Weekly Stock Market Update—October 25, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Stocks rallied nicely this week on the heels of last week’s news that Congress finally found a way to resolve the debt ceiling and budget battles (or at least postpone them until next year)—and end the partial government shutdown. With these concerns put in the closet for now, equity investors were able to turn their full attention to corporate earnings.

Third quarter earnings season was in high gear this week, with 144 companies releasing their results (~1/4 of the S&P 500). Overall, the theme does not seem to be shaping up much differently than in recent quarters. Earnings results continue to be mixed–with numerous companies delivering better than expected results and several missing expectations. 228 companies have reported thus far, of which 68% have reported earnings above analyst expectations (higher than the long term average of 63%). However, better revenue results remain elusive, with only 54% of companies beating revenue expectations (and below the long term average of 61%). Based on company results released thus far, earnings during the third quarter (as represented by the S&P 500 companies) have risen by 3.3% year-over-year, while revenues have only grown by 2.2%. With revenue growth (topline) slower than earnings growth (bottom line), the takeaway is that many companies are again turning to internal levers and tools in order to enhance earnings and beat expectations. More light will be shed on this trend in the coming week, as another 120 companies release their results–and add depth to corporate America’s overall revenue and earnings experience in July, August and September.

Another key topic next week will be the question that has been looming since May: when will the Federal Reserve (Fed) begin to scale back its economic stimulus activities (i.e.; its quantitative easing program)? After being delayed by the government shutdown, the monthly jobs report was released on Tuesday. Non-farm payrolls for September came in much lower than expected, at 148,000 versus an estimated 180,000. Given the Fed’s repeated message that loose monetary policy will be maintained until employment conditions improve notably, the disappointing report reinforced the equity market’s hope that the Fed may continue to hold off on tapering its bond purchases for a while. This hope will be confirmed or dispelled when the Fed holds its latest policy meeting next week.

Current Week Month of October YTD
Dow Jones (INDU) 1.11% 3.04 21.21%
S&P 500 (SPX) 0.88% 4.77% 25.50%
Nasdaq (CCMP) 0.75% 4.60% 31.92%
MSCI EAFE (EAFE) 0.99% 4.38% 21.88%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
NEXTERA ENERGY INC (NEE) NextEra Energy Inc announced that board of directors appointed President and CEO James L. Robo as chairman of the board, effective Dec. 13, 2013. Robo will succeed Lewis Hay III, who will be retiring as executive chairman effective on that date. Unchanged
EMC CORP (EMC) Reported 3Q operating earnings of $0.40 per share, and revenue of $5.5 billion, below expectations of $0.45/share and sales of $5.80 billion. EMC revised its FY 2013 sales and EPS guidance and now expects revenue growth of 7%, compared with earlier estimates of 8%, and earnings of $1.80/share, vs. previous estimates of $1.85/share. Unchanged
CATERPILLAR INC (CAT) CAT reported third quarter EPS of $1.45 per share, well short of expectations of $1.66/share. Revenues of $13.4 billion missed analysts' estimates of $14.4 billion. Managment revised down its FY 2013 earnings outlook to $5.50/share, down from its previous forecast of $6.50. Unchanged
MEAD JOHNSON NUTRITION CO (MJN) MJN reported 3Q earnings of $0.91 per share, beating the consensus estimate of $0.80. Revenue increased 4% to $1.1 billion, vs. expectations of $998 million. Unchanged
EXPRESS SCRIPTS HOLDING CO (ESRX) Announced third quarter EPS of $1.07 per share, $0.01 below the Street estimate. Management raised the low end of its prior FY 2013 guidance, and issued 4Q13 earnings guidance that was in line with analysts' estimates. Unchanged
EASTMAN CHEMICAL CO. (EMN) EMN reported earnings of $1.68 per share, above analysts' estimates of $1.64/share. Revenues of $2.3 billion increased 4% y/y, matching the consensus estimate. Unchanged
MICROSOFT CORP (MSFT) MSFT announced fiscal first quarter earnings of $0.62 per share, well above Wall Street's estimate of $0.54/share, and compared to earnings of $0.53 reported a year ago. Revenue rose 16% to $18.5 billion, above expectations of $17.8 billion. Unchanged
ABBVIE, INC (ABBV) ABBV reported 3Q 2013 earnings of $0.82 per share, $0.04 better than the consensus estimate. Revenue of $4.7 billion beat expectations of $4.5 billion. Unchanged
PROCTER & GAMBLE CO/THE (PG) Fiscal first quarter earnings of $1.05 per share matched analysts' estimates. Total revenue increased to $21.2 billion, up 2.3% y/y, and above analysts' expectations of $21.0 billion. Unchanged

