Stocks rebounded from the previous week. Earnings were not bad, and investors now appear to be focusing on this week’s Federal Reserve and European Central Bank meetings.
The prospect for lower rates in Europe and no indication of changing the money printing policies by the authorities has once again pushed stock prices upwards. Of course, rising dividends don’t hurt either.
As the charts above illustrate, the Dow Jones Industrial Average gained 1.1% held back by IBM ‘s earnings shortfall. The NASDAQ Composite jumped 2.3%
as Apple stabilized their share-price free fall with a dividend increase and
$50 billion stock buyback.
The Markets & Economy
The economic data both here in America and elsewhere continue to suggest a global economy growing well below its potential. Last Friday it was reported that our GDP grew at an annualized growth rate of 2.5% (see chart next page).
Sounds good, but it was much weaker than was estimated. Inventory replenishing itself added over a full percentage point to the growth rate, and many of the data points in the month of March suggest that the upcoming revisions will lower this growth rate even further. As it was reported, the estimate was well below the expected rate of 3.1% growth.
What’s disheartening is that the usual pattern of sequential weakness throughout the year seems to once again be in play. Europe remains a basket case, and Japan is so weak that they have embarked on a monetary easing policy which has made other central bankers blush with envy.
This is all reflected in the sovereign debt rally around the globe - even in the troubled countries of Europe (too many to list here). The money printing going on must go somewhere and right now it is to sovereign debt.
This morning’s news from Italy has further encouraged the stampede into European debt. It seems that after two months AFTER its election, Italy has put together a hodge podge government of left and right parties simply because they could. This kicked off a renewed bond rally which in turn has spurred the rally today in stocks globally.
All of this is to say that the dichotomy of the real economy is struggling while the financial markets of stocks and bonds bull-on is continuing. Many predict it will end badly someday. This problem is not of concern to the markets today. Perversely, a genuinely improving global economic backdrop would pose a risk to financial markets if monetary authorities viewed that as their chance to change policy. We are so far away from that scenario that I laugh every time I hear someone cite that in public.
What to Expect This Week
Markets are up this morning for the reasons mentioned above. The biggest one is the various meetings of the Central Bankers. The Fed’s announcement comes on Wednesday afternoon with the ECB detailing their moves on Thursday.
Additionally, on Friday the government will announce the employment data for April. Many are expecting a bounce back from the weak March numbers based primarily to the declining trend in weekly initial jobless claims. My confidence in the employment data is about as low as one could have, but it will be a focus with the market hoping for improvement - but not a gangbuster report. I don’t think we have much to worry about there.
The weekly report from the Economic Cycle Research Institute (see below) shows no change in trend - very slight improvement. This does nothing to change my mind that the dismal economic growth picture continues for the intermediate term.
SYMBOL: AKAM
Akamai reported first quarter earnings results that exceededWall Street’s estimates, as internet traffic accelerated faster than anticipated. First-quarter revenue grew by 15 percent to $368 million, which was $11 million higher than consensus estimates. Earnings per share were also better than expected, so management raised guidance for the next quarter.
This is the best earnings report we have seen during this earnings season, and we expect the Company to continue its positive momentum. The Company’s media delivery division grew by 17 percent year-over- year, and 4 percent sequentially. This was also the fourth quarter of gross margin expansion, which is rare in this economy. Management was very positive on the conference call with investors and did buy back $40 million worth of stock during the quarter.
The new management team at Akamai has done a terrific job of improving operations while developing further growth opportunities. The stock was up nearly 20 percent after releasing these results, and we expect growth investors to push the shares higher in coming weeks. This is our favorite name in the technologysector, and we expect the shares to reach $50 by the end of this year.
Three-Month Chart
SYMBOL: BIIB
Shares of Biogen Idec continued to rally after announcing much better than expected first quarter earnings results and raising the earnings guidance for the rest of the year. Profits were 41 percent higher from the previous year, as revenues grew by 10 percent to $1.42 billion. Management believes the Company will earn between $7.80 and $7.90 this year, which is up from its prior guidance of $7.15 to $7.25.
Even though management didn’t discuss the first few weeks of Tecfidera’s sales in the United States, they did indicate its approval is a “watershed event for our Company.” Also, sales of Tysabri and Avonex exceeded Wall Street’s expectations. Biogen announced a deal with Elan during the quarter that gives the Company a higher percentage of sales revenue from Tysabri.
Shares of Biogen rallied sharply following this report, and have continued to move higher as investors are starting to realize the sales opportunity for Tecfidera. We expect the news to continue to get better at Biogen, and this should attract more growth investors. Biogen has been one of the best performing stocks in the S&P 500. We look for the stock to rise to $250 by the end of this year.
Three-Month Chart
SYMBOL: R
Ryder Systems matched Wall Street’s estimates for its first-quarter earnings, and maintained guidance for the rest of this year. Net income rose by 16 percent from the previous year, as revenues grew by 2 percent to $1.56 billion. The operations of the Company did improve as their fleet-management division started using newer trucks.
Initially the shares sold off following the earnings release, but several upgrades by Wall Street firms helped the shares recover later last week. Ryder is a barometer of economic activity in the U.S. so we are encouraged by these results. Shares of Ryder have had a nice run lately, and we expect the trend to continue. We look for the shares to move to $70 within the next 12 months.
Three-Month Chart
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