Weekly Stock Market Update—November 1, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Although earnings season continued in high gear during the week, the equity market’s attention once again turned toward the Federal Reserve (Fed), which held its policy meeting on Tuesday and Wednesday. The markets essentially treaded water early in the week, waiting to hear an update on the Fed’s plans regarding its quantitative easing policy. Stock market participants were expecting the Fed to leave its stimulus program unchanged.

The Fed met the stock market’s expectations. After concluding its Federal Open Market Committee (FOMC) meeting on Wednesday, it announced that the economic stimulus program would remain unchanged. In announcing the decision, the Fed referenced some weaker economic data that may be due in part to the partial government shutdown earlier this month. It also noted that activity in the housing market had lost some momentum, along with voicing frustration over how slowly the labor market is healing. The central bank said it would “await more evidence” that the economy is improving before starting to taper its stimulus program.

Also during the week, the month of October came to a close. After all of the anxiety generated by Washington’s battle over the budget and debt ceiling early this month, stocks achieved respectable performance for the month, with the Dow Jones Industrial Average (Dow) gaining 2.9% and the S&P 500 rising by 4.6%.

Third quarter corporate earnings news will start to slow next week and equity investors will likely search for the next market behavior catalyst. Given the Fed’s message that its decisions around the quantitative easing program will be data dependent, it is quite possible that hyper-vigilance over economic data could emerge as the next driver. Many equity market participants are currently speculating that the Fed is unlikely to commence a tapering of its economic stimulus program before the end of the year–with some suspecting that a taper may not happen until well into next year. However, a string of improved economic data could fuel a rise in uncertainty about the Fed’s possible course of action–and timeline. Uncertainty is always a detestable state of mind for the equities market.

Current Week Month of October YTD
Dow Jones (INDU) 0.29% 2.88% 21.56%
S&P 500 (SPX) 0.13% 4.60% 25.66%
Nasdaq (CCMP) -0.52% 3.99% 31.23%
MSCI EAFE (EAFE) -0.42% 3.38% 20.73%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
PIONEER NATURAL RESOURCES (PXD) PXD will sell its Alaska subsidiary, Pioneer Natural Resources Alaska, Inc., to Caelus Energy Alaska LLC, for $550 million cash. The deal is expected to close by the end of the year. Unchanged
APPLE INC (AAPL) Apple reported 4Q 2013 earnings of $8.26 per share, ahead of analysts' estimates of $7.96/share, on revenues of $37.5 billion, up 4.2% year-over-year, and above expectations of $36.9 billion. Unchanged
VALERO ENERGY CORP (VLO) Valero reported 3Q EPS of $0.57 per share, well above analysts' expectation of $0.41/share. Revenues of $36.1 billion grew 4.1% y/y, topping consensus estimates of $29.8 billion. Unchanged
INTL BUSINESS MACHINES CORP (IBM) IBM authorized $15 billion in additional funds for use in the company's stock repurchase program, which is in addition to approximately $5.6 billion remaining from a prior authorization. Unchanged
PRAXAIR INC (PX) PX reported third quarter operating earnings of $1.51 per share, inline with the consensus estimate. Additionally, the company announced that current CFO Jim Sawyer will retire on 12/31/13, to be succeeded by current President Praxair Canada, Matthew J. White. Unchanged
HESS CORP (HES) Hess posted 3Q operating earnings of $1.18 per share, below the Street forecast of $1.44/share, on lower production. Revenues of $2.7 billion matched analysts' estimates. The company revised down its 4Q production guidance on lower volumes in Libya and its Auger platform in the Gulf of Mexico. Unchanged
AMERICAN TOWER CORP (AMT) Fiscal third quarter earnings of $0.45 per share were $0.08 below the Street estimate. Revenues of $808 million increased 13% (y/y), yet missed expectations of $822 million. Unchanged
SOUTHERN CO/THE (SO) Reported 3Q 2013 operating earnings of $1.08 per share, $0.03 below analysts' estimates. Revenues increased modestly to $5.0 billion, yet missed expectations of $5.3 billion. Unchanged
STARBUCKS CORP (SBUX) SBUX reported fiscal 4Q 2013 earnings of $0.63 per share, vs. $0.46/share a year earlier, and above the consensus estimate of $0.60/share. Revenues rose 13% (y/y) to $3.8 billion, in-line with expectations. Unchanged
MYLAN INC (MYL) Third quarter EPS of $0.82 per share topped the Street's estimate of $0.79/share. Revenue declined 2% (y/y) to $1.8 billion, matching analysts' estimates. Unchanged
INVESCO LTD (IVZ) IVZ reported 3Q 2013 earnings of $0.55/share, $0.03 above the consensus estimate, and compared to earnings of $0.43 a year ago. Unchanged
NEXTERA ENERGY INC (NEE) Third quarter revenue increased 14% to $4.4 billion, matching exectations. Earnings of $1.43 per share exceeded the Street forecast of $1.40/share, and compared to $1.26/share last year. Unchanged
CHEVRON CORP (CVX) CVX announced 3Q 2013 operating earnings of $2.57 per share, below the Street estimate of $2.71/share. Revenues of $58.5 billion rose 1% year-over-year, slightly above analysts' estimates of $58.4 billion. Unchanged

