Weekly Stock Market Update—November 8, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

After last week’s statement by the Federal Reserve (Fed) that it has “decided to await more evidence that [economic] progress will be sustained before adjusting the pace of purchases” the equities market is once again scrutinizing economic data for clues about when the Fed could make changes to its quantitative easing program.

There was a series of economic news released during the week with most news meeting or slightly beating expectations. GDP and non-farm payrolls news was the most significant–and market moving. On Thursday, the markets moved meaningfully lower (i.e.; Dow Jones Industrial Average and S&P 500 down 1.0% and 1.3%, respectively) in reaction to the GDP data. The equities market interpreted the better than expected rate of economic activity during the third quarter as a possible sign that the Fed could taper its stimulus program sooner than later. Speculation by many in the equities market has been that the Fed will delay tapering until sometime in 2014. However, the GDP data raised concern that there could now be a possibility of that decision being moved up to December.

On Friday, the government published its monthly non-farm payrolls report for October and the equity markets had the exact opposite reaction. The S&P 500 and the Dow Industrial Average both rose by more than 1% even though the number of new jobs added far exceeded market expectations (204,000 versus expectations of 120,000). The equity markets focused on the fact that the two components that the Fed is monitoring (unemployment rate and labor participation rate) were worse than expected. This led the equity markets to believe that reduced quantitative easing may not be just around the corner after all.

We expect stocks to remain in reactionary mode over the near term, with the pendulum of speculation swinging back and forth as investors consider each new piece of economic data—and how each could influence the Fed’s decisions on its stimulus program.

Current Week Month of November YTD
Dow Jones (INDU) 1.04% 1.49% 22.83%
S&P 500 (SPX) 0.60% 0.89% 26.41%
Nasdaq (CCMP) 0.01% 0.07% 31.25%
MSCI EAFE (EAFE) -0.11% -1.16% 19.35%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
PIONEER NATURAL RESOURCES (PXD) PXD announced Q3 operating earnings of $1.26 per share, $0.09 above the consensus estimate, and compared to earnings of $0.82/share a year ago. Revenue increased 14% y/y to $827 million yet missed expectations of $960 million. Unchanged
PRUDENTIAL FINANCIAL INC (PRU) Prudential reported third quarter operating earnings of $2.94 per share which beat Wall Street's estimate of $2.10/share, and better than $1.53/share reported a year ago. Revenues of $10.8 billion were below analysts' estimates of $12.5 billion. Unchanged
APPLE INC (AAPL) AAPL announced it will open a manufacturing facility in Arizona in partnership with GT Advanced Technologies to make sapphire materials for Apple's electronic devices. Unchanged
QUALCOMM INC (QCOM) QCOM reported fiscal 4Q revenue of $6.5 billion, up 33% from the year ago quarter. Anaysts had expected $6.3 billion. Operating earnings of $1.05 per share missed the Street estimate of $1.08/share, and compared to earnings of $0.89/share a year ago. Unchanged
COSTCO WHOLESALE CORP (COST) Costco reported October comparable sales growth of 3.0%, above the consensus estimate of 2.4%. Changes in gasoline prices and foreign exchange impacted results. Excluding these effects comparable sales rose 6%. Net sales for the month increased 6.4% to $8.15 billion. Unchanged
WALT DISNEY CO/THE (DIS) DIS posted fiscal 4Q operating earning of $0.77 per share, v s. the Street estimate of $0.76/share. Revenue for the quarter rose to $11.6 billion, up 7% y/y, above the consensus estimate of $11.4 billion. Unchanged

Fixed Income Update

The bond market spent most of the week grinding towards lower yields as a surprise move by the ECB to lower their short-term interest rates combined with research articles by Federal Reserve staff. Yields reversed course with the release of October’s employment report on Friday.

Two recent research papers from three Fed economists, including FOMC secretary Bill English, caught considerable attention in the markets this week. Though not a policy signal, since it must have been started some time ago, it does add to the case for more dovish forward guidance next year. The general take away was that the Fed may lower their unemployment guidepost from 6.5% to 5.5% or less thus extending quantitative easing.

