January 26th, 2012 Newsletter

Dear Friends,

Tangents:

Tomorrow is Mozart’s birthday, January 27, 1756.  To celebrate, the Seattle radio station, King FM (98.1 on the radio) has been playing Mozart all month, at least one composition an hour in their tribute program, Mozart Month – 31 days of Mozart.  I turn it on when I wake up and it has been a wonderful way to greet the day.  There are still five more days to go, so listen in.

Seattle Opera is doing Verdi’s Attila right now, so I am looking forward to this weekend.  The final performance is Saturday night.   Gary left for Toronto this morning for a few days at an Amgen meeting, so I’m taking a friend.  Exciting time for Amgen; their monoclonal antibody drug has received approval for prostate cancer, breast cancer and osteoporosis.

photos of the day

January 26, 2012

A car’s headlights illuminate the A9 dual carriageway approach to on a clear starry night near Inverness, Scotland.

Russell Cheyne/Reuters

A tourist swims in a lagoon at the entrance of La Cueva de los Peces (Cave of the Fish) along the coast of Playa Giron, near the Bay of Pigs, 100 miles south-east of Havana, in central Cuba. The Arab Spring, changes in US policy and economic reforms at home are driving a tourist rush that is giving communist-run Cuba one of its best seasons ever and stretching its ability to accommodate demand.

Reuters

Market Closes for January 26th, 2012

Market Commentary:

Canada

By Matt Walcoff

Jan. 26 (Bloomberg) — Canadian stocks fell from a four- month high as financial companies dropped after the U.S. reported a decline in monthly new-home sales.

Manulife Financial Corp., North America’s fourth-largest insurer, lost 5.1 percent after an analyst at UBS AG reduced his rating on the shares. Goldcorp Inc., the world’s second-largest gold producer by market value, gained 2.2 percent as the metal advanced for a second day after the U.S. Federal Reserve extended its low-interest-rate pledge. Encana Corp., Canada’s biggest natural gas producer, lost 4.9 percent as the fuel retreated for the first time in five days.

The S&P/TSX Composite Index slipped 74.89 points, or 0.6 percent, to 12,464.32 after rallying as much as 0.6 percent before the release of the housing data.

The home-sales number “is just a trigger,” Bob Decker, a money manager at Aurion Capital Management in Toronto, said in a telephone interview. The firm oversees about $5.5 billion.

“Stocks are erasing their gain because people are wondering what lies ahead. We’re in a sell-on-news mode. It’s a second sober thought people are having about whether this Fed move indicates something more nefarious about their analysis.”

Canada’s benchmark stock gauge has gained 0.5 percent this week after advancing each of the five previous weeks. The S&P/TSX rose 7.8 percent from Dec. 16 to yesterday as employment and manufacturing data improved in the U.S. and the Fed said it expects to keep its benchmark interest rate near a record low until at least late 2014. Seventy-five percent of Canada’s exports went to the U.S. in 2010, according to Statistics Canada.

U.S. new-home sales fell 2.2 percent in December, the Commerce Department said today in Washington. All but six of 75 economists in a Bloomberg survey had forecast an increase.

The S&P/TSX Financials Index dropped the most in two months. Bank of Nova Scotia, Canada’s third-largest lender by assets, declined 1.5 percent to C$52.73. Toronto-Dominion Bank, the country’s No. 2 lender, lost 1.1 percent to C$77.86. Bank of Montreal, the fourth-biggest bank, slipped 1.7 percent to C$59.64.

Manulife and Sun Life Financial Inc. declined after Peter A. Rozenberg, an analyst at UBS AG, cut his ratings on the stocks to “neutral” from “buy.” Low interest rates will hold back profit, Rozenberg wrote in a note to clients.

Manulife lost 5.1 percent to C$11.91. Sun Life, the country’s third-biggest insurance company, slumped 5 percent to C$20.05.

