Micro-Cap Stocks Start 2014 with a Strong Showing

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Microcap LeadrsMicroCap Market Report: January 11, 2014 – Despite a slack December jobs report issued Friday, U.S. stocks eked out their first weekly gains of the New Year. For the week, the S&P 500 posted a gain of 0.60% while the NASDAQ Composite closed higher as well. The Dow Jones Industrial closed with a small weekly loss… -0.20%.

Although the December jobs number was a disappointment, there is some silver lining to consider, including a few other data points that have been strong, which we will address in a moment. Additionally, some economists believe job gains slowed last month due to poor weather across much of the U.S.

Still, risk appetite was limited through much of it, a trend that has been evident to start 2014. In what should be considered a positive sign, micro-caps, broadly speaking, impressed last week.

Micro-cap stocks lead the way into 2014

That could be a harbinger of a strong finish to January to come. The iShares Russell Microcap ETF (NYSE: IWC) gained 2.34% while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) was higher by just about the same amount, +2.30%. WMCR has broken out to new highs.

The Markets @ 1/10/2014
 
Index Close Weekly % Change YTD Change YTD%
           
DJIA 16437.05 -32.94 -0.20% -139.61 -0.84%
NASDAQ 4174.66 42.75 1.03% -1.93 -0.05%
S&P 500 1842.37 11 0.60% -5.99 -0.32%
NYSE Comp 10371.13 74.36 0.72% -29.2 -0.28%
NYSE MKT 2375.5 -22.12 -0.92% -50.7 -2.09%
RUS 2000 115.52 0.83 0.72% 0.16 0.14%
RUS MICRO 76.88 1.76 2.34% 1.76 2.34%
VANG INTL 51.7 0.28 0.54% -0.28 -0.54%
CHINA INDEX 7125.65 124.27 1.77% 70.82 1.00%
VANG EMER MKTS 39.63 -0.26 -0.65% -1.18 -2.89%

We have a new bench mark for our emerging markets sector… the Vanguard FTSE Emerging Markets ETF (NYSE: VWO). This ETF is one of if not the most popular fund in the emerging market sector and probably the largest. Plus, we can more easily find up to date market data for our weekly coverage.

Vanguard FTSE Emerging Markets ETF (Fund Description)

Investment approach

• Seeks to track the performance of the FTSE Emerging Index.

• Passively managed, using index sampling.

• The fund invests substantially all of its assets in the stocks included in the index.

About the benchmark

• The FTSE Emerging Index is a market-capitalization-weighted index representing large- and mid-cap stocks of companies located in emerging markets around the world.

• Brazil, Russia, India, Taiwan, China, and South Africa are among the markets included in the index.

Source: https://institutional.vanguard.com/iippdf/pdfs/FS964R.pdf

Characteristics as of 11/30/2013

Fund total net assets

$64.5 billion

Number of stocks

922

Net assets of ten largest holdings

16.6%

Month-end ten largest holdings (12/31/13)

1

Taiwan Semiconductor Manufacturing Co. Ltd.

2

Tencent Holdings Ltd.

3

Petroleo Brasileiro SA

4

China Construction Bank Corp.

5

China Mobile Ltd.

6

Industrial & Commercial Bank of China Ltd.

7

Gazprom OAO

8

Vale SA

9

Naspers Ltd.

10

MTN Group Ltd.

Source: Vanguard.com: https://personal.vanguard.com/us/funds/snapshot?FundId=0964&FundIntExt=INT

Market Report

In economic news out Friday, the Labor Department said U.S. employers added just 74,000 new jobs last month, good for the lowest monthly gain in three years. The unemployment rate dropped to 6.7%. The Commerce Department said wholesale inventories rose 0.5% in November and the October number was revised up to 1.3%. Economists expected a November increase of 0.4%.

On Thursday, the Labor Department said claims for initial jobless benefits fell by 15,000 to 330,000 last week. Economists expected 335,000 claims. The less volatile four-week moving average fell by 9,750 to 349,000.

On Wednesday, the ADP private payroll report showed that U.S. private employers added 238,000 new jobs last month. The November reading was also boosted to 229,000 new jobs. The ADP report and Thursday’s jobless claims bolstered expectations that Friday’s jobs number would be superior to what it was. However, there is additional positivity to consider.

Will the Fed have to taper, tapering

Once again, we are dealing with Federal Reserve-induced perversions of U.S. financial markets. Because the December jobs report disappointed, that may give the Fed pause about tapering its quantitative easing too rapidly. Tapering is, at this point, a fact of life, but soft economic data could force the Fed to taper, tapering.

CONTINUING…

Gold continued a modest recovery… up $8.30 to close at $1,246.70.

Oil prices continue to lose ground… prices closed Friday at $92.72, -$1.24.
The US Dollar was off… -0.0046 for the week to close at 0.7151 euros.
Bonds continued an upward move… The 10-year bond gained $1.18 to close at $99.08 and the 30-year bond gained $2.39 to close at $99.17.

The Bottom Line for Stocks

Although micro-caps, as we previously noted, performed well last week, there is some concern for the sector if markets remain in current form. The concern is investors’ recently displayed preference for defensive sectors such as consumer staples, telecom and utilities. That is not a major problem for the broader market, but for micro-cap investors, there is a lack of credible micro-cap telecom and utilities from which to choose.

Fortunately, biotechnology micro-caps look strong and we reiterate the view that Treasury yields will climb higher as the U.S. economy improves, providing a boost for micro-cap financial services names along the way.

Research and Editorial Staff
MicroCap MarketPlace

Mike Casson, Executive Editor

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