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Market Round Up: December 12 - 16, 2011

Market Round Up: December 12 - 16, 2011

General Comments: The death of the North Korean leader over the weekend is expected to create temporary market instability, especially in East Asia.  Historically, during periods of transition, North Korean leaders have used military threat in an effort to extort economic concessions from others.  It will be interesting to watch Mr. Kim Jong-il’s youngest son’s actions during this period. 

The Securities Exchange Commission (SEC) is suing six top executives from Fannie Mae and Freddie Mac for “misleading investors.”[1] It has been suggested that these top executives knowingly “told the world that their subprime exposure was substantially smaller than it really was.” According to SEC commissioner, this “is about holding individuals accountable,” and speaks to the larger issue of the opacity of public reporting relative to private sector requirements. Of course, regulations in the private sector are also undergoing revision to ensure increased transparency.

Technology IPOs have performed particularly well the past several months, making Zynga’s lacklustre IPO particularly noteworthy. Zynga, an online gaming company, rose only 10% at the market’s opening and pulled back to $9.50 by close. This was five per cent below its offering price of $10. Analysts have suggested that Zynga’s performance may reflect a growing wariness in the market, that investor “appetite for new issues of fast-growing technology companies may be waning”[2] and that investors are becoming increasingly “sceptical about the business models.”[3]

North American Markets: While markets retreated Monday and Tuesday, mounting worries led to an even larger sell off Wednesday.  Positive US economic news meant a strong opening Thursday morning, but North American markets still closed down with the TSX, Dow and S&P all falling just under 1%. Both oil and gold prices fell as well (but gold gained again Thursday). Good news on Friday, including a commitment by Euro zone finance minsters to “meet a deadline for organizing loans to the International Monetary Fund as part of efforts to manage the sovereign debt crisis” and information that the US consumer pricing data for November came in flat (suggesting inflation remains under control) led to mixed markets on Friday.[4] At the close, the S&P and TSX came in slightly higher, while the Dow closed slightly down.

Global Markets: The January effect, and tendency for improved stock performance in January, specifically in small cap stocks, is upon us. While identified a long time ago, this effect is becoming less pronounced over time as investors both adjust for it and tax loss selling is not as prominent as tax sheltered retirement plans become more prolific. Given this information, and the already strong performance in small caps companies since September, it will be interesting to see how meaningful this effect will be in 2012.  “Since the end of September, small caps have been the place to be, surging by 11.5%—3.5 points more than large caps.” This “has been helped along by a string of better-than-expected U.S. economic data… as small caps are particularly sensitive to changes in the economic outlook because they have fewer foreign profits and less diversified revenue streams.”[5]