The Ricks Report – January 22, 2013

The Ricks Report

January 22, 2013

The Markets

Investors appeared to be as optimistic as a newly-engaged couple last week. Strong housing data, a positive labor report, temporary easing of debt ceiling pressures, and some stronger-than-expected earnings results helped the Standard & Poor’s 500 and the Dow Jones Industrials indices close at five-year highs.

Commerce Department data showed housing starts climbed by 12.1 percent in December, on an annualized basis, exceeding economists’ expectations. Home construction is expected to continue to rebound, as long as mortgage rates remain low, and experts anticipate sales of new and existing homes will show improvement this week. This continued improvement in the housing market may have contributed to a more positive investor outlook.

The possibility of a debt ceiling compromise also encouraged markets higher. Unlike down-to-the-wire fiscal cliff negotiations, which caused investors to hold back at the end of 2012, discussions of temporary debt ceiling extensions by House Republicans soothed investors’ concerns.

Several companies, including several high-profile Wall Street banks, reported strong results last week, and several companies reported earnings that beat lowered expectations. This helped drive bank, transportation, and housing indices to historic or multi-year highs. Since the Transportation sector includes many highly cyclical and economically sensitive stocks, which tend to underperform when investors anticipate recession, this was seen as positive news for the economy.

According to Barron’s, a secular bull market begins when both transportation companies and the Dow Jones Industrial Average hit new highs. The Dow Jones Transportation Average reached a new high last week, but the Industrials index remains 4 percent below its highest close which was reached back in October 2007. Are we headed for a bull market? Only time will tell.

Data as of 1/18/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.9%	4.2%	13.6%	9.0%	2.3%	5.3%
10-year Treasury Note (Yield Only)	1.8	N/A	1.9	3.7	3.7	4.0
Gold (per ounce)	1.9	-0.3	2.5	14.2	13.9	16.8
DJ-UBS Commodity Index	2.1	1.7	0.2	0.7	-5.5	2.0
DJ Equity All REIT TR Index	1.2	3.6	20.7	18.6	8.9	12.6

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

What’s the difference between America’s deficit and its debt, and how do they relate to the debt ceiling? The terms deficit, debt, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It’s important for all Americans to understand these terms.

The deficit

America’s deficit is its annual budget shortfall. Any year the government’s spending exceeds its revenue (the amount of money taken in through taxes and other means), it has a deficit. When the government spends less than it takes in, it is called a surplus. Deficits are controversial and have been for many years. Keynesian economics states deficits can be used to stimulate economies and help countries rise out of recession. Other experts argue governments should not incur deficits because the money paid in interest could be better spent elsewhere.

The debt

The national debt is the full amount the American government owes – all of its deficits and surpluses added together. If the government runs at a deficit of $10 million for five years, then its debt will be $50 million. Every year that a country runs at a deficit, its debt increases.

The debt ceiling

When a government runs at a deficit, it must borrow money to keep operating. The U.S. government generally borrows by selling securities such as Treasury bills, notes, bonds, and savings bonds. The amount it can borrow this way is limited by the debt ceiling, which was established under the Second Liberty Bond Act of 1917.

The United States hit its current debt ceiling, which is about $16.4 trillion, on December 31, 2012.  Before it can issue additional debt, Congress will need to raise the debt ceiling. This may make the debt ceiling a popular topic in political conversation during the next few months!

Weekly Focus – Think About It

Compromise:  n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.

–Ambrose Bierce, American journalist

Best regards,

Gregory Ricks

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Gregory Ricks, LLC is a Registered Investment Advisor which offers services and charges fees as set forth in Form ADV, a copy of which you should obtain prior to investment.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The information presented is for informational and educational purposes only and not intended to be a solicitation for the purchase or sale of a security.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Sources:

http://www.reuters.com/article/2013/01/19/us-usa-stocks-weekahead-idUSBRE90H1E020130119

http://www.reuters.com/article/2013/01/18/us-markets-stocks-idUSBRE90D0CG20130118

