January 16, 2013 Update

DJIA:13,534 NASDAQ: 3,110 10-YR TRS: 8/32 yield 1.831% Oil:$93.28 EURO:$1.3305 YEN:88.78

Micro

• Earnings: Goldman Sachs (NYSE: GS) forecast Q4 EPS to be $3.71 per share, J.P. Morgan Chase (NYSE: JP) forecast Q4 EPS to be $1.16 per share, Ebay (NASDAQ: EBAY) forecast Q4 EPS to be $0.69 per share, U.S. Bancorp (NYSE: USB) Q4 EPS of $0.74 per share, Bank of New York Mellon Corp. (NYSE: BK) expects Q4 EPS of $0.54, Comerica Inc. expected to report Q4 EPS of $0.65 per share, Chipotle Mexican Grill (NYSE: CMG) estimated Q4 EPS at $1.92-$1.97 which is below consensus of $2.09
• Negotiations between the US Department of Justice and Anheuser-Busch (NYSE: BUD) over the $20.1B deal to buy the 50% of Grupo Modelo (maker of Corona) that BUD does not already own is centering on a supply and pricing agreement between the merger entity and Crown Imports. It is important to note that the discussion is not centered on the sale of the production assets. 
• Japan’s All Nippon Airways had to conduct an emergency landing of Boeing’s (NYSE: BA) 787 Dreamliner aircraft in southern Japan after a battery alarm went off. 
• AMR’s (AAMRQ.PK) goal of exiting Chapter 11 may be easier as the carrier will have one less union to fight with after the 9,700 passenger service workers voted down joining the Communications Workers of America. This is no time to celebrate as employees will have a second chance to gain representation if the merged with US Airways (NYSE: LCC) is carried out. 
• CVS (NYSE: CVS) and Rite Aid (NYSE: RAD) is running short of flu vaccines as severe flu is driving up demand.  
• Chipotle Mexican Grill (NYSE: CMG) expects their revenue to be +17% to $699.2M, which exceeds consensus of $690.7M. Also forecast their comparable sales +3.8% and operating-profit margin -1.5% to 24.6% after opening 60 restaurants. Even though the cost of food has increased, CMG is optimistic that the inflation will level out during the year. 

Macro

• SPZ: declining as the World Bank cut its 2013 growth forecast from austerity measures and unemployment and as investors await earnings reports from GS and JPM.
• Asian Markets: trading mostly lower with Hong Kong crippling as financials loose ground and Japanese stocks skidding on a stronger yen for the second day in a row.
• European Markets: mostly in the red from concern regarding the strength of the euro after Jean-Claude Juncker’s announcement that the currency’s comeback could hamper recovery efforts. 
• China’s Beige Book expects GDP to have accelerated to roughly 8% in Q4.

The Loss of Idiosyncratic Risk

The relationship between risk and return has always been important when determining the value of an investment. Unfortunately, evaluating risk has become exceeding more difficult as globalization has increased correlations in the financial markets. As countries’ economies and markets have become more interconnected, idiosyncratic risk is becoming less and less of a threat. It appears that most risk is now systemic and systematic, which only further complicates portfolio diversification. Take the classic Alan Greenspan example of when he believed the decline of the housing prices to be an idiosyncratic risk, only affecting the neighborhood in which the property values were plummeting. Theoretically, it’s valid but in reality the decline of one house affects its neighbor. Because everything is connected and is “too big to fail,” it is now more important than ever to write down collateral assets. Although the structure of the financial markets and methods in which we evaluate them are changing, it reenforces the truth that when it comes to market valuation no one can truly be an expert but only a perpetual learner on cause and effect in a modernizing world.