Weekly Stock Market Update—October 11, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Earnings season? What earnings season? The partial government shutdown, continued budget discussions, and looming debt ceiling deadline monopolized investor attention again this week–and dictated market behavior. Early in the week, stocks fell as Congress and the White House continued to battle over the budget and lifting the debt ceiling, with much posturing but little evidence of progress toward a resolution. Over the two-day period of Monday and Tuesday, concern about this ongoing standoff drove a 1.9% sell-off for the Dow Jones Industrial Average (Dow) and a 2.0% decline for the S&P 500.

Wednesday brought news that President Obama officially nominated Federal Reserve (Fed) Vice Chairwoman Janet Yellen as the next Fed chairperson. The stock market took some relief in this announcement because: 1) uncertainty and speculation about who might be nominated has now been ended; 2) Yellen is known for her strong support of the quantitative easing program and commitment to the current low interest rate policy; and 3) many expect that she would proceed carefully in winding down the Fed’s economic stimulus actions.

Stocks enjoyed one of their best days of 2013 on Thursday on hopes of progress in Washington. The Dow and S&P 500 both rose by an impressive 2.2% in reaction to news that a deal to temporarily raise the debt ceiling was in the works. Republicans, Democrats and the President all appear to finally be talking. Whether a deal is actually reached before the October 17th deadline remains to be seen with no deal in sight at the close of the weekend.

A resolution to the budget and debt ceiling impasse is clearly of critical importance to equity investors. If Washington is able to reach a compromise next week, focus will shift to third quarter earnings reports that corporate America will be releasing over the next few weeks. Current expectations are for earnings, as represented by the S&P 500 companies, to rise by 4.5% year over year, while forecasts call for revenue to grow by 3.0%. The Street’s expectation for earnings growth has been revised down meaningfully from an early July forecast for earnings growth of 8.5%, so corporate America has a much lower hurdle to clear in meeting expectations once again this quarter.

Current Week Month of October YTD
Dow Jones (INDU) 1.13% 0.79% 18.56%
S&P 500 (SPX) 0.81% 1.37% 21.44%
Nasdaq (CCMP) -0.41% 0.58% 26.85%
MSCI EAFE (EAFE) -0.31% -0.39% 16.31%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
HESS CORP (HES) HES announced an agreement to sell its East Coast and St. Lucia terminal network to Buckeye Partners, L.P., for $850 million. The company intends to use proceeds from the sale to repurchase shares under its $4 billion buyback program. The deal is expected to close in 4Q 2013. Unchanged
COSTCO WHOLESALE CORP (COST) Costco reported 4Q13 earnings of $1.40 per share, below analysts' estimates of $1.46/share, and compared to per share earnings of $1.39 last year. Revenue rose 0.8% to $32.5 billion. Additionally, total September sales increased 6%, and comparable store sales grew3% (vs. expectations of 3.4%). Unchanged
JPMORGAN CHASE & CO (JPM) JPM reported 3Q13 net loss of $380 million, or $0.17 per share. Excluding certain items (primarily litigation charges) operating earnings of $5.8 billion, or $1.42 per share, were above the consensus estimate of $1.17/share, and compared to earnings of $1.40/share last year. Unchanged

Fixed Income Update

The more enduring and important news this week took a back seat to the ongoing fight in Congress to raise the debt ceiling. Hopefully rational heads will prevail and the debt ceiling will eventually be addressed. Changing leadership at the Federal Reserve though will have lasting effects for many years to come.

Janet Yellen has been officially nominated as the next Chairman of the Federal Open Market Committee (FOMC). If confirmed, her term will officially begin on February 1, 2014. The next step in Janet Yellen’s confirmation process is a hearing in front of the Senate Banking Committee. Historically, the hearing takes place roughly two weeks following the nomination. With the ongoing disorder in DC, however, Congress may be too preoccupied to set a date and this may delay the hearing somewhat. Following the hearing, there will be a period, about two weeks, before the Senate Banking Committee takes a formal vote. Then about two weeks further a full Senate vote is scheduled. Under the smoothest of circumstances, Yellen’s confirmation is unlikely before mid-to-late November. Bernanke’s term is scheduled to end on January 31, 2014. Though he remains the leader of the FOMC, he has probably already stepped aside in spirit. Some think this may have happened at the September meeting.

There will be much written and speculated on how a Yellen led Fed will act versus a Bernanke led Fed. Initially, probably not much will change as she is currently Vice Chairman of the Fed. But over time, like most before her, changes will occur.

Since the Janet Yellen news was widely expected, the approaching debt ceiling was the main topic and influence on rates. The most affected sector so far has been short-term Treasury Bills. Even though securities maturing in October come after the date that the debt ceiling is to be breached, the Treasury has the means to pay. The question is more of a political will to pay. With this uncertainty, short T-bill rates increased to 0.50% from 0.01% a month ago. As of this writing, a short-term fix or postponement of the debt ceiling is being discussed. Markets generally like this as at least they are talking. But until a longer term agreement is in place, markets could be volatile.

Treasury yields ranged from unchanged to increasing 4 basis points.

Company Spotlight

BERKSHIRE HATHAWAY-BLK CEDEA (BRKB) Sold $1.55 billion of 3 and 7 year debt Buy / Buy
Reported quartely earnings Buy / Buy
A2 *-/A/A+
Reported quartely earnings Buy / Buy
A2 *-/A+/AA-
Reported quartely earnings Buy / Buy

October 11, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.02 0.03 -0.01 0.18 -0.16
Taxable MMF 0.01 0.01 0.00 0.15 -0.14
2-Year Treasury 0.34 0.33 0.01 0.26 0.08
5-Year Treasury 1.41 1.41 0.00 0.66 0.76
10-Year Treasury 2.68 2.65 0.04 1.67 1.01
30-Year Treasury 3.74 3.72 0.02 2.85 0.89
5-Year Exp. Inflation 1.85 1.85 0.00 2.15 -0.30
2-Year Agency 0.43 0.40 0.03 0.34 0.09
5-Year Agency 1.79 1.76 0.03 0.94 0.85
10-Year Agency 3.37 3.32 0.05 2.24 1.13
2-Year Corporate* 0.83 0.83 0.00 0.70 0.13
5-Year Corporate* 2.32 2.30 0.01 1.59 0.73
10-Year Corporate* 3.96 3.92 0.03 2.91 1.05
30-Year Corporate* 4.93 4.93 0.00 4.14 0.79
2-Year Municipal** 0.53 0.53 0.00 0.45 0.08
5-Year Municipal** 1.49 1.50 -0.01 0.91 0.58
10-Year Municipal** 2.88 2.91 -0.03 2.14 0.74
30-Year Municipal** 4.99 4.99 0.00 4.04 0.95
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*** $80.40 $80.12 $0.28 $79.78 $0.62
CRB $286.61 $286.45 $0.16 $308.87 -$22.26
Gold $1,269.00 $1,309.90 -$40.90 $1,770.60 -$501.60
Crude Oil $101.89 $103.84 -$1.95 $92.07 $9.82
Unleaded Gasoline**** $2.67 $2.61 $0.06 $2.60 $0.07

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