Fixed Income Update

As it has been the majority of this year, actions taken by the Federal Reserve took center stage again this week.

Investors’ expectations coming into the latest Federal Open Market Committee (FOMC) meeting, could best be described as unrealistically dovish. And as one could predict, they were disappointed. Previous to this meeting, investors thought that the Fed would continue its current level of quantitative easing (QE) until the employment and other macro targets were hit. Now they think the Fed will begin to taper as soon as the data stops being disappointing. So while there is no timetable on the tapering start, a good data point here and there and the market believes the Fed could begin to taper.

In terms of the actual tapering path that the market believes, we are far from the early September path. The biggest concentration of probability now is that tapering begins in the January-March period versus March and beyond that was expected earlier this week. The chart below shows a view of the markets expectations of tapering just prior to the September FOMC, just prior to Wednesday’s FOMC and now. The path is an indication, not a hard measure of investor expectations.

It has been an interesting month in the municipal market. Municipals are on track to post positive gains for the month where normally in October it is more challenged. It’s really been the supply component, combined with reduced selling pressure, which has set up a more productive tone. During the month, the amount of daily bids wanted have fallen to an average of $712mm per day and is the lowest daily average since May. Heavy mutual fund selling has abated to a large extent and is occurring on a more sporadic basis. This is allowing the secondary bids to stabilize and give these buyers some confidence that yields can hold.

Treasury yields increased 1 to 11 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
Reported quarterly earnings Buy / Buy
Aa3/AA-/#N/A N/A
Sold $1 billion of 5 year debt and $1 billion of fixed & floating rate 3 year debt Buy / Buy

November 1, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.04 0.04 0.00 0.22 -0.18
Taxable MMF 0.01 0.02 -0.01 0.16 -0.15
2-Year Treasury 0.31 0.30 0.01 0.28 0.03
5-Year Treasury 1.38 1.28 0.09 0.74 0.64
10-Year Treasury 2.62 2.51 0.11 1.73 0.89
30-Year Treasury 3.70 3.60 0.10 2.90 0.80
5-Year Exp. Inflation 1.77 1.83 -0.06 2.11 -0.34
2-Year Agency 0.38 0.41 -0.03 0.34 0.04
5-Year Agency 1.69 1.66 0.03 0.99 0.70
10-Year Agency 3.28 3.23 0.05 2.28 1.00
2-Year Corporate* 0.74 0.77 -0.03 0.66 0.08
5-Year Corporate* 2.19 2.16 0.02 1.59 0.60
10-Year Corporate* 3.83 3.78 0.05 2.89 0.94
30-Year Corporate* 4.81 4.77 0.04 4.11 0.70
2-Year Municipal** 0.47 0.48 -0.01 0.47 0.00
5-Year Municipal** 1.40 1.41 -0.01 0.96 0.44
10-Year Municipal** 2.90 2.91 -0.01 2.18 0.72
30-Year Municipal** 5.00 5.01 -0.01 4.04 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*** $80.74 $79.19 $1.55 $80.05 $0.69
CRB $274.96 $282.56 -$7.60 $296.89 -$21.93
Gold $1,313.40 $1,352.50 -$39.10 $1,715.50 -$402.10
Crude Oil $94.64 $97.85 -$3.21 $87.09 $7.55
Unleaded Gasoline**** $2.55 $2.57 -$0.02 $2.47 $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