Stocks Continue Rally on European Bailout News – October 31, 2011

Up to date in less than 2 minutes: Last week, U.S. stocks rose driving the Standard & Poor’s 500 Index toward the biggest monthly gain since 1974, after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 gained +3.6%, +3.8%, +3.8%, and +6.8%, respectively. Equity Performance Table Last Week Year to Date Last 52 Weeks Dow Jones Industrial +3.6% +5.6% +10.0% S&P 500 (Large Caps) +3.8% +2.2% +8.6% NASDAQ (Technology) +3.8% +3.2% +9.2% Russell 2000 (Small Caps) +6.8% -2.9% +8.2% International Stocks (EAFE) +6.3% -2.9% +0.0% Dow Jones Total Stock Market (Broad Market) +4.2% +1.2% +8.4% Interest Rates Prime Lending Rate 3.25% Interest Rate Bias Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral 90 T-bill Rate 0.00% 90 Day LIBOR 0.43% TED Spread 0.43% 30-Year Mortgage Rate 4.20% 15-Year Mortgage Rate 3.45% 5-Year Adjustable Mortgage Rate 3.00% 30-Year Treasury Yield 3.38% 10-Year Treasury Yield 2.32% 5-Year Treasury Yield 1.13% 2-Year Treasury Yield 0.29% Notable Dividend Increases – 2011 Lockheed Martin (“LMT”) 33.3% NextEra Energy (“NEE”) 10.0% United Technologies (“UTX”) 12.9% Proctor & Gamble (“PG”) 9.0% Abbott Labs (“ABT”) 9.1% Clorox (“CLX”) 9.0% Colgate Palmolive (“CL”) 9.4% Chevron Corp (“CVX”) 8.3% General Mills (“GIS”) 8.9% International Business Machines (“IBM”) 15.4% Union Pacific Corp (“UNP”) 25.0% Intel Corp (“INTC”) 33.0% McDonalds Corp (“MCD”) 14.8% Kimberly Clark (“KMB”) 6.1% Now, all the details…………………… Last week, the S&P 500 rose +3.8% to 1,285.09, the highest since August 1st. It has rallied four straight weeks, the longest streak since January, and added +14% in October. The Dow gained 422.32 points, or +3.6%, to 12,231.11. Stocks gained after the European rescue fund was boosted to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50% on Greek debt. The S&P 500 had fallen five consecutive months, driven lower by concern the European debt crisis would curb global growth. “The crisis atmosphere has lessened,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $38 billion, said in a Bloomberg telephone interview. “European policy makers have bought more time,” he said. “It’s not a permanent solution, but it limits the immediate risk to the market.” Equities also climbed after the U.S. economy expanded in the third quarter at the fastest pace in a year, as gains in consumer spending and business investment helped support a recovery on the brink of faltering. Separate data showed that consumer confidence unexpectedly rose in October, while fewer Americans filed for unemployment assistance. Last week, raw-material producers gained +7.9%, the most among 10 industry groups in the S&P 500, after a report from HSBC Holdings Plc and Markit Economics showed China’s manufacturing may end the longest contraction since 2009. The report, along with Japanese data showing exports exceeded economists’ forecasts, signaled that Asia’s two largest economies are withstanding Europe’s sovereign debt crisis. Last week, financial shares in the S&P 500 rose +7%, the biggest advance since July 2010, as 76 of 81 companies rose. Morgan Stanley (“MS”) soared +13% to $19.31. JPMorgan Chase & Co. (“JPM”) jumped +9.8 to $36.69. Bank of America (“BAC”), which has dropped -45% this year for the worst performance in the Dow, surged +14% to $7.35. Companies most-tied to the economy gained as the Morgan Stanley Cyclical Index advanced +7%. Caterpillar (“CAT”) increased +11% to $96.85. The world’s largest construction and mining-equipment maker posted higher-than-expected third-quarter profit and sales and said 2012 revenue will gain as the U.S. and global economies improve. Last week, 189 companies in the S&P 500 reported quarterly results. Approximately 75% of the companies that reported earnings since October 11th beat analysts’ projections, according to Bloomberg data. Earnings have surpassed estimates by an average +5.8%. Third-quarter corporate earnings “show things aren’t as bad as the market thought,” Terry Morris, who manages $2.2 billion at National Penn Investors Trust Co. in Wyomissing, Pennsylvania, said in a Bloomberg phone interview. “Maybe things will be kind of quiet in Europe now and we can get back to fundamentals.” The MSCI EAFE Index (broad developed international index) rose +6.3% last week. The Americas rose +4.7% with Brazil up +7.7%, Mexico up +4.8%, and Canada up +4.8%. Europe rose +4.2% with Germany up +6.3%. Asia-Pacific rose +7.1% with Australia up +5.1%, China up +6.7%, Hong Kong up +11.1%, India up +6.1%, Taiwan up +5.0%, and Japan up +4.3%. Treasuries dropped in price with the 10 year yield rising to 2.32% from 2.22% in the week earlier. The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 2,018, down from the prior week’s level of 2,153. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009. The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 43 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn. Last week, oil was up +6.8% and closed at $93.32 per barrel. Year-to-date oil is up +2.1%. The average price of unleaded gasoline dropped -0.2% last week to end at $3.443 per gallon per October 30th data provided by AAA. Year-to-date, unleaded gasoline is up +12.0%. Natural gas was up +2.5% last week and closed at $3.923/MMBtu. Year-to-date, natural gas is down -10.9%. Last week, gold rose +6.8% closing at $1,746.20 per troy ounce. Year-to-date, gold is up +15.1%. The dollar was down -1.6% last week as measured by the U.S. Dollar Index with that index closing at 75.067. Year-to-date, the U.S. Dollar is down -1.6% as measured by the Dollar Index. The Euro was up +2.9% against the U.S. dollar closing at $1.4158/Euro. Year-to-date, the Euro is up +5.9% against the U.S. Dollar. In the coming week, look for a slew of corporate earnings from the likes of Humana Inc. (“HUM”), Emerson Electric (“EMR”), Consolidated Edison (“ED”), Vulcan Materials (“VMC”), CenturyLink (“CTL”), MasterCard (“MA”), and Berkshire Hathaway (“BRK/B”). Look for economic reports this week on manufacturing and non-manufacturing activity, ADP employment change, FOMC rate decision (no change expected), October unemployment, and weekly jobless claims data. Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

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