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And That's the Week That Was

January 29th, 2013

by Ron Brounes

of Brounes & Associates

Market Matters…

Market/Index

Year Close (2012)

Qtr Close (12/31/12)

Previous Week

(01/18/13)

Current Week

(01/25/13)

YTD Change

Dow Jones Industrial

13,104.14

13,104.14

13,649.70

13,895.98

6.04%

NASDAQ

3,019.51

3,019.51

3,134.71

3,149.71

4.31%

S&P 500

1,426.19

1,426.19

1,485.98

1,502.96

5.38%

Russell 2000

849.35

849.35

892.80

905.24

6.58%

Global Dow

1,995.96

1,995.96

2,087.80

2,115.30

5.98%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

1.76%

1.76%

1.84%

1.95%

19 bps

Hail to the Chief (love him or hate him)! As Prez O took his oath of office, he laid out a vision for his second term. Of course, Conservatives (and some Centrist Dems) found little to like in his remarks as he appeared to focus on a more “liberal” social agenda at a time that many believed job creation and economic growth should be his top priorities. Perhaps in an effort to shift the public opinion polls in their directions, House Republicans agreed to keep the gov functioning by extending the debt ceiling until mid-May while Congress and the Administration continue to seek “compromise” on budgetary matters. The legislation should provide incentive for politicos to reach a deal or they may be forced to forgo compensation if an acceptable budget agreement is not passed. Tax reform will remain the trickiest issue to overcome as Obama wishes to protect the Middle Class by shifting the burden to the wealthy, while Republicans stand strong in their defense of “no new taxes” (just read their lips).

Earnings season moved into high gear and, for the most part, investors have been very pleased with the better-than-expected results thus far. Heading into the season, many companies had warned about struggling operations at the end of the year as uncertainty over the budget talks cast a pessimistic overtone over the biz community. At this point, those fears may have been overblown. Techs took center stage with IBM, Microsoft, and Google posting solid numbers. Even Netflix returned to profitability as it continued to add streaming customers. Though some analysts feared that the consumer had gone into hibernation during the fourth quarter amid the discouraging bickering out of DC, folks continued drinking Starbucks coffee, eating McDonalds fries, and using Procter & Gamble products.

Not all numbers came up roses, however. Despite record sales of iPads and iPhones, investors were disappointed in Apple ’s shrinking margins and overall results as the mobile device giant faced increasing competition from rivals. Since September 2012, Apple shareholders have seen its valuation plummet by about 35% (for no definitive reason) and the one-time largest domestic company by market capitalization has been replaced by previous leader Exxon-Mobil, just a year after the two behemoths flip-flipped places on the charts (when Apple became number one). In other corporate news, Microsoft seems to have entered the Dell buyout talks as a potential (billion dollar) partner with private equity firm Silver Lake.

Investors pushed stocks higher on the mostly favorable earnings (sorry Apple) with the S&P busting 1500 and enjoying its longest winning streak (seven days) since late 2004, while the Dow Jones closed at its highest level since October 2007. The markets were also driven higher by a newfound optimism out of DC. (Haven’t we felt this way before only to be disappointed and turned off?) Crude prices rose to around $96/barrel on shrinking inventories (after seven consecutive weeks of gains) and prospects for an improved economy based on recent data and earnings. With just a few days left in January, stocks remain firmly in positive territory and investors can take solace in the fact that (typically) “as January goes, so goes the market for the year.”

Economic Calendar

Date

Release

Comments

January 22

Existing Home Sales (12/12)

Unexpected monthly decline, but 2012 was best in 5 years

January 24

Jobless Claims (01/19/13)

Lowest point since January 2008

Leading Eco. Indicators (12/12)

Gain suggests stronger growth in months to come

January 25

New Home Sales (12/12)

Disappointing decline in December

The Week Ahead

January 28

Durable Goods Orders (12/12)

January 29

Consumer Confidence (01/13)

January 30

GDP – 4th qtr

Fed Policy Meeting Statement

January 31

Jobless Claims (01/26/13)

Personal Income/Spending (12/12)

February 1

Nonfarm Payroll (01/13)

Unemployment Rate (01/13)

ISM – Manu (01/13)

Construction Spending (12/12)

Though housing has been spearheading the strength in the domestic economy, December proved a month to regroup as the sales numbers helped squash some of the recent optimism. Still, the overall results for 2012 were extremely positive and analysts hope that December proves to be an end-of-year aberration. Existing home sales declined in December, but the full-year numbers proved to be the strongest in five years. Likewise, new home sales fell last month, but remained 20% above the levels of last year this time and median prices have increased almost 14% from December 2011. New claims of unemployment benefits fell to a five-year low last week, a promising sign for the labor market. The index of leading economic indicators jumped in December (and was revised higher in November) as prospects for future domestic growth seem favorable.

Looking abroad, European Central Bank (ECB) Prez Draghi believes that the region finally has hit rock bottom and has seen its weakest days. Literally hundreds of banks which participated in an ECB stimulus plan that provided them with cheap borrowing terms are paying back those loans on the first day allowed by terms of the program. In Germany, a business confidence index soared well above expectations and its purchasing managers’ index climbed comfortably into expansion mode. However, not all is rosy throughout the EU. The overall euro-zone purchasing managers’ index still signals contraction and France’s fell to its lowest ever since March 2009. Spain’s unemployment rate hit a record 26% in the fourth quarter, putting a huge damper on Draghi optimistic assessment. Meanwhile, China’s manufacturing sector accelerated in January, another sign that the emerging market has regained its footing. The Bank of Japan announced a sizable (open-ended) bond purchase program as it continues to fight off the deflation that has been dramatically impacting its economy.

