Week In Review

The week that was:

Volatility returned to global markets this week as fears over unrest in Egypt sent stocks reeling Friday to their biggest one-day decline in months and put an end to the market’s eight-week win streak.  Oil prices surged almost 5% on the news. 

On Thursday, S&P cut Japan’s long-term sovereign credit rating to AA minus because it “expects Japan’s fiscal deficits to remain high in the next few years, which will further reduce the government’s already weak fiscal flexibility.”  This news came out even as it was reported that Japan’s trade surplus more than doubled in 2010 and exports to key trade partner China hit a record high.

US GDP grew at a 3.2% annual rate in the fourth quarter, which was below the forecast of 3.5%.  This was the sixth consecutive monthly expansion, and it pushed the American economy above an important psychological threshold:  real output is finally above the pre-recession peak (after three years).

The Federal Reserve announced on Wednesday that interest rates will remain at record lows for the time being.  They will also continue on course with the $600 billion Treasury-buying program. 

Stocks:

The S&P 500 fell 7.01 points this week, or 0.55%, to 1276.34.  The Nasdaq Composite fell 2.65 points, or 0.10%, to 2686.89.  The Dow Industrials fell 48.14 points, or 0.41%, to 11823.70.  Friday’s 1.79% drop in the S&P marked the biggest point and percentage drop since August 11, 2010.

• Netflix (NFLX) shares rose 19.72% on the week after the company issued a first-quarter forecast that easily exceeded Wall Street’s expectations.  NFLX reported 63% subscriber growth YOY much to the dismay of short-sellers.  As recently as December 31^st, over 30% of the float was short.  My NFLX long put options are also feeling the pain at this point in time.

Bonds:

End of week bond yields:

3 Month yield = 0.12%, down 1 bps from last week.

2 Year yield = 0.54%, down 7 bps from last week.

3 Year yield = 0.93%, down 11 bps from last week.

5 Year yield = 1.92%, down 9 bps from last week.

10 Year yield = 3.32%, down 9 bps from last week.

30 Year yield = 4.53%, down 3 bps from last week.

Here is a good rebuttal to Meredith Whitney’s bearish case on the muni market:

http://classic.cnbc.com/id/15840232?video=1753870300&play=1

What to look for next week:

7:30 AM          Monday           Personal Income and Outlays

9:00 AM          Tuesday           ISM Manufacturing Index

7:30 AM          Thursday         Jobless Claims

7:30 AM          Friday              Employment Situation

• Economists expect nonfarm payrolls to increase by 140,000 new jobs in January, after a gain of 103,000 in December.

Earnings will also continue, with results due out from Exxon Mobil (XOM), MasterCard (MA), and Pfizer (PFE).

Week In Review

Stocks:

The S&P 500 rose 21.74 points this week, or 1.71%, to 1293.24.  The Nasdaq Composite rose 52.13 points, or 1.93%, to 2755.30.  The Dow Industrials rose 112.62 points, or 0.96%, to 11787.38. 

• Verizon (VZ) said Tuesday that it will begin selling the popular iPhone 4 from Apple (AAPL) in February, at prices identical to rival AT&T’s (T).  This launch will greatly expand the iPhone’s potential audience in the U.S. market.
• JP Morgan Chase (JPM) reported quarterly results on Friday which were highlighted by a recovery in M&A and equity and debt offerings.  However, they reported lackluster results in key trading businesses.

Bonds:

End of week bond yields:

2 Year yield = 0.57%, down 2 bps from last week.

3 Year yield = 0.99%, up 1 bps from last week.

5 Year yield = 1.92%, down 4 bps from last week.

10 Year yield = 3.33%, up 1 bps from last week.

30 Year yield = 4.53%, up 5 bps from last week.

• Last week Moody’s put out a report detailing the reasons for the recent municipal market selloff and which types of issuers would be most pressured should they lose access to market funding. The overall tone was positive as they attributed recent investor selling to the Bush tax cut extension, concern over the expiration of the Build America Bond program, and negative press reports regarding municipal finances. With the exception of four types of issuer categories, the rating agency was positive on municipalities’ abilities to weather hostile capital market conditions. Issuers that rely on debt issuance to fund operating deficits (State of Illinois and California), rely on short-term notes to finance seasonal cash flow needs (State of Illinois and California), issue bond anticipation notes (BANS) for interim construction financing (certain community college districts in CA), and seek to convert outstanding variable rate demand bonds to a fixed rate mode due to expiring credit or liquidity support (certain hospitals) are in the most danger should they be shut out of the markets.

