MarketView for December 21

Summary

With its reflexive drop overnight and continued weakness Friday following the failed “Plan B” maneuver by House Speaker John Boehner, the stock market once again hit a brick wall during regular trading hours on Friday, finishing lower after a Republican plan to avoid the "fiscal cliff" failed to gain sufficient support on Thursday night, draining hopes that a deal would be reached before 2013. At the same time, finger-pointing lawmakers fled Washington for Christmas vacations even as the year-end deadline for action edged ever closer.

Nonetheless, share prices still managed to rebound from the day's lows near the end of the session, and for the week, major averages still ended higher, with the S&P 500 gaining 1.2 percent. Furthermore, the day's round of data indicated the economy was surprisingly resilient in November; consumer spending rose by the most in three years and a gauge of business investment jumped. However, at the same time, consumer sentiment slumped in December.

Trading was volatile as confidence eroded in the prospect of a deal out of Washington, and in part due to quarterly expiration of options and futures contracts. The CBOE Volatility Index, the markets favored anxiety measure, finished below its high of the day.

Republican House Speaker John Boehner failed to garner enough votes from even his own party to pass his "Plan B" tax bill late on Thursday. It was the latest setback in negotiations to avoid $600 billion in tax hikes and spending cuts that some say could tip the economy into recession.

Herbalife dropped for an eighth straight session. Investor Bill Ackman recently ramped up his campaign against the company. The company skidded 19 percent to $27.27 and has lost more than 35 percent this week.

Research in Motion fell 22.7 percent to $10.91 after the company reported its first-ever decline in its subscriber numbers on Thursday alongside a new fee structure for its high-margin services segment.

Banking shares, which outperform during economic expansion and have led the market on signs of progress on resolving the fiscal impasse, led declines. Citigroup Inc (NYS:C) fell 1.6 percent to $39.49, while Bank of America (BAC) slid 1.9 percent to $11.29. The KBW Banks index (^BKX) lost 1.19 percent.

Volatility on Friday was exacerbated in part by "quadruple witching," the quarterly expiration of stock index futures and options, stock options and single stock futures contracts.

About 8.59 billion shares changed hands on the three major equity exchanges, more than the daily average of 6.47 billion shares in 2012, partially due to "quadruple witching.”

To Apple or Not to Apple

The nearly 28 percent drop in the price of Apple’s shares since mid-September is hurting not just individual shareholders, it is also creating grief for those chased hot mutual funds that loaded up on Apple as the stock raced to a record $705 per share.

Apple makes up 10 percent or more of assets in 117 out of the 1,119 funds that own its shares, according to data from Lipper, a Thomson Reuters company. Those big stakes have contributed positively to each fund's annual performance to date, with Apple still up about 32 percent for the year. It was trading at $527.73 soon after the opening on Friday.

But that year-to-date outcome may not accurately reflect the performance of the funds for individual investors. All told, approximately $4.5 billion has been added to funds with overweight stakes in Apple this year, according to Morningstar data. The majority of these dollars were invested after March and after Apple first exceeded $600 per share - meaning many investors have been riding down with the decline.

The $302 million Matthew 25 fund, for instance, holds 17.4 percent of its assets in Apple, according to Lipper. The fund's 31.9 percent gain through Thursday makes it one of the top performing funds for the year.

Most of its Apple shares were bought years ago at a bargain basement price of about $125 per share. But $158.9 million of the fund's assets - or 53 percent - were invested after the end of March, when Apple was trading near $615 per share, according to Morningstar data.

For those investors that bought after March, all that concentration in Apple hasn't led to a stellar gain but rather a drag on the portfolio. Someone who invested in Matthew 25 in early April has seen the value of the fund's Apple stake fall about 19 percent, while someone who invested at the beginning of September has watched that outsized Apple stake drop 27.2 percent.

In turn, the majority of the fund's investors have reaped a much more modest performance than its year-end numbers suggest. Since the end of March, the fund has gained 6.7 percent, according to Morningstar data, far less than its 31 percent year-to-date gain and about two percentage points more than the S&P 500 index.

Since, September the fund is down nearly 3 percent through Thursday's close, compared with a 1.1 percent decline in the S&P 500 in that period.

The impact of Apple's falling stock price shows some of the drawbacks of portfolio concentration, experts say. These stakes can leave the funds overexposed to the ups and downs of one company - counter to what most mutual funds are supposed to do for investors.

Along with concerns about iPhone sales in China and tax-motivated selling among people who want to avoid potentially higher capital gains taxes in 2013, the wide fund ownership of Apple may be a factor in the size of the stock's recent declines, fund managers said. In addition, with so many funds already heavily invested in the high-priced stock, there may be fewer marginal buyers available to push prices up again when shares begin to dip.

Short interest in the stock rose to 20.6 million shares at the end of November from 15.1 million shares at the end of September, according to Nasdaq. Still, some bullish investors see the stock's recent declines as a buying opportunity.