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Oct 28, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another flat week as investors sat idly waiting for November 8th.  In the meantime, earnings announcements continued to roll in at a steady pace with many companies beating expectations and a few well-known ones falling short.  Patience is in short supply these days.  It seems everyone is on edge and despite low expectations, no quarter is given.  With frayed nerves and plenty of trepidation, these next two weeks will be difficult but unavoidable.

Let’s start with earnings announcements.  Below are some of the most popular companies that reported this week:

  • Procter & Gamble – Takeaway: doing better. Things appear to be turning around for this company as growth picks up.
  • Lockheed Martin – Takeaway: the instruments of war are big business. Our allies are buying.
  • T-Mobile – Takeaway: Sometimes insubordination pays off. Growing market share at the expense of its rivals.
  • Chipotle – Takeaway: one big food scare and it appears customers have moved on. Looking to branch out into burgers.
  • Apple – Takeaway: Billions in revenue but little regarding Tim Cook is under increasing pressure to become Steve Jobs.
  • Coca-Cola – Takeaway: selling sugar is becoming more difficult in an increasingly health conscious world. Maybe smaller portion sizes and a new marketing campaign will work?
  • Amazon – Takeaway: Jeff Bezos remains an enigma. Will the company outspend its earnings or will it put something away for a rainy day?  Should the company be split in two?
  • Google – Takeaway: Appears unstoppable. It is essentially an advertising platform masquerading as a search engine.

In economic news, gross domestic product (GDP) in the 3rd quarter came in above analysts’ expectations.  Also released this week was new home sales in September, which came in higher by 3.1% from August and is the second strongest month since 2008.  On a year-over-year basis, the September pace was up 29.8%.  These measures will undoubtedly give ammunition to those voting members of the Federal Reserve who wish to hike interest rates in December.

Another sign things are heating up is the pace of merger and acquisition of activity.  On the eve of this presidential election, one would think companies might put plans on hold and wait for clarity on matters like antitrust policy.  Not this year.  U.S. companies have struck a total of $248.9B in merger agreements this month, surpassing the previous record of $240B in July 2015.  Another large deal announced this week was between Qualcomm and NXP Semiconductors for $47 billion.  Although not yet announced, a recent rumor suggests General Electric is in talks to buy Baker Hughes in a potential $30B+ deal.

In company news, both Apple and Microsoft had special events this week.  Apple took the time to introduce its new MacBook Pro laptop line which for many fans was a little too incremental an upgrade.  On the other hand, Microsoft introduced a pretty nifty new surface computer which is pretty innovative.  It’s strange how these two companies have slowly switched places over the past few years.  It’s as if Tim Cook has become Steve Ballmer and Satya Nadella has turned into Steve Jobs.

There’s a good chance you’re aware of the hot water Yahoo has been in recently regarding spying on its users at the behest of the U.S. government.  In closing, I’d like to make you aware of another program you may not be aware of (yet).  It seems AT&T implemented a program dating back to 2007 linked to selling vital user information to law enforcement agencies for millions of dollars.  The program was called “Project Hemisphere” and warrantlessly bundles information on users, including their locations, and sells them to various agencies.  If you were wondering, privacy is now and forever dead.  If you’d like to learn more about how this program works, you can read more about it here, here, and here.  Now you know.

October 28, 2016

The Bank of Starbucks

Oct 21, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With seventeen days to go before the election, investors are cautious.  Earnings announcements took center stage, as the first wave of companies reported earnings.  Many are doing better than expected, albeit expectations are quite low.  Others are struggling to find growth in an environment where costs are increasing faster than sales.  With a heightened sense of uncertainty, underperforming companies are not being given the benefit of the doubt.  I expect we’ll see more of this behavior over the next few weeks as the bulk of earnings announcements remain ahead.  Coupled with a presidential election that has frayed the nerves of voters, the next few weeks could be emotionally taxing.

