Sunday, October 28, 2012

Mobile Devices, Corruption in China, U.S. Growth and the Baseball World Series; Let's Go Giants!

Last week, dynamics in the high profile mobile technology market included: 1) Apple (AAPL -0.9% for the week) – its earnings report disappointed some investors, and the pricing for its iPad Mini tablet was higher than expected, 2) Samsung Electronics (005930:KS -1.1% for the week) – its strong earnings results were driven by sales of smartphones (including the Galaxy S3) and flat panel displays, but smartphone market growth may slow in 2013, 3) Microsoft (MSFT -1.5% for the week) - released its Windows 8 operating system and a version of its Surface tablet offering, 4) Facebook (FB +21.9% for the week) – its earnings surprised investors with better than expected traction in mobile advertising and 5) as a sign of increasing competition, Apple, Google (via its recently acquired Motorola division), Microsoft and Samsung are major advertisers during this year’s Major League Baseball World Series.

In the U.S., the Commerce Department reported that third quarter GDP grew at a stronger than expected rate of 2% driven by consumer, defense and homebuilder spending. In China, the New York Times reported in “Billions in Hidden Riches for Family of Chinese Leaders” (October 25, 2012) that members of Prime Minister Wen Jiabao’s family had accumulated assets of over $2.7 billion since 2002, and the report “Illicit Financial Flows from China and the Role of Trade Mis-invoicing” (Oct 2012) by Global Financial Integrity said “the Chinese economy hemorrhaged $3.79 trillion in illicit financial outflows from 2000 through 2011. (Note: Last week, China blocked access to The New York Times website.)

MY TAKE
  • Regarding U.S. GDP growth, September’s results are positive, but questions to consideration include: 1) when will business-spending trends improve, and 2) are investor expectations for higher GDP growth levels unrealistic? 
  • Regarding China, corruption in that country is not new news, but the scale cited in reports likely exceeds most expectations – investors should proceed with caution. 
  • Regarding mobile devices, competition may provide consumers with increased product choices and lower prices, but investors should be aware of the potential impact of lower profit margins and market share shifts. In addition, the expanding use of Google’s Android operating system is worth tracking – it drives many Samsung and Motorola mobile devices, as well as cameras by Nikon - another World Series advertiser.
  • Finally, with San Francisco leading in the World Series, let’s GO GIANTS!

Sunday, October 21, 2012

Another Week of Global Cross Currents to Consider

Observations from corporate earnings reports last week included: General Electric CEO Jeff Immelt “the overall environment remains challenging “ (GE -2.0% for the week), Microsoft – weakness in PC sales and Europe present challenges (MSFT –1.9% for the week), Google – moving into mobile is less lucrative for the company (GOOG -8.4% for the week), McDonalds CEO Don Thompson "It's been very rare that we've ever seen all of our major markets experiencing the impact of these (shifts in) global economies at the same time" (MCD -4.1% for the week), Honeywell CEO Dave Cote “we are planning for a continued challenging macro environment” (HON +3.8% for the week), IBM - Americas region was soft, Europe and Asia steady and Japan improved (IBM -6.8% for the week).

In China, the National Bureau of Statistics said gross domestic product (GDP) grew 7.4% during the third quarter, down from 7.6% in the second quarter- the slowest rate since early 2009. In the U.S., the Commerce Department said new home building activity increased 15% in August, up 34.8% from a year ago, significantly exceeding expectations.”


Additionally, economists Carmen Reinhart and Kenneth Rogoff, in a Bloomberg article said, “Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 %. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth. This disappointing performance shouldn’t be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted and that this pattern is evident across both history and countries.”


MY TAKE

  • Since publishing “This Time Is Different: Eight Centuries of Financial Folly” in 2009, Reinhart/Rogoff have consistently stated that the current economic recovery is different from typical recessions and will require an extended time period to resolve. 
  • Regarding corporate earnings results, 1) economic weakness, 2) the U.S. fiscal cliff and 3) unresolved global policy issues are among the concerns facing business managers. 
  • Regarding results from Microsoft and Google, information technology demand continues to de-emphasize desktop computers, but the shift toward tablets and smartphones presents business challenges as well.
  • Regarding weak China GDP results and the strength in U.S. home building, positive and negative economic crosscurrents will continue to challenge investors.

