Markets Decline 1/24/14

The markets pulled back this week, which saw only four trading days due to the markets being closed on Martin Luther King Jr. Day.  The Dow Jones Industrial Average saw its biggest weekly decline since May of 2012, due in part to a sell-off in emerging market currencies.  Other factors contributing to the pullback were data that showed Chinese manufacturing contracted in January, Argentina’s easing of its currency controls, and fear that the US Federal Reserve’s bond tapering will accelerate.  Investors are beginning to withdraw from emerging market funds, as developed nations look more attractive right now (considered a “flight to quality”).   However, we feel that emerging markets still have good fundamentals that will drive their growth going forward.  They are trading at much lower earning’s multiples when compared to their historical valuations, all while still maintaining very healthy growth rates.  These short-term corrections are very common in market cycles and can actually provide us with opportunities.  That said, we could potentially see more of a pullback, especially if the media attempts to push this as a “doom and gloom” scenario.  Overall, we remain optimistic given the improvements in housing, labor market, and manufacturing data in the U.S., and we expect these trends to continue in a positive manner.

Earnings

We are in the “thick” of earnings season this week, with multiple companies reporting earnings.  Below are highlights from a few companies that reported earnings this week:

Procter & Gamble (PG) surpassed analyst expectations, posting earnings of $1.21 per share (compared to the $1.20 average analyst estimate) due to better than expected sales of products in emerging markets.  Foreign currency fluctuations reduced PG’s earnings by $0.11 per share.  The interesting thing, however, is that PG is anticipating that foreign currency fluctuation impacts will ease this year.

Microsoft (MSFT) also beat analyst expectations, posting $0.78 per share (compared to the $0.68 average estimate).  This was attributed to stronger than expected holiday sales of its Xbox game console and Surface tablets.  The company noted that it is seeing the demand for PCs stabilize, and its tablets sales, which started slow, are picking up steam.

Freeport McMoran Copper (FCX) surpassed analyst expectations, posting $0.84 per share (compared to the $0.80 average estimate).  While the company’s performance was strong, the shares fell after Indonesia issued regulations on metal exports, resulting in higher export taxes and delays in obtaining export permits.  This is note-worthy because FCX’s Grasberg mine, located in Indonesia, is considered the biggest and most important asset to FCX.  These types of companies do run into regulation issues from time to time, and we expect FCX to get this resolved.  Going forward, we anticipate global demand for copper to remain strong, and we think that FCX’s bottom line will benefit from this.

Next week will also be important when it comes to corporate earnings.  A short list of companies that are expected to report earnings next week include AT&T (T), Apple, Inc (AAPL), Caterpillar (CAT), Ford Motor (F), Boeing (BA), Exxon Mobil (XOM), Google (GOOG), and Chevron (CVX).

Debt Ceiling Approaching

We are nearing the February 7th deadline for the Federal government’s debt ceiling.  Treasury Secretary Jack Lew said Wednesday that, if no deal is reached, the government will once again exhaust its borrowing powers by late February.  After Lew’s comments, Democrats and Republicans immediately dug in and began taking shots at each other.  It is largely expected that the Democrats will try to pass a “clean” debt limit increase, meaning one without any additional measures attached to it.  However, like the last time this was debated, it is expected that the GOP will try and attach some measure to the bill; perhaps changes to Obamacare or a decision on the Keystone XL pipeline.  We expected the back and forth to continue in the short-term.  However, we are hopeful that the goodwill established between the two parties after passing the budget in December will prevent a resolution from going into the 11th hour (or beyond) this time around.

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