January 27, 2012: Market Update

$100 Billion and Counting

Has the tide turned this week?  For the first time in over a month, the market looks to be headed for a slightly lower finish.  We are right in the middle of earnings season and while some companies have reported stellar earnings, many are openly cautious about the first half of 2012.  To sum up the week, the markets closed in lackluster trading, weighed by Greece’s failed debt restructuring talks and a mixed bag of earnings reports.

The debt restructuring talks in Greece continued this week despite what seems like months of ongoing “talks” and an insistence that all parties involved are “very close” to striking a deal.  This week was a little different though in that it raised an interesting question.  If private parties are expected to write off fifty percent of the Greek debt they hold, isn’t it fair to expect the European Central Bank (ECB) to do the same?  It turns out that the ECB expects full repayment and as a creditor believes that they come ahead of all other creditors.  This is the first time this question has been raised and poses an interesting quandary for central banks around the world.  Time is running out for Greece with the recognition that a number of EU nations are no longer in the mood to hand Greece more money knowing full well that it cannot be repaid.

Aside from earnings announcements, the other big news this week was the report from the latest Federal Open Market Committee (FOMC) meeting.  While many expected interest rates to stay low for a “prolonged time”, many took this to mean through 2013.  However, the Fed made clear this week that they intend to keep rates at or near zero percent through 2014, a full year longer than most had expected.  On the one hand, these low rates are a form of stimulus and generally help the stock market.  On the other hand, it is an acknowledgement that the economy is weaker than previously thought and still too feeble to stand on its own.  In addition, we learned that the fourth quarter gross domestic product (GDP) came in at 2.8% versus the 3.0% expected.  While this is higher than the 1.8% we saw in the third quarter of 2011, projections for 2012 are being revised lower.

Earnings announcements were the centerpiece this week.  There are simply too many companies to discuss in detail so let’s focus on just a handful.  Apple was by far the standout.  Not only did it eat its competitor’s collective lunch but it blew well past analysts’ expectations.  With cash approaching $100 billion, they are now the 58^th largest country in the world.  In other news, Starbucks announced good earnings with further plans of expansion in China and Latin America.  Domestically, they are looking into going further into food service and potentially expand into wine and alcohol.  Caterpillar was perhaps the most optimistic company to report this week.  According to management, there simply are no economic headwinds strong enough to slow down this company.  That’s a bold statement from a company that depends on global growth.  Other companies reported decent numbers but were less enthusiastic with their forward guidance.  For many, commodity costs are really cutting into their earnings even in cases where revenue growth is strong.  At the end of the day, this quarter is more about company specific news rather than broader industry or sector trends.

In closing, the story of the week is a puzzler.  Which is more valuable… the White House or a single Apple Store?  It turns out the White House wins, but just by a smidge.  Apple sells an annual average of $4,709 worth of merchandise per square foot (in FQ4) in its hundreds of stores around the world, while Zillow values the White house at $4,752 per square foot.  The runner-up is Tiffany’s which averages $2,974 per square foot.  There’s a tidbit of trivia for your next social event.

January 20, 2012: Market Update

Don’t Smile: It’s Not Quite a Kodak Moment

The market looks to finish just less than three hundred points higher this week.  Not bad for a week in which we received a mixed bag of earnings announcements. What tilted the playing field in our favor was a lack of news out of Europe and some generally favorable economic data suggesting things at home are improving.

Earnings announcements have been a minefield of uncertainty as companies tiptoe lightly around analysts’ expectations.  Those companies that lowered expectations in the weeks preceding the announcements are doing better than those that did not.  Intel comes to mind as having reduced their guidance a month ago, only to beat their lowered numbers this week.  Investors were happy that Intel “beat” and rewarded the company nicely.  Others that failed to lower expectations and reported disappointing earnings met the ire of analysts and were duly punished.  Some companies that come to mind are Google, Fifth Third Bank, Parker-Hannifin and Johnson Controls.  Forward guidance is another area that we’re watching closely and there’s simply no consensus.  Companies are reporting guidance from rosy to dire depending on the sector, industry or amount of exposure to Europe they have.  Thus far in 2012, the percentage of early reporters beating earnings estimates is, by a wide margin, the lowest in recent memory, reports Bloomberg.  It really is a mixed bag.

