Stronger than expected earnings reports and better economic releases propelled the stock markets and bond yields higher again this week. Many equity markets hit 5-year highs; some neared all-time highs. Credit spreads were flat to a bit higher. Oil prices rose, but natural gas and metals prices were lower. Actions by their respective Central Bankers put downward pressure on the Yen and propelled the Euro higher against the US dollar.

Perspective:

Often in the investment business, people ask about the forecast for the next year; those are typically thought of as the "long-term" forecast. All too often, the investor's horizon is even shorter. Day trading systems promise to have their investors out of the market (cash rich or poorer) by the end of each day; institutions that are paid per transaction are big fans of day-trading strategies. Therefore, it was refreshing to be asked at a recent Board meeting by the new Chief Investment Officer what I thought about the capital markets for the next decade.

Giving his thoughtful question some consideration, I was pleased to find an article in this week's Economist which reported that Standard Life's head of global strategy put together a range of projections of 10-year inflation adjusted returns. For instance, US equity returns were expected to return from -1% to +8% over inflation; Treasuries were expected to add from -4% to +1.25%, and investment-grade corporates were expected to return from -3% to +3.25% over inflation. Life Insurers have a long horizon and need to accurately project the return on their investments in order to properly price their products; these projections are ones that Standard Life will be using in its business, but unlike those projections from other institutions, Standard Life is not trying to entice investors with high yields. Click on the magazine name above to read the full article.

On a personal note, the Davidson clan will be gathering in Old Greenwich CT to celebrate the Ordination of our son this week. Our projections over the next decade and beyond are for many satisfying and rewarding experiences.

Economic Releases:

US Home Sales in December were lower than they have been earlier this year, but the good news is that the December data capped the best year in Home Sales since 2009. Existing Home sales slipped to 4.94 million, but were up 12.8% from the previous December. The good news for housing was that the supply of houses were down to 4.4 months of sales versus 4.8 months the in November and 6.4 months a year ago. One consequence of lower supply was an +0.8% increase in prices. Similarly, New Home Sales (blue in the chart below) slipped to 369,000; November and October Sales were revised a total of 25,000 higher. A short supply of new homes boosted prices of New Homes 1.3% to $248,000, the highest in 5 years. While 2012 has been good for New Home Sales, it still pales in comparison to 2005 where the monthly sales hit 1.4 million!

Other Economic Releases

In another sign of strength, Initial Jobless Claims dropped to 330,000 in the week of January 19th. The 4-week average for Claims dropped to 351,750. The weekly series and its 4-week average were at and near a 5-year low respectively. Continuing Claims, reported on a one-week lag, dropped 71,000 to 3.157 million, a 4-1/2 year low. The Flash Report for Manufacturing PMI (Purchasing Managers' Index) for January rose a couple of points to 56.1, well into the expansion zone. The WSJ reported that the Philadelphia's survey of economists was closely grouped around 2.3%, the third narrowest 25th to 75th percentile (2.1% to 2.5%) in the 45 years the survey has been conducted.

Germany's Ifo Surveys of Economic Sentiment, Current Conditions, and Business Expectations all advanced in January. Germany's Zew Surveys of Current Conditions and Business Expectations all increased as well. The biggest increases came from expectations in both Surveys. France's Business Climate Indicator, on the other hand, fell a few points to 86. The UK's fourth quarter GDP fell -0.3% and was flat year-over-year; Unemployment in the UK ticked down to 7.7%. On the positive side for the EU, the ECB announced that it would repay more of loans sooner than expected, giving a boost to the Euro.

China's Manufacturing PMI Flash report for January rose a point to 51.9. The Bank of Japan continued its easing when it met this week when it raised its inflation target to 2.0%; it left interest rates and the asset purchase ceiling unchanged.

Equities Markets:

Equity markets posted another gain this week on better-than-expected earnings announcements and strengthening economic news. About a quarter of the S&P 500 companies have reported in this cycle; 76% of them reported an better than expected earnings, well above the typical 2/3rd of the companies that beat expectations. The Dow and S&P posted 8 consecutive days of increases, the longest consecutive rally since 2004. Both the Dow and the S&P closed at the highest levels since 2007 and were within a couple of percentage points of reaching new record highs.

Bond Markets:

Government Bond yields rose on better economic news. Credit spreads were also a touch higher.

Currencies & Commodities:

The US dollar rose against the Yen, Looney, and Pound, but fell against the Euro, which was boosted by the ECB announcement of early repayment of its loans. Oil prices rose, but natural gas and metals commodity prices fell on the week.

-----------------------------------------------------------------

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.