Slow but Steady U.S. Economic Recovery Continues… 4-25-14

The Wall Street Journal wrote this week that while the current U.S. economic recovery has been one of the most lackluster in modern times, it is also shaping up to be one of the most enduring. According to the National Bureau of Economic Research, the U.S. economy emerged from recession in June 2009-just over 58 months ago-meaning that economy is already exceeding the average duration for post-World War II recoveries. However, the nation’s 6.7% jobless rate is the highest on record at this stage of an expansion, and GDP has grown at a 1.8% annual pace since the recession, half the pace of the previous three expansions.

Report shows QE program worked

Also, a new paper published last Friday by the International Monetary Fund concludes that the Federal Reserve’s bond-buying program delivered a “significant” boost to the U.S. economy. The IMF estimates that the total impact of the Fed’s bond buying from 2008-2012 cut real ten year yields by 140 basis points. “We find that recent purchases of U.S. government debt securities by the Fed…have indeed affected the level and dynamic of U.S. real rates significantly,” IMF researchers said.

Factory orders rise

Factory activity in the mid-Atlantic region expanded in April at a faster clip than expected, according to a Federal Reserve survey. The Philadelphia Fed said its business activity index rose to 16.6 from 9.0 in March. Readings above zero on the index indicate an expansion in factory activity in the region that includes eastern Pennsylvania, southern New Jersey, and Delaware. Gauges measuring new orders and factory employment improved, while survey respondents’ view on the outlook for the next six months deteriorated. The Philadelphia Fed business index is viewed as one of the first monthly indicators of the health of U.S. manufacturing, leading up to the national report by the Institute for Supply Management.

Russian conflict in the Ukraine

U.S. Secretary of State John Kerry warned Russia that its intimidation of Ukraine’s acting government, which included a resumption of military drills yesterday, would impose costs on the country’s economy. He said it’s failed to live up to commitments it made under the accord in Geneva a week ago, and continued lack of cooperation would bring consequences. “If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake,” Kerry said. President Barack Obama plans to call European leaders to discuss additional sanctions today.

Crisis has damaged Russia’s Economy

Russia’s sovereign debt rating was cut to the lowest investment grade by S&P ratings agency. They also stated that further downgrades are possible if economic growth deteriorates and the conflict in Ukraine sparks wider sanctions. S&P cut the country’s rating to BBB- from BBB, which was the country’s first downgrade since December 2008. “The tense geopolitical situation between Russia and Ukraine could cause significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects,” S&P said in a statement.

Seasonality in Unemployment Claims

More Americans than forecast filed applications for unemployment benefits last week. Initial jobless claims increased by 24,000 to 329,000 in the week ending April 19th. However, the Labor Department noted that the Easter holiday makes it difficult to adjust for seasonal variations. The number of Americans continuing to receive jobless benefits fell by 61,000 to 2.68 million–the lowest level since December 2008.

U.S. Consumer Confidence remains Strong

Consumer confidence shot up last week, signaling that the recent improvement in retail sales is poised to continue. The Bloomberg Consumer Comfort Index climbed to -25.4 in the period ending April 20, the second-strongest level since January 2008, from -29.1 the prior week. Americans were more upbeat about being able to provide for their families than at any time in six years, according to the data. “Rising equity prices, which are sitting near all-time highs, and a slower pace of firings in the economy are bolstering consumer confidence across just about all income and demographic groups,” said Bloomberg economist Joseph Brusuelas. Optimism among the highest earners is “critical for growth prospects in the current quarter and beyond,” since those Americans are responsible for an outsized share of consumer spending, he said.

