For the week of December 13, 2010 through the market close on Thursday, it has been a positive week. The Standard & Poor’s 500 Index was up 0.20%; the Dow Jones Industrial Average was up 0.78%; the NASDAQ was down slightly at -.01%, and the small-cap Russell 2000 index was also down 0.03%.
The market received plenty of strong economic news throughout the week as well. Retail sales jumped 0.8% in November in total, on top of an upwardly revised 1.7% gain in October. This clearly indicates consumers have picked up the pace of their spending. November’s growth was led by gas stations, department stores, apparel stores, sporting goods and hobby stores. In November both the Producer Price Index for finished goods and the Consumer Price Index rose 0.8% and 0.1%, respectively. We are monitoring core CPI prices, which excludes food and energy as it was up 0.3%, rising after three months of no measurable inflation. Industrial production ticked up to a better-than-expected 0.4%, led by a 0.3% increase in manufacturing output and a 1.9% jump in utilities output. Even housing starts gained a little steam in November, rising 3.9% above October’s level to an annualized rate of 555,000 units. While only a slight decline, initial jobless claims still fell by 3,000 to 420,000 for the week ending December 11th. Initial claims have been showing a better trend over the last two months, suggesting that the recovery is gaining some traction.
Overall, economic predictions of growth have risen more than 1% in a matter of two weeks. Strong economic growth is good for the stock markets. The S&P closed at 1,241.87 on Thursday, furthering our belief that the S&P will reach 1,300 by year-end.
Interest rates continued their sharp rise this week across all maturities with the five-year jumping to 2.12% and the 10-year treasury increasing to 3.54%—a gain of more than 1% in yield in a matter of weeks. We are seeing investors move out of money markets and bond funds back into equities and stock funds, which, in our opinion, is a good thing.
If anything has been screwed up this week, it was politics. Although later, the Senate voted 81-19 in favor of extending the tax rates, and the House of Representatives passed the bill late Thursday night by a vote of 277 to 148. President Obama signed the bill into law late Friday afternoon. The bill will keep in place Bush-era tax rates for all income levels for two years and extend unemployment insurance benefits for 13 months, along with other tax credits. The $1.2 trillion omnibus spending bill stalled during Congress’ lame-duck session because of the lack of Republican votes.
On the topic of taxes, Yahoo News reported that IRS audits were up nearly 11% in 2010. The IRS audited more than 8% of returns with incomes above $1 million.
In stock news, Best Buy (NYSE: BBY) lowered its annual earnings forecast and reported an unexpected 4.4% drop in third-quarter profit, citing weaker demand for televisions and entertainment gadgets in the United States. In mergers and acquisitions, Novartis (NYSE: NVS) is ending a drawn-out battle to acquire the remaining 23% of U.S. eye-care company Alcon Inc. (NYSE: ACL) in a deal worth $12.9 billion. Under the new agreement, Novartis will guarantee minority shareholders $168 a share. When the offer to the public shareholders was made at the beginning of the year, it was valued at about $153 per share, but Novartis stock has risen since then. The company has not changed the offer of 2.8 shares. The new $168-a-share offer equals the average of what the company previously paid Nestle SA for 77% of Alcon. Novartis also said that it will add cash if necessary to guarantee a value of $168 per share should its stock drop. If the value of 2.8 Novartis shares is more than $168, then the number of shares will be reduced accordingly. When Novartis made its initial bid to minority shareholders, they rejected it as too low. Our opinion is to not buy a Swiss company. We learned that minority stockholders have no rights whatsoever.