Update 4/18/14

Economic Data

Even with a holiday-shortened week, there were still a lot of notable market events.  Weekly jobless claim numbers were released yesterday and showed another solid improvement in the job market.  The 304,000 jobless claims were well under the consensus estimate of 312,000.  When the numbers were coming in “weak” during the harsh winter, we anticipated that nicer weather would accelerate the economy and hiring.  Yesterday’s numbers do seem to show this, as economists are attributing this lift to what they are now calling the “spring thaw”. 

Retail sales numbers were released on Monday and seemed to show that the long winter did, in fact, hold down the economy a bit.  Retail sales rose 1.1% in March, which was ahead of the 1% economist estimates.  Leading the way were motor vehicle sales, which consumers “put off” purchasing during the harsh winter.  Even so, the country has not completely been released from winter’s grasp, so these numbers still seem to have room to grow further.  We do anticipate these numbers to continue to improve as the northern states begin their spring.

China released its GDP numbers yesterday and showed that China’s expansion slowed to its weakest pace in the last six quarters.  The numbers showed that their GDP rose 7.4% from a year earlier and was attributed, in large part, to a drop in property construction.  However, this number was still above the 7.3% estimate that economists were expecting.  In order to sustain employment, China’s growth numbers need to come in around 7.5%.  Premier Li stated that the government won’t adopt “short-term and strong stimulus policies in response to temporary fluctuations in the economy,” eluding to the fact that the Chinese government does not expect growth to continue to fall.  However, if growth does continue to fall, we could responsibly expect a mix of moderate monetary easing and more aggressive reform measures in order to keep the growth numbers higher.

Corporate Earnings

In addition to the economic data that was released, several companies released their quarterly earnings numbers.  A few highlights were:

Coca-Cola (KO) reported lower first quarter revenue and earnings than expected but announced higher case volume sales.  Volume rose 2% during the period which beat average forecasts.  The beverage company expects to buy back between $2.5 and $3.0 billion of shares this year and increased their quarterly dividend 9% (total annual dividend of $1.22 per share).  Coke is launching a major ad campaign to help rejuvenate worldwide soft drink sales and is key sponsor at this summer’s World Cup in Brazil.  Earlier this year Coke announced a stake in Green Mountain Coffee which is expected to provide single servings of Coke available through the Keurig cold beverage systems by 2015.

PepsiCo (PEP) announced higher profits as improving global snack sales offset continued slumping sales from the beverage unit. North American drink sales decreased less than was expected providing temporary support for the company to continue as a whole while activist investment has called for the company to split up the snack and beverage businesses.  The company reiterated their forecast for the year and expect earnings to rise 7% in 2014.

Bank of America (BAC) reported a quarterly profit of $0.14 per share, excluding legal costs, which was higher than the $0.05 per share analysts were anticipating.  However, legal costs continue to be issues for Bank of America as the second largest US bank announced a $6 billion charge this quarter for litigation expenses.  This surprised analysts, as the bank was expected to announce a $3.7 billion expense but is setting aside additional money to cover future settlements.  These expenses overshadowed improving revenue in several of the bank’s largest businesses.  CFO Bruce Thompson offered little to suggest that litigation costs are nearing an end.  Legal costs, “can be lumpy and it’s just very hard to predict,” he said, before adding that the company “needs to be realistic” regarding these future costs.

General Electric (GE) reported a 12 percent rise in industrial profits due to strength in jet engines and gas turbines.  Meanwhile the healthcare and transportation segments slumped, leading to overall revenue coming in just shy of estimates for the quarter.  The conglomerate continues to work on spinning off GE Capital, which analysts believe will help them focus on their core profitable businesses going forward.     

2015 Budget Proposal

 

Last month President Obama announced his proposal for the fiscal year 2015 budget.  While still in the early stages several items that we are closely monitoring include:

Required minimum distribution (RMD) rules to apply towards Roth IRAs – currently Roth IRA account holders are not required to take distributions upon turning the age of 70 ½.  Additionally individuals would no longer be permitted to make Roth IRA contributions after the age of 70 ½.

  • Most non-spousal beneficiaries of IRA and retirement plans would be required to distribute inherited accounts within five years.  Current rules allow these beneficiaries to distribute over their life expectancy.
  • Making permanent the estate tax laws that were in effect in 2009.  Would lower the estate tax exemption back to $3.5 million per person from its current $5.34 million per individual ($10.68 million per couple).
  • Introduction of new annual gift tax exclusion limit of $50,000 total per donor.  This would eliminate current annual gift tax exclusion of $14,000 per recipient and set a total cap at $50,000 per year.

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