U.S. GDP Slows in Third Quarter

The Gross Domestic Product (GDP), the broadest measure of goods and services produced across the economy, rose at a 1.5% annualized rate in the third quarter, the Commerce Department reported yesterday. While this matched the average economist estimate, it shows a slowdown over last quarter, when the annualized rate was 3.9%. Still, the number is strong enough to show the U.S. economy is on solid ground, though growth is not nearly as strong as was previously expected. The reading was hurt most by inventories, which subtracted 1.44% from GDP. Economists expect this to be a one-time fall; it is anticipated that last year’s West Coast port shutdown held back personal spending, which in turn led to accumulating inventory on store shelves. This detraction could simply be stores clearing their inventory, but it is certainly something to keep our eye on.

Earnings Recap:

This week saw another set of large, well-known companies release their earnings. As of this morning, 340 of the S&P 500 companies have reported their most recent quarterly earnings. Of those companies, 76% have reported earnings above the average analyst estimate, while 47% have exceeded their revenue estimates. The earnings beat is above the five year average while the revenue beat is below the five year average. A strong U.S. dollar continues to hurt revenues earned outside the U.S. and most companies expect this headwind to remain through 2016. Below is a brief summary of just a few companies that reported this week:

Apple (AAPL) once again surpassed analyst expectations as the company revealed they earned $1.96 per share in the most recent quarter. This was ahead of the average analyst expectation of $1.88 on strong iPhone demand. The company sold 48.04 million iPhones, less than the 48.72 average analyst estimate, but still good for 22% year-over-year increase. Apple CEO Tim Cook said he expects this growth to continue, as about two-thirds of iPhone users still own the iPhone 5 (or older). Apple also noted that roughly 30% of its newest iPhone sales were from customers switching from Android phones, the highest rate the company has ever seen. Growth is China also remained high, up 84% in the last year. Despite fears of a slowing economy, Cook stated that “We saw no signs of a slowdown in China,” from a sales perspective.

Apple now has $205.7 billion in cash, a $2.8 billion increase over last quarter. Of that cash, $187 billion, or 91%, is “parked” outside the U.S. To put that into perspective, if Apple’s valuation was just the $205.7 billion in cash, it would be good for the 16th largest company by market capitalization (behind AT&T’s total worth of $206 B and ahead of Walt Disney at $194.2 B). The company continues to return cash to shareholders as approximately $3 billion in dividends were paid out last quarter, while the company bought back about $14 billion in stock. This brings Apple’s share repurchase amount to $36 billion in 2015 (this quarter was the last of Apple’s 2015 year).

Gilead Sciences (GILD) reported strong sales on the back of its Hepatitis C drugs Harvoni and Sovaldi. Overall, Gilead reported earnings of $3.22 per share, well ahead of the average analyst estimate of $2.87 per share. Revenues also came in ahead of guidance at $8.3 billion. The company also raised its full year profit forecast range by $1 billion, to $30 billion – $31 billion. Despite the earnings beat and guidance raise, the shares traded slightly down the following day. This is due to the continuing questions on how Gilead’s growth can continue. Gilead has stated they are always evaluating acquisitions, but they can be patient. The company has over $25 billion in cash and continues to buy back shares in the meantime.

Ford Motor Company (F) posted its highest North American profit ever on strong demand for trucks and SUVs. Low gas prices helped push sales and margins higher for the quarter, as Ford earned $1.9 billion in the third quarter, or $0.45 per share, which met the average analyst estimate. Revenues in the U.S. and Europe rose 9%, while the Asia-Pacific sales fell 12% year-over-year. However, shares for the company fell after CFO Bob Shanks noted that Ford expects 4th quarter sales to be hurt by higher than expected seasonal costs as well as the potential payouts for a new union contract. The UAW is currently negotiating with GM, and it is widely believed Ford will be next in negotiations.

Exxon Mobil (XOM) profits fell less than expected in the most recent quarter, the company announced today. Overall, Exxon reported a profit of $1.01 per share, down from $1.89 per share in the third quarter of last year. However, this was still higher than the average analyst estimate of $0.89 per share. Exxon’s exploration and production division’s profits fell 79%. However, the fuel refineries division, which benefits from lower oil prices, saw its profits double year-over-year. Exxon continues to cut costs as oil prices remain low. The company expects to cut capital spending by $1 billion and reduce its operating expenses by $7 billion.

Next week a few notable companies reporting earnings are Visa (V), Emerson Electric (EMR), Chesapeake Energy (CHK), Qualcomm (QCOM), Kraft-Heinz Company (KHC), Quanta Services (PWR), Walt Disney Co (DIS), and Berkshire Hathaway (BRK/B).

Elimination of the File and Suspend Election for Social Security:

Under the Bipartisan Budget Act of 2015, a section known as “Protecting Social Security Benefits” includes a revocation of the “file and suspend” election for Social Security benefits. This has been a change that Washington has been determined to make for several years as they believe it has become an unintended “loophole” for taxpayers to receive more benefits. This elimination of this option would become effective six months from the date of passage. The original language of the bill would have required that anybody receiving benefits under a file and suspend strategy would see their benefits canceled. But this clause was removed as it was determined to be too aggressive as well as too much of an administrative headache for Social Security.

In summary, the file and suspend election allows the higher earning spouse to file for their benefits at his/her full retirement age and then suspend their benefits to allow their benefit amount to continue growing until they elect to collect at a later age. When this spouse suspends their benefits, their spouse can claim spousal benefits (up to ½ of the primary earner’s benefit) and later shift to their own benefits, if a higher amount, at a later age. This was originally enacted in 2000 to encourage those people who wanted to work longer to delay collecting their benefits, but made their spouses or dependent children eligible for collecting Social Security benefits at the same time.

Going forward, if a spouse suspends their benefits, than all benefits payable on their record are suspended. Hence, in order for a spouse to receive spousal benefits, the primary spouse will have to be collecting benefits. Therefore spouses who did not earn enough credits to be eligible for Social Security cannot collect any spousal benefits at all until their spouse begins collecting. This means for couples wanting to maximize the benefits of the higher earning spouse, both spouses will not begin receiving any Social Security checks until the primary earner turns age 70. Delaying benefits for the higher earning spouse maximizes the benefits to be received for the surviving spouse. Now many will have to choose between receiving benefits today versus making sure the surviving spouse receives the highest amount possible. Due to this millions of Americans may choose to collect today and thus permanently lower their benefits for the long term.

Also included in this bill is the elimination of the “restricted application”, which allows a spouse to intentionally elect to receive spousal benefits while delaying collecting their own benefit. This had been known as the “collect now, collect later” strategy. This will now be covered under the deemed application rule which states that any application for benefits is automatically treated as applying for both retirement and spousal benefits. The applicant will automatically receive the higher of the two. This would become in effect for those who turn age 62 beginning in 2016 and after. So this option appears to still be available for some already over the age of 62 for several more years.

This bill also eliminates the option to file and suspend benefits in order to receive a cumulative lump sum payment of all suspended payments retroactive to the date one filed. This was considered a good insurance strategy against becoming ill before collecting higher benefit amounts.

It appears at this time that the only segment that will still have the option to file for reduced benefits while delaying collection of their available higher benefit amount are surviving spouses.

Closing these “loopholes” is estimated to possibly save approx. $9.5 billion per year for Social Security. The aggressive proposal comes at a time when the Social Security disability fund is projected to run out of money next year, which if left unaddressed would have resulted in reduced disability benefits. This may be just the first of many measures taken to rebuild the solvency of the Social Security program.

 

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