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Wanted: Market Seeking Catalyst in 2Q13 Earnings
This week marks the unofficial beginning of second-quarter earnings season as Oracle Corporation (ORCL) reports. Next week, it’s NIKE, Inc. (NKE).
These two benchmark companies offer the first glimpse of business conditions for multinational corporations. What they report is material.
Last quarter, NIKE surprised Wall Street with excellent relative growth in revenues and earnings, particularly in the North American market. Oracle came in just under consensus. The stock’s been treading water for the last several months.
Corporations have been coy with their earnings guidance, both out of the collective uncertainty regarding the economy and to make it easier to beat the Street. It’s always a delicate dance that corporations play with investors. Earnings are definitely managed, which is why it’s important to look at cash flow and other financial metrics to get a better understanding of a company’s performance.
If there’s one trend apparent in the financial results of large corporations, it’s that balance sheets have been getting stronger. And this bodes extremely well for dividend-seeking investors. I have a strong inclination this earnings season that we’re going to see continued increases in dividends and expanded share buyback programs to pay for them.
Generally speaking, I wouldn’t be buying … Read More
Breakdown: U.S. Economy and Its Cycles in 18 Brief Points
In a fascinating work on long-run economic cycles, J. Anthony Boeckh’s book The Great Reflation offers up some poignant research on the U.S. economy and its cycles.
The Great Reflation is a non-political, historical breakdown of inflation, monetary and fiscal policies, interest rates, and long-wave economic theory. It was completed in 2010 and made several predictions on the U.S. economy that have turned out to be correct so far.
Boeckh, former publisher of the Bank Credit Analyst, delves into past financial manias, asset inflation bubbles, asset allocation for the aftermath, the U.S. dollar decline, commodities, and the monetary future of the stock market and the U.S. economy.
Here is a summation of Boeckh’s observations:
1. The global financial system will always remain flawed and subject to price inflation and bubbles, so long as it is based on fiat paper money.
2. Before 1914, most Western countries had a monetary regime that legally restricted central bank money creation based on its holdings of gold.
3. Average interest rates fell throughout the 100 years leading up to 1914.
4. In the absence of a financial system based on discipline and restraint, all anchorless fiat money systems (especially the U.S. economy) are destined … Read More
Equity Market Super Stock Adding Up to Solid Returns
One company I consistently like for long-term investors looking for dividend payments is PepsiCo, Inc. (NYSE/PEP).
This is the kind of company that can be put into retirement accounts and held for long periods of time with dividend reinvestment.
The equity market has been very kind to PepsiCo since the beginning of this year. Like many blue chips, it has ridden a wave of enthusiasm by institutional investors looking to bid the equity market with the safest names.
PepsiCo offers safety as a corporation with an array of beverage products that are sold worldwide. The many brands that the company maintains are complemented by its snack business. The two businesses go hand-in-hand.
As a multinational company, currency translation plays a big role in its numbers. In the first quarter of 2013, organic revenue growth was a solid 4.4%, but after currency translation, this fell to a mere one percent.
The company’s Americas Foods division was the highlight, producing organic revenue growth of six percent (five percent after currency translation). PepsiCo experienced business growth in all its Americas Foods segments, which include Frito-Lay North America, Quaker Foods North America, and Latin America Foods.
PepsiCo’s first-quarter financial results beat consensus, and … Read More
Big Investors Still Buying Big-Caps; Will They Be Right?
When it comes to the equity market, the institutional mindset is useful; it’s equally as important as changes in Federal Reserve policy.
While examining views and portfolios of many large, buy-side institutions, I’ve been reading what could only be described as unscientific cautious optimism for the U.S. economy.
There is an expectation to further accumulate the equity market’s existing winners based on earnings growth and valuations. The buy-side is paid to play, but I read many views with these intentions.
This is including corporations like Wal-Mart Stores, Inc. (NYSE/WMT), Johnson & Johnson (NYSE/JNJ), PepsiCo, Inc. (NYSE/PEP), The Home Depot, Inc. (NYSE/HD), International Business Machines Corporation (NYSE/IBM), and even Berkshire Hathaway, Inc. (NYSE/BRK-A).
Sticking with the equity market’s existing winners does make sense for institutional buyers for a number of reasons: liquidity, earnings reliability, growing dividends, very strong balance sheets, and window dressing. Big investors don’t want to look like they’ve missed the equity market’s top stocks.
Everybody knows what can go wrong, but what’s most important for investors is how you structure your portfolio to deal with the investment risk.
Because of the equity market’s stunning performance since the beginning of the year, I view investment risk as … Read More
This Year Solar Is Tops, Precious Metals the Dogs
As we approach the mid-point of the year, U.S. stocks continue to fare well with the annualized return of the Dow at 42% and the S&P 500 at 39%. While I have long been skeptical of the idea of stocks continuing at their current pace, you never know, as trading can be irrational, based on my stock analysis. Just think back to late 1999 and early 2000, prior to the technology implosion.
As my stock analysis suggests, you know things may be irrational when the Nikkei 225 in Japan is up over 70% during the last six months prior to a more than seven-percent correction on May 23 and 3.2% on May 27. Japanese stocks could further correct, as I’m not convinced the economy in Japan is guaranteed to grow consistently, despite the steady injection of easy money, based on my stock analysis. (Read “Japan Not Home-Free Despite Strong GDP.”)
