The major stock market averages were on track for another weekly gain until the trend reversed course on Friday. Greece was once again a culprit, on concerns that efforts to keep them from defaulting were failing. European leaders said the debt-laden country needs to make more cuts in order to be granted bailout funds. Additionally, Greek workers went on strike and some street protests turned violent. These headlines instilled negative sentiment into the markets. The S&P and the NASDAQ had their five-week win streaks snapped last week, and the Dow had its worst day of the year on Friday. We are not complaining too loudly though.

If the stock market was in the same mood/temperament as last year, the negative headlines out of Greece would have inflicted much more damage to the averages (as they in fact did last year), instead of just nicking them. As it is now, the Dow trimmed its losses nicely in the final minutes of trade on Friday, and we certainly don’t begrudge the major indexes for a slight retreat after such a nice start to the year.

The Dow Jones Industrial Average fell .47% to 12,801. The NASDAQ Composite lost .06% to 2904, and the Standard & Poor’s 500 declined .17% to 1343. These averages will have plenty of events/data to digest during the week ahead.

European Union finance ministers meet on Wednesday to consider a rescue package for the troubled country (the Greek parliament voted to approve austerity measures last night, paving the way for it to receive another tranche of bailout money). Also on Wednesday, the Federal Reserve publishes minutes from its last meeting. Economic data out during the week includes January Retail Sales, January Industrial Production, Initial Jobless Claims, January Leading Indicators, and the February Fed Survey. Additionally, 50 companies in the S&P 500 are scheduled to release earnings reports.

According to FactSet – of the 350 companies that have reported earnings to date, 68% have reported actual EPS above the mean estimate, which is below the average of 73% over the previous four quarters. In an interesting dissection of earnings results, two companies account for most of the earnings growth in the S&P 500 for the quarter – Apple and AIG. If these two companies are excluded from the index, the Q4 2011 earnings growth rate for the S&P 500 drops from 5.5 to .8 percent (also according to FactSet).

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

After a week of mixed messages, the benchmark Standard & Poor’s 500 Index finished essentially flat, adding just .07% to close at 1,316. The Dow Jones Industrial Average lost .47% to 12,660. The NASDAQ Composite gained 1.07% to 2,817.

The two major pieces of economic news last week came from the Commerce Department and the Federal Reserve. The Commerce Department reported that U.S. Gross Domestic Product grew 2.8% in the fourth quarter of 2011. This was the best rate in a year and a half (good news), but below the 3% that was widely expected by the markets (bad news).

The Federal Reserve decided “to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”. On one hand this is good news as low interest rates and tame inflation are good for the markets. On the other hand, this Fed policy indicates they believe the economy needs more policy help.

Earnings reports were also a good news/bad news story. Apple was a highlight on the upside as they announced blockbuster results, in what was one of the best quarterly reports ever. On the other side, major names such as Procter & Gamble, Chevron, and AT&T disappointed with their reports/guidance. Of the 172 S&P 500 companies that have reported so far, 65% have reported earnings above the mean estimate (according to FactSet Research). This remains somewhat below what we have become accustomed to over the past several quarters.

We’ll see what happens this week as approximately 100 S&P 500 companies will be reporting earnings – including household names such as ExxonMobil, Pfizer, Merck, Kellogg, and Amazon. Perhaps most anticipated by the markets though, is the expected Initial Public Offering filing of Facebook this week. Beyond all the economic and corporate facts and figures though, is a bigger picture market change we are seeing.

Generally speaking, we believe the markets are becoming more and more resilient to negative news/events out of the Eurozone. Despite some weakness this morning due in part to Portugal and Greece, the U.S. markets are seemingly more able to withstand, and react less negatively to bad news from across the pond. Reactions can change at any time, but at least for now the markets primary focus seems to be shifting back to this side of the Atlantic.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

In the week ahead a dozen of the Dow 30 components are scheduled to report their earnings, along with about one-fourth of the companies in the Standard & Poor’s 500 Index. Notable names reporting this week include Apple, Johnson & Johnson, McDonald’s, Procter & Gamble, AT&T, Amgen, Caterpillar, Colgate-Palmolive, Ford, and Chevron.

