Weekly Markets Review

December 21, 2010

"In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual." -Galileo Galilei

The major market indices were mixed last week, as the DJIA and S&P 500 Stock declined 1.36% and 0.36%, respectively, while the Nasdaq gained 0.98%. Growth outperformed value. Small cap stocks had the best gain, adding 1.70%. The utilities index was the top performer, and the telecom index was the worst. The construction and engineering group rose 9.6%, and the oil and gas exploration and production group rose 9.3%. Spot gold prices fell 0.20%. The dollar was up on speculation that the Fed could raise interest rates sooner than expected based on increasing inflation and a better overall economic outlook.
After lagging their large cap cohorts from September to November, the small cap stocks of the Russell 2000 are up 3.6% since December 1 while the Dow Industrials have gained 1.7%. The Russell 2000's performance alludes to an increasing appetite for risk among equity investors – and possibly hinting towards the end of the recent romance with large defensive equities. Stay tuned…
Equity Markets Review
* U.S. National Economic Council director Lawrence Summers said Dec. 13 that the employment rate in the United States will begin rising by the spring, The New York Times reported. Summers, the top economic adviser to U.S. President Barack Obama, said that there is uniform agreement that the recession is over, and that the latest employment statistics indicate that growth will begin in the spring.
* Factories in the United States produced more goods in November than forecast, extending a rebound in manufacturing that will give the world's largest economy a boost into 2010. Industrial production was forecast to increase 0.5%. Last month's jump in producer prices was led by a 6.9% gain in fuel costs, which accounted for about 75% of the overall gain, the Labor Department said. Separately, the U.S. Federal Reserve said Tuesday in Washington. That wholesale prices climbed 1.8% in November, also exceeding the median estimate of economists surveyed by Bloomberg News. Production climbed 0.8%, the fourth gain in the past five months.
* Speaking on NBC's Meet The Press over the weekend, former Fed chairman Alan Greenspan said companies will be forced to start hiring soon to keep up with production needs after cutting jobs to the bone in prior months. "We have a level of employment at this stage which is barely adequate to staff the level of output," Greenspan said. But even as companies start replenishing payrolls, the unemployment rate may continue to rise because the economy needs to add 100,000 jobs per month simply to keep even with population growth, he said, noting that people who gave up looking are likely to start job-hunting again, rolling them back into unemployment statistics. Unemployment dropped to 10% in November from 10.2% in October, the highest in 26 years.
* A new survey suggests that U.S. consumers are no longer jumping at foreclosed homes because of worries about hidden costs, but may be willing to dip back in with the help of the government's expanded tax credit. Currently, those somewhat likely to consider buying a foreclosed home are at 43%, after peaking at 55% in May, according to a survey by Harris Interactive. Further demand for foreclosed homes could come from homeowners looking to trade up to a larger house; 24% of homeowners are somewhat likely to consider a trade-up, and 88% of those are somewhat likely to consider a foreclosure.
* U.S. housing starts rebounded sharply, rising 8.9% to a seasonally adjusted 574,000 units on an annualized basis in November, the Commerce Department said. Economists polled by MarketWatch.com were expecting a pace of 563,000.
* Although the U.S. economy returned to growth in the third quarter and is expected to expand in the current quarter, it will slow in 2010, says Abby Joseph Cohen, chief equity strategist at Goldman Sachs Group Inc. "Next year, our GDP forecast is below consensus," Cohen told CNBC in an interview. "Under normal post-recession conditions, we would be expecting GDP next year of 3 % -3.5 % in 2010, but we have trimmed that number down to 2.5% because of continued concern about labor markets and household balance sheets which continue to de-lever."
* The U.S. economic recovery will likely continue into the first half of 2010, as indicated by a better-than-expected rise in the Conference Board’s Index of Leading Indicators , which rose for the eighth consecutive month in November, posting a better than expected gain of 0.9% after rising 0.3% in October. Another report showed that in December, manufacturing in the Philadelphia region grew at the fastest pace in more than four years.
* The American Institute of Architects' Architecture Billings Index declined to 42.8 in November from 46.1 in October. The AIA's Billings Index is a leading indicator for non-residential construction activity. A reading below 50 indicates that a contraction in activity will likely occur over the next nine to 12 months. The index has registered a reading below 50 since January 2008, but in recent months it had shown some signs of improvement before the most recent move lower.
* ExxonMobil said it would buy XTO Energy for $31B and $10B in debt assumption, bolstering its position in unconventional natural gas and oil resources. XTO shareholders will receive 0.7098 XOM share per share, a 25% premium to Friday's close. The move allows Exxon to expand in the growth area of shale gas, and will increase its gas resources by 45T cubic feet (about two years of domestic demand). Exxon believes demand for natural gas, which emits half as much CO2 as coal, will rise as the U.S. looks to pare its global warming emissions and the world seeks greener sources of energy.
