Will the Roller Coaster Ride Continue?

For the week of Tuesday, January 3, 2012 through Friday, January 6, 2012:

• Standard & Poor’s 500 Index: 1.61%
• Dow Jones Industrial Average: 1.17%
• NASDAQ Composite: 2.65%

In 2011, the markets were extremely volatile. Investors’ reactions to the earthquakes, tsunamis, floods, debt ceilings and debt crises pulled the markets every which way. There were days where the Dow Jones Industrial Average leapt 500 points only to fall 600 the next. There were a few record-setting days in terms of point moves. Despite the swings, the DJIA finished with an 8.38% gain, inclusive of dividends for the year. The U.S. dollar regained some of the value it lost against the Euro. Interest rates remain just above record lows set this year. Unemployment has fallen and the economy has been slowly regaining steam.

The first week of 2012 was a short week, which started the year on positive footing. The main news this week starts with the Federal Reserve deciding to become more transparent in its operations. The theory is that this will take some of the volatility from the markets before their announcements of monetary policy and economic forecasts.  ISM Manufacturing and Service numbers indicate the beginning of the year should have some growth. Manufacturing increased ending last year and the services rose; however, less than expectations. Jobless Claims fell this week starting the year on a good note. However, there is still a long way to go to gain the amount of jobs lost during the recession.

With the election year, the markets will likely strengthen once a Republican candidate pulls ahead and becomes the party’s nominee. The outcome of the election will remain undecided until November, but the markets can adjust to likely outcomes. One of the problems on the horizon remains the European Debt Crisis. If there is a liquidity crisis in the eurozone, the global economy could suffer. The Europeans have a lot at stake to let this happen. Hopefully, they can solve the problem. Despite the potential for continued volatility, expect the markets to grow this year.

2011 Snapshot

• The major indices finished the year better than expected.
  • The S&P 500 finished 2011 up 2.11% with dividends; however, on price appreciation alone, it finished down less than 0.01%.
  • The DJIA rose 8.38% with dividends.
  • NASDAQ fell 0.79%
  • Russell 2000 dropped 4.17%
• The sectors that performed worst were financials, materials, and industrials.
• The utilities sector outperformed with enormous growth of 14.83%, 19.96% with dividend.
• Earnings growth was positive for the year, yet it did not propel the markets higher.
  • This will likely assist the markets price appreciation in 2012.
• Commodities
  • Gold rose roughly 10% for the year, but closed 17% off of the year’s high.
  • Oil prices rose 8.15%.
• The U.S. dollar rose against the euro, as a result of the ongoing European debt crisis.
• Interest rates fell significantly in 2011 with many government securities hitting all-time lows.
  • It would be extremely difficult for rates to go much lower, but economic growth may not drive rates higher in 2012.
• Utilities, consumer staples, and healthcare finished as the top performing sectors of the markets.
  • Income from dividends helped them have a strong finish.

Economic News

• Federal Open Market Committee Minutes
  • The Federal Open Market Committee (FOMC) released notes from the December 13 meeting.
  • Communication strategy was the focus of the meeting, as the FOMC wants to become more transparent and provide better guidance on monetary policy and economic projections.
    • The new policies will begin this month.
  • The Fed believes that the economy is improving, but plans to keep current monetary policy in place, which should keep long-term interest rates low into 2013.
• ISM Manufacturing Numbers
  • The manufacturing sector continues to show signs of improvement with the ISM Manufacturing Index rising to 53.9 from 52.7, the highest level since summer.
  • New orders rose to 57.6 from 56.7, while the employment index climbed to 55.1 from 51.8.
  • The data suggests that manufacturing has gained some steam to start the year.
• ISM Services Index
  • The Services Index rose less than expected in December, with an increase of 0.6.
  • The index remains below its third quarter average of 53 at 52.6
• Unemployment Situation
  • In the weekly jobless claims report, Initial claims fell 15,000 to 372,000 from 387,000, which was more than expected.
    • Continuing claims for unemployment benefits also fell.
    • This is a good sign as claims continue to decrease; however, seasonal workers hired for the holidays could reemerge in these numbers in the next few weeks.
  • ADP Jobs Report
    • The ADP report showed that companies added 325,000 new jobs for the month of December.
    • This is a much larger number than the expected 172,000.
    • ADP estimates should be taken with a grain of salt, as they have overshot actual numbers in the past few months.
  • The Bureau of Labor Statistics reported the economy added 200,000 jobs in December.
    • For the year, the economy added 1.6 million jobs.
    • The unemployment rate dropped to 8.5%, the lowest rate since February 2009.

Company News

• Eastman Kodak Company (NYSE: EK)
  • Eastman Kodak is expected to seek bankruptcy protection in the next few weeks.
  • The imaging and printing company is rumored to be considering selling some of its patents in order to prevent filing for Chapter 11.
  • The 131-year-old imaging powerhouse has faced tough times since 2005, attempting to diversify products into other industries.
  • Trouble appeared in September when the company told investors it was increasing cash reserves.
    • Actually, Kodak was borrowing $160 million.
  • On Wednesday, shares lost roughly 30% after the news broke in a Wall Street Journal article.

Interest Rates

• The two-year Treasury increased almost two basis points to 0.26% this week.
• The five-year Treasury rose five basis points to 0.89%, remaining under 1% since last November.
• The 10-year Treasury leapt 11 basis points to 1.98%, well below last year’s starting point of 3.4%.
• The 30-year Treasury yield flew 15 basis points to 3.04%; however, still far below 4% before U.S. debt was downgraded.

Discloures

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