by Shawn Narancich, CFA
Vice President of Research
Two-for-Two
On modest gains for the second consecutive week of the new year, large-cap U.S. stocks rose to a five-year high and are pushing up against levels reached prior to the global financial crisis of 2008. An old saying in the industry observes that stocks climb a wall of worry, and that characterization has never been truer as blue-chip stocks approach all-time highs. Investors were surprised to see the U.S. trade deficit increase by $6 billion in November, but a key trend of reduced oil imports remains in place, and slower exports late last year probably had more to do with port disruptions caused by Hurricane Sandy. Nevertheless, economists will likely reduce their fourth quarter GDP estimates because of a bigger trade drag. For 2013, we continue to expect that our economy will slog ahead at a 2 percent rate.
A European Job Is Tough to Come By
Perhaps more meaningful, Europe confirmed that its economy remains well entrenched in recession, as it reported a new all-time high unemployment rate of 11.8 percent. But Mario Draghi quashed any speculation that Europe’s central bank would do more to help pull the Eurozone out of its funk, stating that it had no intention of lowering interest rates any further or engaging in quantitative easing. Predictably, the euro rallied, as it remains one of the few global currencies not being debased by monetary stimulus. For now, a disruptive break-up of the European Union seems less likely. Despite the Continent’s economic woes, taking Eurozone Armageddon off the table has been enough for investors, who have piled back into European stocks specifically and international stocks in general.
Global Warming Anyone?
Whether the rally in Chinese stocks continues may depend on the cadence of inflation reports to come. After enjoying a long spell of disinflation, China reported that the price level rose in November rose at its highest rate in seven months. While 2.5 percent inflation is unlikely to prompt the People’s Bank of China to reverse its easy money policy, the likelihood of any further monetary easing by the Red Giant has diminished. The root cause of recent price increases? China’s coldest winter in three decades, which has stunted crop production and boosted food prices. Export data out of China this week was surprisingly strong, and recent iron ore price increases are symptomatic of the world’s largest user replenishing depleted stockpiles. Despite the recent uptick in inflation, China’s economy appears to be re-accelerating.
Choppier Seas in Telecom
After outperforming the market last year, the U.S. telecom industry faces rising headwinds in 2013. The cadence of news flow from this sector has picked up notably, with Verizon declaring this week that it enjoyed record post-paid subscriber gains in the fourth quarter. The result? Wall Street analysts rushed to reduce their quarterly estimates to account for higher losses on smart phone subsidies used to attract new customers. AT&T also appears to have experienced robust smart phone uptake as both carriers sold a lot of new iPhone 5s before Christmas.
But beyond these shorter term issues, the telecom industry appears to be standing on shakier ground. Starting with last fall’s announcement that Deutsche Telecom’s U.S. subsidiary T-Mobile would acquire pre-paid specialist MetroPCS Communications in a complex deal, Japanese telecom pioneer Softbank agreed to acquire Sprint. Bankrolled by deeper Japanese pockets, Sprint in turn tendered for the 50 percent of broadband network owner Clearwire it doesn’t already own, in a bid to bolster its class b network. As if that wasn’t enough excitement for this normally staid sector, satellite TV maverick Charlie Ergen won approval late last year to convert satellite airwaves into more valuable cell phone spectrum, then this week launched its own bid for Clearwire at a price substantially above Sprint’s offer price. Whether Ergen’s Dish Network is truly attempting to become a new wireless operator in the U.S. or is just posturing to maximize the value of its spectrum remains to be seen.
Finally, AT&T is ramping up its capital spending to increase the quality of its 4G service. All this industry activity in such a short time period appears to be more than just coincidence, symptomatic of a wireless industry that is jockeying for position at a time of slowing subscriber growth and heightened competition. So while the juicy dividends of AT&T and Verizon remain attractive, telecom could be challenged to repeat last year's strong performance.
Next week, fourth quarter earnings kick into high gear, with 13 percent of the S&P 500 scheduled to report. Following Wells Fargo’s earnings released earlier today, money center banks Citigroup, Bank of America, and JP Morgan will report, as well as industrial bellwether GE.
Our Takeaways from the Week
- Stocks added to recent gains as the first big week of earnings awaits
- The telecom industry faces tougher sledding in 2013