Financial markets have now become a function of how investors are guessing the drama in Washington DC will play out.
NASDAQ
As the charts above illustrate, last week the Dow Jones Industrial Average dropped 1.25% while the NASDAQ Composite was flat.
The Markets & Economy
For now, bond prices are moving higher and stocks are biding their time as the 3rd quarter and the government’s fiscal year end today. In the case of the stock market it has been a good quarter but stocks look forward and right now they cannot figure out what is going to happen in DC.
Both this week’s debate about a continuing resolution to fund the government ( Obama has not spent this money pursuant to an actual budget) and the upcoming debate about the federal government’s raising of the debt limit implies that markets will be on hold for a few weeks until whatever resolution occurs can be analyzed.
In addition, events in Europe are not going well as the Italian government looks like it will fall and problems in Greece are once again on the rise. It has always been my belief that once Merkel was reelected in Germany, the unsolved fiasco known as the European Monetary Union would reassert itself and it is in the process of doing so.
This is just too much for investors to take with stock prices still near their record highs. Rather the confusion is an excuse to move some money to the sidelines. Even gold and oil have pulled back as investors no longer consider them a refuge for all of this uncertainty.
Corporate news is minimal with earnings reports still weeks away. Thus the headlines coming from DC will dominate and that’s too bad but it is the reality.
What to Expect This Week
Well, the big economic report for the week is the employment report for September which is scheduled for Friday. However, depending upon whether or not there is a government shutdown, this release may be delayed. Markets won’t like that but there is nothing anyone can do.
Over in Italy, their government has scheduled a “confidence” motion for Wednesday. Of course it could be delayed because, as of now, that government would fall and thus add to the problems in Euro land.
As far as fundamentals are concerned, the indications are that the US economy continues to outperform the global economy, but that doesn’t say much. The weekly update from the Economic Cycle Research Institute (see chart below) shows no chance that the economy is falling apart as we enter this period of uncertainty concerning how the government finances itself and also the beginning of the Obamacare era. With all of this confusion coming from the government sector it is no wonder that the Federal Reserve Board continued its uber easy policy of printing money like there is no tomorrow.
While the macro news will dominate the markets, the fundamentals remain in place for low interest rates and rising dividends and earnings. Thus stock prices have a floor underneath them and bad days will be followed by good ones in a see-saw fashion until the governments around the world get out of the way - something which they don’t like to do.
SYMBOL: BRCD
The management of Brocade hosted its annual Analyst Day last week and was quite bullish about the Company’s prospects. Most importantly, the Board of Directors has increased its current stock repurchase plan to $1 billion from $308 million that had been previously authorized. Also, the management team focused investors on new products and growth initiatives that should drive profitability higher in 2014.
Brocade has been aggressively buying back shares since their fiscal fourth quarter of 2011, and this announcement further demonstrates managements’ commitment to reducing the shares outstanding. Over the past year the Company has bought back $581 million worth of stock, which reduced its shares outstanding by nearly 10 percent. During this time, cash on the balance sheet has grown by nearly 35 percent, which has allowed for Brocade to be so aggressive with its share repurchase activity. We agree with CEO Lloyd Carney that this is an excellent use of the Company’s capital.
Several Wall Street firms left this meeting and raised their earnings estimates and price targets for Brocade. We believe the Company is positioned for nice market share gains and increased profitability over the near term. Shares of Brocade traded well last week given the soft market conditions and we expect the shares to reach a new trading range following this meeting. We still believe that shares of Brocade will reach $12 within the next 12 months.
SYMBOL: PES
Shares of Pioneer Energy Services have been trading better than its peers since activist investor Gary Siegler announced that he has taken a 5.4 percent stake in the firm. Siegler worked for Carl Icahn in the late 80’s and even mentored now billionaire hedge fund manager David Einhorn in the 90’s. He has led numerous shareholder activist campaigns over the past two decades, most recently Energy Solutions and PMC Commercial Trust, which he was able to push for outright sales of both companies.
We are encouraged that Mr. Siegler is interested in Pioneer and coupled with the better than expected second quarter earnings results, we believe the shares are headed higher. Management is working to improve its profitability while paying down its debt, which could make the Company a much more attractive takeover target. We believe that Pioneer would be an accretive deal for nearly any large oil service company. We expect shareholders would receive at least $12 per share if a deal were to come to fruition.
© McIntyre, Freedman & Flynn
