Category Archives: Market Commentary

Market Commentary: Key Takeaway from Apple’s Lowered Guidance

In a letter to shareholders released after the market closed yesterday, Apple (AAPL) CEO Tim Cook surprised the market by stating the company is lowering its financial guidance for its December quarter.  The company now expects revenue to come in at $84 billion for the December quarter.  Previously, Apple’s revenue guidance was $89 billion to $93 billion and analysts were estimating $91.3 billion, on average.  This news was disappointing and a shock to many investors and the stock sold off almost 10% today.   Given this volatility, we wanted to provide our clients with an in depth look into Apple’s real numbers and discuss some of the headwinds that Cook cited in his letter in more detail.

Tim Cook cited both macroeconomic and Apple-specific factors as the leading causes of this lowered guidance.  Not surprising, the primary macroeconomic headwind that Tim Cook mentioned was the slowdown in China.    Cook mentioned China 11 times in his letter as he clearly wanted to make the point that most of this lowered guidance stems from the China/U.S. trade tensions.   Cook did not provide too many details on the Apple-specific issues, but we can deduce that the Apple-specific issues are really just the slowdown in iPhone unit sales.

Most analysts have known for some time that iPhone sales growth was starting to slow down in developed markets.  Apple also clearly noticed this trend and has been attempting to move analysts away from valuing the company strictly on iPhone unit sales and towards overall earnings and revenue growth.  Apple took this a step further when they announced that they will no longer be reporting total iPhone unit sales in their earnings releases going forward. This was always going to be a choppy process and the timing could not have been worse for Apple.

Emerging Markets:

In Cook’s letter, he stated that “lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of the revenue shortfall in our guidance and for much more than our entire year-over-year revenue decline.”   In an exclusive interview with CNBC, he stated that Apple saw economic growth in China decline more than expected in the second half of the year.  The company also pointed to the trade tensions between the U.S. and China as something that put additional pressure on the economy.

While he did not come out and say this outright, Tim Cook did allude to some Chinese consumers boycotting Apple products due to the trade war with the U.S.  Simply put, some people are not purchasing Apple products simply because it is an American company.  The recent arrest of the Huawei CFO may have helped stoke the fire for Chinese citizens and caused them to boycott Huawei’s largest U.S. competitor, Apple.   The Chinese government has been very careful to state that they are not calling for any type of boycotts for any U.S. companies because this would give the U.S. a stronger position at the negotiating table.  The Chinese absolutely do not want President Trump to call for a boycott of Chinese products.  This could be very devastating for the Chinese economy and the companies in China that sell most of their products to the U.S.  Our expectation is that there is some truth to this as we have seen evidence of anti-U.S. sentiment picking up over the last few months.  We anticipate that this will be a temporary theme that should dissipate over time as trade tensions ease.

In addition, competition from Chinese smartphone makers has also played a role in this slowdown as Apple viewed the Chinese market as one of the best opportunities to continue iPhone unit sales growth.  It now appears that competitors like Huawei may be more of a threat to this strategy than Apple originally anticipated.  These competitors have been able to produce a viable smartphone at lower price points.  This may cause Apple to rethink their strategy for iPhones going forward and may cause them to produce much lower priced units to compete in different geographic regions where disposable incomes are much lower.   Apple has also not been able to “crack” into the India market that has over 1.3 billion people.  Very few people in India have an iPhone and this includes India’s luxury marketplace.  If Apple can go from around their current zero percent to around a 5% market share in India that would have a huge effect for Apple and allow them to diversify their Emerging Market exposure away from China.    In the past, Cook has recognized the opportunities with India and other emerging markets and we hope they are working on strategies to engage these markets going forward.  The first step towards getting exposure to India’s markets may have already been announced with the new Apple Foxconn factory opening in India.  Hopefully, Indians will be more willing to buy iPhones that are manufactured in India.