Fixed Income Update

As the Government is getting back to work, at least until January/February, economic releases that have been postponed are now being released. Unfortunately, the general tone is pointing to a slowing of economic activity.

The all-important employment report for September showed a weaker than expected gain of 148,000 versus a consensus estimate gain of 180,000. While the unemployment rate decreased to 7.2% from 7.3%, this improvement is being viewed with a skeptical eye. Additional economic releases such as the Markit US PMI (purchasing manages report) report were also weaker than expected. Following these releases, investor sentiment has shifted decisively in favor of lower rates. The reasoning is that the FOMC is unlikely to have enough evidence to begin easing its asset purchase program until the first quarter of 2014 and possibly out to April 2014. Also, the likelihood of a renewed budget battle in January/February only reinforces this view. We can expect to see some weaker economic releases in the near future as the effects of the recent partial government shutdown start to be reported.

Demand for Treasuries is also supported by increased regulations. A proposed Federal Reserve liquidity coverage ratio for financial institutions, that goes further than the Basel 3 measure adopted in January, is currently under consideration. This regulation would require the biggest U.S. banks to hold enough easily sold assets to survive a 30 day credit drought under Fed liquidity rules.

The recent rally in bond prices, especially in investment grade and high yield credit sectors, has retraced all that was lost when spreads widened this past spring. High yield spreads are the tightest to Treasuries since May 28th while mutual funds of these two sectors saw $3.7 billion of inflows for the past week.

Treasury yields decreased 1 to 8 basis points this week.

Company Spotlight

Reported quarterly earnings Buy / Buy
Reported quarterly earnings Hold / Hold
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Reported quarterly earnings Buy / Buy
Aa2/AA-/#N/A N/A
Reported quarterly earnings Buy / Buy
Aa3/AA-/#N/A N/A
Reported quarterly earnings Buy / Buy
A2 *-/A+/AA
Sold $1.5 billion of 5 year debt and $2 billion of 30 year debt Buy / Buy

October 25, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.04 0.03 0.01 0.22 -0.18
Taxable MMF 0.02 0.03 -0.01 0.16 -0.14
2-Year Treasury 0.30 0.31 -0.01 0.31 -0.01
5-Year Treasury 1.28 1.33 -0.06 0.82 0.45
10-Year Treasury 2.50 2.58 -0.08 1.82 0.68
30-Year Treasury 3.59 3.64 -0.05 2.98 0.62
5-Year Exp. Inflation 1.83 1.84 -0.01 2.09 -0.25
2-Year Agency 0.42 0.41 0.01 0.36 0.06
5-Year Agency 1.68 1.71 -0.03 1.07 0.61
10-Year Agency 3.24 3.28 -0.04 2.38 0.86
2-Year Corporate* 0.76 0.78 -0.02 0.66 0.10
5-Year Corporate* 2.17 2.20 -0.03 1.65 0.52
10-Year Corporate* 3.78 3.84 -0.06 2.97 0.80
30-Year Corporate* 4.77 4.81 -0.04 4.17 0.60
2-Year Municipal** 0.48 0.47 0.01 0.46 0.02
5-Year Municipal** 1.41 1.42 -0.01 0.94 0.47
10-Year Municipal** 2.91 2.93 -0.02 2.16 0.75
30-Year Municipal** 5.01 5.03 -0.02 4.05 0.96
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*** $79.18 $79.65 -$0.48 $80.04 -$0.87
CRB $282.56 $286.92 -$4.36 $297.74 -$15.18
Gold $1,352.40 $1,314.40 $38.00 $1,712.00 -$359.60
Crude Oil $97.97 $100.81 -$2.84 $86.05 $11.92
Unleaded Gasoline**** $2.59 $2.67 -$0.08 $2.47 $0.12

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