Weekly Stock Market Update—November 15, 2013
By Steve Scranton, SVP, CFA
Chief Investment Officer

Stock Market Update

Stocks continued to rally this week, with the major indices pushing their way further into uncharted territory. The Dow Jones Industrial Average (Dow) tacked on an additional 1.4% this week, closing at a record level of 15,961.70. Meanwhile, the S&P 500 gained 1.6%, taking the index to a new record-high level of 1,798.18. Speculation is rising that the S&P 500 index could take a run at the 2,000 threshold this year.

Information and events this week bolstered hope that the Federal Reserve (Fed) might leave its quantitative easing program unchanged for a longer period than has recently been expected. Key among them was testimony by Fed Vice Chair Janet Yellen at her confirmation hearing in front of the Senate Banking Committee. To the equity market’s delight, her testimony at the hearing confirmed the hope that she could be slightly more dovish than Chairman Bernanke. This reassured stock market participants and bolstered expectations that news of a tapering might not be right around the corner in December–and could be delayed until sometime next year.

Stocks, as represented by the S&P 500, have now achieved a stellar year to date gain of 28.5%, thanks in large part to the perceived and/or real economic support coming from the Fed’s bond-buying stimulus program. Because of its significant effect on the market, we expect equity investors will remain keenly focused on clues regarding when the Fed might start to taper its stimulus program. While optimism is buoyant this week, the pendulum could swing in the opposite direction on new economic data. Expect all eyes to remain on economic data and Fed commentary.

Current Week Month of November YTD
Dow Jones (INDU) 1.37% 2.88% 24.51%
S&P 500 (SPX) 1.61% 2.52% 28.46%
Nasdaq (CCMP) 1.74% 1.82% 33.53%
MSCI EAFE (EAFE) 1.01% -0.68% 19.94%

Updates to the Equities Buy List:

Company Name News Event Impact to Our Company View
CISCO SYSTEMS INC (CSCO) CSCO reported fiscal Q2 operating earnings of $0.53 per share, $0.02 above the consensus estimate. Revenue of $12.1 billion rose 2% (y/y) and missed forecasts of $12.4 billion. Management expects Q2 revenue to decline in the range of 8%-10% on a year-over-year basis. Unchanged
APPLIED MATERIALS, INC (AMAT) AMAT reported fiscal fourth quarter earnings of $0.19 per share, vs. the Street expectation of $0.18/share. Revenue for the quarter increased 20% to $2.0 billion, modestly exceeding estimates of $1.97 billion. Unchanged

Fixed Income Update

What will Janet say? This was the question on investors’ minds as she spoke at her nomination hearing before the Senate Banking Committee.

Janet Yellen, nominated to be the next chairman of the Federal Reserve, said the economy and labor market are performing “far short of their potential” and must improve before the central bank can begin reducing monetary stimulus. “A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases.” She also said, “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” During her question and answer session, she seemed to say all the right things as there was little contentious questioning from the Senators.

The bond market liked what they heard as bond prices rallied and yields fell. The most affected sector of the yield curve was the 5 year to 7-year maturities. However, there are some doubts lingering in investors’ minds of how Yellen will deal with:

  1. If U.S. payrolls and data keep to the strong side will the Fed keep pumping money into the economy?
  2. How will she deal with dissenting members at FOMC votes and a significant minority indicating that tapering should begin?
  3. At $45 billion per month, QE means the Fed is buying a big majority of Treasury issuance next year. The Fed already owns more than 40% of the existing stock of Treasuries that mature in 5+ years.

Questions are natural for any new leadership but for now, Janet Yellen is saying all the right things. She has been a major influence at the Fed the last few years and is expected to continue the current policies.

Last week I mentioned that Fannie Mae and Freddie Mac, the mortgage financiers seized by U.S. regulators in 2008, had now paid back almost all of what they received in aid from the government. The changing fortunes at the two companies have attracted the attention of the private equity world. Fairholme Capital has proposed to buy the guarantee business of Fannie Mae and Freddie Mac for $52 billion and Pershing Square has taken just under 10% stakes in the two companies. Private equity has been big buyers of the junior preferred shares of the companies and through this proposal they would be credited at par value on the securities while they currently trade close to one-third par value.

For the week, yields declined between 3 and 7 basis points.

Company Spotlight

CORNING INC (GLW)
A3/BBB+/A
Sold $250 million of 10 year debt Buy / Buy
MORGAN STANLEY (MS)
Baa2/A-/A
Moody's lowered the firms debt rating to Baa2 from Baa1 Hold / Hold
GOLDMAN SACHS GROUP INC (GS)
Baa1/A-/A
Moody's lowered the firms debt rating to Baa1 from A3 Hold / Hold
JPMORGAN CHASE & CO (JPM)
A3/A/A+
Moody's lowered the firms debt rating to A3 from A2 Buy / Buy
CISCO SYSTEMS INC (CSCO)
A1/A+/#N/A N/A
Reported quarterly earnings Buy / Buy
WAL-MART STORES INC (WMT)
Aa2/AA/AA
Reported quarterly earnings Buy / Buy

November 15, 2013

Current Last Week Week Change Last Year Year Change
Tax-exempt MMF 0.02 0.02 0.00 0.20 -0.18
Taxable MMF 0.01 0.01 0.00 0.13 -0.12
2-Year Treasury 0.29 0.31 -0.03 0.24 0.04
5-Year Treasury 1.34 1.41 -0.07 0.62 0.72
10-Year Treasury 2.70 2.75 -0.05 1.59 1.11
30-Year Treasury 3.79 3.85 -0.06 2.73 1.06
5-Year Exp. Inflation 1.86 1.82 0.03 1.98 -0.12
2-Year Agency 0.38 0.38 0.00 0.28 0.09
5-Year Agency 1.70 1.77 -0.07 0.85 0.84
10-Year Agency 3.40 3.46 -0.07 2.10 1.30
2-Year Corporate* 0.76 0.76 0.01 0.64 0.12
5-Year Corporate* 2.23 2.28 -0.05 1.49 0.74
10-Year Corporate* 3.99 4.04 -0.05 2.75 1.24
30-Year Corporate* 4.99 5.02 -0.03 3.95 1.04
2-Year Municipal** 0.48 0.47 0.01 0.48 0.00
5-Year Municipal** 1.41 1.40 0.01 0.90 0.51
10-Year Municipal** 2.91 2.90 0.01 2.03 0.88
30-Year Municipal** 5.01 5.00 0.01 3.95 1.06
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*** $80.82 $81.30 -$0.48 $81.08 -$0.26
CRB $274.34 $274.39 -$0.05 $292.84 -$18.50
Gold $1,287.50 $1,284.60 $2.90 $1,713.80 -$426.30
Crude Oil $94.74 $94.60 -$0.86 $85.45 $8.29
Unleaded Gasoline**** $2.66 $2.55 $0.10 $2.48 $0.17

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