Grudgingly catching up to the Federal Reserve was the European Central Bank (ECB). Surprising the markets somewhat, they lowered their short-term interest rate to 0.25% from 0.50%. They felt they had the conditions to do this as inflation in the Euro zone is below their threshold. If economic conditions do not improve, the next step for them is their own quantitative easing (asset purchases) and or negative deposit rates.

With all this recent negative sentiment combined with the government’s shutdown in October, Friday’s employment report was expected to show a marked slowdown. But the headline nonfarm payroll number surprised to the upside with a gain of 204,000 versus expectations of 120,000. As a result, yields reversed course and ranged between unchanged to increasing 15 basis points for the week.

Outside of market action, interesting events continue to happen in the Fixed Income world. The U.S. Treasury is set to bring to market its first new security in 17 years. On January 29, 2014 the Treasury will sell $10 billion to $15 billion of its first floating rate notes. The notes will have a 2-year final maturity date and will be indexed to the weekly 3-month Treasury Bill auction. There will be a sale each month with a new security auctioned the first month of each quarter and reopenings in the next two months. Interest will be paid quarterly. These are the first new U.S. Government securities since Treasury Inflation Protected Securities (TIPS) in 1997. For investors, floaters offer short-term security that’s a hedge against a potential rise in interest rates. For the Treasury, the goal is to provide additional debt that appeal to investors while keeping financing costs low.

Fannie Mae and Freddie Mac, the mortgage financiers seized by U.S. regulators in 2008, continue to pay back the Treasury. Fannie Mae will pay back $8.6 billion this quarter while Freddie Mac will return $30.4 billion. Fannie Mae has now paid back a total of $113.9 billion compared to $117.1 they received and Freddie Mac has repaid $71.345 billion surpassing the $71.226 billion they received. The government does not consider this a repayment but a return on investment.

Company Spotlight

EMERSON ELECTRIC CO (EMR)
A2/A/#N/A N/A
Reported quarterly earnings Buy / Buy
US BANCORP (USB)
A1/A+/AA
Sold $500 million of 5 year fixed & floating rate debt Hold / Hold

November 8, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.02 0.04 -0.02 0.21 -0.19
Taxable MMF 0.01 0.01 0.00 0.14 -0.13
2-Year Treasury 0.31 0.31 0.00 0.26 0.05
5-Year Treasury 1.42 1.37 0.05 0.64 0.78
10-Year Treasury 2.75 2.62 0.13 1.62 1.13
30-Year Treasury 3.85 3.70 0.15 2.75 1.10
5-Year Exp. Inflation 1.82 1.77 0.05 2.04 -0.22
2-Year Agency 0.35 0.37 -0.03 0.32 0.03
5-Year Agency 1.66 1.72 -0.07 0.88 0.77
10-Year Agency 3.31 3.34 -0.03 2.12 1.19
2-Year Corporate* 0.72 0.74 -0.02 0.65 0.07
5-Year Corporate* 2.17 2.22 -0.05 1.50 0.67
10-Year Corporate* 3.89 3.89 0.00 2.75 1.14
30-Year Corporate* 4.88 4.86 0.02 3.97 0.91
2-Year Municipal** 0.47 0.47 0.00 0.43 0.04
5-Year Municipal** 1.40 1.40 0.00 0.92 0.48
10-Year Municipal** 2.90 2.90 0.00 2.13 0.77
30-Year Municipal** 5.00 5.00 0.00 4.01 0.99
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*** $81.26 $80.72 $0.54 $80.79 $0.47
CRB $274.39 $274.96 -$0.57 $291.87 -$17.48
Gold $1,287.80 $1,313.20 -$25.40 $1,726.00 -$438.20
Crude Oil $94.41 $94.61 -$0.20 $85.09 $9.32
Unleaded Gasoline**** $2.55 $2.55 $0.01 $2.45 $0.11

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