Gold futures climbed to a seven-week high on the Comex in New York. Goldcorp rose 2.2 percent to C$48.75. Franco-Nevada Corp., which owns royalties on precious-metals production, gained 3.6 percent to C$44.50. Gabriel Resources Ltd., which is developing a gold mine in Romania, soared 8.7 percent to C$6.13 for its first gain since Jan. 16.

Natural gas retreated after rebounding 18 percent from a nine-year low over the previous four days. The fuel fell today on speculation a larger-than-average inventory decrease in the U.S. last week won’t be enough to resolve a supply glut.

Encana decreased 4.9 percent to C$19.74 after Thomas R. Driscoll, an analyst at Barclays Plc, reduced his price estimate on its U.S.-traded shares to $17 from $22. Talisman Energy Inc., an oil and gas producer with operations in North America, the North Sea and Indonesia, slipped 2.9 percent to C$11.90.

Oilfield-services company Calfrac Well Services Ltd. tumbled 5 percent to C$25.70.

US

By Rita Nazareth

Jan. 26 (Bloomberg) — U.S. stocks fell, reversing a rally that sent the Dow Jones Industrial Average toward its highest level since 2008 earlier today, as banks tumbled and a report showed that sales of new homes unexpectedly declined.

Banks had the biggest drop in the Standard & Poor’s 500 Index among 24 groups on concern about the industry’s ability to boost profits after the Federal Reserve yesterday pledged to keep the benchmark interest rate low. Wells Fargo & Co. and Fifth Third Bancorp slumped at least 3 percent.

PulteGroup Inc. and Lennar Corp. retreated more than 2.3 percent to pace losses in homebuilders. AT&T Inc., the largest U.S. phone company, slid 2.5 percent as its profit forecast trailed estimates.

The S&P 500 lost 0.6 percent to 1,318.43 at 4 p.m. New York time, reversing a gain of as much as 0.6 percent. The Dow fell 22.33 points, or 0.2 percent, to 12,734.63, after earlier rising to the highest level on a closing basis since May 2008.

“It’s a little bit of cold water in the face,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a telephone interview. “We’re in risk territory because we’ve come a long way in the market and in terms of optimism on the economy. It’s premature to think that we’ve solved all problems.”

The S&P 500 has risen 4.8 percent so far this year, poised for the best January since it gained 6.1 percent during the first month of 1997, according to data compiled by Bloomberg.

Stocks are extending the measure’s 11 percent rally in the October-December period, its best fourth-quarter increase since 2003, as improvements in hiring, manufacturing and home sales bolstered confidence in the world’s largest economy.

Equities reversed gains today after a report showed that sales of new U.S. homes unexpectedly declined in December for the first time in four months, capping the slowest year on record for builders. Claims for U.S. jobless benefits rose last week, displaying the usual volatility around holidays that has masked an improvement in the labor market. Orders for U.S. durable goods advanced more than forecast in December.

Benchmark gauges rose yesterday as the Fed signaled low rates through at least late 2014 and didn’t rule out bond purchases to bolster the economy. Investors also watched earnings reports. Of the 151 S&P 500 companies that reported results since Jan. 9, 103 posted per-share earnings that beat projections, according to data compiled by Bloomberg.

A measure of banks in the S&P 500 slumped 3.3 percent.

Wells Fargo lost 3.8 percent to $29.05. Fifth Third Bancorp slid 3 percent to $13.08.

The Fed’s low interest rate pledge may hurt lenders’ profits as they struggle to find loans or securities with yields high enough to support their net interest margins, a gauge of profitability that measures the difference between the cost of funds and what they earn on assets.

“The statement itself was market friendly in terms of reiterating that the Fed is going to remain largely accommodative,” Ryan Larson, Chicago-based head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., said in a telephone interview. His firm oversees $250 billion in assets.

“When you talk about the banking environment and some of these companies that are directly tied to interest rates, it’s going to probably put a cap on some of those companies going forward until rates start to increase.”

A gauge of homebuilders in S&P indexes slumped 3.4 percent.

PulteGroup retreated 2.4 percent to $7.80. Lennar decreased 2.9 percent to $22.13.