Of the 60 S&P 500 companies that have already reported earnings for the fourth quarter of 2011, 62% have reported earnings above the average estimate (according to data from FactSet Research). This is lagging the levels that we have been accustomed to seeing in the past several quarters, when over 70% of companies exceeded analyst estimates. So far we have certainly seen a few misses and there has been a general ratcheting down of expectations. Nevertheless, some high profile earnings beats by the likes of IBM, Intel, and Microsoft have injected enthusiasm into the markets and generated optimism for upcoming reports.

Additionally, stocks are moving on the big picture of a gradually improving domestic economy along with an overall reduction in the stress level regarding the euro zone crisis. With each passing week, European events seem to be less and less of a driving force in our financial markets. One of the results of this has been a reduction in market volatility and a less tumultuous investing environment. So when it was all said and done last week, the major stock market averages posted decent gains.

The Dow Jones Industrial Average rose 2.4% to 12,720. The NASDAQ Composite gained 2.8% to 2787 and the Standard & Poor’s 500 Index added 2% to 1315. In addition to trading off of earnings in the week ahead, these indices will have plenty of macroeconomic data to digest.

Reports on December Durable Goods Orders, December Leading Indicators, December New Home Sales, and Initial Jobless Claims all have the potential to move markets – as do two other events in the week ahead. On Wednesday the Federal Reserve releases its economic outlook, after which Chairman Bernanke holds a press conference. Also, fourth quarter Gross Domestic Product is released on Friday and street estimates are for economic growth of around 3%, its best pace since the second quarter of 2010.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

Fourth-quarter earnings season “officially” begins today when aluminum company Alcoa reports after the closing bell. Street expectations are that Alcoa will lose a penny a share on revenue of $5.76 billion. The other big report this week will be on Friday when financial giant JPMorgan Chase & Co. is seen posting a profit of 93 cents per share. The S&P 500 is expected to generate earnings growth of 7.8% for the fourth quarter of 2011 (according to data from Thomson Reuters). While Wall Street is getting into the earnings mindset though, there is the potential that Europe might once again claim the spotlight.

French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet in Berlin today to discuss the euro zone’s sovereign debt crisis. Markets will also be watching to see how bond auctions in Italy and Spain are received on Thursday. We have been seeing some market data/indicators so far this year showing that our stock markets are becoming less fixated on the news out of Europe (and this is certainly welcome). Still, we are not out of the European woods yet, and any disappointing outcomes there could rattle our markets yet again.
Looking away from Europe we see a domestic economic picture that is generally brightening, at least a little. The U.S. Department of Labor reported that Nonfarm Payroll employment rose by 200,000 in December and the Unemployment Rate fell to 8.5%. Weekly initial jobless claims declined by 15,000 week-over-week. Additionally, the December ISM Manufacturing Index and November Construction Spending reports were both stronger-than-expected.

These numbers corroborate our view that while the U.S. economy is still weak historically speaking, it is on somewhat firmer ground of late – and the major stock market averages posted decent gains last week. The Dow Jones Industrial Average gained 1.2% to 12,360. The NASDAQ Composite rose 2.7% to 2674 and the Standard & Poor’s 500 Index increased 1.6% to 1278. Along with earnings and developments in Europe, markets will also look to economic reports this week to see if they can build upon last week’s gains.
Reports due out include November Consumer Credit data, the Fed’s Beige Book of regional economic activity, Initial Jobless Claims, December Retail Sales, and the University of Michigan Sentiment Index for January. So we are looking forward to a busy week!

