Monday, March 25, 2013

Market Week: March 25, 2013

The Markets

Global equities took a hit from uncertainty over Cyprus. Domestic equities fared better; though they slid much of the week, optimism about a possible bailout agreement led to a rally on Friday that left them down only slightly.

Last Week's Headlines

In a bipartisan vote, Congress agreed to continue to fund the federal government through September, the end of the current fiscal year. The bill generally maintains the spending levels mandated by the sequester, but allows greater flexibility in how both defense and nondefense cuts will be implemented. Next up in the ongoing arm-wrestling over federal finances will be the issue of whether to raise the debt limit again sometime after May.
After the Cypriot parliament rejected a tax on bank depositors as part of a bailout deal, the country reached a last-minute deal with its international lenders (known as the troika) to restructure the country's banks and impose a tax on deposits over €100,000 to help pay part of the country's debts. The agreement would enable Cyprus to qualify for €10 billion in financial assistance.
Saying that economic gains have been modest, the Fed will continue its current level of bond purchases. However, the amounts may start to vary from month to month if the pace of improvement picks up. The Fed also will continue to maintain interest rates at current levels until the unemployment rate falls to 6.5% from its current 7.7%.
Housing starts rose 0.8% in February, putting them almost 28% ahead of the same time last year. The Commerce Department also said building permits, an indicator of future activity, were up 4.6% for the month and almost 34% higher than last February.
There was more good housing market news from the National Association of Realtors®, which said sales of existing homes were up 0.8% in February. It was the 12th straight month of year-over-year increases in sales, and the 20th month of year-over-year price increases.

Eye on the Week Ahead

The reaction of Russia--a major depositor in Cyprus's banks--to news of a bailout agreement will be of interest to global markets, while data on consumer spending and housing will suggest the state of the U.S. economy.
Key dates and data releases: home prices, new home sales, durable goods orders (3/26); final Q4 2012 gross domestic product (3/28); personal income/spending (3/29).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, March 18, 2013

Market Week: March 18, 2013

The Markets

The S&P 500 came tantalizingly close to its all-time high but couldn't quite manage to top it. Meanwhile, the Dow's 10-day winning streak finally came to an end on Friday. Nevertheless, all four domestic indices pulled off a positive week, with the small caps of the Russell 2000 in the lead once again.

Last Week's Headlines

A 9% spike in gas prices was largely responsible for pushing consumer inflation up by 0.7% in February; that's the biggest monthly increase since June 2009. The Commerce Department said consumer inflation has increased prices overall by 2% since February 2012. Not including food (up 0.1% because of higher produce costs) and energy, prices rose 0.2% during the month. Meanwhile, wholesale prices also were up 0.7%, for a 1.7% annual inflation rate.
U.S. industrial production rose 0.7% in February as utility output returned to normal seasonal levels. The Federal Reserve said utilization of the nation's manufacturing capacity rose to almost 80%, only slightly below its long-term average.
Consumer spending rose 1.1% in February--the biggest increase since September, according to the Commerce Department. Though increased spending at gas stations accounted for part of the increased spending, retail sales other than gas also were up 0.6%, according to the Commerce Department. Total spending was 4.6% higher than last February.
Testimony at a U.S. Senate hearing showed that J.P. Morgan Chase failed to give regulators timely information about the scope of its 2012 losses on its "London Whale" trades in credit default swaps, which cost the bank billions. The hearings have fueled renewed discussion of the so-called Volcker rule, which would restrict banks' ability to make certain speculative investments.
The International Monetary Fund said that though banks in the European Union have made progress in stabilizing themselves, they still face substantial risk from lending losses resulting from continued weakness in the EU economy. Meanwhile, the Federal Reserve agreed to allow 14 U.S. banks to increase dividends or repurchase shares, but expressed concerns about the plans of 4 others.
The tiny island nation of Cyprus may be required to tax bank depositors in order to qualify for a €10 billion bailout of the country's banks by the European Union and the International Monetary Fund. The Cypriot parliament is scheduled to vote on the bailout package Tuesday when banks reopen after a three-day holiday.

Eye on the Week Ahead

Investors will be watching Tuesday's vote in Cyprus because of its potential for a ripple effect in global markets if a rejection of the bailout package destabilized the country's financial system. Wednesday's Federal Open Market Committee announcement is unlikely to call a halt to quantitative easing, but could review some of the options for doing so at some point.

Key dates and data releases: housing starts (3/19); FOMC meeting (3/20); home resales (3/21).

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, March 11, 2013

Market Week: March 11, 2013

The Markets

The Dow finally managed to put the last five-and-a-half years behind it on Tuesday when it surpassed its all-time high of October 2007. Once that milestone was reached, the Dow never looked back, setting fresh records every day for the rest of the week. Meanwhile, the broader S&P 500 was only about 14 points from its own previous high. As money poured into equities, demand for Treasuries fell, sending the 10-year yield soaring.

