Bank of America Leading the Market

January 6, 2012

Equity markets are slightly lower this morning after a better than expected nonfarm payroll report showed an increase of 200K jobs vs. expectations of a 155K increase. The good news was tempered by a downward revision of November’s job gains from 120K to 100K, a revision trend that seems to be occurring more regularly over the past 5-6 months. Private payrolls rose by 212k vs. expectations of 178K while manufacturing jobs rose by 23K. The unemployment rate dropped to 8.5% while November’s unemployment rate was revised from 8.6% to 8.7%. The underemployment rate, commonly known as U6, declined to 15.2% from 15.6% last month.

As of this morning, the fourth trading day of the year, the S&P 500 is up 1.2%. The January Barometer, another of those market anomalies that haven’t worked over the past four years, says that if the market is up in January, it tends to be up for the year. Further, if the market is up after the first five trading days of the year, it is typically up in January. Here’s to a strong Monday!

If the market and economy are going to recover for 2012, the consensus seems to agree that financial stocks will need to post strong returns. The financials have had a nice bump this week, with the XLF (financial services ETF) rising 2.5%. Bank of America (BAC), that downtrodden beneficiary of government largess, is up over 10% so far this year.

In the past two years we have had two enormous new bills passed, Obamacare and the Dodd-Frank Act. These bills were so big that the rules for both are still being written. Some of the goodies include a 4% investment tax surcharge attached to the Healthcare Reform Act, a series of fees, taxes and charges attached to the Dodd-Frank Act. The Healthcare Reform Act includes some especially stiff taxes on medical device companies, taxes which are expected to double the tax burden on these manufacturers. Stryker (SYK) announced they would be letting go 1000 employees, partially due to the new tax on medical devices, including tongue depressors. Covidian (COV), facing the same tax, has announced plans to move jobs to Costa Rica and other lower tax regions. When these goodies are combined with the expiration of the Bush Tax Cuts, it appears that 2013 is shaping up to be a year which will face significant headwinds and a probable recession in the US.

Retail comps for December were mixed, with many retailers suffering from their heavy promotional activity. Target (TGT), JC Penney (JCP), American Eagle Outfitters (AEO) and Kohls (KSS) all suffered margin pressure from the discounting. Ross (ROST), Zumiez (ZUMZ), Ascena (ASNA), Nordstrom (JWN), and Bon-Ton Stores (BONT) all posted strong comps and profits. Comps for the 23 retailers we follow resulted in 13 beating estimates, eight missing, and two in line.

President Obama announced $489 billion of the required $650 billion in defense cuts as part of the Budget Control Act. The cuts, set to begin in 2013, include base closures, troop reductions, delays in weapons development, and reductions in our nuclear arsenal.

California Governor Jerry Brown unveiled a $93 billion spending plan that bumps overall spending by 7% from the current year in spite of the state’s $9.2 billion deficit. The growth is to be funded by economic growth, higher income taxes, and an increase in sales taxes. He says that if voters don’t approve his plan, he’ll cut another $5 billion from education, effectively cutting three weeks from the public school year. He is attempting to bypass the legislature and get the proposal on the June ballot.

Eastman Kodak (EK) is preparing to file for bankruptcy. The company has been shopping a portion of their patent portfolio for months, apparently with little success.

The IMF is reporting that China has passed the US in a number of measures, and should pass the US to become the world’s largest economy in 2016. China is ahead of the US in car sales, exports, fixed capital investment, issuance of patents, net foreign assets and the quality of science and math education.

Yes, the rumors are true. Afghanistan is planning on sending a water polo team to the Summer Olympics. The team, pictured below, is still looking for a place to train after being rebuffed by the US. It looks to me like they need to find a pool quickly.

Have a great weekend

Ned