March 11, 2013


Last week the DJIA finished the week at a new record high of 14,397 up 2.2% for the week. The big economic news for the week was the monthly jobs report on Friday which came in much better than expected with 236,000 new jobs and a drop in the unemployment rate to 7.7%. This is in spite of the year starting with higher taxes, rising gasoline prices and budget cuts. In addition the last 4 months have seen the strongest increase in hourly wages since the recovery began.

Earnings for the 4th quarter of 2012 also have come in stronger than predicted. Original estimates were for earnings to increase by 1.9%, but now look like they will be up 6.1%. However, guidance for the current quarter is coming in with negatives outnumbering positives by a 4 to 1 ratio resulting in projections for first quarter earnings growth of only 1.4% for the S&P 500.

This week all eyes will be on the retail sales numbers due out on Wednesday and if they come in below expectations it could be an indication that the tax increases and higher gasoline prices are starting to hit consumers. If retail sales are sufficiently disappointing they could trigger a correction in stock prices.

“Wisdom consists of the anticipation of consequences.”
– Norman Cousins

Slow Grind

March 4, 2013


Stocks were mostly flat last week with the S&P 500 posting a minor gain and the Russell 2000 posting a minor loss. For the month of February, the S&P 500 was positive by 1.1% bringing the year-to-date gain to 6.5%. However, stocks have been mostly flat to range bound for more than a month as markets digest the strong gains experienced since November. We wouldn’t be surprised to see the markets take a breather given the recent rise in gasoline prices, the expiration of the payroll tax cut, and now the sequester taking effect. Keep in mind that since 1946 the average intra-year stock market correction has been 14%.

This week’s economic calendar is pretty quiet following the slew of data out last week from housing, GDP, and the sequester. Investors will look for continued progress in the slow grind lower in the unemployment rate from the following reports: Wednesday – ADP report, Thursday – initial jobless claims, and Friday – nonfarm payroll report. Economists are currently expecting job creation around 171,000 with the unemployment rate at 7.8%.

“He who knows nothing is closer to the truth than he whose mind is filled with falsehoods and errors”
– Thomas Jefferson

Held Hostage…

February 25, 2013


Washington, once again, is holding the economy and the markets hostage.  Fears of looming sequestration cuts, along with concerns about slower global economic growth and political instability in Europe contributed to markets losing a bit of ground last week.

The S&P 500 closed lower by 0.3% last week as the streak of seven straight weekly gains came to a close.  The NASDAQ finished lower by 1% while the Dow Jones Industrial Average eked-out a 0.1% gain.

We expect volatility to continue as the US deals with the approaching deadline for sequestration on this Friday – March 1st.  Adding to investors’ squeamishness is Fed Chairman Ben Bernanke’s comments before Congress this week, the upcoming election in Italy and a slew of economic reports.

Investors should not be surprised by corrections … they are quite normal and expected.  Valuations remain reasonable, and we expect to ride-out any impending storm.

Spring is only a few weeks away!

“Compromise is when one person wants to rob a bank and the other person does not, and they compromise to rob a person outside of the bank.”
– Christopher Myers

M&A Up-Cycle?

February 19, 2013


The Markets took a breather last week, with the S&P, Dow and Nasdaq all ending virtually unchanged, while the Russell 2000 small cap did advance by a full percentage point. The action for the week was in individual names, and some are talking about a true Mergers & Acquisition up-cycle [much bigger than the March 2011 false-start]. According to Bloomberg, there were 3,179 deals announced this year [thru 02/15]. These deals total $288B, with an average deal size of $90.7M.

Monday was dominated by Italian and Spanish political turmoil [moreover, 4Q Eurozone GDP shrank 0.6% q-to-q], while Tuesday represented a pause ahead of the State of the Union address.

On Wednesday Comcast reported strong earnings and sooner-than-expected acquisition of GE’s remaining 49% stake in NBCUniversal, which produced 3%+ moves in both stocks.

Warren Buffet stepped up with a $28B purchase of Heinz Thursday, a 20% premium to preannouncement levels.  Wal-Mart dominated mid-session trading Friday when Bloomberg outed internal emails describing its early February sales as a “total disaster”.

Finally, on a much more upbeat note, Maker’s Mark quickly reversed its plan to water its whiskey from 90 to 84 proof. Bill Samuels, chairman emeritus called it the “worst five days in my life”. Its parent Beam, Inc. responded today by advancing 1.8% in a relief rally.

“You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.”
Walt Disney


Good Enough?

February 12, 2013


Last week stocks continued their advance with the S&P 500 up 0.31%, although the DJIA did slip by -0.12%. Fourth quarter 2012 earnings reports for the 2/3rds of companies that have reported so far are beating lowered expectations and are averaging a 7.3% increase. However, a number of companies have lowered forecasts for the first quarter, citing slowing economies in Europe and a hesitant U.S. consumer. Higher social security taxes and concerns over looming government spending cuts are two of the latest government induced drags on the economy. Analysts are now projecting a rise of just 1.7% for earnings in the first quarter this year.

On March 1, $85 billion in automatic spending cuts are set to go into effect unless Congress acts. There have been a number of proposals by both Republicans and Democrats to replace the across the board cuts with more targeted spending cuts or revenue enhancers (tax increases). These negotiations are likely to dominate the headlines as we get closer to March 1. In the short term this may unsettle the equity markets, but in the long run any compromise which reduces government spending and also reduces the deficit will be a positive.

“A statesman is he who thinks in the future generations, and a politician is he who thinks in the upcoming elections.”
– Abraham Lincoln

Upward March?

February 4, 2013

Last week U.S. stocks continued their upward march with the DJIA up 0.8% and the S&P 500 up 0.7%. Year-to-date the Dow is up 6.9% and the S&P 500 is up 6.1%.

Much of last week’s headlines were focused on the U.S. economy. 4th quarter GDP posted its first decline since 2009. Two major areas of weakness came from a slowing of inventory investment and a drop in government purchases. Encouragingly, residential investment jumped 15.3%, equipment and software spending was up 12.4%, and most notably personal consumption spending was up 2.2%—all supportive of a growing economy despite the headline number.

Last week’s Labor Report for January showed continued improvement of 157,000 net jobs created. The previous two months were revised higher by 127,000 jobs, although the unemployment rate did tick up to 7.9%.

We remain constructive on the markets, but would not be surprised or disappointed to see a near-term pull-back given the nice run-up over the past few months.

“Life is 10% what happens to you and 90% how you react to it.” -Charles Swindoll

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