Week Ahead: March's Bear Has Attitude
March is coming in like a bear, and it's a bear with swagger.
Markets enter the week ahead on edge. There is some important data, including Friday's February jobs report and some important events. For one, Fed Chairman Ben Bernanke speaks at a meeting of bankers in Florida on Tuesday morning. But it's the unrelenting credit crunch that could continue to drive the markets as it claims new victims.
A high point this week will surely be Warren Buffett's appearance Monday on "Squawk Box," where he will be answering questions from investors between 6 a.m. and 9 a.m.
Investors around the world will be watching the outcome of this weekend's Russian presidential election. First Deputy Prime Minister Dmitry Medvedev, endorsed by outgoing President Vladimir Putin, is expected to win.
In U.S. politics, Tuesday is the big day as voters head to polls for presidential primary votes in Texas, Ohio, Rhode Island and Vermont.
William Stone, chief investment strategist at PNC, expects more choppiness next week as markets look at ISM manufacturing data Monday and that jobs report. "We expect continuing weak economic data," he said in a phone interview. "I think we're going to continue to be kind of haunted" by the credit problems. Stone says he expects the volatility to continue and that at some point, investors will start to look ahead and the market will start to perform better.
"I don't think you can really time it. I think you have to say that valuations are really cheap. Seemingly, that says within a year, we'll be looking ahead," Stone says. For now, he believes investors should look at overweighting large cap stocks and that growth will outperform value. "Where we're seeing the most opportunity right now are in health care and technology," he said. In tech, he likes Microsoft.
He says the economy is at the edge of a recession -- PNC currently predicts a 50/50 chance. "The longer oil stays up, the closer we're going to be to calling it," but that won't change his view on stocks. Stone says he has an aggressive target of 1675 on the S&P 500 by year end.
"We still think we can get positive numbers for the year. I believe that's a fair value, but whether we get there this calendar year is a tough one. I'm standing by it though because it's a reasonable number even if it doesn't sound that way at the moment," he said.
"The large cap stocks are in good financial shape. I think it's a good place if you look at the history of the discount of stocks, relative to bonds," he said.
Stocks vs. Bonds
Stone also pointed to an interesting market phenomena. At the end of February, the dividend yield on the S&P 500 was higher than the yield on the two-year note. There have only been 12 months when that happened since 1977. The average return on stocks in the next six months after those occurrences was 12.4 percent with only one negative return.
The current S&P dividend yield was at 2.23 percent, and the two-year note finished the month below 2 percent. He does note though that the other occurrences happened form 2002 to 2004 so that data is not that robust. "I don't want to bank too much on it, but it's just worth noting. It's another reason why people might become more interested in stocks again," he said.
This past week delivered more pain to the municipal bond market, where by Friday, traders say hedge funds active in the market were selling as they hit margin calls. That activity caused angst in the stock market, which was already unsettled by worries about the economy and inflation, not to mention the quarter end for investment banks.
The short-term muni market has been in disarray as banks stepped back form the auction rate securities market in recent weeks. This has triggered unwinding of tender option bond program trades, as investors no longer find them attractive. Tender option bonds are vehicles used by institutions to capture the spread between long and short-term muni rates. This has forced the sale of longer term muni bonds, flooding the market with too much inventory.
Peter Delahunt of Raymond James explains that pricing has gotten out of whack as a result. He said, for instance, the yield on a five-year Treasury is about 2.50 percent, and a muni bond would typically trade with a yield equal to 80 percent of that Treasury. But on Friday, the muni was at 140 percent of that yield.
"The problem with the municipal market right now is there are fewer buyers," said Delahunt, senior vice president and national sales manager of Raymond James Municipals.
"Our demand universe has imploded to a certain degree, in that the tender bond options programs were responsible for a lot of the demand in the municipal world and that trade hasn't worked," he said. "There are margin calls taking place and liquidations, and there is not the typical buyer in the wings to pick up the pieces."
"What's happening is is we're getting crossover buyers like Pimco that are savvy enough to see an opportunity and jump on it," Delahunt said.
This mess can't help but spill over to Monday's markets.
Good Riddance, February
Stocks took a ripping this past week and closed out the month of February with big losses. The Dow fell 383 points for the month, with 315 of them on Friday. The Dow's 3 percent loss makes it four months of losses in a row, the longest losing streak since a six month down turn that ended in September, 2002. The Nasdaq was down 5 percent for the month or 118 points, and the S&P 500 fell 47 points or 3.5 percent.
