This has been another quiet week for stocks which closed at their highs for the year. The Dow Jones Industrial Average even closed above 16,000 for the 1st time.
As the charts above illustrate, both the Dow Jones Industrial Average and the
NASDAQ Composite gained last week in light trading.
A lack of fundamental news on the economy was offset by continued uncertainty about
Obamacare and its implications for the economy of 2014.
The Markets & Economy
This, of course, is Thanksgiving Week which will pretty much guarantee another quiet week. Retailors are much in the news as they continue to plan for a very subpar holiday shopping season. So much so that many major chains are opening for shopping on Thanksgiving Day evening. Thus “Black Friday” will begin on Thursday now and no doubt forever.
Offsetting these concerns is the continued drop in the price of gasoline which has helped the reported inflation numbers and more importantly helped the purchasing power of the consumer. So far this impact is not helping retail sales or housing. Both continue to slowly drift back to growth rates which are nothing to write home about.
What this says is what we have continued to surmise - The American economy that continues to mope along. Consumer confidence is low and incentives for business expansion and/or hiring remain weak. On the positive side, inventory levels are modest so it just might be that all the pessimism surrounding the holiday shopping season will prove to be too pessimistic.
In the meantime, this economic background is hardly the sort one would expect the Federal Reserve Board to change course as it awaits the arrival of its new Chairman early next year. In other words, while there will be many speeches and endless blather about the whole tapering thing, I believe any decisions of consequence await the new year and an assessment of where the economy is going.
On this latter score, I see many economists quite optimistic for next year. Their basic reason is that there won’t be any more tax hikes from the federal government. Of course, this sentiment disregards the various new taxes and mandates still set to begin under Obamacare. It is no longer a crazy thought that this program just might be delayed or even discarded. It now simply depends on how many Democrats will continue to swallow hard, and not force the President back to the table.
It is also the case that economists almost always think the next year is when the recovery really kicks in. We have heard this clap trap for four or five years and it is no more convincing to me now than it has been.
What to Expect This Week
There will be some economic data this week. Already this morning the home sales index proved a disappointment. More data will be forthcoming, but make no mistake about it - this market’s tune is set by the Federal Reserve. Until there is something to talk about, new highs for the stock market into year-end are the most likely scenario.
Finally, our weekly look at the Economic Research Institute’s w eekly leading economic indicators show that it continues to have a growth rate above water, but well down from the levels of last spring. In other words, there is nothing here to suggest that 2014 is going to be materially better for the economy than 2013.
SYMBOL: BIIB
Shares of Biogen Idec had their largest gain in more than two years following an announcement that its multiple sclerosis drug Tecfidera won a designation as a “new active substance” in Europe. This gives the Company protection against generic copies for an additional 10 years, and paves the way for a European approval in first quarter of next year. This announcement was made public on the EuropeanMedicines Agency’s Committeefor Medicinal Products for Human Use on Friday morning.
This is wonderful news for shareholders of Biogen Idec and further differentiates the Company from other competitors in the multiple sclerosis market. With European approval coming in the first quarter and a worldwide launch of Tecfidera in 2014, we believe that analysts will have to increase their sales estimates for 2014 through 2015 for the drug. This drug was already slated to be a blockbuster in the industry, but the added protection will allow Biogen to increase its dominant position in the multiple sclerosis market and look for new applicants and revenue streams from the product.
Shares of Biogen have been one of the best performing stocks in the S&P 500 for the past couple of years and have doubled this year. We believe the positive momentum will continue, as the Company’s pipeline of new drugs is still robust. Price targets and earnings estimates were raised across Wall Street, but we believe they are still conservative. We look for the shares to reach $350 within the next 12 months.
SYMBOL: BRCD
Brocade announced better than expected fiscal fourth-quarter earnings results, as management continues to be successful cutting costs. The Company earned $0.24 per share, which was $0.06 better than consensus estimates and 41 percent higher than last year. Management also met its goal of reducing annualized spending by $100 million two quarters ahead of schedule. These results were even more impressive given its competitor Cisco Systems reported very weak results just a couple of weeks ago.
CEO Lloyd Carney has done a terrific job of developing new innovative products at Brocade while reducing its costs structure and putting the Company in a much better financial position. Brocade ended the fourth quarter with almost $1 billion in cash, which is the highest level in five years, while also aggressively buying back its shares. This led to gross margins expanding by 240 basis points from last year to 67.2 percent.
Also, the Company is forming leading market positions in the quickly developing network virtualization and software-defined networking markets. Since taken over the leadership role at Brocade, Mr. Carney has improved the operations of the Company every quarter. This is especially impressive given the softness in the storage industry and overall weak business conditions many of its competitors have cited recently. Wall Street is starting to warm up to the growth prospects of Brocade. We are raising our price target to $12 per share given the improved operations at the Company and still believe a takeover is possible atBrocade.
© McIntyre, Freedman & Flynn