Cook also acknowledged that while iPhone sales were most disappointing in China, they were also not as strong as anticipated in developed markets.  The main reason for this is consumers are waiting longer to upgrade their iPhones.  To combat the lengthening replacement cycle facing the iPhone, Apple is undertaking an initiative to make it simple to trade in a phone at its stores so that a consumer can trade in their older iPhone and upgrade to a newer iPhone at a lower price.  They are also working on implementing a program that will allow consumers to finance their phone purchase directly with Apple.  This will allow consumers to pay for their phones over time, which is what most of the wireless carriers did over the past years to get consumers in the door.   This should help Apple’s iPhone sales going forward as giving consumers more choices on how to buy the phones is very important when talking about a higher end product.


Despite these short-term hiccups, Apple is still very well positioned for the long term.  The company is growing every other piece of its business.  All remaining categories (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19% year-over-year.  For example, wearables grew almost 50% year-over-year.  Cook stated that “Apple Watch and AirPods were wildly popular among holiday shoppers.”  The newly launched MacBook Air and Mac mini is driving the Mac to year-over-year revenue growth and the launch of the iPad Pro will drive iPad to double-digit revenue growth.  Just a few years ago, there were worries that falling iPad and Mac sales were overblown fears that weighed on Apple’s share price.  While revenue wasn’t as strong as the company originally projected, Apple still expects to “set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea.”

Another very bright spot for Apple’s future is the services side of its business.  We have talked about Apple pivoting to services, which Cook stated yesterday is continuing to grow at a very high rate.  This is a high margin side of the business and includes things like the App Store, Apple Music, Apple Pay, and iCloud.  According to Cook, all these divisions hit records.  Overall, the revenue for the services business is expected to be $10.8 billion for the quarter.  The revenues that come from Services is more “recurring” so it is a very good sign to see this segment growing.  While consumers are spending more, Apple stated they have 100 million more new devices in service today than they did a year ago.  This should continue to drive Services revenue higher and, in our opinion, should continue to drive continued revenue growth.

Even with this lower guidance on revenue, we expect Apple to post a 7% increase in year-over-year EPS.  The current math puts Apple’s EPS at $4.16 per share in their fiscal Q1.  If this ends up being the number as expected, Apple’s trailing twelve-month (TTM) earnings will be $12.15 per share.  At Apple’s current stock price, the TTM Price to Earnings (P/E) Ratio comes out to 12.02.  If you back out Apple’s net cash, which currently stands at approximately $26/share, the market is valuing Apple at $116, or below 10x earnings.  When compared to the S&P 500’s 25-year average market P/E of 16.1, Apple shares are trading at a significant discount to the rest of the market.  The actual cash number stands at $130 billion.  To put this in perspective, Apple’s cash position alone is worth more than the market capitalization of all but the top 34 companies in the S&P 500.  This large cash position gives Apple a great deal of autonomy to return cash to shareholders.  Cook restated that the company’s goal is to be “net-cash neutral” over time, which hints at larger share buybacks or dividend increases.  Cook stated, “I believe the company’s stock is an incredible value and so you can bet that we’re going to be buying some stock under the plan that we’ve had out there for quite some time.”  This cash position also gives the company plenty of dry powder to make larger acquisitions, something Apple has historically shied away from but could come back into focus now that the share price has come under pressure these last few months.

The bottom line is that Apple is still the most profitable company in the world and while they may hit a few more speed bumps as they focus on transitioning more of their revenue towards other business segments, we still expect that the company will continue to innovate and evolve.  Until that story is no longer intact and we see several segments of their business decline or iPhone revenues continue to fall (beyond one quarter in one country), we do not believe a short-term revenue revision is indicative of a long-term trend. We still remain positive on the outlook for Apple and understand that it may take a few quarters before the sentiment changes on this stock.  Until then, we believe this is a good entry point for investors who do not already have a position in Apple and for those that already own shares we recommend holding your current position.

