Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
December 17, 2012
The stock market has gone into a trance as we approach the end of the year. The uncertainty around fiscal policy, along with concerns over Apple and the economy at large have caused institutions to wait for the dust to clear.
As the charts above illustrate both the Dow Jones Industrial Average and the NASDAQ Composite were virtually unchanged on the week.
The Markets & Economy
With the year-end holidays soon to be upon us, the stock market is taking a wait-and-see approach to what to do next. Even last week’s Federal Reserve Board meeting produced little reaction despite the Fed announcing a rather aggressive move to expand its balance sheet (fancy way of saying they will buy treasury debt and mortgage backed securities) to the tune of $85 Billion per month (over one TRILLION dollars within a year).
In other words, since our federal government is adding about that same amount to the national debt each month, the Fed, via policy mumbo jumbo, has agreed to finance the Country which cannot develop a fiscal plan on its own. Remember President Obama’s administration has not passed a budget in over three years, and his present plan such as it is will not even receive a vote in the democrat controlled Senate (because it could NOT pass).
Thus, with our government at a stalemate, the Federal Reserve has told the markets it will finance our annual one trillion dollar plus deficit. The question of course is what happens when the Fed must change policy. My own view is that it is becoming increasingly impossible for the Fed to ever really become a seller of government bonds and notes in the trillions of dollars. Thus these deficits are being monetized and will one day produce a disastrous outcome.
For the present though, the stock market appreciates that this money, each month, needs to find a home and thus stock prices are being supported while bond prices have reached bubble status. Many of our large corporations are benefitting by borrowing inexpensively and raising their dividends and buying back shares. This is why stock prices do not and will not tank. As an asset class the money must come in and it is.
As far as the economy is concerned, the indications remain moribund. Even Apple is having trouble selling its new phone and must now cut prices and sell at Walmart etc. The competition seems to have caught up with Apple, and its stock price is reflecting that along with many of its suppliers.
All indications are that the Christmas retail season will be difficult and with the tax hikes looming in early 2013, the upcoming year for economic growth is not looking promising.
At the moment, however, the sub 2% GDP growth rate seems to still be the song of the day. The latest reading (see chart below) from the Economic Cycle Research Institute leading economic indicators shows a continuation of the recent trend of very slow growth.
The decline in oil prices is a positive, but reflects a soggy economy as does the Fed’s economic outlook. They would not be taking the steps they have announced if they thought the next twelve months showed promise, and that is true whether or NOT the fiscal cliff issues are smoothed over.
In fact, I worry that President Obama will send us over the cliff fully expecting a difficult year of 2013, and then try to blame his political opponents for causing something which is already baked in the cake.
What to Expect This Week
More political theatre, but it is very unlikely to get an agreement between the President and Congress this week. On the economic news front, there will be some updates on 3rd quarter GDP and some regional surveys released late in the week. None of them will be meaningful (already received one horrible report just this morning from the New York region) as the Fed has already given you their forecast.
Our next report will be two weeks from today on New Year’s Eve. We will either have an agreement and market reaction or we won’t. In the meantime the markets will be closed early on Christmas Eve and, of course, will be closed next Tuesday in honor of the federal holiday which many people don’t realize is officially called Christmas.
Last week Spectra Energyannounced that they will be purchasing the Express-Platte System, one of the three major pipelines that move oil from Western Canada to refineries in the Midwest. The Company will pay $1.49 billion. The deal was primarily financed through a secondary offering last week. This transaction should close in the first half of 2013, and the Company expects this deal to be slightly accretive to earnings right away.
This deal makes a lot of sense given the attractive price Spectra paid, and allows the Company to diversify away from just gas pipelines into the oil markets. The Express pipeline takes 280,000 barrels per day of crude oil from Alberta to refineries in Montana and Wyoming. Also the smaller Platte pipeline carries 164,000 barrels of crude per day from Wyoming to Illinois. We expect this Company will make more deals in the oil pipeline sector as they look to become a more diversified company.
Shares of Spectra have been stuck in a trading range this year, but we believe that smart deals like this will help to attract new investors. The dividend yield is up to 4.5 percent. We don’t feel this is sustainable given the growth opportunities and steady cash flow at the Company. Spectra is a core holding in all of our accounts, and we expect the shares to reach $35 within the next 12 months.
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