The economic picture looked a little better this week with several economic announcements showing improvement.

• January Empire State Survey: Manufacturing +13.48 vs. +10.5 expected, +9.5 prior.  New orders +13.7, +5.1 prior
• December Consumer Price Index: flat vs. +0.1 expected, flat in November.  Core CPI +0.1% vs. +0.1% expected, +0.2% in November
• Initial Jobless Claims: +50K to 352K vs. -14K consensus

While far from being out of the woods, the economy continues to make small steps toward recovery.

The big news this week was the announcement that Eastman Kodak has filed for Chapter 11 bankruptcy protection.  The 132 year old company has been struggling for some time as it failed to transform with the changing times.  Ironically, it was the digital sensor they invented that would go on to later take the place of traditional film and make the company largely irrelevant to consumers today.  While it does have a war chest of patents that could be worth billions of dollars, it is unlikely that the company will come out of bankruptcy like GM and Chrysler did just a few years ago.  More likely, the company will be sold piecemeal to the highest bidder.  As one of the few remaining film shooters (by choice), this is a sad week.  Yet Kodak is just another in a long line of iconic brands that didn’t make the jump into the twenty-first century.

In closing, I came across a bit of trivia that I hadn’t seen before.  We all know that times have changed with the advent of computer trading.  Trading volumes ballooned over the past decade as high frequency trading became commonplace.  In fact, as recently as 2011, it was reported that computerized high-frequency trading made up about seventy percent of all trades.  But that’s not the shocking part.  The part that surprised me is that the average time a stock is held in the United States is only twenty-two seconds.  Foreign currency investments are held on average only thirty seconds.  I’m sure they would argue that their role is to provide liquidity since, in many regards, they have taken the place of market makers.  But it is also clear that their goals and objectives are quite different than that of the average investor.  This is something worth keeping in mind.  Now you know.

January 13, 2012: Market Update

Twinkies, May You Forever RIP

The market cooled off a little this week much like the weather did today.  Some of the buying we observed the first week of the year has subsided as investors take a wait and see approach to fourth quarter earnings announcements which start later next week and continue through the end of the month.  In addition, next week will be a short trading week with the markets closed Monday in observance of Martin Luther King, Jr. day.

We’ve gone some time now without talking about Greece.  In the fourth quarter last year, attention shifted to Spain and Italy with the fear of a weakening European Union.  However, behind the scenes Greece has been fervently trying to work out a deal with its creditor banks to write off at least fifty percent of its outstanding debt.  There is over $18 billion coming due in March and without further funds from the IMF, Greece will be forced to default.  We expect to hear a lot more about Greece in the coming weeks.  In other news, Europe’s ability to fight off its debt crisis was again thrown into doubt today when the euro hit its lowest level in over a year and borrowing costs rose on expectations that the debt of several countries would be downgraded by rating agency Standard & Poor’s.  By the end of the day, France had been downgraded a notch to AA with other country downgrades expected.

There was quite a bit of company news this week ahead of earnings.

• Starbucks rolled out a new “blonde roast” for non-hardcore coffee drinkers who prefer a milder tasting coffee.  I’ll admit, I tried it and came away less than enthusiastic, but then I’m probably not the demographic they’re going after since I prefer a bolder coffee flavor.
• Chevron is rumored to be close to making a major investment in an offshore gas field in Indonesia.  This move could bring Indonesia back into OPEC.
• McDonald’s extended its Olympic sponsorship to 2020, remaining one of the eleven top sponsors.  McDonald’s hopes the move will help it brand in fast-growing cities such as Sochi, Russia (2014 games) and Rio de Janeiro (2016 games).
• Apple’s share of the U.S. smartphone market surged in Q4, jumping from 26% to 43%.
• At the 2012 International CES (Consumer Electronics Show) this week, Qualcomm launched a platform for sharing media at home, announced chips supporting the Wi-Fi display standard and most importantly introduced Snapdragon processors aimed at the TV and media markets.