The markets are closed next Monday in observance of Martin Luther King, Jr. Day – so we will back with our next memo the following Monday. As always, feel free to contact us with any questions or concerns you may have.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

We mentioned in our last memo how stocks had a positive view of the glass half-full. Last week’s trading action however, focused on a glass that was half-empty. Optimism around the deal struck at the European summit waned as a lack of progress in Europe weighed on Wall Street. The mood further soured when Fitch Ratings Agency announced it’s considering downgrading six nations that use the euro – Belgium, Cyprus, Ireland, Italy, Slovenia, and Spain. Fitch also said it “has concluded that a ‘comprehensive solution’ to the Eurozone crisis is technically and politically beyond reach.” The negativity from across the pond pushed our stock markets lower for the week.

The Dow Jones Industrial Average fell 2.6% to 11,866. The NASDAQ Composite dropped 3.5% to 2,555, and the Standard & Poor’s 500 Index shed 2.8% ending the week at 1,220. These drops came despite a string of better-than-expected numbers.

The latest initial jobless claims report came in at 366k, its best level in more than three years and much better than the 390k that was forecast. The December Empire State Manufacturing Survey improved to 9.5 (its highest reading since May), versus the 3.0 that was expected. The Philadelphia Fed Survey improved to 10.3 in December versus the 4.5 that was expected. Also, the Labor Department reported that consumer prices were flat in November, reassuring investors and building beliefs the Federal Reserve can take additional measures to bolster growth. Normally a positive batch of data like this would send stock prices higher – but these are not normal times.

The markets are not trading on fundamentals right now and haven’t been for quite some time. Fears over the European debt-crisis have resulted in volatile markets where mood swings have relegated economic and fundamental analysis to the back burner (or even out of the kitchen). This situation has made it a very difficult year. While we cannot tell you when this will end, we can tell you that at some point in the future the markets will reflect fundamentals – and European news will not dominate market action forever!

The next two weekends are Christmas and New Years – so we will back with our next memo on January 9, 2012. We wish you all the best over the Holiday Season and in the New Year!

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

Major U.S. stock indices closed a bit higher last week after breathing a sigh of relief following the euro zone’s latest plan to “solve” its debt crisis. The European Central Bank cut interest rates by ¼ percentage point, to a record low 1%. Also, 26 of 27 European Union nations agreed to deeper economic integration with stricter budget discipline. While the news out of Europe was not the “big bazooka” many were hoping for – it was enough to calm fears and reduce the tension in global markets. With less fear of a Euro meltdown, stocks ended the week on a high note and claimed a moderate advance for the week as a whole.

The Dow Jones Industrial Average rose 1.37% to 12,184. The tech-heavy NASDAQ Composite gained .76% to 2647 and the benchmark Standard & Poor’s 500 Index gained .88%, ending the week at 1255. We believe that if the fear factor out of Europe can remain at least relatively subdued, that these stock averages will turn focus to other factors and data, which continue to show signs of improvement.

Consumer Sentiment came in above expectations and has now risen four consecutive months. Last week’s report on Initial Jobless Claims was also stronger-than-expected, coming in at 381,000 compared to the 395,000 that was forecast. To the world’s second largest economy – China’s inflation rate fell dramatically, bolstering hope that the country can cool inflation without sacrificing economic growth. So despite the volatility being generated by news out of and around Europe, there are some good things happening in the world.

During the week ahead we’ll be tracking the Federal Reserve’s Open Market Committee meeting, developments in Europe, and an important corporate earnings report. FedEx is considered a bellwether for the economy and is scheduled to release its results on Thursday and market expectations are for earnings of $1.52 per share. This report provides a good look at economic activity during what is a sparse time for corporate earnings news.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The stock market soared last week, putting up its best weekly performance in three years. The Dow Jones Industrial Average rose 7.0% to 12,019. The NASDAQ Composite gained 7.6% to 2627 and the Standard & Poor’s 500 Index climbed 7.4% to 1244. All of the Dow 30 components finished higher on the week, as did all of the 10 S&P sectors.