http://www.bloomberg.com/news/2013-01-18/u-s-stock-futures-little-changed-before-earnings-data.html

http://www.bloomberg.com/news/2013-01-17/housing-starts-in-u-s-jump-more-than-forecast-to-four-year-high.html

http://www.foxbusiness.com/personal-finance/2013/01/17/housing-market-in-2013-what-to-expect/

http://www.reuters.com/article/2013/01/18/us-markets-stocks-idUSBRE90D0CG20130118

http://online.barrons.com/article/SB50001424052748703596604578235570771013936.html?mod=BOL_twm_coll

http://www.investinganswers.com/financial-dictionary/economics/deficit-1077

http://www.investopedia.com/terms/f/federaldebt.asp#axzz2Iima3vBz

http://www.investopedia.com/terms/d/debt-ceiling.asp#axzz2Iima3vBz

http://thehill.com/blogs/on-the-money/economy/274591-us-to-hit-164t-debt-limit-on-dec-31

http://www.brainyquote.com/quotes/keywords/compromise.html

Read Full Post »

The Supreme Court Keeps Stirring Up The Market

The Supreme Court’s decision on healthcare has been a highly anticipated announcement for nearly every American.  The tension has broken and, as we all know, Obama-Care chalked up a big victory with the majority of the reforms being upheld.  The repercussions of the decision were obvious, allowing the government to penalize, by tax, Americans who choose not to get health insurance.  That mandate was the staple behind the implementation of healthcare reform as a whole.

 
A lot of speculation has been placed on the effect of the ruling, from the healthcare of individuals to the taxing changes, and even the possible repeal after the 2012 elections, but what has been left out of the discussion is the effect that the decision has had for investors.  The financial distribution in the healthcare industry has found itself with a new layout and investors are wise to take notice of the changes.

 
The five to four decision has been noticed in the market in terms of the long term effects that the mandate and reforms will have on different aspects of the medical industry.  In some parts, stock prices jumped, while in others, it dropped, and investors have an explanation for each.

 
The decision caused a drop in the stocks of medical devices because of the tax riding on them.  This tax is enough to cause investors to find a new home for their money.  As could have been expected, the stocks of the insurance companies took a hit as well, but the decision made by the courts wasn’t completely black and white.  A ruling to repeal the individual mandate to buy insurance while not allowing insurers to refuse those with pre-existing conditions would have been an even big hit to the insurance sector.  The repeal of the Medicaid portion of the healthcare reform caused the shares of those Medicaid providers to rise, assuming they would see a rise in customers.

 
Hospital stocks, on the other hand, hit a sharp rise.  This movement was the result of a few different things.  First, the individual mandate requiring health insurance will save the hospitals from providing free care to those who cannot afford it.  That will save them a lot of money and is expected to make investors a lot as well.  Also, with more people having insurance, they will be less hesitant to go to the hospital for treatment.  As morbid as it may seem, a hospital is, at its basic form, as business and, as with any business, the more paying customers you have coming through your doors, the better.
The biggest effect on investors from the Supreme Court’s decision: certainty.  Despite all of the forecasting and planning, many investors were still somewhat hanging in the balance trying to determine what would happen following the decision.  Even though they have been hit with a slew of changes, at least now they can move forward knowing what’s in front of them.

 
Along with that certainty comes the question of whether the landscape will change again following the 2012 election.  Mitt Romney has vowed that, if elected in November, he would work to repeal Obama-Care, almost in its entirety.  If Obama is to win a second term, it’s safe to assume he will work to solidify the laws and reforms in his trademark healthcare plan.

 
So overall, where does that leave us?  For now, hospital and Medicaid stocks are up.  Insurance and medical device stocks are down.  Investors can walk on a firm ground they have been waiting for since the beginning of the Supreme Court case, but that ground will get shaky again as November approaches.  Of course, any changes at this point wouldn’t just show in the stock market, but also on your taxes and with your insurance costs.  At this point, it’s wise to just hold on to your hats, and plan for your inability to plan.

 

Photo courtesy of: http://www.cricpa.com

Read Full Post »