What to look for next week:

                        Monday           All Markets Closed for Martin Luther King Jr. Day

                        Tuesday           Citi and Apple report earnings

7:30 AM          Wednesday     Housing Starts

7:30 AM          Thursday         Jobless Claims

9:00 AM          Thursday         Existing Home Sales

9:00 AM          Thursday         Philadelphia Fed Survey

                        Friday              GE reports earnings

Investing In Volatility

The VIX currently sits at 16.39.  Raise your hand if you think high volatility is going to return to the market in some shape or form in 2011.  [raises hand]

Luckily, over the last year many new products have been released that allow for investors to use volatility-based funds in their portfolios.  However, caveat emptor!  Most of these funds are designed for the day-trader or short-term investing populations.

There are new volatility-based products entering the market weekly at this time, but this article presents the current best options for investors, depending on your investing style.  Personally, I bought VXZ recently as a way to be positively exposed to increasing volatility.  In addition to my opinion that volatility is going to mean-revert and head higher at some point, the main idea here is that since my portfolio is substantially net long, if a negative event (think muni default, European sovereign default, etc.) occurs, my portfolio will likely take a large hit in the short-run.  Volatility will also increase if a negative event occurs.    Since these asset classes are negatively correlated in "bad" states of the world, overall portfolio performance should improve.

First Trading Day of the Month Anomaly??

The S&P 500 rose 143 points in 2010.  134 of those 143 points were racked up on the first trading day of each month.  Here are the point changes for the first trading day of each month in 2010:

January +18
February +15
March +11
April +9
May +16
June -19
July -3
August +24
September +31
October +5
November +1
December +26

And now to kick off 2011, we have +14 for the first trading day of January.
I have no explanation for this trend, but think that's it's worth following.

Thank You Professor Becker

“What I trust with the American people is that they have always had a lot of common sense. … And I think most Americans believe, and I think they are correct in that belief, that the private sector has shown that it performs better overall, not 100 percent, but…a lot better overall than the public sector does.”

-  Gary Becker 

China > US ???

Here is a very interesting article and interactive graph presenting the timeline of when China is projected to overtake the US as the world's largest economy.

The key point is that this event is bound to happen at some point in the next 5-15 years and the handling (or mishandling) of it has huge implications for the entire world.

Thoughts on the Employment Situation

Morningstar's Bob Johnson provides full analysis here.

Yes, the December report disappointed.  Expectations were for job growth of 150,000 but the number came out at 103,000 which is not much better than the full-year average of 94,000.  However, Bob points out that the unemployment rate dropped to 9.4% due to prior month revisions.

This LA Times article doesn't necessarily see the reduction in unemployment rate as a positive because the rate may have dropped due to workers giving up looking for jobs.  Fair point.

Either way, these mixed results continue to point to a tougher recovery phase than one might expect in an environment characterized by near 0% interest rates and massive stimulus measures.  I do think it's important to note that we have now seen four consecutive months of upward revisions.  This is a positive development that I hope continues.  It's also worth pointing out that we will not see 5% unemployment anytime soon.  We would need 5-6 years of 2.5-3 million jobs a year to get there.  Unfortunately, I think high unemployment is here to stay.

To Sell Or Not To Sell

Everyone is entitled to their opinion when it comes to Groupon.com's decision to not be taken over by Google.

However, I agree with my Taxes professor, Ira Weiss, when he says:

"You can set up your own daily deal website in an hour.  They happen to have a lead on it, but if I were them I would have sold for that price."