Behind the surge was policy action by several major central banks. The Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank announced coordinated actions to help foreign banks borrow and lend money more easily. The move lowers the cost of dollar loans to banks in Europe and lengthens the time period that the loans would be available. According to the Federal Reserve, the “purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”

With markets then less worried about a meltdown in Europe, they were able to focus on other news as well – news that was mostly positive. The United States Department of Labor reported that November nonfarm payrolls rose by 120,000 and the unemployment rate fell to a 2 ½ year low of 8.6% (down from 9.0% last month). The markets were also buoyed by positive Black Friday retail data and improved consumer confidence numbers.

Looking to the world’s second largest economy – China loosened its monetary policy by lowering its Reserve Requirement Ratio (to encourage new lending by Chinese banks). Add it all together, and the stock market had lots of good stuff to feast on, putting it in a much better mood than it was during Thanksgiving week!

Markets will likely still be paying attention mostly to Europe this week. The economic data here is light this week, and eyes will be focused on possible interest rate action from the European Central Bank on Thursday, and a summit of European Union heads on Friday.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

We certainly hope that you enjoyed your Thanksgiving Holiday, especially since the stock market gave us little to celebrate or be thankful for. While Thanksgiving-week is typically a strong week for the stock market, that was far from the case this time around. Stocks had their worst Thanksgiving-week loss since 1932, and the benchmark Standard & Poor’s 500 has now fallen for 7 straight sessions and is down 7.6% so far this month.
On the week the Dow Jones Industrial Average dropped 4.8% to 11,232. The NASDAQ Composite fell 5.1% to 2,442 and the Standard & Poor’s 500 declined 4.7%, ending the holiday week at 1,159. Three things were the culprit behind this terrible week – Europe, Europe, and Europe….
Fears of the European debt-crisis and contagion are completely dominating Wall Street right now: The euro is at a seven week low against the dollar; S&P downgraded Belgium’s debt rating; Moody’s cut Hungary’s rating to junk; Fitch downgraded Portugal to junk; Italy’s long-term borrowing costs exceeded 7% and its short term exceeded 8% both of which are seen as an unsustainable level; and Germany had one of their poorest bond auctions in years. To put it all as simply as possible – the debt situation in Europe is a mess and Wall Street is worried how far Europe’s debt crisis will spread. Markets right now are focused almost exclusively on Europe.
As asset managers it is extremely frustrating when periods of fear and roller coaster swings in financial markets trump economic and investment analysis. Global economic growth rates, U.S. Gross Domestic Product, stock market valuation metrics, corporate profit reports, and individual stock picking (to name just a few) all don’t matter right now. Everything is being held hostage by news out of Europe.
Concern over European debt is valid and we take it serious. We have written about the threats of contagion before and global financial markets are indeed connected and interrelated. We would however, like to provide a little balance to what seems to be the “all Europe, all the time” singular focus of Wall Street right now.
According to the World Bank, exports account for 11% of the U.S. Gross Domestic Product. Exports to Europe account for 20% of that total. More precisely, exports to the Eurozone account for just 15 percent of our exports (according to the chairman of the White House Council of Economic Advisers). In other words, exports only represent 11% of our economy, and Eurozone exports are only 15% of that 11%. Doing the math (and corroborating this data with other sources) shows us that all U.S. exports to the Eurozone amount to less than 2% of our Gross Domestic Product.
With all of the focus on Europe, many positive factors are being overlooked right now. This includes things such as healthy corporate balance sheets, strong earnings results, attractive dividend yields, favorable stock market valuations, low interest rates, a U.S. economy that is growing (albeit slowly), and rapidly developing emerging markets with burgeoning middle classes.
While we have to accept the volatility and the fear and greed nature of the markets as they are, we certainly do not want long-term performance to suffer due to short-term market gyrations.
At some point the financial turmoil out of Europe will be behind us. We certainly look forward to the time when economic and financial analysis matters again, but right now it simply doesn’t. It is still all about Europe.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

The situation in Greece influenced markets during virtually all of last week. Stocks sank early in the week after reports Greece wanted to pursue a referendum on the bailout (basically undermining the efficiency/implementation of the plan). Stocks bounced later in the week as officials pressured Greece to accept the bailout plan, and to stay away from a referendum. This brought some attention back to our economy and corporate earnings.

