Last week saw a correction in many of the high-flying groups, but overall another quiet week with investors unsure of the economic outlook.
As the charts above illustrate, the Dow Jones Industrial Average was fractionally positive, while the NASDAQ Composite dropped nearly 3% led by social media stocks and the biotech industry -
two sectors which have led this market for a long time.
The Markets & Economy
No sooner than we received the update for last year’s growth rate via the Q4 release, than we started to get drops in the estimate for the first quarter of 2014, which ends today. The outlook now for the first quarter is a sub 2% annualized growth rate. This does not surprise me (or you), but what does amaze me is the immediate assertion that it’s just the weather and that the economy will soon jump to a much higher growth rate for the year.
How many times have we heard this refrain? Every year the pundits start out telling us this will be the year of recovery and every year it just doesn’t materialize. This year it’s worse! Both housing and the auto sectors appear to be rolling over. This morning’s report of the Chicago region manufacturing outlook was a disappointment with depressing new orders and employment data.
While the economists have a grand opinion of the economic outlook, Fed Chair Janet Yellen in a speech going on right now, has stated things don’t look that good to her from either an inflation target (too low) or from an unemployment target (too high, and actually worse than the number being reported). Follow this link to her speech: http://online.wsj.com/news/articles/SB10001424052702304432604579473202058577752?mg=reno64-wsj
In fact, her dovish comments are once again fueling a stock market rally since as I have said many times, investors don’t want a strong economy nor a collapse. Just more of the same, which means trillions in deficit spending, weak US dollar and, of course, near zero interest rates for as far as the eye can see.
This scenario was again promised to the markets by Yellen this morning, and they are eating it up. Incidentally, the Euro region also reported lower than expected or desired inflation, which could be setting the stage for their own version of “quantitative easing”. Thus, the global printing presses are still showing “buy” and that means the bull market is still in gear albeit with sector rotation like we saw last week.
What to Expect This Week
Arguably, we have already seen the most important event of the week with Yellen’s speech. It seems to lessen any impact that might have been seen from Friday’s unemployment numbers for the month of March. Her comments this morning that the employment situation is much worse than whatever the reported number, is not only true (we have told you this for years), but is meant to tell markets not to read anything into a reasonably good number in terms of policy. She has, in effect, immunized the markets from a strong number (above 200,000 non-farm payroll added) while setting the markets up to embrace another ho-hum report should we get one.
Finally, a quick look at two sets of data series which puts the lie to those calling for a jump in economic activity. First of all, the weekly look at the Economic Cycle Research Institute series of leading economic indicators shows no change to their future outlook.
Secondly, the more widely followed US series of leading economic indicators plotted against GDP growth. One can see the outlook is actually deteriorating in this series.
So remember, those predicting a jump in growth have been wrong for years and are most likely talking politics, as opposed to economics and/or market analysis. They won’t change their outlooks for a quarter or two at which point the grand jump in the economy will become a 2015 event. Then, we can start all over again.
SYMBOL: BIIB
Shares of Biogen have remained volatile even though the Company continues to get good news on the regulatory front. Just this morning the FDA approved ALPROLIX, a drug that controls and prevents bleeding episodes in adults and children with hemophilia B. This is the first significant advancement in the treatment of hemophilia B in more than 17 years, and follows the Canadian regulatory approval last week. This approval is right on schedule and cements Biogen’s industry leading position in the hemophilia market.
The shares of Biogen have been on a roller coaster the past two weeks, as many of the highflying stocks in the biotech sector have seen some selling pressure. We believe this volatility will be short lived, and the fundamentals of the Company have never been better. Shares of Biogen have been one of the best performing stocks in the S&P 500 for the past several years, and the shares are higher year-to-date even with the recent selling. We continue to believe that shares of Biogen will reach $400 within the next 12 months.
SYMBOL: AKAM
The management of Akamai gave a bullish presentation at their annual Analyst Day last Tuesday, highlighting current business trends and growth initiatives. The company is positioned nicely to take advantage of the increasing presence of cloud and mobile computing, and all of the recent acquisitions the management team has made over the past two years are working well for shareholders. Several Wall Street analysts left this meeting and raised their price targets and ratings on the Company, and we believe earnings estimates are headed higher.
The one major announcement from the meeting was that Akamai formed a strategic alliance with Telefonica to deliver its suite of CDN services to its enterprise customers. This is another sign that Akamai is growing its dominant global footprint in the CDN market. The Company has announced similar deals with AT&T, Verizon and Orange in the past two years, as carriers need to partner with Akamai to help grow their business. This should improve gross margins, earnings predictability and expand the customer base of Akamai.
The shares have had a somewhat muted response to this presentation, but we believe this has been influenced by the sell-off in the technology sector more so than company specific issues. We look for the management team at Akamai to exceed estimates in the coming quarters which should drive the share price higher. We look for the shares of Akamai to reach $75 within the next 12 months.
SYMBOL: MSFT
Shares of Microsoft are trading at their highest level in more than a decade today as investors are really warming up to new CEO Satya Nadella. Last week the Company made its Office software available on Apple’s IPad in another bold move by Nadella. We believe the steps that Mr. Nadella has been taking are making the Company more relevant in the technology sector again. We have argued that Microsoft needed new leadership in order to regain its footing as a growth company, and investors are taking notice of the new growth initiatives. We believe that the news flow will only improve over the near term, which should keep the shares moving higher over the next several quarters. We expect the shares to reach $50 within the next 12 months.