Last Week's Headlines

The unemployment rate fell to 7.7% from 7.9% in February as the economy added 236,000 new jobs. However, according to the Bureau of Labor Statistics, more than 40% of those without jobs have been unemployed for at least six months, and counting people who are underemployed or who have at least temporarily stopped looking for work would put the unemployment rate at 14.3%. All job gains were in the private sector; governmental agencies cut 10,000 jobs.
U.S. services companies grew faster in February than they have in a year, according to the Institute for Supply Management's index, which rose to 56% from 55.2% the month before. Coupled with last week's encouraging ISM manufacturing report, the growth helped temper concerns about the potential economic impact of recent increases in the payroll tax and gas prices.
After higher oil exports helped cut the U.S. trade deficit in December to $38 billion--its lowest point in three years--an increase in oil imports helped pushed the deficit back up again in January to $44 billion. The Department of Commerce said exports overall were down $2.2 billion, while imports rose $4.1 billion.
The Federal Reserve's "beige book" report showed either modest or moderate economic improvement in 10 of the Fed's 12 districts, with Boston and Chicago reporting slow growth. Anecdotal reports indicated that most districts saw improved consumer spending, strong auto sales, modest improvements in manufacturing and labor markets, increased housing sales, and minimal price and wage pressures.
Increased exports gave China a $15.25 billion trade surplus in February, slightly less than in January. Chinese stocks took a tumble early in the week after the nation's governing body announced plans designed to curb speculation in China's soaring real estate market.
Global status quo: The European Central Bank, the Bank of Japan, and the Bank of England all kept their monetary policies and interest rates unchanged. However, the Bank of Japan's chairman is scheduled to be replaced in April, and a change of leadership could mean fresh stimulus measures there.
Americans worked 2.5% fewer hours in Q4 2012, according to the Commerce Department. That helped cut business productivity for the quarter at an annualized rate of 1.9%. However, productivity rose 0.5% between Q4 2011 and Q4 2012, and was up 0.7% for all of 2012.
New orders at U.S. factories fell 2% in January. However, the Commerce Department said that non-transportation orders were up 1.3%, while business inventories rose for the 15th time in the last 16 months.
All but one of 18 bank holding companies passed the Federal Reserve's most recent stress tests, designed to see how well the banks would cope with extreme economic conditions. Only auto lender Ally Financial fell below the required minimum capital level under the Fed's scenarios. This is the third year such tests have been conducted, but the first under Dodd-Frank guidelines.

Eye on the Week Ahead

Investors will be anxious to see if the Dow's winning streak will continue, and whether the S&P 500 will join it in record territory. Retail sales will be of interest, while quadruple witching options expiration could increase volatility.

Key dates and data releases: retail sales (3/13); wholesale inflation (3/14); consumer inflation, industrial production, quadruple witching options expiration (3/15).

Monday, March 4, 2013

Market Week: March 4, 2013

The Markets

Sequester? What sequester? After a dismal Monday, domestic equities spent the week recovering to end the week not far from where they started. The Dow managed to rise above 14,000 yet again and was only half a percentage point from its October 2007 all-time high. The S&P 500 wasn't far behind; by week's end it was less than 3% away from its pre-2008 top. The interest in equities pushed the 10-year Treasury yield down for a second week.

Last Week's Headlines

U.S. economic growth for the fourth quarter of 2012 wasn't as bad as the Commerce Department's initial estimate. The revised estimate showed annual gross domestic product up 0.1% rather than down by that amount; the final figure will be announced in April. The number is still dramatically lower than the previous quarter's 3.1%. Lower defense spending, local and state government cutbacks, and reduced inventories and exports offset increased home construction and consumer spending.
A nearly 20% reduction in defense spending on aircraft was partly responsible for January's 5.2% decline in new orders for durable goods--the first decrease in five months. The Commerce Department said non-transportation orders were up 1.9%. There also was a slight decline in business spending on capital equipment.
Home prices in the 20 cities measured by the S&P/Case-Shiller index were up in December; the 0.2% increase made 2012's 6.8% gain the best calendar-year growth since 2005, though the average price nationally is still almost 30% below its 2006 peak. And sales of new homes soared 15.6% in January; the Commerce Department said sales were at their highest level since July 2008 and almost 29% higher than a year earlier. However, high sales of lower-priced homes helped push the Commerce Department's January median sale price down more than 9% to $226,400.
Personal incomes fell 3.6% in January; tax-related accelerated payments of dividends and bonuses had temporarily pushed incomes up in December, which accounted for part of the decrease. The Commerce Department said that adjusted for inflation, real disposable personal income was down 4%. The decline didn't seem to affect consumer spending; personal expenditures rose 0.2%, though subtracting price increases would cut that figure in half. The change in income helped cut the nation's savings rate from December's 6.4% to 2.4% in January.
U.S. manufacturers saw expansion for the third month in a row as the Institute for Supply Management's index rose in February to 54.2 (any number over 50 represents growth).
The defeat of Italian Prime Minister and austerity advocate Mario Monti raised questions about how the political parties of Europe's third largest economy will form a functional coalition government, or whether parliamentary gridlock might require new elections.

Eye on the Week Ahead

February's unemployment number--the last pre-sequester report--will be of more than usual interest as budget cuts start to be implemented. In addition to manufacturing data and the Fed's anecdotal report on the economy, the issue of financing federal government operations past the March 27 expiration of the current funding bill may start to get attention.

Key dates and data releases: U.S. services sector (3/5); factory orders, Fed "beige book" report (3/6); business productivity, international trade (3/7); unemployment/payrolls (3/8).