Recently released transcripts from 2007 reveal that Bernanke and friends “may have” underestimated the housing debacle which nearly led to a total collapse of the global financial markets. My has Dr. B. changed his tune. In 2007, he was reluctant to cut rates to limit the damage and now he continues reiterating his intent to keep rates at these low levels for the indefinite future and even initiated all kinds of non-traditional stimulus plans to strengthen the economy. The Fed’s balance sheet recently topped the $3 billion mark for the first time ever as the policymakers remain committed to buying bonds until the labor markets shows even more improvement. (We’ll see how committed next week.)

On the Horizon… The Fed meets for the first time in 2013 and expect some dissention as officials debate the longevity of the bond buying program, given the recent favorable signs from labor. Oil giants Exxon Mobil and Chevron release earnings as does online retailer Amazon.com. A host of economic data led by manufacturing and labor (and GDP) provide new signs about the overall strength in the economy.

Global

ECB

European Central Bank President Mario Draghi said the worst for the region was over.

Hundreds of European banks are rushing to repay cheap three-year funds they borrowed from the European Central Bank a year ago, a show of confidence that financial markets are returning to health three years into the region's debt crisis.

The ECB will be repaid €137 billion from 278 banks on Jan. 30, the first day that banks can pay back the loans early, more than one-quarter of the €489 billion that banks tapped from the ECB in December 2011.

Europe

A German business-confidence index surged in January, well of above expectations.

Business activity rebounded in Germany at the start of 2013 but plunged in France and other parts of the euro zone, highlighting Europe's deepening economic divide as policy makers struggle to resolve the three-year-old debt crisis in Southern Europe.

The euro-zone purchasing managers' index climbed one point to 48.2 in January, according to data firm Markit and though the index remains below 50, signaling contraction, it reached a 10-month high.

Germany's PMI jumped more than three points to 53.6, well above the break-even point of 50 between expansion and contraction, while France's index tumbled 1.9 points to 42.7, its lowest point since March 2009.

Spain's unemployment rate reached a record 26% in the fourth quarter, the latest sign of deepening recession.

The U.K. economy shrank more than expected at the end of last year, leaving Britain at risk of its third recession in four years and putting more pressure on the government.

China

A preliminary gauge showed Chinese manufacturing activity accelerating in January, indicating positive momentum for the country's economy in the new year.

Japan

The Bank of Japan agreed to launch an "open-ended" bond purchase commitment to ending deflation through asset purchases, and adopted for the first time a firm 2% inflation target in a document jointly issued with political leaders, a major transformation for Japan's economy as the BOJ expects consumer prices to fall by 0.2% in the current fiscal year ending March 30—and rise by just 0.4% next year.

Japan's trade deficit nearly tripled to a record $78.3 billion last year, as a strong yen, territorial tensions with China and surging energy imports took their toll.

Data

Sales of previously owned homes in the U.S. slipped unexpectedly in December, but the sales pace 12.8% above the same month a year earlier and 2012 still ended with the most robust sales in five years as the housing market aided the sluggish economy.

Manufacturers in the central Atlantic region said activity is contracting this month, the Federal Reserve Bank of Richmond reported.

The number of U.S. workers filing new applications for jobless benefits fell to another five-year low, indicating a strengthening labor market, as the measure of layoffs fell by 5,000 to its lowest point since January 2008, near the start of the recession, and the four-week moving average of claims, fell by 8,250 to 351,750, its lowest level since March 2008.

The index of leading economic indicators rose 0.5% in December, suggesting better growth ahead

after no change in November which was originally reported as falling 0.2%.

Sales of new homes in the U.S. fell in December but ended 2012 well above a year earlier (20%), marking the beginning of a recovery for the building industry, while the median price for a new home sold in December was $248,900, up 13.9% from $218,600 a year ago.

Fed

2007

Federal Reserve officials in 2007 appeared to underestimate the sickly condition of U.S. financial markets before shifting to a state of growing alarm, according to 1,566 pages of newly released transcripts from the central bank's meetings that year.

During most of the year, Fed Chairman Ben Bernanke embraced only reluctantly the interventionist stance that has defined his stewardship of the central bank and in December 2007, he was "quite conflicted" about whether to cut interest rates sharply.

Janet Yellen, the Fed's No. 2 who is now a leading contender to succeed Mr. Bernanke when his term expires in January 2014, became alarmed about the impact of housing-market stresses on the economy early on and became a leading advocate for aggressive action.

U.S. Treasury Secretary Timothy Geithner, who at the time was president of the Federal Reserve Bank of New York, appeared early on to underestimate the growing financial stress.

Balance Sheet

The U.S. Federal Reserve‘s balance sheet topped $3 trillion for the first time as the central bank continued with its easy-money policy as the Fed’s portfolio has more than tripled since the financial crisis of 2008 and 2009, as the central bank bought government bonds and mortgage-backed securities in an effort to keep interest rates low and to stimulate the economy.

In December, Fed officials committed to buying $40 billion of mortgage-backed securities and $45 billion of long-term Treasurys each month, until the labor market improves significantly, though recently, some have sounded differing opinions on how long it should continue buying bonds, with some leaning toward ending the purchases before the end of the year.

On the Horizon…

Fed Meeting

Economy: hectic week (manu, jobs, GDP)

Earnings:Caterpillar (1/28), Amazon.com, Ford (1/29), UPS (1/31), Exxon, Chevron (2/1)

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

www.ronbrounes.com

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