Targeting the 2007 S&P 500 High?

Key economic indicators and market events for February by Joe Terranova, Chief Market Strategist
Given the strength in the overall market, with capital starting to ow from xed income into equity funds, it begs the question, Are we targeting the S&P 500s high of 1576.09 (achieved October 11, 2007), and how quickly can we get there? Conventional thinking is that the market is in need of a correction. That the VIX volatility index is trading below 13, its lowest level in ve years, should alleviate this concern. As a quiet reminder, however, 2013 is starting out very similar to 2012. In 2012, the S&P began trading at 1258, was up to 1313 by February 1, and at 1372 by March 1 with nary a pullback. While momentum seems set in place to move the markets higher, for those concerned about a potential correction, the options market gives you the ability to purchase insurance and protect yourself if necessary.

February 2013
Sunday Monday Tuesday Wednesday Thursday Friday
1 8:30 AM: U.S. Labor Report 10:00 AM: U.S. ISM Manufacturing European PMIs (IT, FR, UK, SP, GE) 3 4 5 6 7 8 9

Saturday
2

YUM! Earnings*

Disney Earnings*

Visa Earnings*

ECB & BOE Monetary Policy Meetings

China Trade Data

10

11

12

13

President Obamas State of the Union Address

BOJ Monetary Policy Meeting

1:00 PM:

U.S. 10-Year Treasury Auction

17 18 19 20 2:00 PM:

14 G20 Finance Ministers & Central Bankers Meeting 1:00 PM: U.S. 30-Year Treasury Auction Germany Q4 GDP (Preliminary) 21 10:00 AM:

15 8:30 AM:

16

U.S. Empire State Manufacturing

22

23

Presidents Day U.S. Holiday

Dell Earnings*

FOMC Minutes China HSBC Flash Manufacturing PMI

U.S. Philly Fed

Germany Q4 GDP (Final) & Ifo Business Climate

24

25

26

27

28

March 1

Italy Prime Minister Election Results

Retail Earnings Reports (TGT, LTD, JCP, TJX, DLTR)

China Ofcial Manufacturing PMI

Februarys U.S. Labor Report released on March 8.

Times shown are Eastern Time. *Expected earnings release date; may be subject to change.

February indicators / events of note:

U.S. Labor Report Private payroll data is part of the Labor Departments monthly U.S. Employment Situation report. This data gives the true employment story, is the best gauge of the economys direction, and has the power to move markets.

You should be watching:

Last month, the headline number added 155,000 jobs and private payrolls added 168,000, while the unemployment rate was unchanged at 7.8%. The February numbers are still likely to feel the effect of the scal cliff uncertainty. For February, expect the rate to remain unchanged, private payrolls to be on either side of last months gure by 10,000 to 15,000, and for a marginal improvement to the headline number, with up to 175,000 new jobs added. It will be important for this months ISM Manufacturing Index not to materially slip below 50. Last month elevated us back above 50, with a reading of 50.7, up from 49.5 the previous month. Weve been below 50 for four of the last seven months. Last month, the employment component of the report rose 4.3% to 53.7, which was encouraging. We also need to see an improvement in new orders, which was unchanged last month. It appears that a trough has been set in place for the economies of Italy, France, the U.K., Spain, and Germany, and that the economic powers of both the U.K. and Germany are starting to rebound. Last month, U.K. PMI was 51.4, its highest in nine months; and Germany PMI was inching back toward 50, and at 48.8, was its highest in 11 months. Strong corporate earnings have driven the market higher. In February, well begin to get an abundance of consumer-oriented reports from companies such as Yum! Brands. Yum has not participated in the S&P 500s rally over the last couple of months. Much of that is due to the challenges it faces in China. We will look to Yum for a reading on a granular basis of how powerful a rebound we might expect from China. I believe we will get an excellent read from Disney on overall market sentiment and whether consumers are worried about rising taxes. Recently approaching $55 a share, Disney is trading near record highs. Mouse House earnings will give us a better sense of the entertainment component of consumer spending, generally one of the rst places to contract if consumers are tightening their budgets. With Disney, its less about whats right with their earnings, and more important to look for any misstep.
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ISM Manufacturing Index Issued by the Institute of Supply Management, this report provides an inuential monthly measure of the health of U.S. manufacturing based on an in-depth survey of 300 manufacturing rms. An index value of 50 is the dividing line between an expanding or slowing economy. Data released is for the previous month. European PMIs PMIs (purchasing managers indexes) for Italy, France, the U.K., Spain, and Germany are reported on February 1. Each countrys PMI is a key measure of the state of its manufacturing sector. An index value above 50 indicates growth, below 50 contraction. Yum! Brands Earnings Yum! Brands (YUM) is expected to release earnings on February 4.*

Walt Disney Earnings The Walt Disney Company (DIS) is expected to release earnings on February 5.*

*Expected earnings release date; may be subject to change.