Corporate Earnings

This week saw a large number of S&P 500 companies report earnings.  As of yesterday, 239 S&P 500 companies have reported earnings results this season, 75% have exceeded analysts’ profit estimates, while 53% have beaten sales projections. A few highlights were:

Caterpillar (CAT) – Caterpillar’s first quarter profit rose 4.8%, coming in at $1.44 per share.  This was ahead of the average analyst estimate of $1.23 per share.  CAT also raised its full-year earnings guidance by $0.25, to $6.10 per share.  CAT cited improved expectations for their construction equipment arm as the reason for their raised guidance.  CEO Doug Oberhelman, in reference to U.S. construction, said he is hearing “positive stories about new projects and reasons for optimism.”  While their construction arm thrived, CAT’s mining equipment arm slumped once again.  CAT sees mining companies remaining cautious with equipment investments and, as a result, cut their forecast on mining sales.  The company maintained its global GDP growth outlook at 2-3% for this year and also maintained its GDP growth outlook for China at 7.5% for the year.

Apple (AAPL) – Apple exceeded analyst estimates on Wednesday, posting $11.62 per share on a net income of $9.1 billion.  This represented a 7% increase in net income, meaning Apple grew its earnings when analysts were expecting them to be negative.  Apple sold 43.7 million iPhones in the quarter, much higher than the analyst estimates of 38.2 million.  The company cited stronger than expected sales in emerging markets, as sales in Greater China (China, Hong Kong, and Taiwan) rose 13% over last year.  And while the newly inked deal with China Mobile helped, CEO Tim Cook stated that the company’s improvement in China reached across its entire range of businesses.  Analysts were worried that the company’s gross margin would fall, but Apple said that its gross margin rose to 39.3% (up from 37.5% last year). 

Apple’s stock repurchases have boosted shareholder returns and the company stated that it will increase its repurchases from $60 billion to $90 billion this year.  Cook stated that the reason behind the increase in repurchases is due to the fact that the company feels that its shares are undervalued and this is a good time to buy them back.  “That should show you how much confidence we have in the future of the company,” Cook stated.  Apple did not stop there.  The company also increased its dividend by 8%, to $3.19 per quarter.   

The biggest surprise, however, came when Apple announced that they are authorizing a 7-1 stock split for shareholders of record on June 2nd.  As a reminder, a stock split is when the company issues additional shares to existing shareholders.  This cuts the price (in this case, by 7 times) while also increasing the number of shares outstanding (by 7 times).  So as an example, if an Apple shareholder holds 100 shares, and we will just say the price per share is $550 per share on the date of the split (this number may obviously change), the shareholder has $55,000 in Apple stock.  After the split, the shareholder will have 700 shares (7 X 100), and the stock price will be $78.57 ($550 / 7), for a total of $55,000 in Apple stock ($78.57 X 700).  This fueled speculation that Apple is trying to lower its share price to make itself available to be included in the Dow Jones Industrial Average.  The Dow is a Price-Weighted index, meaning a stock trading at $100 makes up 10 times more of the total index than a stock trading at $10.   With Apple’s price per share much higher than the average Dow component, it was excluded from the index.  However, after Apple’s stock split, the price will be much more in line with other Dow components, and there is an expectation that they will be included in the Dow.

AT&T (T) – AT&T posted $0.71 per share, surpassing the average analyst estimate of $0.70 per share.  The company attributed this to signups for AT&T’s Next installment plan as the reason earnings were boosted.  AT&T Next allows customers to pay for their devices in installments, rather than paying a subsidized cost up front and signing a two-year contract.  This eliminates AT&T’s subsidy cost. The shares fell after the announcement, as the company did not raise its earnings growth estimates as much as analysts were expecting. 

Freeport McMoran Copper & Gold (FCX) – Freeport McMoran reported earnings of $0.49 per share, which exceeded the average analyst estimate of $0.42 per share.  Although lower copper prices and reduced output from their mine in Indonesia hurt the bottom line, mining operations elsewhere, as well outperformance in their oil and gas business, helped boost the company’s earnings.  Specifically, FCX’s oil and gas unit sold 16.1 million barrels of oil which was higher than the 15.3 million that were expected.  The company is working on cutting costs, and has reduced their “cash costs” of copper to $1.54 per pound. 

We will continue to keep you updated on the remaining first quarter earnings results over the next few weeks.

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