Five Day NASDAQ Composite
There were several news surprises to trade around last week, but when the music ended stocks were mixed as the charts above illustrate. The Dow Jones Industrial Average gained nearly 1 percent while the NASDAQ Composite was virtually flat.
The Markets & Economy
Today of course is Veteran’s Day which is a federal holiday with the banking system closed, but the stock market is open for reasons, which no one wishes to mention. It used to be about trading revenues, but with volume so pathetic I cannot fathom that argument holds water any longer.
Last week saw plenty of news items including a surprise cut in interest rates by the European Central Bank. While we hinted at this action in last week’s update, I still considered it a long-shot. It does prove conclusively that the Happy Talk about Europe is just that – happy talk. It is also proof positive that Central Banks around the world are continuing to pursue policies which will seek to avoid a rising currency. This is especially true if the underlying fundamentals such as those that exist in the Euro area are as bad as they are.
Closer to home, on Friday the Bureau of Labor Statistics reported that the official unemployment rate moved slightly higher to 7.3%, even as over 200,000 non-farm payroll jobs were ostensibly created. Of course the BLS also reported that 720,000 people left the labor force. There are now 92 MILLION people not being counted in the workforce.
As I have previously said many times, these people still need all the basic necessities of life but our government for bureaucratic reasons pretends they don’t exist in order to keep the official unemployment rate down in single digits.
In fact, just over 58% of adults in America were employed in October. To say we have a recovery is simply to ignore the basics of what a growing economy would look like. In the meantime, our national government is proceeding with speed on outlawing trans-fats from food. Washington is also trying to prevent the country from aggressively pursuing its natural resources which have brought our nation to the verge of energy independence in spite of terrible energy policy emanating from Washington DC.
What to Expect This Week
Today is very quiet as it is a federal holiday. The news flow this week is minor compared to the events of last week. Earnings season is running down, and thus the entire week is likely to be quiet. Updates from Washington DC concerning Obamacar e and other matters could capture some headlines, but this market seems poised for a lackluster few days.
The update below from the Economic Cycle Research Institute shows some recent weakness especially on the moving average growth rate. Other measures of the economy including last week’s GDP measure for the 3rd quarter still show us growing but perhaps in an unspectacular fashion.
The holiday consumer shopping season seems to be garnering an unusual amount of concern far in advance of Thanksgiving despite the respite that the falling price of gasoline is giving to the consumer.
All in all, two things can still be concluded.
- The government shutdown had NO short-term measurable impact on the economy. Someone should tell the White House and the national news corp.
- Secondly, we remain where we have been for a long time. In a very slow-growth economy, but growth none the less. This is good news for stocks for the reasons mentioned over and over again in past commentaries.
SYMBOL: SE
Spectra Energy reported solid third-quarter results last week as the Company’s transmission business continued to exceed expectations. The Company earned $0.42 per share, beating consensus estimates by 7 cents. Revenues also rose by 6 percent from last year, and the cash available for distribution rose 18 percent from the previous year to $66.3 million. The quarterly distribution also rose for the 24th consecutive time, and we look for this trend to continue.
The management team has positioned the Company for strong growth for the next decade, and its assets are in some of the most exciting areas in the industry. The Company’s organic growth rates are at the high end of the gas industry, and management believes they are poised to invest $25 billion over the next decade to increase its fee-based gas infrastructure projects. We look for these new projects to increase growth rates going forward.
Shares of Spectra traded a bit lower despite the good earnings report, largely due to lower energy prices the last couple of weeks. The Company remains a core holding for our clients, and the valuation is very conservative at these levels. We expect higher distributions will lead to a higher share price, and look for the shares to reach $42 within the next 12 months.
SYMBOL: MRO
Marathon Oil reported better than expected third-quarter earnings results, and the Company sees strong production growth through 2017. The Company earned $0.87 per share, which was ten cents better than consensus estimates and 34 percent higher than last years. Revenues and production were both down from the previous year as the Company’s assets in Libya had experienced a significant drop-off in production.
Excluding Libya, the Company’s assets are greatly exceeding even management’s expectations. Production at the Eagle Ford formation in Texas has more than doubled from last year. Management now believes production will increase by 5 to 7 percent from 2012 to 2017. This kind of production growth will really benefit shareholders.
Shares of Marathon are trading near 52-week highs. This remains one of our top picks in the energy sector. Marathon has much higher growth rates than its larger competitors like Exxon Mobil and Chevron, and has a more conservative valuation. We look for shareholders to look past the issues in Libya and drive the share price to $45 within the next 12 months.
SYMBOL: DUK
Duke Energy reported third-quarter earnings results that were slightly lower than Wall Street expectations, but stated the fourth-quarter will be better for investors. The Company earned $1.46 per share, which was five cents lower than consensus estimates. Revenues were flat from last year at $6.7 billion. The lower than expected results were caused by milder weather conditions that reduced electricity demand during the quarter.
On the positive side, the Company received regulatory approval for higher rates in North Carolina, South Carolina and Ohio that should generate $600 million in additional annual revenue. Also merger costs were lower than expected, and we believe costs at the Company will continue to come down for the next several quarters. We expect investors will bid shares higher as they look forward to the fourth-quarter earnings results.
Shares of Duke Energy have been trending higher over the past month as interest rates have been coming down. The shares still yield an impressive 4.3 percent, which is supported by its operating cash-flow yield of more than 12 percent. The Company will continue to cut costs, while growing its EPS by more than 5 percent for the foreseeable future. We believe the shares will reach $85 within the next 12 months.
© McIntyre, Freedman & Flynn
