Weekly Stock Market Update—September 13, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

After August’s rough month of negative performance and increased volatility, September is shaping up well for the stock market. The month got off to a positive start last week and that momentum accelerated during the current week, as the Dow Jones Industrial Average (Dow) rose by 3.1% and the S&P 500 tacked on a 2.0% gain. Much of this rally was achieved Monday thru Wednesday, driven by enthusiasm about China and receding fears about Syria:

  • China. Favorable economic news from China provided an unexpected aid to investor sentiment. The data included: 1) a much better than expected 7.2% rise in August exports; 2) a stronger than expected 10.4% rise in August industrial production; and 3) a 13.4% rise in retail sales. There has been much concern about how much China’s economy would slow until achieving some level of equilibrium. This data led investors to speculate that it could be stabilizing after slowing for more than two years.
  • Syria. As expected, a possible U.S.–led military strike on Syria continued to dominate investor attention. This week brought some favorable progress on the situation: 1) on Monday, Russia proposed a plan to place Syria’s chemical weapons under international control; the proposal was welcomed by Syrian officials; 2) news reports suggested that an approval from Congress for a military strike is becoming less likely; 3) on Tuesday, Syria accepted Russia’s proposal to surrender its chemical weapons; and 4) faced with resistance in polls and Congress, President Obama asked Congress to delay a vote on authorizing military force (to give the diplomatic efforts a chance) and said on Wednesday that the decision by Syria to place its chemical weapons under international control raised the chances of averting a strike. This chain of events greatly eased fears that a strike seemed imminent.

In the latter half of the week, with concern about Syria easing investor focus shifted to the looming Federal Reserve (Fed) meeting. Stocks drifted moderately to the upside as the market awaited news on this important topic. On Thursday, the U.S. and Russia began meetings to discuss a proposal for Syria’s weapons surrender.

This coming Wednesday will bring what we have all been waiting for–the Fed meeting and a hopeful end to months of uncertainty. Will the Fed announce a tapering of its economic stimulus program? And how will the markets interpret their comments and plans? Those are the key questions that could dictate whether the stock market’s September surge will continue.

Current Week Month of September YTD
Dow Jones (INDU) 3.10% 3.93% 19.54%
S&P 500 (SPX) 2.03% 3.47% 20.18%
Nasdaq (CCMP) 1.72% 3.72% 24.42%
MSCI EAFE (EAFE) 2.67% 5.58% 14.76%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
JACOBS ENGINEERING GROUP INC (JEC) JEC announced an agreement to acquire Sinclair Knight Merz (SKM), a professional services firm that provides consulting, planning, engineering, architecture, scientific, and construction management services. Total purchase price, approximately $1.2 billion cash (AUS$1.3 billion). The transaction is expected to close by the end of FQ1 2014. Unchanged
JPMORGAN CHASE & CO (JPM) JPM's board named two new directors and announced changes in its rules to assure its independence from management. Unchanged
CISCO SYSTEMS INC (CSCO) CSCO announced the acquistion of privately held, data storage maker Whiptail, for $415 million. Unchanged
APPLE INC (AAPL) AAPL introduced two new phone models, an updated high-end iPhone 5S and a lower priced iPhone 5C. Preorders for the 5C will begin on 9/13, and in store sales of both phones will begin on 9/20. The company also announced it will release iOS 7 on 9/18, and Japan's NTT DoCoMo has been added as a carrier provider. Unchanged
VERIZON COMMUNICATIONS (VZ) VZ issued $49 billion of floating rate and fixed rate notes. The proceeds will be used to finance its acquisition of Verizon Wireless from Vodafone Group PLC’s (VOD). Unchanged
INTL BUSINESS MACHINES CORP (IBM) IBM announced that it will sell its customer care business process outsourcing business to Synnex for $505 million, consisting of approximately $430 million in cash and $75 million in stock. Unchanged
QUALCOMM INC (QCOM) QCOM announced a new $5.0 billion stock repurchase program, which replaces the recently completed $5.0 billion program announced on March 5, 2013. Unchanged
PHILIP MORRIS INTERNATIONAL (PM) PM increased the quarterly dividend by 10.6%, to $0.94 per share, up from $0.85 per share. Unchanged
WALT DISNEY CO/THE (DIS) DIS will increase its share buybacks to $6-$8 billion in fiscal 2014, up from~$4 billion. Unchanged

Fixed Income Update

The word to best describe the week is supply. Not only did the U.S. Treasury sell $65 billion of 3-year, 10-year, and 30-year securities but the corporate world saw its biggest sale ever.