AT&T lost 2.5 percent to $29.45, the biggest decline in the Dow. The carrier projected “mid-single-digit or better earnings growth” for 2012. Analysts predicted 11 percent on average.

AT&T also reported a fourth-quarter net loss of $6.68 billion because of a pretax charge of about $4 billion for the failed takeover of T-Mobile USA, and expenses for revaluing benefit plans and other assets.

E*Trade Financial Corp. tumbled 15 percent, the most in the S&P 500, to $7.99 after the online brokerage reported results that missed analyst estimates and Sandler O’Neill & Partners LP cut its rating.

SanDisk Corp. dropped 11 percent to $46.39. The biggest maker of flash-memory cards gave a sales forecast that fell short of estimates, citing lower prices for chips that store data in mobile phones.

Caterpillar Inc. rallied 2.1 percent, the biggest gain in the Dow, to $111.31. The largest construction and mining- equipment maker posted fourth-quarter earnings and forecast full-year profit that topped analysts’ estimates as demand rose for shovels and trucks.

3M Co. added 1.3 percent to $87.58. The maker of Post-it Notes and fuel system tuneup kits reported higher profit than analysts had estimated as demand increased for aerospace and auto industry products.

Netflix Inc. surged 22 percent, the most since January 2010, to $116.01. The online and mail-order video-rental service reported fourth-quarter profit that topped analysts’ estimates and forecast improving margins in its streaming business.

J.C. Penney Co. climbed 19 percent to $40.72 after saying cost reductions from new Chief Executive Officer Ron Johnson’s turnaround plan may boost 2012 profit more than analysts estimated.

Time Warner Cable Inc. advanced 7.8 percent, the biggest gain since April 2009, to $74.51. The second-largest U.S. cable- television provider reported fourth-quarter profit that beat analysts’ estimates and said it would repurchase $4 billion in shares.

“The backdrop that is coming forth is a nightmare for those who are way underinvested,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview. His firm manages $300 billion. “Earnings continue to come in better than expected, our economy is improving. In addition, it looks like the ‘euro-quake’ situation appears at least in the short term to be on the backburner.”

European stocks advanced, climbing 20 percent from a September low and entering a bull market. The Stoxx Europe 600 Index added 1.1 percent to 257.86 today.

The S&P 500’s best January rally since 1997 has pushed a pair of momentum and sentiment gauges to levels seen only 6 percent of the time since 1993, a sign the market is due for a pullback, BTIG LLC said.

The benchmark index’s 14-day relative strength index, which measures the degree that gains and losses outpace each other, rose above 70 yesterday for the first time since Feb. 18, according to data compiled by Bloomberg. Some technical analysts consider RSI readings above 70 a sign that stocks have risen too far, too fast. The Chicago Board Options Exchange Volatility Index, a gauge known as the VIX, fell below 20 for the first time since July on Jan. 19.

The last time RSI exceeded 70 while the VIX stayed below 20, 11 months ago, the S&P 500 reached a 32-month high before dropping 6.4 percent over the next month, data compiled by Bloomberg show. The VIX is the benchmark gauge of S&P 500 options prices.

“We’re definitely in a rare spot,” Josh Dollinger, Chief quantitative and technical strategist at BTIG in New York, said in a telephone interview. “These are extreme readings. They more often than not prove to be exhaustion tops.”

Have a wonderful evening everyone.

Be magnificent!

What does it matter if we do not understand the exact meaning of the grand harmony?

Is it not like the bow player who touches a string and at once releases every resonance?  This is the language

of beauty, this is the caress that comes from the heart of the world and goes straight to our hearts.

-Rabindranath Tagore,1861-1901

As ever,

Carolann

The art of listening needs its highest development in listening

to oneself.  Our most important task is to develop an ear that

can really hear what we’re saying.

-Sydney J. Harris, 1917-1986

Carolann Steinhoff, B.Sc., CFP, CIM, FCSI

Senior Vice-President &

Senior Investment Advisor