February indicators / events of note:

Visa Earnings Visa (V) is expected to release earnings on February 6.*

You should be watching:

Visas stock has been trading near historical highs, nearly ve years after the companys initial public offering in March 2008 at the worst possible time, during JP Morgans takeover of Bear Stearns. I will be looking to Visa for evidence of a favorable trend in global consumer spending, focusing on the magnitude of the companys transaction-based activity. The only message we need from the ECB is continued assurance that it will do whatever is needed to defend the euro, as rst promised by Chairman Mario Draghi last July. Those words were enough to take the yield on the Spanish 10-year bond from 7.75% in July to a low print of 4.84% on January 11 and improve Europes sovereign debt market. Yields for the Spanish 10-year are back above 5%; a rise above 5.50% would be an early warning sign that additional reassuring language, and possibly action, may be needed from the ECB to ease yields. Throughout January, BOE Governor Mervyn King has been defending the banks favorable support for the U.K. banking system. Do U.K. banks require further capital as Governor King has suggested? U.K. banks have made substantial progress increasing their capital ratios and are ahead of their European peers. However, when the BOE governor tells you that banks arent sufciently capitalized, we need to pay attention. I dont expect anything more from the BOEs monthly meeting than continued strong monetary support. Its time to start paying attention to China trade data, which has the potential to become a market catalyst as it did last month. The markets responded to Januarys favorable trade data, which included a 14% rise in exports, a signicant bump up from the previous months 2.9% and well above estimates for 5%. Exports to the U.K. were up 18% and up 32% to Brazil. Exports to the European Union also rose for the rst time since May 2012, and exports to the U.S. were up 10%, their highest level since June 2012. I expect a very contentious speech targeting the House. The scal debate is nowhere close to over. Yes, weve extended the debt limit, but only until mid-May. The president needs to release the 2014 scal federal budget in March, and the House and Senate have an April 15 deadline to pass it. The sequester related automatic spending cuts to Medicare are scheduled to take effect April 1, and there is also the slight risk of a federal shutdown in late March to early April.
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ECB & BOE Monetary Policy Meetings The European Central Bank (ECB) and Bank of England (BOE) both hold monthly monetary policy meetings on February 7.

China Trade Data Chinas monthly trade report provides important import, export, and interest rate data on the Chinese economy.

President Obamas State of the Union Address President Obama will deliver his fth State of the Union address to Congress and the nation.

*Expected earnings release date; may be subject to change.

February indicators / events of note:

U.S. Treasury Auctions > 10-year Treasury Notes February 13 > 30-year Treasury Bonds February 14 Germany Q4 GDP and Ifo Business Climate Index Germany releases preliminary GDP (gross domestic product) on February 14 and nal GDP on February 22, the same day Ifo Business Climate Index data is released. The Ifo Index, prepared by the Ifo Institute for Economic Research in Munich, is a leading indicator for Germanys economic activity based on a survey of 7,000 companies. U.S. Empire State and Philly Fed Manufacturing Surveys The monthly U.S. Empire State and Philly Fed Manufacturing Surveys provide useful intelligence on regional manufacturing conditions within the Federal Reserve districts of New York and Philadelphia, respectively, and are useful indicators of national manufacturing trends.

You should be watching:

Treasury auctions begin to matter again this month, as we look to see if demand for Treasuries begins to wane. With yields rising on the 10-year back above 2% and the 30-year approaching 3.25%, we may see new buyers begin to pull back. Were looking for German GDP to track above 1% on a year-on-year basis. Also, much of the recent evidence from Germany, particularly the Ifo Index, points toward more favorable sentiment and optimism among German companies. As long as Germanys DAX continues to be a leading global equity index, theres no reason to change our mantra, as goes Germany, so goes Europe. I have highlighted these two regional manufacturing indexes because they should begin to matter. Over the last few months, the readings for both indexes were distorted, largely due to Superstorm Sandy and the scal cliff. We did not see expected improvement from either last month. However, based on the strong U.S. durable goods orders print we got in January, we should see a rebound in manufacturing. Further negative readings for these indexes would be concerning as they would be real numbers with less distortion. If Dell can successfully orchestrate a sizeable leveraged buyout (LBO) and take the company private, that would provide a solid sentiment reading on the market and the ability of private equity and the LBO market, which have been relatively dormant for the last couple years, to reignite. I expect a Dell LBO to be announced, which would be a positive signal that could break the ice and lead the way for others to follow. As discussed in a recent blog, I expect the minutes from Januarys FOMC meeting will reveal a contentious internal debate between Fed hawks and doves on whether target guidance implemented in December is truly the mechanism to end the central banks asset-buying program. Remaining scheduled FOMC meetings for 2013: > March 19-20 > June 18-19 > April 30-May 1 > July 30-31 > September 17-18 > December 17-18 > October 29-30

Dell Earnings Dell (DELL) is expected to release earnings on February 19.*

FOMC Minutes The Federal Open Market Committee (FOMC) releases minutes from its January monetary policy meeting.