There was an uptick in merger and acquisition activity this week with two big deals in the works.  In a low growth environment, like we’ve experienced the past six quarters, it is exceedingly hard to grow revenues organically.  That is to say, marketing products can only go so far if consumers aren’t buying.  For these companies, one alternative is to literally buy growth.  Buying a competitor is one way to increase market share and sales, create synergies and lower costs.  Another strategy is to add a complementary business as a way of diversifying growth in a faster-growing industry.  This week we saw examples of each of these types of activities.  British American Tobacco is in talks with Reynolds American in a deal worth $47 billion.  Late this week, another story emerged of an acquisition of Time Warner by AT&T for upwards of $71 billion.  Presumably, AT&T wants the content that Time Warner could provide.  While deals such as these make sense, it is often more difficult than expected to merge companies’ cultures and management.  A strong regulatory environment is another hurdle these companies face.  So despite tremendous potential, not all mergers work as intended.  These two will no doubt be scrutinized in the weeks to come.

In other company news, it seems Apple may be shuttering plans to build a car.  For the past couple of years, rumors have abounded that Apple was secretively working on a car to rival Tesla.  This week we learned that Project Titan is moving in a new direction, with software now constituting the main focus of the program.  Hundreds of employees have been reassigned, laid off or have voluntarily departed.  As for Tesla, you have to give it to Elon Musk.  Despite recent setbacks with its autopilot feature, it was announced this week that every Tesla car will now come equipped with enhanced autopilot hardware (not just the high-end cars).  In the face of rising criticism, the company appears to be betting its future on the success of autopilot and the autonomous car.

We’re now ten months into the year and you may be wondering what sectors have performed the best.  One of the best-performing sectors, which may come as a surprise, is energy.  The energy sector, which did poorly much of 2014 and all of 2015, has done very well this year.  Oil prices bottomed in the first quarter and have risen consistently throughout the year.  Energy companies scaled back production as prices declined and only recently began bringing production back online.  The lag in production and supply has caused prices to rise considerably from a low of $27 per barrel in February to just under $50 per barrel today.  The second best performing sector is utilities, which likely did well because of the dividends they pay.  In uncertain times, and particularly in a low-interest-rate environment, investors needing income go to utility companies.  The third best performing sector is technology, which probably doesn’t come as much of a surprise.  When you think of growth, which sector comes to mind?  The weakest performers this year have been consumer services and healthcare.

The story of the week is about Starbucks.  No, it’s not about coffee or coffee prices (at least not directly).  I came across a story earlier this year that made a claim I found astounding.  The title of the story was, “Starbucks Has More Customer Deposits than Many Banks.”  The Wall Street Journal, using data from Standard & Poor’s Global Market Intelligence, discovered that Starbucks held more than $1.2 billion for customers in the first quarter of 2016.  This figure represents funds that were deposited to reloadable prepaid cards, as well as, money that had been added to accounts on Starbucks’ mobile app.  Starbucks benefits in a number of ways from holding such significant amount of deposits.  It mainly gives them access to a large and cheap amount of capital that they can use to further the company’s growth.  Unlike banks, Starbucks can avoid the expense of paying interest on the balances.  It also isn’t required to insure the deposits with the Federal Deposit Insurance Company (FDIC).  Now you know.

October 21, 2016

Samsung Issues Heating Up

Oct 14, 2016   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Another week closer to the presidential election and the market didn’t have much to tell us.  With earnings announcements set to start in earnest next week, it seems investors are on hold.  We had a few early announcers this week and if we extrapolate their reports we’d find a mixed picture indeed.  A lot is riding on the next few weeks and it’s not just the run up to the polls I’m hinting at.

In company news, let’s start with Samsung.  You have probably heard by now the company is having problems with its phones catching fire and in some cases causing injury.  The company announced this week it is halting production of the Galaxy Note 7 and does not plan on resuming its production.  If you happen to have one of these devices, you are advised to turn it in to your wireless carrier for a full refund or exchange it for another phone.  The beneficiary of this unfortunate problem could be Apple, with one analyst estimating it could lead to eight million additional iPhones being sold.

In other news, Germany said nein to internal combustion engines this week.  The German Bundesrat voted to ban vehicles powered by gas and diesel by 2030.  This resolution will place more pressure on the European Commission to promote zero-emission cars throughout the region.  Volkswagen, Mercedes-Benz, and BMW are all working hard to bring electric cars to market and given the ease of which this bill passed, it seems likely it was with their support.  Not to fear, the ban is solely for the sale of new cars after that date.  If you happen to have a “vintage” gasoline powered car, you’ll still be able to drive it (if you happen to move to Germany).

