Market Recap

Earnings were the primary driver of the markets this week (we will address this below). Markets were all higher on the week, including the NASDAQ, which closed at an all-time high. As is customary when an all-time high is reached, media outlets begin calling for a “correction” or saying that the NASDAQ is “overvalued”. It is important to take these stories with a grain of salt, as simply reaching an all-time high is really no reason to cry out for a reversal. We must examine the underlying fundamentals. As you will see on the chart below from today’s Wall Street Journal, the NASDAQ 100 is much more diverse than it was the last time it reached this level in 2000. Also, the PE Ratio is much lower. While it is possible that a pullback could occur (for a large number of reasons), we are not at “bubble” levels by any stretch of the imagination.

China to Open Bank Card Clearing Market to Foreign Firms:

Chinese officials announced it will open up its market for domestic bank card transactions. This will allow foreign companies such as MasterCard (MA) and Visa (V) direct access to the Chinese marketplace. Previously, China UnionPay had a monopoly, as it was protected from foreign competition and was the sole clearing service provider for yuan-denominated bank card payments. The People’s Bank of China believes that increased competition will mean better service and more convenience for consumers. This move also resolves a longstanding trade dispute between the U.S. and China.

There will no doubt be a rush of new entrants attempting to capitalize on this opportunity. The numbers in China are simply astounding; In 2014, China had 4.9 billion bank cards. The value of credit and debit card transactions totaled ¥449.9 trillion ($73 trillion) last year. Last year, approximately 48% of retail sales were paid for with bank cards in China, up from a mere 4.7% in 2002.

Corporate Earnings Are Mixed But Drive Markets Higher:

This week saw many S&P 500 companies release their quarterly earnings. As the U.S. Dollar strengthened over the fourth quarter and first quarter, the general market sentiment was that earnings would fall. While the strong Dollar certainly has negatively affected earnings, the markets did expect this. As of this morning, 190 of the S&P 500 companies have now reported earnings. 72% have surpassed analyst expectations on Earnings Per Share (EPS). Granted, the better than expected earnings are partially due to reduced expectations. A few highlights from this week were:

Coca-Cola (KO) reported that growth was hindered by foreign currency translation due to the strong U.S. dollar. The company’s profit fell in the first quarter to $0.48 per share, higher than the average analyst estimate of $0.42 per share. Currency swings contributed to an 8% decline in operating income, and the company expects a 6% negative effect for the year. Revenue was about $80 million higher than forecasted, as the company continues to steer consumers towards higher revenue-per-ounce products like the Coke “Mini-can”, Coke’s attempt to market soda to more health-conscious consumers who tend to shun the 12 oz (and larger) cans and bottles. Globally, Coca-Cola volumes rose 1%, Coke Zero rose 5%, Sprite rose 4%, while Diet Coke fell by 6%. CEO Muhtar Kent stated the company is in its transition year, as divestitures and cost cutting measures should begin to translate into earnings next year.

Boeing (BA) earnings jumped from a year ago as the company continues to deliver commercial jets and Boeing factories are running the highest production rates in the company’s history. All told, Boeing earned $1.97 per share, surpassing the average analyst estimate of $1.80 per share. Shares dropped as Boeing’s Operating Cash Flows fell to negative $486 million, down from positive $615 million a year ago. However, CEO Jim McNerney downplayed the massive miss by attributing this loss to timing of receipts and expenditures. The company still forecasts strong cash flows for the full year, forecasting $9 billion or more in Operating Cash Flow. The company’s cash flows were also hurt by supply issues due to the West Coast port labor disputes. Separately, seats that were supposed to be delivered from French seat maker Zodiac have been delayed, causing work to be done out of sequence, contributing to several hundred million in increased costs. As a result, Boeing has temporarily parked two 787 Dreamliners, set for delivery to American Airlines, in the Mojave Desert. McNerney believes the delays should be resolved this quarter.

AT&T (T) reported a $0.63 per share profit for the first quarter, topping the average analyst estimate of $0.62 per share. AT&T added 441,000 (net) wireless customers, the highest first quarter growth in five years. Of the customers it lost, the company believes they were typically the price sensitive ones interested in the “latest offers”, generally low priority for AT&T. Wireless margins fell to 45.3% from 45.5% a year ago, but still outpaced the 44.08% average analysts were expecting. The company will start to look very different in the coming years, as its recent acquisition of both Iusacell SA and Nextel Mexico give AT&T the opportunity to expand their service. Also, the company is awaiting approval of its $48.3 billion purchase of DirecTV (DTV), saying they expect the deal to go through in the second quarter. Yesterday, the AT&T announced it is selling $17.5 billion in bonds to help pay for the acquisition. If this goes through, this will be the third biggest corporate bond sale in history.

