MarketView for March 27

 

 

Summary 

 

Stocks retreated from near four-year peaks on Tuesday, while a number of large-cap shares hit new highs, with the help of portfolio managers snapping up top performers near the end of the quarter, an activity also known on the Street as window dressing.  The moves follow three months of big gains, putting the S&P 500 on track for its best quarter since the third quarter of 2009. It follows a similarly strong run in the fourth quarter of 2011, with gains for the past six months totaling 25 percent.

 

With the first quarter ending on Friday, portfolio managers adjusted holdings by buying some of the best performers to dress up their portfolios. A total of 175 stocks on the New York Stock Exchange hit new 52-week highs on Tuesday, including Dow components Home Depot and IBM, along with high-end retailers.

 

The market's sharp gains have followed improving economic data, as well as accommodative measures by central banks around the world. In the latest snapshot of the economy, consumer confidence fell in March to 70.2, with inflation expectations reaching the highest level in 10 months, according to the Conference Board, a private industry group.

 

Single-family home prices were unchanged in January, according to the S&P/Case-Shiller index, suggesting a battered housing market kept crawling along the bottom. Homebuilders' shares rallied, going against the overall market's slight downturn for the day.

 

Bernanke said in an ABC News interview, when asked about the potential for more quantitative easing, that the Fed isn't taking any options off the table.

 

Among Dow components hitting 52-week highs, IBM reached $208.56 and then retreated slightly from that peak to end down 0.3 percent at $207.18. Disney rose to a 52-week high of $44.50, only to slip to $44.15, off 0.5 percent. Home Depot reached a 52-week high at $50.34, before giving up some of that gain to end at $50.04, off 0.2 percent for the day.

 

In the luxury segment of the retail sector, Nordstrom hit a 52-week high of $55.67. It ended at $55.40, up 0.2 percent. Among top performing-stocks, Bank of America, the second-best performing S&P 500 stock for the quarter, is up 75 percent; Netflix, the third best, is up 74.6 percent.

 

Apple hit another all-time high of $616.28, and closed with a market capitalization of $572.92 billion. The shares then pulled back from that peak to end at $614.48, still up 1.2 percent for the day. Apple, in the 10th-best spot, is up 51.9 percent for the first quarter so far.

 

Volume was 6.07 billion shares on the NYSE, the Nasdaq and the Amex, compared with the daily average for the year so far of 6.83 billion.

 

Confi  Consumer Confidence Falls on Inflation and Gasoline Concerns

 

Their confidence in the economy reduced, the latest worry by consumers is the possibility of rising inflation and higher gasoline prices. Nonetheless, data on Tuesday suggested consumers did not feel the economic recovery was losing momentum, and their view of their present situation rose to the highest level since September 2008, the heart of the financial crisis. A report from The Conference Board indicated that the index of consumer confidence fell to 70.2 from an upwardly revised 71.6 the month before. However, expectations for inflation in the coming year rose to the highest level since May 2011 at 6.3 percent from 5.5 percent.

 

Rising gasoline prices have sparked worries that already fragile consumers could start to feel squeezed, putting a dent in the economy. Prices at the pump reached $3.92 a gallon last week. Yet, consumers' expectation for inflation was below the 6.7 percent seen a year ago when similar concerns were taking hold following a massive earthquake in Japan and political turmoil in the Middle East and North Africa.

 

A separate report on Tuesday showed U.S. home prices were unchanged in January from December, the first time since July prices have not declined in a sign the battered housing market is slowly stabilizing. The S&P/Case-Shiller composite index of 20 metropolitan areas was flat in January on a seasonally adjusted basis, beating economists' expectations for a decline of 0.2 percent.

 

It was the first time the index did not decline since July 2011, when prices were also flat month-over-month. The last time prices increased was April of last year. Average home prices across the country were back to early 2003 levels, the report said.

 

Prices have been pressured by a low demand, distressed sales and an overhang of pending foreclosures. The data echoed other recent reports suggesting the housing market is in a fledgling, though weak, recovery.

 

On a non-seasonally adjusted basis, prices tumbled 0.8 percent in January from December.

Year over year, prices fared a little better with January notching a 3.8 percent decline compared to the year before, in line with expectations and an improvement from December's 4.0 percent drop.

 

PIMCO’s Gross Cries the Blues

 

PIMCO co-founder Bill Gross, the manager of the world's largest bond funds, is lowering expectations. In his April investment letter posted on the firm's website on Tuesday, Gross says: "Total return as a supercharged bond strategy is fading."

 

Gross, who runs the $252 billion PIMCO Total Return Fund, says investors should get used to smaller investment returns because of slower global growth and as the financial services industry continues to deleverage, or reduce its reliance on derivatives and borrowed money to generate higher returns.

 

Gross didn't stop with bonds. He said stocks returning between 6.5 percent and 7 percent after inflation, now popularly called 'Siegel's constant' after business professor Jeremy Siegel, are fading as well. "And levered hedge strategies based on spread and yield compression are fading," too, he added.

 

In his letter entitled "The Great Escape: Delivering in a Delevering World," Gross writes that investors should not "desert bonds" if annual returns hover around 4 percent instead of 10 percent. He says that bonds should remain "critical components" of an investor's portfolio.

 

"The best way to visualize successful delivering is to recognize that investors are locked up in a financially repressive environment that reduces future returns for all financial assets," Gross said. "Breaking out of that 'jail' is what I call the Great Escape."

 

In light of this new reality for investing, Gross says he favors high-quality, short duration and inflation-protected bonds. He also likes dividend-paying stocks like Merck & Co. and Johnson & Johnson, with a preference for developing over developed markets. He also favors commodities whose prices rise with inflationary pressures and are in limited supply.

 

In an ultra-low interest rate climate where global growth and inflation would stay mild, investors "must take risk in some form," Gross wrote.

 

Clinging to near-free assets such as Treasury bills would mean earning an inflation-adjusted return of minus 2 percent to 3 percent, Gross said.

 

For his part, Gross increased the Total Return Fund's exposure to mortgage-backed securities (MBS) to 52 percent in February from 50 percent in January. In October, the fund's exposure to MBS was just 38 percent. Gross has been steadily plowing into MBS on the expectation that the Fed would announce a new round of mortgage bond buying.

 

At the same time, derivatives, financial instruments that derive their value from another security, have long been a staple of the trading strategy in PIMCO's Total Return Fund to generate some of the fund's returns.

 

Last month, Gross addressed the issue of PIMCO's reliance on derivatives. In the March note entitled "Defense," Gross says from 1980 to 2011, the firm employed an offensive strategy that utilized "prudent derivative structures" to generate "consistent alpha."

 

In the note, he said the firm, for the time being, was shifting to a more defensive posture in light of the heightened risk that remains in the world financial markets. As part of that new strategy, Gross says PIMCO will "de-emphasize derivative structures that are fully valued and potentially volatile."

 

PIMCO, short for Pacific Investment Management Co., is a subsidiary of Allianz and oversees $1.36 trillion.