* Boeing Co.'s much-anticipated Dreamliner airplane took off on its maiden flight into cloudy skies Tuesday after more than two years of delays. The new lightweight carbon and titanium plane, which Boeing has said will save airlines million of dollars in fuel and maintenance costs, has been hampered by production delays five times in the past three years, and the first flight has been postponed six times, testing customers' patience. The flight was witnessed by several thousand Boeing employees, industry VIPs, airplane enthusiasts and reporters, but excitement rippled throughout the aerospace industry, reported Reuters.
* Best Buy Co. Inc. posted higher earnings for its fiscal third quarter and the largest U.S. consumer electronics retailer increased its full-year financial outlook. Strong sales of laptop PCs, television sets and other electronics helped quarterly earnings to quadruple to 53 cents a share.
* General Electric Co. expects total revenue to be flat next year as well, with growth in service revenue offsetting weaker equipment revenue, the world's biggest maker of jet engines and electricity producing turbines said Tuesday.
* GE and French aerospace group Safran won a contract to manufacture engines for China's future C919 aircraft worth an initial $5B for each company, and potentially many times that over coming decades if China succeeds in its plan to become a player in the passenger plane market dominated by Boeing and Airbus, reports SeekingAlpha.
* The battle for market share among e-book readers intensified after Amazon said Kindle sales for December to-date are its best ever, barely halfway through the month. Amazon also announced it would begin selling Kindle with free expedited shipping, while Barnes & Noble struggles to get its new Nook e-book reader into customers' hands.
* Strong shipments of its popular BlackBerry smartphone helped Canada's Research in Motion Ltd. grow its revenue by 41% in its third fiscal quarter, reported MarketWatch.com.
* Palm Inc. posted a wider-than-expected loss of $81.9 million, or 54 cents per share, on sales of $78.1 million for its second fiscal quarter ended Nov. 30.
Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week / YTD
Information Technology… (0.82) / 53.23%
Materials… (0.86) / 41.39
Consumer Staples… (1.41) / 11.40
Utilities… 0.69 / 8.99
Consumer Discretionary… 0.53 / 38.26
Financials… (1.60) / 12.87
S&P 500… (0.36) / 22.13
Industrials… 0.53 / 18.85
Healthcare… (0.57) / 16.58
Telecommunications… (1.93) / 1.17
Energy… 0.11 / 9.69
Opportunities Overseas
Increasingly, we are finding it easier to justify higher allocations to international equities for a few key reasons: First, roughly 55% of the investable equity universe (by market cap) is non-U.S., a huge opportunity set. Second, world GDP has outpaced U.S. GDP every year this decade, especially in emerging markets, which have seen average GDP growth since 2000 of 5.9% as compared with 1.8% growth from developed economies. And finally, for those of the persuasion that the Dollar will weaken, international investing is one way to capitalize on a weaker domestic currency. (source: JP Morgan Asset Management)
The Wall Street Spin Cycle
Brett Arends wrote a must-read piece in The Wall Street Journal over the weekend. Arends speaks about the annual tradition of “Top Picks,” which tends to result in sub-par performance. He explains that much of the stock market community remains a marketing machine that happens to sell investments in much the same way that CVS sells pills. Investment professionals tend to stick together, usually with a bias that is overtly positive, recommending the same ideas, regardless of how foolish. Read his article for a look behind the veil.
Sports, Culture & Politics
* Three Americans jailed since July for crossing the border from Iraq to Iran will be tried, AP reported Dec. 14, citing Iranian Foreign Minister Manouchehr Mottaki. Mottaki did not specify the charges or when proceedings would begin, but he called the U.S. citizens' goals suspicious. Interrogation of the three continues, he said.
* A man identified as Al Qaeda's deputy leader Ayman Al-Zawahri called U.S. President Barack Obama's Middle East policy a crusader and Zionist campaign, and urged Muslims and Palestinians to fight outside of Israel and the Palestinian Territories, AP reported Dec. 14. In a 25-minute audio message, Al-Zawahri also criticized Egyptian President Hosni Mubarak and Jordanian King Abdullah II for peaceful relations with Israel. Authenticity of the message could not be confirmed.
* Senior U.S. officials are pushing to expand CIA drone strikes beyond Pakistan's tribal region and into Quetta in an attempt to pressure the Pakistani government to pursue Taliban leaders, The LA Times reported Dec. 14. Proponents, including some military leaders, argue that even the threat of attacking the Taliban in Quetta is critical to the success of President Obama's revised war strategy. But others, including high-ranking U.S. intelligence officials, are skeptical of employing drone attacks in a place that Pakistanis see as part of their country's core and may threaten the countries' relationship. Pakistani officials warned that fallout would be severe.
