Market Commentary: Third Quarter Earnings Season is in Full Swing 10/25/13

As many major corporations reported operating results. We have long held the view that earnings matter. Historically, there is a .71 positive correlation between stock prices and earnings direction. This means when corporate earnings rise, 71% of the time stock prices have risen as well.  We hold the view that earnings growth rates will likely increase during 2014 as compared to growth during 2013. This is one of the positive drivers behind our positive view on the stock market.  Despite the strong gains in 2013, stable corporate earnings, low interest rates and low inflation are likely to continue in 2014. 

The Federal Reserve’s “easy money” policies continue and QE3 is still firmly in place. The Fed is pumping more than $80 billion of fresh capital into risk-assets monthly (through intermediaries) with no real end in sight.  With Janet Yellen coming into the chairman’s spot in January, we expect Fed policy will remain the same until dramatic improvement is made in job creation.  Additionally, we are starting to think there is an outside chance we could see Congress reach meaningful budget compromise to forestall the 2014 sequester.

This Week’s Economic Data:

•          New jobless claims fell to 350,000 from 362,000.

•          Existing home sales fell 1.9% in September.

•          Durable goods orders rose more than expected, posting a 3.7% increase in September.

•          Construction spending rose 0.6% in August, following a 1.4% increase in July.

The Week Ahead:

Monday: Industrial Production, Pending Home Sales

Tuesday: Producer Price Index, Retail Sales, Consumer Confidence

Wednesday: Consumer Price Index, GDP

Thursday: Jobless Claims

Here is an example of improvement in business at a few great American Companies:

Boeing is riding a wave of global demand which has produced new orders for fuel efficient and added capacity airplanes.  Despite early problems with small fires and concerns about the potential difficulty of executing common repairs on an airplane not made with traditional materials, Boeing’s 787 Dreamliner is in high demand. In fact, demand for Boeing airplanes continues to be high across its entire range of products. The current backlog of orders at Boeing is about 4,800 airplanes, orders worth a staggering $345 billion. In the third quarter, the commercial division of the company received 200 orders while delivering on 170 orders, a significant example of demand outstripping the company’s ability to produce. Production expansion is planned to meet this demand, in particular for the 787 line. Nearly 100 787s have been delivered to date, and the company plans to double its current output of seven Dreamliners per month by 2020. At the current rate, it would take over 10 years to fill the 890 orders for 787s that are currently on the books. Highlighting the global reach of the company, commercial deliveries in the third quarter included clients such as Royal Brunei Airlines, Aeromexico and Iraqi Airlines, all based in regions that serve growing aviation markets. (Source: The Wall Street Journal)

GE  rose to a five-year high this week, as demand for jet engines and locomotives have proven strong and show no signs of slowing.  As a result, GE’s industrials business is poised to meet its profit margin growth goals.  Orders climbed 19% overall, and were strong in China, Russia, and sub-Saharan Africa.  As a result of these strengthening orders, GE now has an order backlog of $229 Billion, which is a record high.  The company seems to be going more towards the industrial manufacturing aspect of its business, as CEO Jeff Immelt stated that GE Capital, the financial arm of GE, could get spun off and have an IPO for the consumer lending business.  These plans are considered tentative, but the fact that the company has already disclosed these plans seems to make this development very probable.  This is certainly something we will keep an eye on; GE plans to discuss this in more detail at its November 15th investor presentation.


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