It's true.  Daily deal websites are a dime a dozen.  Full article here.

Top Songs of 2010

Rare non-finance-related post, but wanted to share my top 26 songs of 2010:

1)  Lil Wayne - 6 Foot 7 Foot

2)  Best Coast - Crazy For You

3)  Matthew Dear - You Put a Smell On Me

4)  Ratatat - Neckbrace

5)  Minus The Bear - Animal Backwards

6)  Toomy Disco - Age of the Jaguar

7)  Pretty Lights - Finally Moving

8)  Daft Punk - Derezzed

9)  No Regular Play - Teaser

10)  Tensnake - Coma Cat

11)  Cut Copy - Take Me Over

12)  DJ Shadow - I've Been Trying

13)  Chromeo - I'm Not Contagious

14)  Caribou - Odessa

15)  The Black Keys - Next Girl

16)  Royksopp - The Drug

17)  Blackbird Blackbird - Hawaii

18)  Aloe Blacc - Loving You Is Killing Me

19)  Bear In Heaven - You Do You

20)  Midnight Magic - Beam Me Up

21)  Arcade Fire - We Used To Wait

22)  Jose James - Blackmagic

23)  Yeasayer - Madder Red

24)  Jonsi - Go Do

25)  Cali Swag District - Teach Me How To Dougie

26)  Gorillaz - Stylo

Week In Review

The week that was:

U.S. stocks ended 2010 with strong gains, advancing for the second year in a row, as stimulus measures from the Fed and recent signs of economic improvement encouraged investors.  Corporate and economic newsflow were very slow in the last week of 2010.  Initial unemployment claims fell by 34,000 to the lowest levels since July 2008.  The decline is much greater than the 2,000 decrease expected by economists and provides further evidence that the job market is slowly thawing.  However, the news item failed to stimulate the market ahead of the new year.

The People’s Bank of China announced last weekend that it increased its main one-year lending and deposit rates by 25 basis points to 5.81%.  The interest-rate increase sent stocks downward in most markets worldwide as it seems Beijing has lost faith in other measures to rein in the rapid credit growth fueling housing and food inflation and is now resorting to increasing the price of credit.

Stocks:

The S&P 500 rose 0.87 points this week, or 0.07%, to 1257.64.  The Nasdaq Composite fell 12.73 points, or 0.48%, to 2652.87.  The Dow Industrials rose 4.02 points, or 0.03%, to 11577.51. 

For the year, the S&P 500 was up 12.78%, the Nasdaq was up 16.91%, and the Dow was up 11.02%.

• Shares of IMAX (IMAX) jumped almost 12% on Friday after rumors surfaced that Sony (SNE) and Disney (DIS) may be preparing to make a bid at a price of at least $40 per share for the company.
• Amazon.com (AMZN) reported that sales on Cyber Monday following Thanksgiving increased by 44% from the same day in 2009, with orders coming in at 13.7 million compared with 9.5 million items last year.  Amazon’s third-generation Kindle e-reader product is now the best-selling item in the company’s history.  AMZN shares are up 62% over the trailing six months.

Bonds:

End of week bond yields:

2 Year yield = 0.59%, down 6 bps from last week.

3 Year yield = 0.97%, down 11 bps from last week.

5 Year yield = 2.00%, down 4 bps from last week.

10 Year yield = 3.28%, down 10 bps from last week.

30 Year yield = 4.33%, down 13 bps from last week.

• Muni bond mutual fund outflows have reached $9.5 billion in December alone.  The fund redemptions have caused forced selling by fund managers while many individual investors have been selling to due to fear driven by headline including Meredith Whitney’s 60 minutes interview.  This action in the muni market may present a buying opportunity for investors that find themselves in a high tax bracket.

What to look for next week:

9:00 AM          Monday           ISM Manufacturing Index

7:30 AM          Thursday         Jobless Claims

7:30 AM          Friday              Employment Situation