It may be hard to believe, but Facebook has only been around since 2004.  And while it remains wildly popular, the latest research suggests it is becoming less relevant with teens.  Piper Jaffray survey shows a decline in usage from 60% last spring to just 52% this fall.  While still a large percentage, the speed of the decline is surprising.  It seems teens are much more interested in Snapchat and Instagram these days.  Some analysts believe monetization from Instagram could eventually top that of Facebook.  Before you scold me for stating the obvious, you already know this and a simple Google search indicates this trend has been going on since at least 2013.  Two frequently cited reasons are that there are too many adults on Facebook and teens are tired of the drama.

Got milk?  In closing, it was reported this week that America’s dairy farmers have an oversupply of 43 million gallons or almost 370 million pounds of the stuff.  That is to say, 43 million gallons have been dumped in just the first eight months of this year, resulting in lots of farmers crying over spilled milk.  The glut has cut milk’s price by 22% since spring, to $16.39 per cwt (hundredweight or hundred pounds).  At this price, some farmers can’t afford to truck the dairy to market.  From the early 1980’s through the mid 90’s the price stayed around $12.50 per cwt.  If we adjust that price for inflation, the price in today’s dollars would be around $28 per cwt or approximately 70% higher than it is today.  If you know a dairy farmer, he may need a hug.  Now you know.

October 14, 2016

Is Someone Reading Your Emails?

Oct 7, 2016   //   by Marc Henn   //   Weekly Market Update  //  No Comments

First and foremost, our thoughts and prayers go out to those who are being impacted by Hurricane Matthew.

It was a busy week. The jobs number for September was reported on Friday and came in below expectations at 156,000 new jobs being created, while August’s number was revised upward from 151,000 to 167,000, and the unemployment rate rose slightly to 5.0%. More importantly, however, is that since the beginning of the year, 3,000,000 people have entered back into the work “pool”. The ISM services index also jumped in September which sent interest rates higher. This, along with the jobs number, still puts in play a December interest rate hike by the Federal Reserve.

In company news, Reuters reported on Monday that Yahoo built a secret customer program to search incoming emails for specific information at the request of U.S. intelligence officials. CEO Marisa Mayer’s compliance with the directive caused friction within the company and is rumored to have led to the departure of then Chief Information Security Officer Alex Stamos. In response to the story, the company stated, “Yahoo is a law abiding company, and complies with the laws of the United States”. Following this report, operators of Microsoft and Google email services issued statements stating they are safe from this type of intrusion. Separately, Sears is looking for bidders for its Craftsman brand. The list of potential buyers includes Black & Decker, Techtronic Industries and Husqvarna. Google also had multiple announcements including its new Pixel phones, Daydream View headsets, Chromecast Ultra and Google Home.

Overseas, the British Pound hit a 30+ year low against the U.S. Dollar as the Brexit decision continues to loom over that country. In addition, the European Central Bank will likely wind down its bond purchase program ahead of schedule. Global interest rates edged higher on the news. European bank woes have been highlighted by the Deutsche Bank situation and calls into question the use of negative interest rates to boost the economy in Europe. A quote by bond trader Jeffrey Gundlach sums it up nicely, “You cannot save your faltering economy by killing your financial system and one of the clear poster children for this is Deutsche Bank’s stock price. If you keep these negative interest rate policies for a sufficient future period of time you are going to bankrupt these banks”.

In other news, in response to the regular renewal of sanctions against Russia over Ukraine, Russia this week suspended a plutonium pact with the U.S., put on hold a research agreement and terminated a uranium conversion deal. Also, U.S. regulations to clamp down on companies trying to reduce taxes by relocating abroad could be finalized shortly. The so-called “anti-inversion” rules would make it difficult to shift profits overseas.

For the story of the week, many of you, as I can too, remember when stocks traded in 1/8 increments. Fifteen years ago the decimalization of stock trading was introduced and we began quoting stock prices in pennies. Earlier this week, a pilot program to widen “tick sizes” to five-cent increments rather than pennies began. This move was set in motion by the SEC a few years ago and is designed to see whether nickel increments can boost trading in smaller-cap stocks. The program began this week with 10 stocks and by the end of October will include about 1,200 companies. Higher trading costs is definitely a possible downside to this as the liquidity benefits to smaller companies seems overstated. Now you know.

October 7, 2016

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