The June, September, and December meetings will be followed by Chairman Bernankes quarterly press conference.
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*Expected earnings release date; may be subject to change.

February indicators / events of note:

China HSBC Flash and Ofcial Manufacturing PMIs China HSBC Flash Manufacturing PMI gives an advance reading of manufacturing conditions for the current month. Ofcial (nal) Manufacturing PMI is released on the last day of the month, which, when combined with the monthly U.S. ISM Manufacturing Index gure released the next day, gives a clear picture of global manufacturing health. An index value above 50 indicates growth, below 50 contraction.

You should be watching:

As many of you know, I prefer China PMI over Flash PMI. However, I included Flash PMI for February because the market appeared to trade on that data last month when the reading came in at 51.9, taking us back above 50, and suggesting a rebound in Chinas manufacturing conditions. I still await conrmation of Januarys actual PMI to be released late on January 31. Decembers nal PMI was 50.6. I expect it will get above 51 in February for the rst time since April 2012, making it the fourth consecutive month above 50. It appears that Pier Luigi Bresani, the Common Good Party candidate, has the current lead. I would be less concerned if Bresani wins, as he would continue the scal policies of Prime Minister Monti. More concerning would be if threetime past prime minister Silvio Berlusconi returned to power, as he is both a staunch critic of austerity and rm advocate of standing up to Germany. A long-shot win by Berlusconi would be read as a negative by the marketplace; however, I dont see that happening. February 27 will be a signicant reporting day for the U.S. retail sector. Retail sales were strong in 2012 and will continue to be an important area to monitor.

Italy Prime Minister Election Results Italians go to the polls in late February to choose a new prime minister to succeed Mario Monti.

February 27 Retail Earnings Reports* Among the companies reporting earnings: Target (TGT), Limited Brands (LTD), J.C. Penney (JCP), TJ Maxx (TJX), and Dollar Tree (DLTR).

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*Expected earnings release date; may be subject to change.

JOSEPH M. TERRANOVA, Chief Market Strategist, Virtus Investment Partners Joe Terranova is chief market strategist for Virtus Investment Partners. He was elevated to that position in June 2009, having started with the company in the role of chief alternatives strategist. In his current role, Mr. Terranova works with Virtus regional sales teams and the nancial advisors who sell the companys investment products, providing insight into the domestic and global investing landscape and has represented Virtus as a keynote speaker for several nancial institutions. He is a member of the Virtus Investment Oversight Committee. Prior to joining Virtus in 2008, Mr. Terranova spent 18 years at MBF Clearing Corp., rising to the position of director of trading for the company and its subsidiaries. In this capacity, he managed more than 300 traders and support staff for MBF, one of the New York Mercantile Exchanges largest rms. His work was highlighted as the feature story in the June 2004 issue of Futures magazine. Mr. Terranova is perhaps best known for his risk management skills, honed while overseeing MBFs proprietary trading operations during some of the most calamitous times for the U.S. markets, including the rst Gulf War, the 1998 Asian Crisis, 9/11, and the collapse of Amaranth Advisors. In 2003, he was one of the rst Wall Street professionals to make an early call for higher energy, natural resources, and commodity prices. In June 2008, he cautioned investors to move to the sidelines in commodities and, in March 2009, he encouraged investors to ignore the global embracement of pessimism and overweight equities. Before joining MBF, Terranova held positions at both Swiss Banking Corp. and JP Morgan Securities. Mr. Terranova has been an ensemble member of the CNBC Fast Money franchise since 2008. He also frequently contributes exclusively to CNBCs other business programs. He is the author of Buy High, Sell Higher (Business Plus, 2012), a book about the new rules of investing based on his years as a professional trader. In 2007, Mr. Terranova and Hockey Hall of Fame player Mike Bossy established Bossys Bunch, a program that rewards excellence in the classroom for elementary school students. Mr. Terranova earned a bachelors degree in nance from the Peter J. Tobin College of Business at St. Johns University in New York.

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This commentary is the opinion of Joe Terranova. Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates, or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.
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