Fixed Income Weekly

Treasurys were slightly lower across the curve after a quiet week of trading. The curve was 4 basis points flatter at end the week at +275 bps, 17 bps under the all time record set on Feb 22.

A strong credit market last week was followed up by heavy issuance of corporate debt this week. According to Bloomberg, some $30 billion in corporate bonds were issued by close of business Thursday, bringing the year to date total to just shy of $200 billion. Credit spreads have been steadily moving lower while Treasurys have remained in a tight range. CFOs are definitely aware of this and are taking advantage of the environment to raise cheap capital. And thanks to today’s news that Obama plans to nominate San Francisco Fed President Janet Yellen to Vice Chairman of the Federal Reserve, one of the most dovish of the 12 Fed Presidents, companies will likely see better chances still to borrow cheaply. The term “dovish” is used to describe those who favor easy monetary policy, as opposed to “hawkish” policy makers, who traditionally lean toward tighter monetary policy. The effect of ZIRP on the cost of debt is two-fold. Rates are low, and as investors stretch out to grab more yield in the face of measly low-risk returns, spreads will continue to tighten as long as rates stay here.

The FOMC meets next week and is expected to stand pat on rates, but all eyes will be reading the comments that accompany the rate decision. Namely, “the exceptionally low/extended period” section. Not much is being said one way or another on that, but I expect to hear more speculation early next week. I don’t think the committee is ready to remove them yet, but we are certainly closer than we were in January.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst

Daily Insight: Jobs, Trade Balance, Household net Worth

U.S. stocks closed smack-dab on the 17-month high Thursday (1150 on the S&P 500, initially hit on January 19) to fully erase the 8.1% pullback the market ran into a month back. A late-session surge brought the market out of negative territory, where it had been for virtually the entire day, to match that near-term high.

Jobless claims that remain stuck at high levels and foreclosure filings that continue to rise at a pace of 300K per month couldn’t stop a spate of optimism that banks have put damaging loan quality behind them. That’s a dangerous assumption in this environment. But hey, it sure feels good.

As a result, financials led the market higher with consumer discretionary shares being the next best performing sector. Basic material stocks participated in the advance for the first time in three sessions as the U.S. dollar lost ground.

Nine of the 10 major industry groups rose yesterday. Energy was the sole loser.
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Brent Vondera, Senior Analyst

Daily Insight: Crude Oil, Mortgage Apps, Wholesale Inventories

U.S. stocks gained ground for a second day on Wednesday, and if not for Monday’s fractional decline the broad market’s re-rally would be two weeks in length. As a result, the S&P 500 has inched closer to the 15-month high hit on January 19.

The tech-laden NASDAQ Composite led the way. Mid and small-cap indices also out-performed the broad market. Shares of Travelers, Chevron and 3M weighed on the Dow Industrial Average, which lagged the other major indices -- a big day from Boeing (added 17 Dow points) kept the index in positive territory.

Financials, tech and energy were the leaders for the session – although as mentioned above Chevron didn’t follow other energy names. Telecom, consumer staples and basic material shares were the three of the 10 major sectors that closed lower on the day.

On the sovereign debt problems over in Europe, former European Commission President Romano Prodi stated: “For Greece the problem is completely over. I do not see any other case now in Europe.” I don’t think comment on those remarks is necessary.
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Daily Insight

U.S. stocks gained some ground on Tuesday amid growing optimism an improving economy will justify an extension of the year-long market rally, or so it was written by the financial press. Stocks were considerably higher for most of the session, but slid to negative territory late in the day before bouncing back above the cutline 25 minutes ahead of the closing bell.

As stocks grind higher and attempt to break past the near-term highs hit in January, the latest NFIB small business survey illustrated that small biz owners are not so ebullient about things and the IBD Economic Optimism reading for March suggested that things are not quite right with the world. Both surveys fell. The NFIB survey remains stuck at a level that’s well below the marks hit during the past two economic contractions and the Personal Financial Outlook segment of the IBD survey fell to the lowest level since February 2009 – a period when everything but the safest of assets was getting hammered. More on the NFIB report below the jump.

News from Cisco Systems that they’ll roll out a heavy-duty router capable of 12 times the capacity of rival equipment helped boost information technology and telecom shares. The router will allow internet providers to carry data traffic at speeds 100 times faster than most home connections today and able to direct traffic based on the priority of the data – this thing is all about video.

Basic material, utility and consumer staples stocks were among the session losers.

The dollar rallied after Fitch Ratings warned about deteriorating credit quality In Europe, which prompted traders to seek refuge in the greenback as they sold euros and pounds.

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http://www.acrinv.com/20100310224/blog/daliy-insight-3-10-2010

Is the market fairly valued?

It’s the one year anniversary of the S&P 500 lows, and what a difference a year makes! The S&P 500 is up over 68% in the last 12 months, but clearly the tremendous opportunities that were in place a year ago are no longer there.

There are two market conditions, however, that will allow investors to take advantage of opportunities. The first is that volatility is dramatically lower. As measured by the VIX index, volatility is nearly 80% lower than it was at the time of the Lehman Brothers bankruptcy.

The second favorable condition is that correlations between assets and within markets have come down. When correlations were extremely high, and everything was going down at the same time, the only thing that mattered to investors was to have as little risk exposure as possible.

Lower volatility and lower correlations across different asset classes presents the opportunity for investors that do their homework to generate good returns. That means looking at fundamentals such as earnings, cash flow, and dividend payouts. It also means identifying long-term trends that will cause specific sectors to outperform. For example, the Technology and Industrial sectors are positioned to perform well in 2010.

But are stocks way ahead of the economy? Is the good news already baked into stock prices?

