Stock prices declined modestly last week. A shrinking trade deficit caused 2nd quarter GDP estimates to increase (over 2% now annualized), thus renewing fears that the Federal Reserve would commence “tapering” at their September meeting.
As the charts above illustrate, the Dow Jones Industrial Average dropped by 1.5% as shares of IBM are starting to show weakness. The NASDAQ Composite dropped less than one percent as trading volumes fell to just about the lowest level of the year.
The Markets & Economy
Earnings season has just about ended for those companies on a June 30 quarter end. The reports in general confirm an economy which is growing quite slowly in nominal terms, but with some good pockets of news. Our ability to increase our oil and natural gas production is setting the stage for the USA to become a net exporter of energy. What an amazing turnabout this is for our country. Let’s hope the government does not screw things up with taxes and export restrictions.
Elsewhere our country is competing well in the global economy as evidenced by the improving productivity numbers, which helps our global competitiveness. This is showing up as increased exports and a shrinking trade deficit. These are huge positives.
Going the other way, however, is the disappointing growth in personal income and the lower percentage of people working. This is holding back the country, and continues the decade’s long trend of increasing reliance on the government sector by more and more people. This cannot end well. Detroit has filed bankruptcy. Other places such as Chicago and the state of Illinois are not far behind. Public spending and entitlement reform will come about. The only question is whether it comes from a rational long-term plan, or because entities simply run out of money and must abruptly restructure the benefits negotiated by the politicians and public sector unions. Time will tell.
What to Expect This Week
It is August and people simply are not doing much unless they have to. We do expect an earnings report from Brocade Communications this week. Other than that nothing company specific is happening.
On the macro front, there will be several updates on the economy. These include inflation data for July, Industrial Production, housing data for July as well as various regional manufacturing surveys.
Don’t expect anything earth shattering, but on a slow day in August the traders may try and make something out of nothing.
The weekly glance at the Economic Cycle Research Institute charts below give no indication of either acceleration for the economy or a slowdown. In other words there is nothing to see here. The next big data point will not come until the Friday after Labor Day when the employment report for August will be issued. Until then the summer weather is the most important topic of any given day.
SYMBOL: MRO
Marathon Oil reported second-quarter earnings results that were slightly lower than Wall Street’s consensus estimates, although the Company did increase its quarterly dividend by 12 percent. Earnings-per-share came in at $0.67, which was a few cents less than expected, but rose by 14 percent from the second quarter of last year. Revenues came in better than expected at $3.9 billion, which represents a 3 percent increase year-over-year.
The Company continues to sell its non-core assets and management is now focused on growing its domestic exploration and production division. Income from the North American Upstream Division rose from $70 million last year to $221 million during this quarter. Overall the Company experienced improved operations at all of its divisions, with the exception of Oil Sands, and significantly enhanced the strength of its balance sheet going forward.
The shares of Marathon actually sold off by 2 dollars following the reports, although most of it appeared to be market related. We are encouraged by the strong domestic growth,and the management team raising its quarter dividend by 12 percent from last year. Marathon has a conservative valuation at these levels, and we believe that Wall Street is underestimating the value of the Company’s longer-term growth opportunities. We expect the shares will reach $45 within the next 12 months.
SYMBOL: SE
Spectra Energy reported second-quarter earnings results that were shy of Wall Street’s expectations, but reaffirmed their commitment to become a master limited partnership. The Company earned $0.30 per shares, which was 3 pennies light of consensus estimates. Revenues, on the other hand, grew by nearly 10 percent from the second quarter last year, to $1.22 billion. We are encouraged by management’s commitment to enhancing shareholder value.
While earnings were a little light of expectations, management’s focus on splitting into two separate entities will lead to a more favorable tax status for the Company, and higher dividend payments to shareholders. The Company secured $3 billion of new expansion plans so far this year, and expects to spend $25 billion over the next decade on growth opportunities. These growth initiatives are the catalyst for the Company to advance with its master limited partnership strategy.
Shares had a muted response to this report, although the total market cap of the Company has increased by $6 billion since its MLP strategy was announced during the third quarter of last year. Even with this strong move in the share price, we see very limited downside at these levels, and the activist shareholder group we have discussed in previous reports remain shareholders in the Company. Management has to continue to enhance shareholder value, or will likely lose their job. We look for the value of the shares to reach $42 within the next 12 months.
© McIntyre, Freedman & Flynn