October Nonfarm Payrolls came in weaker than expected, increasing by just 80,000. But the Labor Department report was still a positive when netted out, as gains for the previous two months were revised up by 102,000. Also, the jobless rate declined a notch from last month, coming in at an even 9%.

Earnings continue to be fairly strong. According to data from FactSet, of the 413 S&P 500 companies that have reported earnings so far, 73% have surpassed consensus estimates. Core large-cap/household names such as Pfizer, Kraft Foods, and MasterCard are included in the list of companies that surpassed expectations.

Put it all together, and stocks October rally came to an end last week, as worry over the state of the European Union was the driving force (outweighing many positive factors). The Dow Jones Industrial Average fell 2.0% to 11,983. The NASDAQ Composite decreased 1.9% to 2,686 and the Standard & Poor’s 500 Index dropped 2.5% to 1,253.

Greece and European debt will likely be front and center again this week. The Greek government is in flux and euro-zone finance ministers convene a meeting today. Also, earnings season is starting to wane, and the economic calendar is light this week – allowing for Europe to get even more attention.

We’ll be traveling and/or away the next couple weekends, so we’ll wish you a Happy Thanksgiving now, as our next memo will be out on November 28th. As always though, don’t hesitate to contact us with any questions or concerns you may have.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness

We mentioned in our last memo that the E’s – Europe, the U.S. Economy and corporate Earnings – were all starting to be viewed less pessimistically. The fear factor receded even further last week (maybe in deference to Halloween tonight) and there is a much more positive spell over Wall Street after last week’s developments.
Europe was able to cobble together an agreement to increase the region’s bailout fund, European Financial Stability Facility (EFSF), to one trillion euros ($1.4 trillion). They also secured approval from Greek bondholders to take a voluntary 50% write-down on their holdings. These moves caused the euro to strengthen and bolstered stocks around the world.
Economic growth for our economy was also a positive as GDP for the third quarter came in better than expected at an annual rate of 2.5%. This helped to alleviate the fears of a double dip recession at least for now and further solidified the “risk on” nature of the markets.
Earnings continue to be strong. Despite some high profile misses from companies like Amazon and 3M, earnings season continues to solidify current valuations at the low end of the historical spectrum. Of the 284 companies that have reported so far 77% have exceeded average estimates, this is according to data from Factset.
Add it all up and the result was a winning week in the stock market. The Dow Jones Industrial Average closed at 12,231, a weekly change of 3.58%, while the S&P 500 closed at 1,285, a change of 3.78% for the week and the NASDAQ also closed up 3.78% for the week at 2,737. This coupled with the previous weeks in October, will, barring a major down turn today, result in the best October ever for the Dow Jones.
The week ahead will most likely continue to be dominated by news from the three E’s. In Europe, even though they have begun to lay ground work for a system to deal with their continued woes you can be assured it hasn’t gone away for good. It would certainly be nice if markets didn’t have to continually be so focused on rumors and/or news out of Europe, but only time will tell. On the Economic front, Nonfarm payrolls are expected to be around 125,000 and we will also get September Factory Orders and the ISM Index, which is a measure of our manufacturing and can signal economic expansion. The Federal Reserve Board is holding their two day meeting, but there are no major changes expected this time around. The final E, Earnings will continue to flow as well, with Lowe’s, Home Depot, J.C. Penney, Kohl’s, Target, Wal-Mart, Hewlett-Packard, Tiffany and Nordstrom all reporting this week. These earnings will provide for a good indication on where retail spending is for consumers.
Also, keep an eye out for the next potential headlines to affect the markets as the Super Committee created during the debt talks in August continues to become more public this week with where things stand as the deadline approaches.

Disclaimer: Data obtained from resources believed to be reliable, but we do not guarantee its accuracy or completeness