Down Week on Lack of Fiscal Cliff Deal

Markets

For the week of Monday, December 10, 2012, through Friday, December 14, 2012:

• Standard & Poor’s 500 Index: -0.32%
• Dow Jones Industrial Average: -0.15%
• NASDAQ Composite: -0.23%

The U.S. markets ended slightly higher Monday on hopes a political deal was in the works concerning the fiscal cliff. Despite new noise from the eurozone, the markets showed little concern when the Italian Prime Minister Mario Monti said he would resign, while Silvio Berlusconi threatened a comeback on an anti-austerity platform. Tuesday brought strong market performance that erased the Dow Industrials’ losses since the election with a fifth-straight positive session. Apple, Inc. (NASDAQ: AAPL) rebounded after falling a fourth-straight day Monday.

On Wednesday and Thursday, market performance ended flat, as the Federal Reserve’s new stimulus program failed to excite investors. Stocks closed lower on Friday, weighed down by Washington’s lack of progress in reaching a deal to avert the fiscal cliff. U.S. economic reports showed a drop in the CPI, but gains in industrial production and capacity utilization. Home foreclosures increased 5.4% in November, marking the first annual gain in two years. Banks are likely trying to manage the flow of distressed properties, without disrupting the housing recovery.

Economic Data

• Chain Store Sales Snapshot:
  • The ICSC Chain Store Sales Index fell 0.7%, continuing its post-Thanksgiving decline, reaching its lowest point since late October.
  • Year-over-year growth was down to 2.5%.
  • Overall, customer traffic was stronger than last year.
• International Trade:
  • The foreign trade deficit widened to $42.2 billion in October.
    • This was larger than the previous month’s revised deficit of $40.3 billion.
  • Exports fell by 3.6%, and imports fell 2.1%.
  • An important factor in GDP, the real goods deficit shrank slightly to $46.2 billion.
• Wholesale Trade:
  • Ahead of expectations, wholesale inventories climbed 0.6% in October.
    • This was a gain of 0.4%.
  • The inventories-to-sales ratio moved from 1.19 in September to 1.22 in October.
• MBA Mortgage Applications Survey:
  • The Mortgage Applications Composite Index was higher by 6.2%, driven by a second consecutive week of refinancing.
  • Purchase applications were relatively unchanged.
  • At 3.47%, the contract rate on a 30-year fixed mortgage fell to the lowest level on record.
• Federal Open Market Committee Meeting:
  • Significantly, the Federal Reserve announced it would cease calendar-based deadlines for interest rate policies.
    • The Fed will use economic conditions to adjust expectations for future monetary policy.
  • The central bank announced it will purchase $45 billion per month in Treasury securities, replacing Operation Twist.
    • Monthly asset purchases will total $85 billion per month early next year, pushing the balance sheet toward $4 trillion.
• Jobless Claims:
  • Initial claims fell 29,000 to 343,000 for the week.
    • Following the Hurricane Sandy increase, this is the fourth consecutive decline.
  • Claims are now down to their lowest level since February 2008.
  • The four-week moving average also fell by 27,000 to 381,500.
    • The underlying claims data suggests an improving job market.
• Producer Price Index:
  • A plunge in the energy index undermined continued strength in food prices, resulting in producer prices falling 0.8% in November.
    • Producer prices were broadly weak last month.
    • This could indicate a drag on consumer prices next year.
• Retail Sales:
  • Retail sales rose 0.3% in November, thanks to auto dealers.
  • Non-auto sales were unchanged.
  • Performances were mixed across segments:
    • Gains were at non-store retailers, electronics and appliance stores, building supply stores, and furniture stores.
      • Repair from Hurricane Sandy’s damage likely contributed to strong sales at building supply stores.
    • Declines were at gasoline stations, department stores and grocery stores.
  • Year-over-year growth held steady at 3.7%.

Earnings:

• Dollar General Corp. (NYSE: DG)
  • The discount chain posted a bigger-than-expected increase in quarterly profit.
    • Total sales were in line with Wall Street’s expectations.
    • Sales at stores open at least a year rose less than expected.
  • Dollar General reported that profit rose to $207.7 million, or $0.62 per share, compared to $171.2 million, or $0.50, one year ago.
  • Sales increased 10.3% to $3.96 billion.
• Costco Wholesale Corporation (NASDAQ: COST)
  • Costco reported earnings of $0.95 a share, versus $0.80 a year earlier.
    • This beat Analysts’ estimates of $0.93.
  • Net revenue rose to $23.2 billion.
  • Same-store sales grew 7% overall in the United States, with a 9% international gain.
  • Membership fees were up 14% to $511 million.

M&A Activity and More:

• Treasury earns $7.6 billion from sale of last shares of AIG:
  • The Treasury Department sold its remaining stake in the American International Group (NYSE: AIG), earning about $7.6 billion from the sale.
    • In its sixth offering, the government sold 234.2 million shares at $32.50 each.
    • This was at a slight discount from the closing price of $33.36 on Monday.
  • With the latest sale, taxpayers gained about $22.7 billion from a bailout that many predicted would prompt a staggering loss.

Interest Rates

• Treasuries retreated after the Federal Reserve committed to more bond purchases for next year.
  • The two-year Treasury rate was flat at 0.24%.
  • The five-year Treasury rate increased nearly seven basis points to 0.66%.
  • The 10-year Treasury rate rose 14 basis points to 1.71%, rising above the six-month average.
  • The 30-year Treasury yield soared more than 16 basis points to 2.91%.

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