The economic news continues to be mixed.  Initial jobless claims came in higher than expected and December retail sales were lower than expected.  But the Fed’s Beige Book is increasingly optimistic, with “ongoing improvements” in conditions being reported from most districts.  In addition, January Reuters/UofM Consumer Sentiment was reported at 74 versus the 71.5 expected and 69.9 in December.  The glass remains half full.

In closing, I came across an interesting story on Monday.  However, by Wednesday it was being reported by most mainstream media outlets.  Yet for those who might not have heard it bears repeating.  Hostess Brands filed for Chapter 11 bankruptcy in Texas this week.  In its filing it revealed it owes creditors more than $1 billion.  The maker of Twinkies, Ho Hos, and Ding Dongs failed to find a buyer from a list of companies that included Kraft and Campbell Soup, according to reports.  It seems that, not unlike Eastman Kodak, it failed to change with the times.  This may not be the ultimate end for the Twinkie but its demise has been a long time coming.  Now you know.

January 6, 2012: Market Update

Ringing in the New Year

The markets got off to a good start this year.  Perhaps it was a little optimism mixed in with a little institutional reinvesting of cash.  Some key economic indicators came in better than expected and the jobless number continues to show improvement.  Issues in Europe, which have plagued the markets for some time now, were unusually quiet this week.  Regardless, we’re happy the year has started off on the right foot, albeit a little cautious about what lays ahead.

It seems that with the start of every New Year we’re bombarded with predictions for the coming year.  The pundits seem overly assured that their predictions are correct and remorseless in disparaging anyone who disagrees with them.  However, more often than not, those very predictions, which seemed unassailable just twelve months earlier, don’t seem to pan out.  In light of this observation, I came across a study which looked at the ten stocks with the highest “buy” and “outperform” ratings.  Over the course of 2011, these stocks lost 3.5% including dividends, even before taking into account trading costs and taxes.  For comparison sake, the S&P ended the year down only slightly.  Surprisingly, six of the top ten stocks actually lost double-digits with the median falling 12%.  It’s fun to watch the analysts on CNBC, but keep in mind that their collective track record has been less than stellar.

Along the same lines, it is around this time of year that you’ll hear “themes” being bandied about.  Although, they too seem like sure bets, the time horizon on some of these themes can be years if not decades.  Two that come to mind are the aging of the baby boomers and the rise of alternative energy, i.e. solar power and natural gas.  While both are incontrovertible, the first is happening in unexpected ways while the second is taking considerably longer to materialize.  What we’ve come to expect is that themes are valuable for their insight, albeit not for their timeliness.

As the economy muddles along, we continue to look for opportunities that present patient investors with reasonable rewards.  We’re in the process of reviewing our holdings and will look to make strategic changes to the portfolios in the weeks ahead.  Our dominant focus in 2012 will be on finding investments that can offer both capital preservation and safe income, whether that is in bonds or reliable dividend paying stocks.

Now for the story of the week, I have to issue an apology in advance.  It is a bit disturbing for those with delicate sensibilities.  You’ve been warned.  It turns out that Pepsi is being sued by an Illinois man who claims to have found a mouse in his Mountain Dew can in 2009.  Pepsi Co. has chosen a rather unusual defense.  Instead of insisting that it is impossible for this to have happened due to their spotless bottling facilities, etc.,  they chose to bring expert testimony that demonstrates “the mouse would have dissolved in the soda had it been in the can from the time of its bottling until the day the plaintiff drank it.”  This seems like a winning-the-battle-while-surrendering-the-war kind of strategy that hinges on the argument that Pepsi’s product is essentially a can of bright green/yellow battery acid.  It certainly makes me think twice about drinking Mountain Dew.  And now you know the rest of the story!