This stock market rally still faces headwinds

Covestor model: Macro Themes

The month of February continued the steady gains of January for the Dow, which has climbed nearly 600 points so far this year.  The Dow hit the 13,000 mark for the first time since early 2008, before the world markets collapsed.  Although the index has climbed back to where it was before the crash, the perceptions of investors and the realities of the job market and debt situation give reason for concern about the meaning of the Dow hitting that mark.

One of the most important political issues directly affecting the economy that was addressed this month was the continuation of the 2% payroll tax cut for employees.  While employers are still on the hook for their 6.2% share, employees must pay only 4.2%.  This tax typically funds social security, and the difference of social security contributions will be made up from tax revenues.  In other words, the long term result will be an increase in our national debt due to the payroll tax cut. This issue will not have to be addressed again until December, after the presidential election has taken place.

Gold hit a three month high earlier this month, getting very close to the $1800/oz level.  Brent crude oil is at its highest level since 2008, riding a recent surge up to nearly $125/barrel.  Consumers have certainly felt this at the gas pump, with prices rising quite rapidly.

Ben Bernanke spoke in the final week of February, saying that keeping monetary stimulus is warranted even as the unemployment rate falls and rising oil prices may cause inflation to rise temporarily. In economic news, consumer spending rose 0.2% and personal income rose 0.3% in January. On the other hand, constructions spending fell 0.1% and the ISM Manufacturing Index dropped from 54.1 to 52.4. A reading above 50 still indicates growth; however, slightly slower than in December. The index of prices paid increased to 61.5 from 55.5, the production index was little changed at 55.3 from 55.7, new orders eased to 54.9 from 57.6, export orders climbed to 59.5 from 55, and the employment gauge dropped to 53.2 from 54.3.

Here on some updates on particular stocks:

Teekay LNG Partners (TGP) reported that the group generated distributable cash flow of $44.1 million in the fourth quarter which represents an increase of 12% from the quarter a year ago. A cash distribution in the amount of $0.63 per unit was declared and management intends to commend a 7% increase to the quarterly distributions commencing with the first quarter 2012.

The increase in cash flows was attributed from the November 2010 acquisition of a 50% interest in two LNG carriers. A new, three-year charter contract at a fixed-rate of $130,000 per day was entered into for the Maersk Methane, commencing in April 2012. The acquisition of the eight LNG carriers from A.P. Moller-Maersk is expected to be completed next week which will further increase cash flows.

After this acquisition, the partnership will have approximately $400 million of available liquidity which can be used to take advantage of future growth opportunities. Seaspan (SSW) reported that the company generated fourth quarter EBITDA of $118 million, an increase of 38% from a year ago. A $50 million share repurchase program was announced. Management also announced a 33% increase to the dividend. This underscores management's confidence in the continuous of increasing cash flows and the stability of their long term charter business strategy.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.