Market Report – December 17, 2012

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In the Rear View Mirror

Amid an ever-shortening timetable in which to solve the fiscal cliff, U.S. equities fell in the recently completed week for the first time in a month. The S&P 500 fell 0.3% for its first weekly slide in four weeks while the Dow Jones Industrial Average lost 0.2% on the week. The Nasdaq was savagely repudiated as Apple (NASDAQ: AAPL), the largest U.S. company by market value, sank to a 10-month low.

President Obama and House Speaker John Boehner have been diligently meeting and discussing ways to avert the fiscal cliff. However, the two remain at an impasse about how to solve the dreaded, GDP-draining scenario. Under the fiscal cliff, scores of Bush-era tax cuts would expire, essentially becoming tax hikes in the process.

Fiscal cliff looming

If politicians do not solve the fiscal cliff and solve it soon, more than $600 billion in tax increases and spending cuts will go into effect next month. The worse news is that the likely result of those tax increases and spending cuts would be 4%-5% in lost GDP and another U.S. recession.

Those issues loomed large in the week that was as traders overlooked some decent economic data to take a more risk off view of the market. The silver lining is that micro-caps proved durable as the iShares Russell Microcap Index Fund (NYSE: IWC) added almost 0.8% on the week. The Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) added 0.1%.


The Markets @ 12/14/2012
Index Close Weekly % Change YTD Change YTD%
DJIA 13135.01 -20.12 -0.15% 917.45 7.51%
NASDAQ 2971.33 -6.71 -0.23% 366.18 14.06%
S&P 500 1413.58 -4.49 -0.32% 155.98 12.40%
NYSE Comp 8333.73 19.44 0.23% 856.7 11.46%
NYSE MKT  2396.2 -2.22 -0.09% 117.86 5.17%
RUS 2000 823.05 1.19 0.14% 82.13 11.08%
RUS MICRO 314.53 1.98 0.63% 38.81 14.08%
VANG INTL 14.89 0.18 1.22% 1.83 14.01%
USX CHINA 4246.06 175.94 4.32% -283.74 -6.26%
EMERG MKTS 6910.44 120.06 1.77% 905.13 15.07%

Market Report

Majors off for the week

The three most followed indices were off 0.15%, 0.23% and 0.32%…it doesn’t seem to matter which one we’re talking about, they all closed the week in the red.

MicroCaps showed some resolve

The Russell Micro Index gained 0.63% while the Russell 2000 was virtually unchanged again this week at +0.14%. Emerging Markets were up for the third week…gaining 1.77%; The Vanguard International continued to show strength with a 1.22% gain.

China recovered what it lost last week…our China Index gained 4.32% for the week and is now showing a 6.26% loss YTD. All other indices we follow are solidly in the green with the NYSE MKT (AMEX) being the laggard at +5.17% gains for the year.

The Dollar reversed directions again this week and headed south

The US Dollar moved down against the Euro (closing at 0.7598 Euros; minus $0.0137 for the week); bonds were off again…the 10-year bond lost $0.75 to close at $99.23 and the 30-year bond lost $1.23 to close at $97.52.

Oil prices moved up slightly

WTI Crude Oil gained $0.80 this week to close at $86.73 on Friday. Still, low oil prices mean low gasoline prices (gas prices fell 7.4% in November, the biggest drop in four years) and that means a tame inflation rate.

Gold declines again…gives back $8.20 this week…to close at $1,695.80

Fiscal cliff fears continue to punished gold… as noted several time by Reuters…institutional investors lightened gold holdings, worried that a failure to reach a budget deal could hurt economic growth and undermine gold’s appeal as an inflation hedge. With no budget deal yet…the dumping continues.

In economic news, the Federal Reserve concluded its last monetary policy meeting of 2012 today, pledging to hold interest rates near historic lows until the U.S. unemployment rate is below 6.5%. The jobless rate is currently 7.7%.

However, the Fed did say it purchase $45 billion worth of short-term Treasuries and longer-dated U.S. bonds when Operation Twist expires at the end of this month.

Initial claims for jobless benefits fell by 29,000 to 343,000 last week. Economists expected the weekly claims number to fall to 370,000. The less volatile four-week moving average slid by 27,000 to 381,500.

The Census Bureau said U.S. retail sales increased 0.3% last month following a 0.3% drop in October. The core number, which excludes sales at sales at car dealers, building supply stores and gas stations, jumped 0.5% in November after being flat in October. The Labor Department’s Producer Price Index slid 0.8% in November following a 0.2% drop in October. Economists expected a November decline of 0.5%.

The Federal Reserve said industrial production jumped 1.1% last month following a 0.7% decline in November. The November increase is the best since December 2010. The Labor Department said the consumer price index fell 0.3% last month. The core index, which excludes food and gas prices, rose 0.1%.

The Bottom Line for Stocks

The harsh reality is there are just nine trading days left in the year and that means policymakers have precious little time with which to work to avert the fiscal cliff. However, that does not mean the market is a lost cause through year-end. Rather, there are a rising number of worthwhile opportunities in the micro-cap universe.

For starters, due to the spate of bullish Chinese economic data, high-quality, legitimate Chinese micro-caps are worth a look once again. At the U.S. sector level, biotech and staples should be the preferred destinations while financials and energy names are best left alone until more positive news of the fiscal cliff becomes available.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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