* The Glass-Steagall Act, which barred banks that took deposits from underwriting securities, is under consideration for reinstatement by the U.S. House of Representatives, according to Majority Leader Steny Hoyer, D-MD. A renewal of the 1933 law "is certainly under discussion" by House members, Hoyer told Bloomberg News in Washington. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. with the $46 billion merger of Citicorp and Travelers Group Inc. Enactment of the law has generated debate about whether it helped spawn reckless lending practices and financial speculation that led to the meltdown of credit markets last year.
* Ben Bernanke was awarded Time Magazine's prestigious Person of the Year for 2009 award.
* An Iranian oil official said a move by American lawmakers to impose fuel sanctions would not cause any problems because Tehran has many suppliers, Reuters reported Dec. 16. The U.S. House of Representatives approved legislation to impose sanctions on foreign companies that help to supply fuel to Iran.
* Senior Israeli officials said U.S. President Barack Obama warned Chinese President Hu Jintao that the United States would not be able to keep Israel from attacking Iranian nuclear installations much longer, Haaretz reported Dec. 17. Sources said Obama warned Hu as part of his attempt to convince the Chinese to support strict sanctions on Tehran. Israeli officials said China refused a Saudi-American initiative designed to end Chinese dependence on Iranian oil, which would allow China to agree to sanctions. The Israelis said Russian President Dmitri Medvedev shows greater willingness for sanctions on Iran, despite hesitations by Foreign Minister Sergey Lavrov.
* Turkey fears that the placement of U.S. missile defense elements on Turkish soil would worsen Ankara's relations with Russia and Iran, RIA Novosti reported Dec. 16. Responding to what the daily Milliyet said was a proposal by U.S. President Barack Obama's plan to deploy missile shield elements in Turkey, a Turkish military source reportedly said that Russia and Iran would see the deployment of missile defense elements in Turkey as a threat.
* U.S. Secretary of State Hillary Rodham Clinton said the United States would contribute to a $100 billion fund to help developing countries cope with climate change, The Washington Post reported Dec. 17. Clinton said U.S. contributions to the fund would be contingent on reaching a substantive political accord that would include "transparency" in tracking emissions cuts by major developing countries.
* The government will award $2B in grants and loans over the next 75 days as part of a $7.2B plan to dramatically expand Americans' broadband internet access and create tens of thousands of jobs.
* A $636 billion military spending bill cleared a procedural hurdle in the U.S. Senate, Reuters reported Dec. 18. The 63-33 vote opened the way for senators to give the measure final approval Dec. 19. The bill covers Pentagon operations through Sept. 30, 2010.
* Following confirmation that Iranian forces took control of Iraqi Fakka oilfield's Well 4, a U.S. military spokesman said such incidents are a frequent occurrence, AFP reported on Dec. 18. There was no violence and the incident occurred in a disputed area of the nations' border, said the spokesman, who added that the United States hopes the incident will be resolved diplomatically.
* As expected, the Senate Banking Committee yesterday (Thursday) approved U.S. President Barack Obama's nomination of Federal Reserve Chairman Ben Bernanke to a second four-year term. While the debate prior to the vote was contentious, 16 Senators voted in favor of Bernanke's second term while seven were against it. Bernanke was named Time magazine's Person of the Year 2009 on Wednesday.
* Following confirmation that Iranian forces took control of Iraqi Fakka oilfield's Well 4, a U.S. military spokesman said such incidents are a frequent occurrence, AFP reported on Dec. 18. There was no violence and the incident occurred in a disputed area of the nations' border, said the spokesman, who added that the United States hopes the incident will be resolved diplomatically.
* Venezuelan President Hugo Chavez accused the United States of violating Venezuela's airspace with an unmanned spy plane, AP reported Dec. 21. Chavez said the aircraft flew over a Venezuelan military base in the western state of Zulia after taking off from neighboring Colombia. He stated that "the Yankees" entered Venezuela, and he ordered the aircraft to be shot down. He added that Venezuela cannot permit this. A spokeswoman for the U.S. Embassy said the mission had no information about any flyover and had not been contacted by Chavez's administration.
* Actress Brittany Murphy, 32, died Sunday morning. Cause of death is not determined.
Over the weekend, the top-five box office performers as reported by The New York Times were:
1) Avatar, Twentieth Century Fox, $73,000,000
2) The Princes and the Frog, Walt Disney Studios, $12,224,000
3) The Blind Side, Warner Bros., $10,030,000
4) Did Your Hear About The Morgans, Sony, $7,000,000
5) Twilight: New Moon, Summit Entertainment, $4,370,000

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