Archive for ND&S Updates

The Wall of Worry has eroded, but is still intact

January 28, 2013 


The S&P moved up 1.1% last week [in spite of AAPL’s 12% decline], producing a 5.4% YTD advance. Washington has kicked the Fiscal Cliff and the borrowing ceiling deadline down the road, and markets seem to be tentatively concluding that the reduction in DC’s crisis atmosphere [the sequester does hit 3/01] will produce positive budgetary results. If the politicians fail to deliver, markets and their rating agency “spokespersons” will ultimately intervene.

Meanwhile, preliminary fourth quarter GDP will be released Wednesday morning, and expectations are for only a modest 1% increase. This compares with the third quarter GDP, which grew by 3.1% [revised up from 2.7%]. Stronger consumption, smaller trade deficit and more government spending powered the upward third quarter revision, but inventories are at unsustainable levels and government spending should [hopefully] decelerate.  Friday’s jobs report should show further employment increases, although not enough to reduce the unemployment rate.

Finally, it is worth noting that rising market averages are masking lower correlation between individual equity participants [32.4 in December, down from 47.2 last June]. This is reducing daily swings in the S&P and increasing the opportunity for individual stock selection.


January 22, 2013 


Some of you , like me, attribute this famous quote to Winston Churchill.  Googling tells me it was FDR not Churchill who spoke these famous words. The context referred to economic fear and concern about declining markets.  Today I read a piece that eased many of my fears on the economy by Citigroup.

The reason for the commentary was a decision to boost their forecast of economic growth from 2.0% to 2.4% for 2013.  In addition they have raised their projected earnings on the S & P 500 to $110 from $108.  One of the undeniable positives is the amount of cash on corporate balance sheets.  In addition to nice dividend increases, corporations repurchased 8 billion shares of their companies in the eighteen month period ending October 2012.

One of the drivers of growth in 2013 will continue to be the housing industry.  Housing starts, housing prices, and housing inventories are all positive. One forecaster predicts the housing industry will be adding 25,000 jobs per month.

The final data point: household wealth last year in the US increased by 8% or $5 trillion.  With interest rates so low, some of this rediscovered wealth should flow over to the equity markets.

Maybe FDR had the right idea about fear.  Prudent investing, taking into account all information available is the way to go.

Inflection Point?

January 14, 2013 


This week earnings season really gets in gear with many of the large financials scheduled to report 4th quarter earnings including Citigroup, J P Morgan and Bank of America, as well as Intel and GE. Look for earnings overall to be up about 3% for the quarter for the S&P 500 which is down considerably from analyst estimates of 14% in the spring of 2012. For 2013 most estimates are for a 7%+ earnings go ahead which could be a stretch given the headwinds of recent tax increases and the as yet unknown budget cuts which may be forthcoming from negotiations over deficit spending.

This year is off to a good start with equities leading the way. So far the S&P 500 is up 3.2% ytd and in the week ended last Wednesday $18 billion has flowed into equity mutual funds and $1.1 billion was pulled from U S Treasury funds. With treasury rates still near record lows and investment grade corporates and junk bonds also at or near record lows this could be the beginning of a shift away from bonds with the average stock yielding 2.2% and the average triple A corporate at 1.6%.

Much could depend on talks on the fiscal deficit in the next few months.

“a strategic inflection point is a time in the life of business when its fundamentals are about to change. that change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”
– Andrew S. Grove, Only the Paranoid Survive


January 7, 2013 


2012 was certainly an unforgettable year with so many headline risks such as: the election, U.S. national debt, slow economic growth and high unemployment, the Eurozone troubles, China slowdown, Facebook IPO, and so on. In the face of uncertainty, global equity markets posted double digit returns, and even the Dow Jones Industrial advanced a 7.26%.

The fiscal cliff was partially resolved last week. For example, the Bush tax cuts were extended for individuals making less than $400k and households making less than $450k. However, the 2012 payroll tax cut was allowed to expire which will reduce consumers’ paychecks. Congress postponed the sequester (spending cuts) until March 1st and they still need to address the debt ceiling.

Regardless, some progress on the deficit has been made.

Fourth quarter earnings season kicks off this week with Alcoa and Wells Fargo. We are interested to hear from both companies as they provide insight into the U.S. and global economies.

“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.”
– Chinese Proverb