Download Weekly Advisor Analysis 09-23-13 PAA

Weekly Advisor Analysis
September 23, 2013
Fed Stays Course, Rally Marches Forward
Many investors were caught off guard last week by the Federal Reserve’s decision to maintain
their $85 billion per month asset purchasing program, despite clear signs the key barometers Ben
Bernanke & Co. monitor, such as the jobs market and economic growth, showed weakness leading
up to the meeting. As a result, the S&P 500 added another 1.3 percent last week and is now up
19.89 percent so far in 2013, according to CNBC. Despite the decision to maintain the asset
purchasing program being made because of less than optimal economic conditions, more investors
than not continue to equate more Federal Reserve accommodation with brighter prospects for
equities.
Source: Yahoo! Finance
Federal Reserve Dominates Headlines
Last week we highlighted a Bloomberg survey that showed more than half of participants
believing no reduction in asset purchases would be made at the September Federal Open Market
Committee meeting. Those respondents who were correct in their assumptions were most likely
keeping a close eye on the same exact economic statistics the Federal Reserve continues to point
to at each meeting. Nevertheless, judging by the rapid ascent in stock prices immediately
following the initial release of the official Federal Reserve statement, most investors were
apparently caught off guard by the decision. However, what remains an even larger enigma is the
fact market participants continue to push equities higher each time the Federal Reserve increases
or maintains accommodation despite the fact they’re doing so because of the frail condition of the
U.S. economy. For example, the Federal Reserve had forecasted U.S. gross domestic product
(GDP) to grow 2.3 percent to 2.6 percent in 2013 back in June, but lowered that forecast to 2.0
percent to 2.3 percent growth last week, the averages of which are depicted below. Furthermore,
their 2014 GDP forecast is now only 3.0 percent, which is historically not exceptional according to
The Washington Post.
More Fed Drama
Before the Federal Reserve decision on Wednesday of last week, there was another surprise
announcement relating to the Fed made before last week even began. The person widely favored
by most to take over as Fed Chairman, Larry Summers, removed his name from the running in a
letter to President Obama that has since been made public. Stocks reacted positively to this news,
according to The Washington Post, because most investors viewed Larry Summers as someone
who would have potentially reduced Federal Reserve asset purchasing faster due to his previous
statements made about the program and inflation. It now appears that Vice Chairwoman Janet
Yellen is the odds on favorite, as the graphic derived from a CNBC survey depicts below, to take
over the post after Bernanke’s term ends in 2014. Considering she is currently working for the
Federal Reserve, and is essentially second in command at the Fed, most believe she will carry on
the same philosophy that is in place today, meaning asset purchasing will remain in place until the
economy has shown clear, consistent signs of health.
Federal Reserve Saves Corporations Billions
According to Bloomberg, due to the Federal Reserve’s quantitative easing program and the record
low interest rates that have resulted, American corporations have saved over $700 billion in
interest payments from the stimulus. The article details that corporate bond yields, or the cost a
company pays to borrow money through issuing debt, have dropped from an average of 6.14
percent before the Lehman Brothers bankruptcy rocked the global financial markets, to an average
of 4.16 percent today. Bloomberg estimates that this translates to savings of $15.4 million
annually for every $1 billion that is borrowed. And, considering corporations have issued $5.16
trillion of debt over this time period, it has saved these companies $700 billion. To put that
number into perspective, Bloomberg points out the entire annual economic output of Switzerland
is $632 billion. These savings have allowed corporations to raise their capital expenditures, or
money spent on company projects for future growth, by 8.7 percent in the second quarter of 2013
which is the highest increase in over a decade, according to JPMorgan.
Best regards,
UDB Financial
Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* Quantitative Easing is a government monetary policy occasionally used to increase the money supply by
buying government securities or other securities from the market. Quantitative easing increases the money
supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
* Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced
within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis.
It includes all of private and public consumption, government outlays, investments and exports less imports
that occur within a defined territory.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* 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.
* 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.cnbc.com/id/101050527
http://finance.yahoo.com/q/bc?s=%5EGSPC+Basic+Chart&t=5d (Chart)
http://online.wsj.com/article/SB10001424127887323808204579083613104165436.html
http://online.wsj.com/article/SB10001424127887324807704579085591204631358.html
http://online.wsj.com/article/SB10001424127887324492604579083243936441418.html
http://online.wsj.com/article/SB10001424127887323342404579079143276866818.html
http://articles.washingtonpost.com/2013-09-18/politics/42176357_1_federal-reserve-unemployment-rateeconomic-growth
http://marketrealist.com/2013/09/fed-took-estimate-gross-domestic-product-growth/
http://cdn2.marketrealist.com/wp-content/uploads/2013/09/MR-fed-gdp-forecast-2013.png (Chart)
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/16/markets-are-thrilled-larry-summers-wontbe-fed-chair/
http://nbr.com/2013/09/17/market-expects-15-billion-fed-taper-soon-cnbc-survey/ (Chart)
http://www.bloomberg.com/news/2013-09-17/bernanke-saves-companies-700-billion-as-apple-to-verizonborrow.html