ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

And That's the Week That Was

January 6th, 2013

by Ron Brounes

of Brounes & Associates

Market Matters…

Market/Index

Year Close (2012)

Qtr Close (12/31/12)

Previous Week

(12/28/12)

Current Week

(01/04/13)

YTD Change

Dow Jones Industrial

13,104.14

13,104.14

12,938.11

13,435.21

2.53%

NASDAQ

3,019.51

3,019.51

2960.31

3,101.66

2.72%

S&P 500

1,426.19

1,426.19

1,402.43

1,466.47

2.82%

Russell 2000

849.35

849.35

832.10

879.15

3.51%

Global Dow

1,995.96

1,995.96

1,984.57

2,051.22

2.77%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

1.76%

1.76%

1.71%

1.92%

16 bps

It’s all over but the shouting (and the high-fiving and the congratulatory back-slapping and the name- calling and the blame-placing, etc. etc. etc.). Now that Congress has come together and put partisanship in the rearview mirror to compromise over the potential “Fiscal Cliff” debacle, investors finally can scratch one major uncertainty off of their “things to be concerned about” list. Or can they? In reality, Congress merely put off the inevitable for a couple of months as the “best and brightest” did nothing to address the $110 billion in spending cuts that would have gone into effect on January 1. The first income tax increase in 20-odd years impacts folks earning more than $400k ($450k for couples), but makes no dent in the overall deficit. Now a new (“do nothing”) Congress must figure out how to slash spending without pushing the economy back into recession, while also addressing the debt ceiling issue.

Moody’s Investor Service was unimpressed with the 11th hour deal and claimed that the move “does not provide a meaningful improvement in government’s debt ratios.” (In other words, beware of a Treasury credit rating downgrade.) A key Wall Street exec warned of a rise in the Treasury’s funding costs; a contraction in credit; a reduction in foreign purchases/holdings of US debt; a destruction in market confidence, among other alarming consequences. So much for the congratulatory back-slapping (that almost cost Boehner his Speaker’s job…does he still want it?).

The holiday sales numbers are in and the results were not overly pretty for many retailers. With the threat of fiscal cliff hanging over their heads and many folks still trying to recovery from superstorm Sandy, consumers remained cautious in December and same-store sales were lackluster at best. While Costco, Gap, Macy’s and Nordstrom reaped solid results, Target and Limited were among the weak performers. Shifting to automakers, on the other hand, many consumer were in the market for new wheels as the three majors ( GM, Ford, Chrysler ) each finished 2012 on a strong note. In other biz news, Avis Budget is buying Zipcar for $500 million in a deal that expands its presence in the car-sharing market. Google received a mere slap on the wrist after a two-year Federal anti-trust investigation turned up very little other than some relatively minor patent infringements.

Stocks began the new year exactly how they ended the old…rallying on the anti-Cliff news. The Dow experienced its biggest one day jump in over a year and the two days combined (12/31/12 and 01/02/13) topped the best showing for a new year (last day/first day) ever recorded. The S&P 500 closed at its highest level in five years. Bonds tumbled in the new year as optimistic investors moved funds from the safe-haven of treasuries into risk assets like stocks. The yield on the 10-year jumped to over 1.90%, the highest in eight months. The news out of DC also helped push oil prices to settle above the $93/barrel level for the first time since mid-September. Some late-week news from the Fed raised new concerns about the longevity of the current bond buying programs as dissension among policymakers cask doubt that rates will remain at the current low level indefinitely. The Fiscal Cliff II: two months and counting.

Economic Calendar

Date

Release

Comments

January 2

ISM – Manu (12/12)

Better than expected with nice jump in employment index

Construction Spending (11/12)

Surprising decline in new building

January 3

Jobless Claims (12/29/12)

Volatile during holiday season

January 4

Unemployment Rate (12/12)

Unchanged at 7.8%

Nonfarm Payroll (12/12)

Rebound from Sandy’s impact in November

Factory Orders (11/12)

Solid demand for metals and machinery

ISM – Services (12/12)

Fastest pace in 10 months

The Week Ahead

January 8

Consumer Credit (11/12)

January 10

Jobless Claims (01/05/13)

January 11

Balance of Trade (11/12)

As much as anyone, Dr. Bernanke was instrumental in the stock market’s favorable performance in 2012. The bond buying programs that were enacted under his watch (including the continuation of the $45 billion/month purchase after Operation Twist ended) proved to investors that the Fed would do everything in its powers to keep rates low and stimulate economic growth. The Fed overlooked inflationary fears; housing rebounded; stocks jumped (for the most part). Now the minutes from the most recent policy meeting showed that certain officials want to end the bond buying stimulus sooner than later (now perhaps) as they have become uncertain about any additional long-term benefits of these programs. Bernanke has continued to state that labor will be the driving force in policy decisions and, despite some recent gains, the jobs market is not yet on solid ground.

Speaking of…in December over 150k new nonfarm jobs were added to the economy and the unemployment rate held steady at 7.8 percent. Analysts had hoped for a better showing after the ADP/Moody’s Analytics private sector report showed stronger gains mid-week, though the news calmed some fears that the Fed was prepared to act to end the stimulus anytime soon. News from the manufacturing front was better as the Institute of Supply Management (ISM) index climbed back into expansion mode and factory orders confirmed a continuation of the road to sector recovery from early in the year. Meanwhile, the services sector, as defined by the ISM as well, rose at its fastest pace in 10 months, a nice showing for about 90% of the domestic economy.

News from Europe’s manufacturing sector was less positive as the euro-zone’s purchasing manager’s index fell further into contraction. China’s related index, on the other hand, was unchanged in December as the world awaited word about the Fiscal Cliff and the potential for global trade in the new year. While China has shown nice signs of reemerging as the primary economic superpower, many remain concerned that its internal growth can only take it so far and continued sluggishness in Europe (and the political calamity in the US) will continue to take its toll on the emerging market.

On the Horizon… So much for end of the fiscal cliff talk (maybe a new term is in order?). The partisan bashing has already begun in earnest as both sides are digging their feet in the ground and preparing for another (ridiculous) battle. Some Republicans showed their disdain at the Speaker for his role in the “compromise” and withheld votes for a new term in that role. They are taking shots at entitlement spending and insisting that the Prez make major concessions in this area. Some Dems are still upset about the higher-than-desired wealthy American definition ($450k vs. $250k) and are listing their personal pet projects on the “untouchable” list. Meanwhile, Alcoa kicks off another earnings season and Wells Fargo follows up with a key report from the financial sector. Last quarter, many corporations warned that the last three months of the year could prove unsettling as consumers and biz alike hold off on spending/investing until Washington begins to get its cards in order. At this point, the political cards still appear to be a mess. Another day, another year…same old rhetoric.

The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance is not a guarantee of future performance.

© Brounes & Associates

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