Of course, red hot commodities were the top performers in February. Gold, for one, was up 5.4 percent to $972.10 per tory ounce, setting another record on the final day of the month.
The dollar continues to crumple, losing 2.1 percent against the euro in February and 2.3 percent against the yen. The yield on the 10-year Treasury ended the month at 3.532 percent, its lowest yield since Jan. 23. The two-year was at a four-year low of 1.649 percent.
Opec convenes Wednesday as oil hovers above the lofty $100 a barrel marker. Oil gained 11 percent, or $10.09 in February to finish at $101.84 per barrel. In the past week, it hit a new high of $103.05. The Wall Street Journal says crude is now $1.92 per barrel below its inflation adjusted record high of $103.76, set in April, 1980.
What Would Warren Buffett Do?
Well, there will be plenty of opportunity the hear what the Oracle of Omaha has to say when he appears on "Squawk Box" Monday. PNC's Stone, like many others, says he's going to tune in. "I've been a fan forever. I never lost faith in him even during the tech stuff. He tends to be right more than he's wrong," said Stone, who attends Buffett's annual meeting every year.
"It's interesting that he's doing more media stuff. I don't know what to make of it," he said. One theory from one of his friends, also a Buffett watcher, is that the sage investor has reached a point in his life where he wants to educate investors and act as a teacher. (In fact, Buffett does spend time with MBA students on a regular basis)
Buffett issued his annual investment letter Friday after the bell.
"Buffett's major clarion call in this year's annual letter is taking on accounting and investment return assumptions for corporate pension funds," said CNBC's Becky Quick, a Buffett expert. "He points out that for the 363 companies in the S&P 500 that have pension funds, the assumption in 2006 averaged 8 percent."
Quick said Buffett pointed out that if you looked at returns for the Dow in the 20th century, it equals 5.3 percent when compounded annually. Buffett says that if the market matched the performance that pension funds are assuming, the Dow would have to be at 2 million on Dec. 31, 2099.
Big in the coming week will be interest rate meetings, held by the Bank of England and European Central Bank Thursday morning.
In U.S. data, the big release is Friday's jobs number, but there will be plenty of other headlines to watch all week long. ISM manufacturing data is released Monday at 10 a.m. Construction spending for January is released at 10 a.m. that day. Auto makers also report monthly sales Monday.
On Wednesday ADP's employment report is issued at 8:15 a.m. Productivity and costs data is released at 8:30 a.m., and ISM non-manufacturing data and factory orders are reported at 10 a.m. The highlight of the day though could be the Fed's beige book on economic activity, released at 2 p.m.
Initial weekly jobless claims are reported at 8:30 a.m. Thursday morning, and pending home sales are released at 10 a.m.
Friday's big jobs report is released at 8:30 a.m. and consumer credit is released at 3 p.m
The bond insurance drama continues to ripple through markets as Ambac talks to potential investors about fresh capital. Those talks are likely to culminate in a deal, but have hit a snag, according to CNBC's Charlie Gasparino.
The big Fed event this coming week is on Tuesday when Bernanke speaks on mortgage foreclosures at the Independent Community Bankers convention in Orlando
Philadelphia Fed President Charles Plosser speaks on monetary policy Monday at the NABE conference in Arlington, Va. at 8 a.m. Fed Governor Randall Kroszner speaks that day on risk management at the Annual Washington Conference of the Institute of International Bankers conference at 2 p.m..
On Tuesday, Dallas Fed President Richard Fisher speaks in London on inflation and growth. At 1 p.m., Fed Governor Fredric Mishkin speaks on the economic outlook at NABE's conference.
Cleveland Fed President Sandra Pianalto speaks on the economy in New York Wednesday at 7:30 p.m. and on Thursday Boston Fed President Eric Rosengren speaks at an economic breakfast in Massachusetts. Also Thursday, New York Fed President Timothy Geithner speaks about financial challenges in New York. Rosengren speaks on risk management at the Chicago Fed at 7:30 p.m. that day, and St. Louis Fed President William Poole speaks at the University of Illinois at 8 p.m.
San Francisco Fed President Janet Yellen also speaks at the Banque of France conference. Mishkin is talking there on exchange rates and monetary policy at 8:30 a.m. and Fed Vice Chairman Donald Kohn speaks at the same conference at 10:15 a.m.
Treasury Secretary Hank Paulson gives a keynote at Stamford Friday.
The earnings season has ground to a halt and now it's getting to the point where companies could start talking about what's going on in the current quarter. One report worth watching is warehouse retailer Costco which reports earnings Wednesday before the bell.
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