Sunday, October 14, 2012

A Debate, A Summit and Hundreds of Earnings Reports to Consider

Dynamics in Europe last week included: 1) the Nobel Peace Prize award to the European Union, 2) Germany Chancellor Angela Merkel’s visit to Greece where she said “These problems cannot be solved with one wave of a magic wand or one measure” while confronting 30,000 protesters in Athens and 3) Standard & Poor’s cutting Spain’s debt rating to one level above junk

In addition, 3rd quarter corporate earnings reporting started with 1) aluminum producer Alcoa cutting its growth forecast by 1% based on concerns about Chinese demand (AA down 4.4% for the week), 2) YUM Brands (parent of Taco Bell, KFC and Pizza Hut) also it concerns about weakness in China, but reported solid results (YUM up 5.2% for the week), 3) Wells Fargo surprised investors with weak results (WFC down 4.5% for the week) and 4) JP Morgan Chase CEO Jamie Dimon said the U.S. housing market had “turned the corner” (JPM down 0.11% for the week).

Also, it was notable that shares of Apple dropped 3.5% for the week as research firms IDC and Gartner Group reported that 3rd quarter personal computer sales declined 8%.

This week, a much broader set of companies sharing their results and forward outlook will include: Abbott Labs, American Express, ASML Holding, Baker Hughes, Bank of America, BlackRock, Citigroup, Coca-Cola, CSX, Danaher, eBay, General Electric, Goldman Sachs, Google, Halliburton, Honeywell, Intel, IBM, Johnson & Johnson, McDonald's, Microsoft, Morgan Stanley, PepsiCo, Philip Morris, Schlumberger, Tata Consultancy Services and Verizon.

MY TAKE
  • Regarding global policymakers, as they navigate their countries through once in a lifetime economic and political challenges, it is likely that “kick the can” policies will confront the forces of the financial markets.
  • Regarding earnings season, some investors expect companies to reduce forecasts and believe this information is “factored into the market”. However, a weakening trend is likely not as “factored in” as these investors may think.
  • Regarding Apple, the IDC/ Gartner Group data supports the market shifts to tablets, smartphones and cloud based computing – but how will Apple’s business model address an environment of increasing competition?
  • Finally, remember that 1) earnings season is a time to listen and learn and 2) many complex dynamics drive the direction of financial markets!

Sunday, October 7, 2012

On U.S Jobs, Growth and Jack Welch's Twitter Rant


On Friday, the U.S. Department of Labor provided its September employment report that included: 1) payrolls increased 114,000 - slightly better than expected, 2) unemployment dropped to 7.8%, and 3) the labor force participation rate had not improved, remaining at 63.5% - the lowest since Sept. 1981. 

In response to the news, former General Electric chairman/CEO of Jack Welch went viral with the following tweet "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers" (Chicago is President Obama’s hometown). Defenders of the report’s integrity included Bureau of Labor Statistics economist Steve Haugen who said, “The data are not manipulated for political reasons. I've been involved in the process myself for almost three decades. There's never been any political manipulation of the data, period.” Contributing to a confusing U.S. economic picture are improvements in consumer confidence and home loan applications, but a decline in factory orders during August – the 5.2% drop is the largest in three years.
 
Separately, in “Is U.S. Economic Growth Over? (September 2012), a provocative report by economist Robert Gordon of Northwestern University, he suggests that the U.S. standard of living will continue to benefit from innovation but more slowly than in the past, with headwinds including 1) the dynamics of globalization and the Internet; 2) cost inflation in higher education and poor secondary student performance; 3) environmental regulations and taxes; and 4) consumer and government debt. He also highlights that “Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living.”
 
MY TAKE
  • Regarding U.S. jobs, debates will continue on this topic during the presidential campaign, but the labor participation rate remains very problematic for the economy.
  • Regarding Jack Welch, his tweet is entertaining and cranky, so let’s move on.
  • Regarding Gordon’s report, it makes several good points, and we should remember that productivity improvements and population growth are fundamental economic drivers. Investors should continue to seek opportunities that benefit from these dynamics, as well as other characteristics such as price/valuation dislocation.