A closer look at some of the sector performances so far this year shows gold and silver mining investments are faring the worst, with the gold mining sector down nearly 33% this year and its silver counterpart down a whopping 38%, according to data from Barchart.com. At this … Read More
Stock Advisor Sentiment Suggests Sell-Off Ahead
As the key stock indices continue to climb higher, optimism amongst investors and stock advisors rises to a dangerous level.
According to the Advisor Sentiment tracked by Investors Intelligence, an indicator I follow to gauge optimism in the stock market, the number of stock advisors who are bullish towards key stock indices is at its highest since April of 2011. (Source: Investors Intelligence, May 22, 2013.) To bring this into perspective, in April of 2011, the key stock indices like the S&P 500 started to decline, dropping nearly 20% through October of that year.
The stock market is becoming very overbought and very overpriced. It’s not a matter of “if” the market faces a major set-back, but “when.”
The U.S. economy continues to struggle and early indicators of economic slowdown are flashing warning signs. Consider the Business Outlook Survey by the Federal Reserve Bank of Philadelphia, which provides an outlook for manufacturing activity in the Philadelphia area. The survey indicates demand has been weak, with new orders and shipments declining and inventories building up. (Source: Federal Reserve Bank of Philadelphia, May 16, 2013.)
The index of current manufacturing activity in the Philadelphia region registered at negative 5.3 in May compared … Read More
Federal Reserve’s Quantitative Easing Making U.S. Economy Fundamentally Weak?
While testifying in front of the Joint Economic Committee in Washington regarding monetary policy and the economic outlook of the U.S. economy, the Chairman of the Federal Reserve, Ben Bernanke, said yesterday, “…the committee has said that it will continue its securities purchase until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “The Economic Outlook,” Board of Governors of the Federal Reserve System, May 22, 2013.) In other words, the Federal Reserve has made it clear, once again: it will not stop quantitative easing until the unemployment rate comes down.
The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.
I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.
First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed … Read More
This Stock’s 24% Year-to-Date Gain Signaling a Buy Opportunity?
“Opportunity cost”—it’s a phrase used in microeconomic theory to denote the costs that are forgone by not having your resources in the highest returning assets.
It is a phrase that’s pertinent to the stock market.
Without question, I remain completely taken aback by what has transpired with the stock market since the beginning of the year.
Looking at the numbers, not being invested in many corporations has been costly.
Excluding the reasons why, the simple fact is that the Dow Jones Industrial Average is up 16% since the beginning of the year (not including dividends).
The S&P 500 is up 15.7%. The NASDAQ Composite is up 14.8% and the Russell 2000, an index of small-caps, is up 16.6% (not including dividends).
I think this stock market can smell the end of quantitative easing.
More meaningful, however, is the Federal Reserve’s policy regarding interest rates, which are going to continue to be low for the near future, as it has been made very clear.
This is a huge, perhaps neglected, certainty for the stock market and corporations.
Making the case for being a buyer in this market is extremely difficult. Institutional investors have already placed their bets and a lot … Read More
The Great Big Gamble: Can a Little Earnings Growth Turn into a Lot?
At a recent dinner with old pals, the conversation migrated from cars, sports, food, and family to the economy and the unbelievable performance of the stock market.
Everyone said that in their respective professions (a manufacturing sales manager, an insurance adjuster, a foodservice executive, and a bank manager) business conditions were flat.
I’ve heard this from many people. Countless businesses are holding steady, but despite profound efforts, they can’t generate meaningful top-line growth.
Yet, the stock market just hit an all-time record high on modest first-quarter earnings results.
Quite obviously, this stock market is overbought.
Wall Street and institutional investors are in the business of betting on the future using someone else’s money.
Corporate earnings over the last several quarters have held up. But the earnings have mostly been squeezed out of worker productivity and cost controls.
Blue-chip balance sheets continue to grow stronger, and the lack of certainty in the global marketplace has dampened the willingness of corporations to make new investments.
The result is continued growth in quarterly dividends and share buybacks; and this is one of the many reasons why institutional investors have been buying this stock market—there is nowhere else to go.
I think it is … Read More
How a Company’s Bean Counters Earn Their Money
Reading financial documents is like reading a textbook on microeconomics; there’s a lot to learn, but you can pass out from boredom.
The U.S. Securities and Exchange Commission (SEC) requires a publicly traded company to file what’s called a “form 10-Q.” This is a more in-depth document that describes the quarterly performance of a company’s specific operations, along with a more thorough review of its earnings performance. While time-consuming, these reports are very much worth reading, even if you aren’t a shareholder.
The Walt Disney Company (NYSE/DIS) is a company that’s on my list of important benchmark stocks. Disney’s operations are representative of the media and entertainment industry which, for better or worse, is a huge portion of the global economy.
Disney hinted that business was getting better in its fiscal first quarter of 2013 (ended December 29, 2012) due to theme parks. The company’s latest 10-Q for quarterly earnings ended March 30, 2013 proved it.
According to the company, fiscal 2013 second-quarter sales grew to $10.6 billion, up solidly from $9.6 billion in the comparable quarter last year.
Earnings improved significantly to $1.5 billion, up from earnings of $1.1 billion. Fully diluted earnings per share were commensurate to … Read More
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