General Motors (GM) said Earnings Per Share (EPS) tripled from a year ago to $0.86 as legal costs fell. This was well short of the average analyst estimate of $0.97 per share. GM’s North America sales were strong, as U.S. demand for trucks and SUVs soared. Overall, GM had its strongest domestic quarter since emerging from bankruptcy in 2009, increasing 6.1%. China sales also increased 9.4% and are forecasted to grow 6-8% in 2016. However, the picture was much bleaker elsewhere. A stronger dollar hurt profits abroad, as vehicles shipped to other countries appear expensive. Sales in Europe fell 14% while sales in South America fell 15%. The company took a one-time charge of $428 million as it shuttered most of its Russian operation. However, GM sees shuttering the Russian operation as a stepping stone to profitability in Europe for 2016.

Freeport McMoRan Copper & Gold (FCX) reported a loss yesterday as copper prices remained sluggish. The company posted a $2.38 per share loss for the first quarter, down from a $0.49 per share profit a year ago. Revenues also fell 17% from a year ago to $4.15 billion. The company’s outlook on copper was optimistic for the long-term, as they expect Chinese growth to “normalize”, which will increase their demand for copper. Once again, the company’s profits remained weighed down by its 2013 acquisitions of McMoRan Exploration and Plains Exploration, two oil and gas exploration and drilling companies. Freeport reported a $3.1 billion loss for impairment of its oil and gas properties. This led the company to announce they will explore ways to minimize its exposure to oil and gas, allowing them to re-focus on copper.

PepsiCo (PEP) surpassed analyst estimates on stronger than anticipated demand for Frito-Lay products. The company reported Earnings Per Share (EPS) of $0.83, surpassing the average analyst estimate of $0.79. The company’s bottom line did take a 12% hit from a strong dollar, however. PepsiCo also stated that they now expect a stronger dollar will bring-down its per-share earnings by 11% for the year, up from the 7% they had previously forecasted. Without the impacts of the dollar, however, the results looked good. Organic revenue grew 4.4% (10% in emerging markets), with Global Snacks up 7% and Global Beverages up 1.5%. The company was able to successfully increase prices to combat inflation abroad. Gross margins rose to 55.5% from 55.4% a year ago. Separately, PepsiCo announced today they will begin selling Diet Pepsi without aspartame later this year. As aspartame has been somewhat controversial (some consumers believe it may cause cancer), PepsiCo is attempting to lure additional consumers to purchase its Diet Pepsi line of products. Diet Coke will continue to use aspartame in its products.

Next week, another host of companies will report earnings. A few of the companies scheduled to report next week are Apple (AAPL), Barrick Gold (ABX), Express Scripts (ESRX), Merck (MRK), Ford Motor (F), Panera Bread (PNRA), Pfizer (PFE), MasterCard (MA), Waste Management (WM), Exxon Mobil (XOM), Gilead Sciences (GILD), Visa (V), Chevron (CVX), and Quanta Services (PWR).

Tax Return Identity Theft:

As many taxpayers discovered this year, it is becoming more common for criminals to file fraudulent tax returns to claim tax refunds. Victims of this crime often don’t realize this has occurred until they file their return and receive a rejection notification indicating that a return has already been filed in their name. Nearly 2.9 million reports of this occurred in 2013, an increase of 60 percent from the prior year. 2014 numbers have yet to be released.

Number of Tax Identity Thefts
2010 441,000
2011 1,100,000
2012 1,800,000
2013 2,900,000
2014 ?

The IRS has been overwhelmed with these cases and is looking into ways to defend against this issue. They are teaming up with software companies and tax preparers to determine methods to better protect identities and prevent this fraud from occurring. They hope to have more solutions in place for next year’s tax season. One idea includes requiring employers to provide W-2 forms to the government earlier. Some steps that have already been taken include assigning 6 digit PINs for those who have already been a victim and limiting the number of prepaid debit card options available to those receiving a refund.

We will continue to provide updates on this as they develop.