The stock market took a breather last week given the number of so-called macro issues to deal with as well as the usual “stuff” such as Federal Reserve Board meetings and employment reports, etc

 

 

As the charts above illustrate, both the Dow Jones Industrial Average and the NASDAQ Composite dropped around 2 percent for the week,

 but remain positive for their year to date performance.

The Markets & Economy

Did anyone ever think that Europe, and more specifically Greece, could mess things up any more than they have? It truly has become a joke over there with now nearly everyone envisioning the long-term future of a Europe without a Euro and including several sovereign countries repudiating their debt obligations.

This will not happen anytime soon, but everyone must realize that all of the shenanigans being played out in Europe are simply to allow the banks and investors time to organize their affairs (take that to mean their investments) to be able to absorb the new reality (which means valuations).

Just this morning, the markets have turned their full attention to Italy where their bond markets are in nearly the same position as Ireland and Portugal when they required bailouts. The scandalous Italian prime minister will soon either resign or be voted out. Again, this is merely an attempt to buy time to allow the financial system to position itself for the impact of an effective restructuring of Italian debt.

While the media is having a great time with this, the markets have largely discounted this fiasco. On the other hand, there will remain surprises as happened here in America where a financial company run by a former Goldman Sachs CEO and democrat Governor of New Jersey failed last week after making bets on European sovereign debt using 40 to 1 leverage. Is it any wonder that this man was voted out of office leaving New Jersey taxpayers with an 8 billion dollar budget shortfall? The real question is what could this man have been thinking? His actions have cast more uncertainty over the financial sector and are another reason to tread very carefully in that arena. Someone owns all of this bad debt, and you do not want to wake up one day and find out that you own stock in a company with such exposure.

Meanwhile back to our economy - the news continues to support the notion that no recession has occurred or is imminent. Last week’s employment data showed that the unemployment rate remains at 9% and private job creation continues, albeit at a disappointing rate (and with the help of the phantom adjustment called the birth/death adjustment that more than accounted for the entire gain in non-farm payrolls).

This current read on the economic data is confirmed by the latest view from the Economic Cycle Research Institute (see graph below), which shows the year over year growth rate improving to a minus 9.4. They firmly believe that 2012 will be a recession year so we will continue to watch their weekly numbers.

At this point however, the numbers merely indicate that the economy is moving forward very slowly with high productivity from those who are working. This continues to produce huge profits, dividends and other corporate financial activity that is making stocks the best asset choice, albeit one with quite a bit of daily volatility given the news headlines.

What to Expect This Week

 

Friday is Veteran’s Day, a federal holiday. While the stock market will be open, this should create a quiet ending to the week.

For the first four days of the week, the earnings season will be wrapping up. In addition, the dueling soap operas in Europe and who will default first will compete with our own focus on the results of the “super committee” in Washington DC.

Believe me, the super committee will not produce a substantive agreement. That can only be settled by the 2012 election. The only true purpose of the committee is to provide a fig leaf to kick the can down the road, and for both sides to be able to go their bases political supporters and try to elicit a political advantage. I doubt seriously the markets have high expectations, but might react to an outright failure, as concerns would mount that the United States debt would once again be downgraded.

SYMBOL:  BIIB

Biogen Idec reported better than expected third quarter earnings results recently and the Company continues to get encouraging news from its drugs to treat multiple sclerosis.  The Company earned $1.59 per share, which was a dime better than consensus estimates and 20 percent higher than last year.  Management also stuck with its conservative earnings guidance for the remainder of this year, that the Company will earn at least $5.70 per share.  We believe $6 per share is more likely.

The better than expected results were driven by the success of the Company’s multiple sclerosis division, which is now considered the best in the industry.  Sales of Tysabri surged 26 percent from the previous year as the drug continues to gain traction in the market.  Avonex sales were also strong, although the data the Company continues to release concerning its new treatment, BG-12 has investors excited.  Biogen is building the best multiple sclerosis treatment franchise in the world and their lead over the competition grows by the day.

Shares of Biogen have been a homerun for our clients and we believe the news will continue to improve at the Company.  This new management team has done a tremendous job of improving profitability, while building an industry-leading pipeline of new products.  Even though the stock has performed extremely well, we believe the valuation is still conservative and expect the shares to reach $140 within the next 12 months.

 Three-Month Chart

 

 

SYMBOL:  SE

 

Spectra Energy reported third quarter earnings results that matched Wall Street’s expectations and stated that they expect higher earnings in the fourth quarter.  The Company experienced 30 percent earnings growth from the previous year and earned $0.39 per share during the quarter.  Revenues also rose by 10 percent to $1.12 billion, which exceeded consensus estimates.

The earnings results were helped by higher natural gas prices, although the Company’s Western Canadian operations were the main growth driver.  The Western Canadian transmission segment posted a 24 percent increase in EBITDA during the quarter, and we believe this growth is sustainable.  Management also has done an effective job of controlling costs, and we don’t believe there is a better-run natural gas pipeline business in the industry.

Shares of Spectra are making new all-time highs and since one of its largest competitors was taken over recently, speculation of further industry consolidation should push the shares higher.  The shares currently yield 4 percent and we see very little downside to the shares at this level.  We believe the shares should reach $35 within the next 12 months, even more if the company is taken over.

 Three-Month Chart

 

SYMBOL:  PDC

 

Pioneer Drilling reported third quarter earnings results that exceeded our expectations last week, as the management team continues to grow its production services division.  Revenues grew by more than 10 percent from the second quarter and earnings per share rose from a loss last year to a gain of $0.11 per share.  Management also indicated that they see improving business conditions, which should lead to better than expected fourth quarter results.

On the conference call with investors CEO Stacy Locke stated that demand for their services steadily grew during the quarter and their production services division will continue to be a bigger part of the Company going forward.  Revenues from the division grew by nearly 60 percent from the previous year, and now account for 42 percent of the Company’s revenues.  The Company also issued more shares during the quarter, which gives the Company a much stronger balance sheet.

For some reason shares of Pioneer have been very volatile over the past three months, which is hard to explain given the Company’s strong balance sheet and growth opportunities.  We believe the volatility is unwarranted, and expect the shares will trade higher in coming months.  With business conditions improving, we believe the shares are undervalued and expect the shares will reach $15 within the next 12 months.

  Three-Month Chart

 

 

 

 

 

 

 

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www.mcintyreinvestments.net