Verizon Communications sold $49 billion in securities throughout 8 different maturities and structures. This was to help fund its purchase of the 45% of Verizon Wireless that it did not own from Vodafone Group Plc. This sale was almost triple the previous issuance record of $17 billion from Apple Inc. in April.

Leading up to the sale, a large short (selling what you don’t own) position in Treasuries was set up to protect the issuer against higher rates. This helps explain yields increasing in the early part of the week. To entice buyers, Verizon offered yields that were higher than market rates. Combined with their debt being downgraded by Moody’s and S&P on September 2nd current investors in Verizon debt suffered steep losses. It appears that the company may have been trying to encourage investors not to penalize the company by giving them a very attractive investment while funding their own need at the same time. Additionally, given the large size, major corporate bond indexes that many bond managers track will have to increase the percent they own in Verizon, thus adding more support for the bonds.

The debt sold at very attractive levels and promptly gave investors a profit as demand was huge. It was reported that they had over $90 billion in orders for $49 billion being sold. In fact, bond investors that were lucky enough to buy the debt were rewarded with a quick gain of $2.54 billion after one day. Not only did Verizon pay up to get the sale done but they paid up in fees too. Verizon paid 0.541% of the funds raised in fees to the underwriters. This exceeded the average 0.486% paid on offerings of investment grade U.S. corporate bonds this year. For perspective, Apple paid 0.313%.

As the sale was a huge success, those short positions in U.S. Treasuries were now to be unwound. Conveniently, the U.S. Treasury was selling $65 billion. Not surprisingly these auctions were very well bid and actually sold at lower yields than where they were prior to auction. The sale demonstrated that there is still a large demand for Fixed Income securities, even in the face of higher rate expectations.

For the week, yields of U.S. Treasury securities decreased 2 to 6 basis points.

Company Spotlight

BERKSHIRE HATHAWAY-BLK CEDEA (BRKB)
Aa2/AA/AA
MidAmerican Energy Company, a subsidiary of Berkshire Hathaway, sold $950 million of 5.5, 10 & 30 year debt. Buy / Buy

September 13, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.04 0.05 -0.01 0.20 -0.16
Taxable MMF 0.01 0.01 0.00 0.19 -0.18
2-Year Treasury 0.44 0.46 -0.02 0.24 0.20
5-Year Treasury 1.70 1.76 -0.06 0.64 1.05
10-Year Treasury 2.89 2.94 -0.05 1.72 1.16
30-Year Treasury 3.83 3.87 -0.03 2.93 0.90
5-Year Exp. Inflation 1.80 1.74 0.05 2.21 -0.41
2-Year Agency 0.54 0.53 0.01 0.32 0.23
5-Year Agency 2.00 2.02 -0.02 0.93 1.07
10-Year Agency 3.56 3.56 0.00 2.29 1.27
2-Year Corporate* 0.93 0.93 0.00 0.71 0.22
5-Year Corporate* 2.61 2.64 -0.03 1.61 1.01
10-Year Corporate* 4.18 4.19 -0.01 3.01 1.17
30-Year Corporate* 5.04 5.04 -0.01 4.28 0.76
2-Year Municipal** 0.59 0.60 -0.01 0.42 0.17
5-Year Municipal** 1.72 1.72 0.00 1.01 0.71
10-Year Municipal** 3.32 3.36 -0.04 2.26 1.06
30-Year Municipal** 5.25 5.30 -0.05 4.09 1.16
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*** $81.46 $82.15 -$0.69 $79.26 $2.20
CRB $291.02 $293.34 -$2.32 $317.45 -$26.43
Gold $1,323.90 $1,386.20 -$62.30 $1,769.50 -$445.60
Crude Oil $108.50 $110.53 -$2.03 $98.31 $10.19
Unleaded Gasoline**** $2.77 $2.85 -$0.09 $2.68 $0.09

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