Archive for ND&S Updates

How Long Can This Keep Goin’ On?

April 29, 2013 


Investors remain puzzled by the buoyancy of the stock market in the face of a sluggish economy.  After a very weak fourth quarter, consensus for Q1 2013 had bounced up to 3 percent growth, so that the first go around release of 2.5% disappointed economists. As a result focus moved to all the negatives that have been noted-weak southern Europe, slower France and Germany, questionable China, uncertain U.S. consumer spending and on and on.

What has been impressive is the U.S. companies’ ability to handle the sluggish revenue picture by delivering good bottom line results. Bellwether General Electric for example reported profit improvement of around 16% as against a very modest revenue increase. 52% of companies reporting so far have exceeded expectations.  The explanation – cost cutting.  Companies have done this by keeping their head count down and controlling capital spending.  Of course this does little to help the effort to reduce unemployment.  Dividend increases have been meaningful, as witnessed last week by Apple’s fifteen percent dividend boost.

We would proffer two other explanations for this good stock market – the extremely loose monetary policy by Mr. Bernanke, “don’t fight the Fed,” and the other adage, “don’t fight the tape.”  One more explanation – rates on money markets and bonds offer little competition at their current levels.  In this light climbing the wall of worry is more manageable.

“Expect the best. Prepare for the worst. Capitalize on what comes.”
– Zig Ziglar

“Unbeatable Determination”

April 22, 2013 


Global growth concerns pressured the market last week. China reported that its first quarter GDP grew 7.7%, which was less than its expected growth of 8%. Coca-Cola and Johnson & Johnson provided some mid-week earnings support, but energy, homebuilding and commodity-related companies slumped. Lower precious metals and energy prices dragged down their respective industries, but did lay the groundwork for lower inflation and a longer-lived domestic industrial revival.

We are in the thick of earnings season, and the market is reacting in its typical schizophrenic fashion. Just over 100 of the S&P500 companies have reported. Although there have been several prominent misses [such as IBM], ~70% of reporting companies have “beaten” forecast results. Reported revenue is lagging, due to pressure on bank’s net-interest-margin, lower commodities prices and foreign exchange pressure from a stronger dollar.

In addition to earnings, economics and energy, the markets’ tone last week was impacted by the terrorist bombing during the Patriots-Day running of the Boston Marathon. Describing the personal tragedies is beyond the scope of this update, but our emergency response and investigative response was exemplary. The support of the citizenry was [and is] inspiring. Let’s observe a moment of silence and relive the scene in the Garden Wednesday evening as Rene Rancourt led the sold out audience in a unifying rendition of our National Anthem.

“America was not built on fear. America was built on courage, on imagination, and unbeatable determination to do the job at hand.”
Harry S Truman

“We must do”

April 15, 2013 


Last week the S&P 500 finished up 2.3% boosted by the positive news that unemployment claims were much lower than expected. First quarter GDP estimates have also been rising with forecasters now estimating growth at around 3%, substantially better than 4Q 2012. However Friday’s retail sales figures were disappointing at – 0.4% and consumer sentiment numbers also fell. Consumers may now be starting to feel the effect of higher taxes on their pocketbooks.

Today China announced first quarter GDP growth of 7.7% vs forecasts of 8.0% further evidence of a global slowdown.

This week earnings reports for the first quarter begin in earnest and analysts have been estimating growth of only about 1.5% for the quarter and the number of companies issuing lowered earnings forecasts has been higher than average. So look for continued below trend economic growth.

“I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.”
-Leonardo da Vinci


April 8, 2013 


Last week the S&P 500 fell 1.01%. This was only the third negative weekly close of 2013, but it was the worst week since the 1.94% plunge at the end of last year. Despite the decline, investors continued to add exposure to equity based funds. For the 1st quarter equity funds experienced net new inflows of $78.9 billion close to the 1990 quarterly record of $80 billion.

Part of last week’s decline was due to the weak March employment report. Job gains decelerated to their slowest pace since last June when investors were faced with a flare up of sovereign risk concerns. The unemployment rate slipped to 7.6%, but only because the labor force participation rate fell to a new low. However, one month does not necessarily mark the start of a new trend, because underlying private domestic demand is strengthening, led by housing. In the interim, concerns about yet another Q2 slowdown will keep monetary policymakers on track with the current pace of asset purchases.

“Pennies do not come from heaven. They have to be earned here on earth.”
Margaret Thatcher

Don’t Worry, Be Happy…

April 1, 2013 


The S&P 500 hit an all-time high last week so don’t worry, be happy … at least that’s what the markets have been telling us lately.  We suspect that the markets will likely push higher into year-end, but it is not unreasonable to expect a 5% or so pullback in the weeks and months ahead.

The S&P 500 closed higher by 0.8% last week as the broad index surpassed its previous peak from 2007.   The NASDAQ finished ahead 0.7% while the Dow Jones Industrial Average gained 0.5% for the week.  The push higher last week was prompted by better-than-expected U.S. gross domestic product growth of 0.4% (ahead of expectations of 0.1%).  Investors also cheered strong U.S. housing data – the largest housing price gain since 2006.

Bonds rallied last week as news of the Cyprus bailout (bail-in?) rattled investors and led to a flight-to-safety into U.S. treasuries.  The benchmark 10-year treasury closed the week at a yield of 1.85%.  It is a bit unsettling; to say the least, that actions by the European Union could lead to a 60% haircut for some depositors in Cyprus banks.  Eurogroup President Jeroen Dijsselbloem caused quite a raucous when he exclaimed that the Cyprus plan could be a blueprint for future EU bailouts.  Dijsselbloem recanted only after he was lambasted by the press for his perfunctory comments.

Market valuations are still reasonable at 14.5X 2013 EPS estimates; however, we suspect that S&P 500 earnings will move lower to $106 or so … at that point the markets would be more or less fairly valued.  The Fed is still on our side so don’t worry, be happy.

“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it you can never get it back.”
– Harvey MacKay