weeks in a row) have seen the most outflows. Investment grade funds that invest in bonds of corporations have now seen 10 weeks of inflows. Investors view that corporate defaults will remain low with an improving economy thus making the credit premium embedded in these securities look attractive.

For the week, yields of U.S. Treasury securities increased 5 to 16 basis points.

Company Spotlight

MICROSOFT CORP (MSFT)
Aaa/AAA/AA+
Announced plans to acquire Nokia's devices & services business for $5.44 billion in cash. Buy / Buy

September 6, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.05 0.08 -0.03 0.21 -0.16
Taxable MMF 0.01 0.01 0.00 0.19 -0.18
2-Year Treasury 0.45 0.40 0.05 0.26 0.19
5-Year Treasury 1.76 1.64 0.12 0.68 1.08
10-Year Treasury 2.93 2.79 0.15 1.68 1.25
30-Year Treasury 3.86 3.70 0.16 2.80 1.06
5-Year Exp. Inflation 1.74 1.79 -0.05 1.98 -0.24
2-Year Agency 0.60 0.48 0.12 0.33 0.27
5-Year Agency 2.12 1.90 0.22 0.95 1.16
10-Year Agency 3.63 3.42 0.21 2.24 1.39
2-Year Corporate* 0.99 0.87 0.12 0.78 0.22
5-Year Corporate* 2.74 2.53 0.21 1.68 1.05
10-Year Corporate* 4.24 4.04 0.20 3.00 1.24
30-Year Corporate* 5.06 4.88 0.18 4.18 0.88
2-Year Municipal** 0.59 0.57 0.02 0.47 0.12
5-Year Municipal** 1.70 1.64 0.06 0.99 0.71
10-Year Municipal** 3.34 3.28 0.06 2.20 1.14
30-Year Municipal** 5.28 5.23 0.05 4.09 1.19
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*** $82.15 $82.09 $0.06 $81.04 $1.11
CRB $293.34 $291.16 $2.18 $308.89 -$15.55
Gold $1,389.10 $1,395.80 -$6.70 $1,703.20 -$314.10
Crude Oil $110.16 $107.65 $2.51 $95.53 $14.63
Unleaded Gasoline**** $2.84 $2.89 -$0.05 $2.62 $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