Since we last wrote the market has meandered sidewise with little to get either the bulls or bears excited. Volume has lightened a bit. Earnings season has largely come to an end with companies reporting earnings mostly in line with expectations but leaving investors to wonder how about the upcoming quarter's earnings. By any account, the start to 2013 has been extremely good and bordering on extraordinary.   At the current rate, the S&P is on pace to earn 65% this year. We don't know of anyone with an ounce of sanity that is calling for that type of gain this year so some choppy to down market action is likely in the coming weeks.

The bulls will argue that the recent sideways market action is simply the market buying time and getting ready for the next leg up. The bears will argue that the current market is moving sideways because it has lost its momentum and is waiting for a catalyst of some type to develop a correction of some significance. To be honest, both the bulls and the bears have good reasons for each of their conclusions. On the bullish side, the overbought conditions of a few weeks ago have largely been worked off setting the stage for new buyers to come in to push the market to the next level. On the bearish side, momentum has definitely come to a halt, new highs have begun to recede, and history would lead one to believe that at least a mild correction is due. As mentioned in our previous newsletter, February is often a troubling time for Wall Street. So where will we go from here? Significant technical and fundamental factors point to an increasingly risky market over the next few weeks. With the government sequestration set to go into effect March 1st, any government hiccup in solving the issues could lead investors to scurry for the exits. Many have become accustomed to Washington and the Federal Reserve "working it out" at the last hour so there seems to be a little complacency.   A break down in the negotiations could provide the impetus for a sell off so risk is elevated at least until an agreement is hammered out. We believe that something will be worked out by providing some palatable solution for both sides without really accomplishing anything about our longer term debt issues. That said, we believe the next 5% move will be to the downside.

One of the many benefits of active management is the ability to invest based upon what the market is actually doing rather than investing based upon what you think the market will do. Accordingly, despite our feelings we will continue to be invested as long as the market continues to climb higher. When circumstances change, we will adjust our portfolios. Active management puts the odds in our favor to capture most of the up markets and avoid most of the down ones. Our portfolios have enjoyed the rally to start this year so we are hopeful that the market will grind higher while keeping a close eye on early warning signs of impending problems. Whatever the case, we are at the ready to respond appropriately. Thank you for your continued trust.

HOW LONG? - The current bull market for the S&P 500 will reach 4 years in length on 3/09/13. Of the 10 other bull markets that have occurred since 1950, the shortest duration was 2.1 years. The average duration of all 11 bull markets since 1950 (i.e., the current bull market is the 11th) is 4.7 years. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the stock market (source: BAM Research).    

UNWIND WHEN? - The Fed's balance sheet had $480 billion of Treasury notes and bonds on 9/10/08, 5 days before Lehman Brothers declared bankruptcy and 2 months before the asset purchases of QE1 began. The Fed's balance sheet had $2.9 trillion of Treasuries as of 12/31/12 and is expected to reach $4 trillion as of 12/31/13 from the $85 billion of monthly QE3 asset purchases (source: BAM Research).

WHEN WILL THEY RAISE RATES? - During the downturn of the US economy that began in 2008, our peak unemployment rate (10.0%) was reached on 10/31/09 or 39 � months ago. Since the 1970s, the average length of time that the Federal Reserve has waited after unemployment peaked until they began raising short-term interest rates to slow down a recovering economy has been 14 months (source: Federal Reserve).  

THE NEXT CREDIT PROBLEM? - The percentage of student loans that are 90 days or more delinquent has increased from 6% to 11% over the last 10 years. Total outstanding student loans ($956 billion) are now +12% larger than outstanding credit card balances (source: Federal Reserve Bank of New York, Federal Reserve).

PRICEY - The richest college in the USA (as measured by the school's $32 billion endowment fund) is Harvard. The school is charging $54,496 for tuition, fees, room and board for the current school year (source: Harvard).

I was in Dallas last week for a small conference among other like minded advisors and left with a number of new ideas and better ways to serve our clients. We will be rolling out these service enhancements in the coming weeks and months and would greatly appreciate your feedback as we embark on being a better financial advisor and counselor to you. It is all very exciting to us and we look forward to sharing more details with you as we finalize details of the improvements.   More to come.

Carter's team failed to advance in the TSSAA tournament last week bringing an end to a long and very enjoyable 14 years of competitive basketball. It has been a long run from coaching him in the 4 and 5 year olds through the YMCA to watching him play against future college stars in high school. It has been a joy to watch and I am certain to have a little culture shock next fall when basketball season starts up again with no child to watch. I guess my high school basketball career has come to a close until, at least, our kids start having grand kids that I can relive my glory through!

Sam and Bo

We continue to make posts to our blog throughout the week so check it regularly if you want to see our thoughts.  You can access it by following the link below. 

THE GREATEST COMPLIMENT

In these uncertain times, a trusted financial adviser is more important than ever.  Whatever comes over the upcoming months and quarters, the markets are certain to have lots of volatility and wild swings.  Europe, the US economy and dysfunction in Washington, and continued trouble in Iran and the Middle East to name just a few.  If you have family, friends and neighbors that may benefit from our services, would you please forward this email and/or provide our contact information to them.  We purposefully do not spend time marketing our services so that we can devote all of our resources to managing your assets.  Thank you to all who have provided us referrals - it truly is the greatest compliment you can give us.      

Remember to visit our blog for market comments and observations in between newsletters.  We try to provide a few comments in between newsletters and certainly when there is a particularly interesting market day.  You can access it by clicking here. 

Published by Sam C. Bills, Jr.  Copyright � 2008 Bills Asset Management.  All rights reserved.

BAM Market Wrap is produced and distributed regularly via email by Sam C. Bills, Jr. of Bills Asset Management  3001 Flagstone Drive, Franklin, TN 37069 Phone (615) 371-5928 Fax (615) 250-4903 - www.Billsasset.com

Bills Asset Management  is an independent registered investment advisor (RIA) not associated with any financial institution.  Data used in this publication is gathered from reliable sources, although completeness and accuracy cannot be guaranteed.  Performance results do not take into account any tax consequences and are not predictive of future results.  This publication does not give any specific investment advice, does not provide financial planning services, or consider any individual's financial situation, needs or goals.  This publication may not be reproduced or retransmitted in whole or in part without the consent of the author, Sam C. Bills, Jr.

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