Market Report – February 18, 2013

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MicroCap Market Report – A wave of mergers and acquisitions activity pertaining to some of the most familiar names in Corporate America helped lift stocks this past week as the S&P 500 rose for the seventh straight week. That is good for the benchmark U.S. index’s longest winning streak in two years. On the week, the S&P 500 added 0.1% while the Dow Jones Industrial Average fell by the same amount. The NASDAQ Composite endured a minor decline of 0.06%.

Double barrel market drivers: Economic data and earnings

Over the past few weeks, it has been a combination of strong economic and solid earnings reports that have lifted stocks or at least supported them. That was the case again in the just completed week, but arguably, a spate of deal-making was the more prominent catalyst.

M & A activity adds a positive force

In the past week alone, Comcast (NASDAQ: CMCSA) announced it would pay General Electric (NYSE: GE) $16.7 billion for the 49 percent of NBCUniversal it did not yet own. U.S. Airways agreed to acquire rival American Airlines to form the largest U.S. carrier. Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) and a Brazilian partner announced they will pay $23 billion for ketchup giant H.J. Heinz (NYSE: HNZ).

Microcaps lead market gains

Increased mergers and acquisitions are usually good for lifting risk appetite, which in turn benefits riskier assets such as micro-cap equities. That was the case in the week past as the iShares Russell Microcap Index (NYSE: IWC) jumped 1.4% while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) added 0.84%. Both are trading at or near new 52-week high.

The Markets @ 2/15/2013
Index Close Weekly % Change YTD Change YTD%
DJIA 13981.76 -18.21 -0.13% 877.62 6.70%
NASDAQ 3192.03 -1.84 -0.06% 172.52 5.71%
S&P 500 1519.79 1.86 0.12% 93.6 6.56%
NYSE Comp 8933.22 -2.02 -0.02% 489.71 5.80%
NYSE MKT  2388.24 -21.7 -0.90% 32.58 1.38%
RUS 2000 928.61 19.08 2.10% 79.26 9.33%
RUS MICRO 56.53 0.78 1.40% 4.21 8.05%
VANG INTL 47.74 -0.13 -0.27% 1.44 3.11%
CHINA INDEX 4546.35 8.47 0.19% 107.83 2.43%
EMERG MKTS 7206.57 6.74 0.09% 166.6 2.37%


Market Report

Majors were flat to down but small cap indices rock

The Dow was down as was the NASDAQ; the S&P 500 eked out a small gain of 0.12% to keep its winning streak alive at seven weeks.

The DJIA and S&P 500 are neck and neck for YTD gains at 6.70% and 6.56% respectively, but well behind the smaller cap stocks.

Micro Caps still out in front and pulling away…the Russell 2000 Index gained a very robust 2.10% last week and is up 9.33% YTD, while the Russell Micro turned in an impressive gain also at +1.40% for the week and is showing a strong 8.05% gain for the year.

China stayed in the green, with The NASDAQ Golden Dragon China Index gaining 0.19%; Emerging Markets were also weak with a paltry 0.09% move to the upside. Red Numbers continued for the Internationals… off 0.27%

Oil continues a slow trek toward $100 a barrel…WTI Crude Oil closed at $95.86, up $0.14 for the week.

The Dollar strengthened, but ever so slightly

The US Dollar gained $0.0001 for the week, to close at 0.7483 euros. That’s hardly worth reporting.

However, bonds made a strong move to the upside…with the 10-year bond gaining $2.83 to close at $99.92 and the 30-year bond gaining $6.93 to close at $98.91. Looks like risk aversion investors have continued to shift toward safe-haven currencies.

Gold dropped thru the bottom this past week, losing $57.20 to close at $1,608.80

The Kitco primer I wrote about last week details how the US Dollar strength/weakness affects the price of gold: “When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity.

For more information about gold prices, go here: http://www.kitco.com/kitco-gold-index.html

In economic news, initial claims for jobless benefits fell by 27,000 last week to 341,000 claims. Economists expected a decrease of just 6,000. The less volatile four-week moving average rose by 1,500 to 352,500.

The University of Michigan-Thomson Reuters consumer-sentiment survey rose to an initial February reading of 76.3, up from 73.8 last month. Economists expected a February reading of 75. Federal Reserve Bank of New York’s Empire State jumped to 10 this month from -7.8 in January, good for the best reading since May 2012.

Industrial production fell 0.1% in January following a 0.4% increase in December. Economists expected a January increase of 0.2%.

Overall, it was a week light on data points, which can be a good thing from time to time. That said, the jobless claims and consumer sentiment numbers can certainly be considered “good” and those are exactly the types of reports the bulls need to see to keep driving equities higher.

Is there a recession in our future???

Will Deener, noted business and financial columnist for the Dallas Morning News, wrote this weekend in a short column entitled. “Perspective” that “concerns are mounting that the economy could lapse into recession later this year. However, one of the best indicators of where the economy is heading is the Conference Board’s U.S. Leading Economic Index, which remains positive. In the past 50 years not a single recession has begun without this index first turning down.”

The Conference Board Leading Economic Index® (LEI) for the U.S. rose 0.5 percent in December to 93.9 (2004 = 100), following no change in November, and a 0.3 percent increase in October.

Says Ken Goldstein, economist at The Conference Board: “The latest data suggest that a pickup in domestic growth is now more likely, compared to a few months ago. Housing, which has long been a drag, has turned into a positive for growth, and will help improve consumer balance sheets and strengthen consumption. However, for growth to gain more traction we also need to see better performance on new orders and an acceleration in capital spending.”

About The Conference Board Leading Economic Index® (LEI) for the U.S.

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components.

The ten components of The Conference Board Leading Economic Index® for the U.S. include:

Average weekly hours, manufacturing

Average weekly initial claims for unemployment insurance

Manufacturers’ new orders, consumer goods and materials

ISM Index of New Orders

Manufacturers’ new orders, nondefense capital goods excluding aircraft orders

Building permits, new private housing units

Stock prices, 500 common stocks

Leading Credit Index™

Interest rate spread, 10-year Treasury bonds less federal funds

Average consumer expectations for business conditions

For additional information go to: http://www.conference-board.org/data/bcicountry.cfm?cid=1

The Bottom Line for Stocks

At this juncture, there are really two schools of thought at play in the market:

What is important to note about the latter scenario is that those forecasting a pullback are not overtly bearish. They merely expect an S&P 500 retrenchment of anywhere from 3% to 5%.

That is tolerable and does not signal a recession in and of itself

After all, markets normally do not move up in straight lines. Should a dip arrive, we would use that opportunity to embrace micro-cap energy and financial services names. Broadly speaking, precious metals miners, micro-caps included, are being dragged lower by falling gold prices.

Opportunities also abound with micro-cap health care stocks and to a lesser extent, staples names.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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