Clearly the stock market is a forward-looking mechanism that moves in advance of the economy, but it hasn’t necessarily moved too far at this point.

Economic data over the past few weeks makes the double-dip scenario seem less likely, with new orders for equipment, retail sales, and even things like hotel stays pointing to a brighter economic climate. The jobs numbers are still bad, but have shown improvement. More importantly, many individuals are feeling less uncertain about their job prospects.

Meanwhile, corporations are reporting strong cash flow and balance sheets look relatively healthy. We are starting to see businesses buy back stock, raise dividends, and increase investment for future growth – all of which are positive signs.

We always hear about historically high P/E ratios (here is a good story in today’s Wall Street Journal), but when the market is measured by cash flow (P/CF) the S&P 500’s valuation is 37% below the 12-year average and half of its valuation in 2007. P/CF has increased from roughly 4.5 in March 2009 to 8.2 today. With data going back 1998, the CF multiple has never fallen below 8.0 prior to 2008.

I believe the S&P 500 will finish 2010 somewhere between 1200 and 1250, 5% to 9% above today’s levels, but I would be concerned around 1300. Notice that I say “in 2010.” There are many uncertainties beyond 2010 that are keeping investors at bay. Because the market is forward-looking, it is affected by how far investors are willing to look into the future, which depends on their level of comfort and safety. One year ago, investors could barely look a week into the future. When a bull market is under way, investors are willing to look 18 to 24 months into the future to discount future earnings.

Some may argue that fair value is 20% below where the market stands today. I agree that buying stocks at prices 20% lower than today's would better compensate for the long-term risks facing the U.S. economy; however, I am not selling stocks because waiting for this event to occur could take several years. Markets are historically "overvalued" for extended periods of time. At the same time, ignoring the significant risks at hand is not prudent behavior either. Expectations must remain reasonable.

One year ago, investor sentiment and psyche was quite low among both individual and institutional investors. One year later, the easy money has been made, so it's important to remember that the recovery will be slow and bumpy as the economy moderates.

- Peter Lazaroff, Investment Analyst

Daily Insight: Dollar Strength on Weakness...and Policy

U.S. stock indices ended mixed on Monday as the Dow and S&P 500 closed technically lower (essentially flat), while shares of Cisco Systems helped drive the NASDAQ Composite into positive territory.

Stocks really need some sort of catalyst at current levels, the broad market has basically recouped the 8% slide that occurred during the three weeks ended February, and we were without an economic release to provide that boost. There were additional comments out of Europe over the weekend that offered the clearest evidence Germany and France would be at the ready to help Greece refinance their debts if needed, but this was already baked into last week’s trading.

(I did found it interesting to read that the Greek Prime Minister excoriated “unprincipled speculators” yesterday for threatening to bring a new global financial crisis. He’s referring to the CDS market – in short, CDS is just insurance against default. This market can be a bit screwy, particularly the naked sort – not to be confused with the naked-Rahm that’s allegedly found loitering in Congressional showers. Naked CDS is when someone is using this derivative to bet for or against default, but has no direct exposure to the underlying debt. But look, speculators wouldn’t be betting against Greece in the first place if the government hadn’t promised benefits they can’t possibly afford. Get your finances in order and you wouldn’t be dealing with this problem, which should be a lesson to all governments.)

Telecom, consumer discretionary, tech and financials were the sectors up on the session. Tech and telecoms were boosted by news that Cisco Systems will unveil new tools to help build systems to increase download speeds. The index that tracks financial shares was most likely helped by news that AIG was able to sell another of its premier units. This must have offset talk that banks are going to have to take much more losses on mortgage loans, which to this point have been valued on the prayer that housing is going to make a sustained comeback sometime in the near future.

Industrial and health-care shares led the six major sectors that declined on the session.

So we’re at the one-year mark of the nefarious intraday low of 666 on S&P 500 and the closing 13-year low of 676 by day’s end on March 9, 2009. The broad market has jumped 68% from that low, which means it’s recouped 52% of the value lost from the October 9, 2007 all-time high. The chart after the jump takes us back to that October 2007 all-time high.
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Brent Vondera, Senior Analyst

Daily Insight: February Jobs Report

U.S. stocks got a boost after the latest jobs report showed less payroll positions were lost than White House economic adviser Larry Summers had set the market up to expect, and more importantly that we’re likely very close to some mild monthly increases in employment. Now, we’re going to need 300K-plus per month for more than a year to bring the jobless rates down substantially (don’t forget among others waiting on the sidelines there are 2-3 million May graduates readying to enter the job market), but additions are additions and it looks like they’re around the corner.

The market also got help from a couple of Fed officials who stated the central bank needs to keep rates low until the recovery picks up (I thought the recovery was gaining steam; that’s what we heard from the last FOMC statement). ). Federal Reserve Bank of Chicago President Charles Evans stated he needs to see “highly sustainable” growth before supporting steps toward tighter monetary policy and St. Louis Fed Bank President James Bullard stated policy makers want to remain “very accommodative.”

Financials led the way on those Fed comments and energy was next in line as the price of crude jumped to $81.50/ barrel – wholesale gasoline rose to $2.27/ gallon, highest since October 2008; it appears that $3 retail is on its way.

For the week, the broad market gained 3.10% and is now within 1% of its 16-month high touched on January 19. The Dow Industrials added 2.33% for the week and the NASDAQ Composite jumped 3.94%. Small-cap stocks led the week’s advance, up 5.96% -- and have led the market during this nearly one-year rally from the March 9, 2009 depths. Mid-cap stocks added 4.35%.
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Brent Vondera, Senior Analyst