Another quiet week in early January as the earnings season is about to gear up.
As the charts above illustrate, the Dow Jones Industrial Average gained .4% last week while the NASDAQ Composite moved higher by just .7%.
The Markets & Economy
Stock prices are stuck in a rut. They are always waiting for something - whether it be an indication of the momentum in the economy, earnings or the various issues surrounding the manner in which the federal government is financing and/or influencing the economy.
Accordingly, while the news on the economic front continues to suggest sluggish growth, and with estimates for the growth rate in last year’s fourth quarter continuing to collapse to below 1% now, stock prices are not being impacted because of the continued asset purchase program by the Federal Reserve.
The Fed is buying 85 billion dollars of treasury bonds each month, which more or less offsets the borrowing needs of the federal government. This period of calm though is going to be interrupted by the forthcoming debt limit negotiations. Currently, Congress has authorized no more borrowing above the 16.4 Trillion dollar limit.
President Obama for his part wishes to simply raise the limit and continue on this path under the assumption that the debt bomb is of no consequence. If anything, he wishes to raise taxes again (but only on the so-called rich). This is a prescription for very slow growth and eventually a debt crisis here in America.
Just look at the chart below. It graphically shows the relationship between those seeking disability status versus the working population. Under Obama we are now breaking records, and since the recession bottomed over four years ago there have been more people joining disability than have found new jobs. This has gone on long enough to conclude something terrible is going on with our nation’s economic policies.
We cannot continue to engage in sub-par economic growth, while at the same time increasing the number of people both absolutely and proportionately who are dependent on government assistance as a way of life. To do so will create social unrest and economic stagnation. We are seeing indications of both.
Over the next six weeks the show down in DC will move from under the surface to one which dominates the news. The markets simply cannot get away from the policy makers in Washington DC trying to manipulate the economy through taxes, regulations and subsidies. It’s a mess.
On the other hand, corporations do understand this and have prepared by pulling in their horns, which means slowing investment and employment plans. This is good for stockholders and investors, but not good for society. Eventually the two must come into sync but for now, it’s great to be in stocks.
What to Expect This Week
Earnings and economic data will pour out in abundance. In addition, the talk this morning is that Apple is having a tough quarter with its new phone. This will hurt NASDAQ, Apple and its suppliers until the Company can give color on its upcoming earnings report on the 24th of January.
As we said above, most economists see a sub 1% growth rate for last year’s 4th quarter. Given this year’s tax hikes and the talk of more, don’t expect that number to get any higher as we get into 2013.
The weekly data from the Economic Cycle Research Institute does show their index to be at 18 month highs. They still think we are in recession, but their own data does not help them convince others. Nevertheless, their analysis does demand respect given their excellent track record.
SYMBOL: BA
Boeing was in the news last week as the 787 Dreamliner has had some operational issues. An empty 787 had a fire in its battery panel early in the week, and there were several stories of gas leaks in other 787’s. The stock initially sold off on these reports, but the share price did recover and is only trading a few dollars below its 52-week high.
While these stories are clearly not positive, they aren’t unprecedented with the launch of new aircrafts. This is the most technologically advanced commercial plane ever created so some snafus had to be expected. We believe management will make the necessary changes as soon as possible. We do not believe this will affect the demand for the 787 Dreamliners, as these small issues will be dealt with shortly. Airlines need the energy efficiency that the 787 offers and we haven’t heard of any orders being delayed or cancelled for the 787’s.
Boeing still has a conservative valuation, trading at just 13 times this year’s earnings, and with a dividend yield of 2.6 percent. The Company expects to triple its production of 787’s this year, and more than 800 Dreamliners are in the Company’s backlog. We expect the shares will be range-bound as these problems stay in the headlines, although once the Company moves beyond these issues we believe the shares will reach $100 by the end of this year.
Three-Month Chart
SYMBOL: EPD
Enterprise Products Partners not only raised its quarterly distribution this morning, but the SeawayPipeline was completed this weekend. The Company raised its quarterly distribution by 6.5 percent over the previous year to $0.66 per common unit, and it represents the 34th consecutive quarterly increase. We look for this trend to continue, and Enterprise remains a core holding for all of our clients.
The completion of the Seaway Pipeline also is a big deal for Enterprise. This will free up the bottleneck between Cushing, Oklahoma and the Texas Gulf Coast. It’s a 500 mile pipeline that will increase capacity to 250,000 barrels of oil per day between Texas and Oklahoma. This pipeline should be running at 100 percent starting today, and is another sign of the Company’s financial strength given it is able to take on these new projects.
Shares of Enterprise have performed extremely well over the last couple of years, and we believe the Company is poised for solid growth through 2015. The valuation is still conservative, and we see growth opportunities all over the place at the Company. We believe the shares will reach $65 by the end of this year.
Three-Month Chart
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