Quote of the Week:
"I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do." - Leonardo da Vinci (Italian draftsman, painter, sculptor, architect, engineer, 1452-1519)
As da Vinci opined, the "urgency of doing" is upon us. Ever optimistic, we see a New Year of promise. Mostly because at home in the U.S., we see both business and government wrestling with the right questions; questions about how to properly manage debt and revenues, and where to apportion spending most efficiently for the greatest result.
2011 will go down as one of the most profitable years in history for U.S. companies. Further, the level of cash reserves in U.S. companies is the highest we remember in our careers. Historically, stock prices tend to follow earnings, so where earnings improve, generally so does the stock market. When companies have large cash reserves, they tend to deploy the money in many areas, like mergers and acquisitions, additional plants and equipment, and, yes, additional human capital (that means hiring). With all these elements as a backdrop, we think the stage is set quite nicely.
Is there a rub? Yes. As of last Friday, the yield on the 10 year Italian government bond was 6.85%. Others of Europe's debtor nations have similar yields. Ten year U.S. Treasury yields were 2.03%. It appears the world, and investors, aren't overly concerned about the U.S.' ability to pay interest on debt, but investors do appear concerned about many European countries. Fortunately, the Italians, Greeks, Portuguese, Irish, and others now seem, to quote da Vinci, "willing" to address issues, but now they must "do".
We think they will. Grudgingly, Haltingly, Maybe they'll even have to do it from within a European recession next year. But they will. Why? They have to.
There will be other headwinds to be sure.
But as you peruse the upbeat market information below, we think you'll be getting a peek at the promise of 2012.**
Market Week: December 27, 2011
The Markets
In-the-black Friday: Buoyed by good economic data and congressional reconciliation over extension of the payroll tax cut, the Standard & Poor's 500 headed into the Christmas weekend with a gift for investors--its return to positive territory for the year. That left only four trading days in 2011 for the Nasdaq and Russell 2000 to try to catch up as the Dow continued to dominate 2011. The Nasdaq was only 1.3% away from breaking even for the year, but the Russell 2000 was still almost 5% from doing the same. And despite a relatively benign week, the Global Dow would need to gain more than twice as much in four days as it did during the entire first quarter to have a positive year.
Last Week's Headlines
• Housing starts shot up 9.3% in November, driven largely by construction of multifamily units, while building permits (an indicator of future construction) were up 5.7%. The Commerce Department said that housing starts were up 24.3% compared to last November.
• The U.S. economy grew more slowly during the third quarter than previously estimated by the Commerce Department. The final 1.8% growth rate represented a downward revision from the 2.5% and 2% of the first two estimates, but was still higher than Q2's 1.3%. Corporate profits rose at a slower pace than in Q2; they were up $32.5 billion compared to $61.2 billion in the second quarter, while after-tax profits were up $41.6 billion.
• New home sales rose 1.6% in November; that's 9.8% ahead of the same time last year, according to the Commerce Department. Meanwhile, the National Association of Realtors® said home resales were up 4%, which put them 12.2% above last November.
• There were reassuring signs out of Europe as a successful auction of short-term Spanish sovereign debt cut the yield on three- and six-month bills by more than half. Also, the European Central Bank allowed 523 European banks to borrow a total of €489 billion in three-year loans to refinance debt.
• The Bureau of Labor Statistics said 43 states had lower unemployment rates in November, while three states (Wisconsin, Minnesota, and Colorado) saw unemployment rise and four others remained the same. The West continued to have the highest regional unemployment rate (9.9%) while the Northeast had the lowest (7.9%).
• American incomes were up 0.1% in November, according to the Commerce Department. However, the extra money promptly went out the door, as consumer spending also was up 0.1%.
• The Federal Reserve Board proposed new regulations designed to help prevent a repeat of the 2008 financial crisis. The rules, which would apply to banks with more than $50 billion in assets and other systemically important financial companies, would require annual stress tests; prevent the largest banks from investing more than 10% of their capital in another systemically important bank, limit debt-to-equity ratios and credit exposure to a single company, and increase capital requirements in some cases.
• The Supreme Court set a three-day session March 26-28 to hear arguments in the 26-state legal challenge to the Patient Protection and Affordable Care Act (the health-care reform legislation passed in 2010).
• The Conference Board's index of leading economic indicators was up 0.5% in November. Seven of the index's ten indicators showed improvement, led by interest rate spreads and housing permits.
• Durable goods orders were up 3.8% in November. However, the Commerce Department said if orders for defense and transportation-related equipment such as aircraft parts are excluded, orders actually fell 1.2%.
• Congress gave taxpayers at least a temporary reprieve from higher taxes by approving a two-month extension of a payroll tax cut that had been scheduled to expire January 1.
Eye on the Week Ahead
The holiday-shortened week is the last opportunity for institutional investors to window-dress their portfolios before leaving a tumultuous year behind.
Key dates and data releases: home prices, consumer confidence (12/27); pending home sales (12/29).
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. Equities data reflect price change, not total return.
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.
Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2011
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