Earnings have come in pretty well, but the news on the economy remains dreary despite the cheerleaders in the financial media.
The markets rally on the strong earnings reports combined with a subdued outlook for economic growth. Why? This guarantees Federal Reserve Board money printing. As a result both the Dow Jones Industrial Average and the NASDAQ Compositejumped nearly one percent last week as evidenced by the graphs above.
The Markets & Economy
The theme we have beaten home here in these weekly write ups of a strong stock market combined with a blasé economy has now reached the mass media. People just don’t understand how the economy could actually shrink in the 4th quarter of last year even as stocks rose to 5-year plus highs.
On top of that the monthly report on unemployment showed the rate ticked up to 7.9%, and frankly there is no sign whether it is hours worked or hourly income, that demand for labor is anything but running in place.
The media does not understand and politicians especially in the Obama administration cannot figure out how this can be. Those of you reading these weekly pieces though understand the elaborate Ponzi scheme which your federal government is engaged in through its friends at theFederal Reserve.
The Fed has bought over 3 Trillion dollars in assets over the past four years. Additionally, they are currently purchasing 85 billion dollars of stuff (mostly treasuries, but the money finds its way into stocks etc…) each and every month. This is roughly offsetting the budget deficit run by our government of over One Trillion dollars per year.
On top of this the government reports de minimus inflation, Thus the Treasury is able to pay virtually zero interest on these borrowings. Does anyone think this is causing disruptions in our capital markets? Of course it is, and one of them is for firms to focus on financial engineering rather than invest for growth. Growth produces profits which are taxed at high rates. Borrowing money to buy your stock produces a tax break on interest expense and higher share prices without necessarily creating economic value (although the perceive wealth impact is a plus).
And the beat goes on. The economy is going nowhere (see chart below), while stock prices are getting inadvertent support from what will someday be seen to be disastrous monetary and fiscal policy. Printing money has its limits and our politicians do not understand them, but someday they will. In the meantime stocks paying dividends will especially do well in this environment.
What to Expect This Week
With last week’s twin reports of lower growth and higher unemployment, the debate about the economic outlook for 2013 has returned. While Washington DC is embroiled in issues such as gun control and immigration reform, the economy is being ignored except for the repeated attempts by the Obama administration to convince the media we need higher taxes.
Quite simply these people are clueless, but with the elections over with they are now free to say what they would actually like to do. Hopefully, divided government will serve to create a stalemate in policy as that is the best hope at this point.
The weekly update from the Economic Cycle Research Institute shows a dip in their numbers (see chart below), but hardly a disaster. Today’s news from Europe, where their markets are declining precipitously, remind us that they have not solved in any shape, manner or form their economic issues. In fact, Europe has fallen back into recession, and their central bank is and has been too tight. No doubt thanks to the Germans who see the risks of doing what our own Federal Reserve is happy to do daily - and that is print money and hope.
SYMBOL: R
Shares of Ryder Systems traded substantially higher after reporting better than expected quarterly earnings last week. The Company earned $1.17 per share, which was 7 cents higher than consensus estimates, as revenues grew by nearly 3 percent from the previous year. Management also raised earnings per share guidance for 2013 to a range of $4.70 to $4.85, higher than consensus numbers of $4.57 per share.
On the conference call with investors, new CEO Robert Sanchez was very positive about business conditions. The Company was able to extend far more leases on their trucks than Wall Street was looking for. Management did decide to pause its share repurchase plan as they look to keep plenty of financial flexibility for the next year, although we believe the Company will start to buy back shares within the 12 months.
Shares of Ryder got a nice pop on these better than expected results. Ryder is a great barometer of the domestic economy. We are encouraged by the progress management has made. The transportation sector has been one of the hottest industries in this market, and we look for Ryder to take a leadership position. We still believe the shares will reach $70 by the end of this year.
Three-Month Chart
SYMBOL: BX
Shares of Blackstonetraded up nearly 10 percent after reporting better than expected fourth-quarter earnings last week. The Company experienced a 14.3 rise in its investment portfolio as the domestic real estate market continues to improve. Management also has seen much better performance in their capital markets as the Fed continues to keep rates at historically low levels.
This is the type of market in which companies like Blackstone should be able produce excess returns. Total assets under management rose to $210 billion, which was 3 percent higher than the third quarter of this year. Moreover, the Company has had no problem attracting capital, and has more than $35 billion in fresh powder to make some new private equity investments.
As long as these market conditions continue the shares of Blackstone will continue to rally. The valuation is still conservative, even though the financial stocks have come into favor with investors. We expect the news flow to continue to improve from Blackstone, which should drive the share price to $24 within the next 12 months.
Three-Month Chart
SYMBOL: EMC
EMC reported solid fourth-quarter earnings last week, but the shares fell due to its 80 percent stake in VMWare, which had a less than stellar quarter. The Company earned $0.54 per share, which was 2 cents higher than consensus estimates. Also revenues grew by nearly 8 percent to $6.01 billion from the previous year. The management team also maintained its earnings guidance for 2013.
The Company still sees robust growth for 2013, even though some analysts have been negative in the cloud computing and data analytics market. Management believes that IT spending will still grow at 3 percent this year, and the Company will be able to grow revenues by 8 percent. There might be some slowdown in the government spending, although that should be offset by a better global economy.
EMC remains our top pick in the large cap technology sector, and we think the weakness at VMWare will be short-lived. At these levels EMC has to be an attractive takeover candidate, so we wouldn’t be surprised to hear some rumors of a takeover within the next six months. We expect better global economic conditions will drive the shares to $30 by the end of this year.
Three-Month Chart
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