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

Cyprus, Part 2

March 25, 2013


European officials have once again come up with a Cyprus bailout plan. This time the plan will protect deposits up to E100,000 but will result in large depositors taking a haircut of 30% to 70% or more. At least one bank [Cyprus Popular] will be liquidated. The Bank of Cyprus will likely survive, but in an altered form. The Cypriot economy [only E17.5B] will experience a significant recession, probably down 25%+ peak to trough.  Finally, the size of Cyprus’ surviving financial system will be much smaller.

However, Monday’s trading day suggested that the painful Cypriot rescue plan will be a template for several other Eurozone economies.  The Cypriot banks will not open Tuesday [Thursday is now the target opening date]. This delay is making things worse, suggesting that restrictions on financial flows to and from Cyprus will be in place for weeks if not months.

It is becoming harder for Europeans to kick the can down the road.  This makes the US dollar a safe haven, and gives our banks, with their fortress-like balance sheets, a golden opportunity to gain share around the world.

“Procrastination is opportunity’s natural assassin.”
-Victor Kiam

Beware of Greeks Bearing Deposits

March 18, 2013


A better way to put it, beware of Cypriots having their deposits taken by fiat – 6.75% of deposits under  E100,000 and 9.9% on those over E100,000.  This is certainly a most unique way to structure a bailout, one that must have kept the EU, ECB and IMF officials working long hours.  It turns out Cyprus has been a favored spot for agile Russian funds to park.  It’s not surprising then that Putin characterized the plan as “unfair, unprofitable and dangerous.”  The plan requires approval by the Cypriot parliament; we think it probably will not pass in its current format.

A longer term problem is one of perception- the perception that the richer European nations feel comfortable beating up on the poorer and smaller (in this case).  Cyprus has been told to come up with E5.8 billion as their contribution to the bailout plan.  It’s not yet clear how this can be done if the deposit-snatching plan gets hung up.

Meanwhile the U.S. economy and markets have been flourishing- housing has been healthier, industrial production strong, and unemployment claims and new jobs much better.  Negatives have been consumer sentiment and gasoline prices.  On balance the numbers are positive and one Wall Street firm bumped up their 2013 GDP growth estimate to 3.0% from 1.5%.

“Don’t measure yourself by what you have accomplished, but by what you should have accomplished with your ability.”
– John Wooden


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