PFA Investment Committee

Jim Reding                 Ryan Powers

Bob Spindel                Brad Combs

Matt Schaller              Matt Kellermann

Market Commentary: December 6, 2018

Paradigm Financial Advisors

Market Update

December 6, 2018


Wild Ride for Investors Continues into December:

The stock market rose almost 2% on Monday after it was announced that President Trump had reached an agreement with Chinese President Xi to suspend all tariffs and continue negotiating a trade agreement over the next 90 days.   However, the rally faded quickly and the market fell  3% on Tuesday due to concerns over the flattening bond yield curve.   On Tuesday the spread between the 2-year and 5-year Treasury notes became negative for the first time since 2007.    The spread between 2-year and 10-year Treasury Bonds flattened further to .13%.

Investors became very nervous on Tuesday as the noise level rose and many commentators declared dooms day is coming because in the past an inverted yield curve has historically been a leading indicator of an impending recession. However, as the chart below shows, an inverted yield curve does not always lead to a recession and there have been a number of time periods where the U.S. economy and stock market have continued to do very well with an inverted yield curve.


Programmed Trading Increased Selling Pressure on Tuesday:

After looking at the volume spikes on Tuesday, it appears that the selling was exacerbated by institutional trading programs that were triggered when the 2-year and 5-year yield curve became inverted for the first time since 2007.   Many hedge funds and wall street firms have built trading algorithms that are programmed to sell stocks when certain leading economic indicators hit certain levels.  These trading programs were triggered on Tuesday as the 2-year and 5-year yield curve became inverted and the programmed trading once again dramatically increased the volume of short term selling in the stock market.  As we have discussed, programmed trading by Wall Street firms, hedge funds, etc. is designed to create short-term chaos so that they can profit from “retail investor’s panic selling”.  The wild swings in the markets are frustrating but they do not impact disciplined investors that do not succumb to emotional selling because over the long-term stock prices have consistently been determined by earnings, cash flow and other fundamentals.


Disconnect between the Federal Reserve and the Bond Market:

The yield curve has been flattening for several years because of the disconnect between the Federal Reserve and the bond market’s divergent outlooks for future economic growth.

The Federal Reserve believes that the U.S. economy is going to continue to grow at a healthy pace in the next few years.  However,  bond market participants do not share this view because they think the following risks could derail the U.S. economy:

a)      The Federal Reserve could derail the U.S. economic recovery by raising short term rates too quickly.

b)      S. corporate earnings may have reached a peak in Q3 2018 and earnings could fall in 2019.

c)     President Trump’s tough trade negotiations with China could lead to a full-blown trade war which could have a negative impact on U.S. and global economic growth

d)      Geopolitical risks in the Middle East could rise if President Trump decides to  punish Saudi Arabia for the brutal murder of Jamal Khashoggi by cancelling the sale of U.S. military equipment and/or imposing harsh sanctions on Saudi Arabia.

e)     The European economy may continue to struggle due to the turmoil surrounding BREXIT and Italian debt negotiations.

Long term bond yields have fallen as the bond market continues to price in all of the risks that could have a negative impact on U.S. economic growth.


The Federal Reserve is moving more dovish on the likelihood and pace of future rate hikes:

Federal Reserve Chairman Powell made it clear last week that they recognize that there are a number of issues that could have a negative impact on economic growth and he indicated that the Fed is going to be more “data dependent” moving forward which should result in fewer rate hikes than they originally anticipated.   In the summer, the Federal Reserve indicated that they would likely raise rates on more time in December 2018 and three more times in 2019.   The data now suggests that they will probably do one hike in 2 weeks and possibly just one more in the summer of 2019.


Leading Economic Indicators remain positive:

Even though the yield curve has been flattening, nearly all of the other leading economic indicators are still positive which indicates that the U.S. economy is not at risk of entering into a recession any time soon.


Job Growth remains strong:

  • The November ADP payroll Report came out this morning which showed 179K new private sector jobs were created last month.
  • The November Non-Farm Payroll Report will be released tomorrow and the consensus estimate has come down slightly from 200K jobs to 198K jobs.
  • Initial Jobless Claims fell by 4,000 to 231K last week from an upwardly revised 235K the previous week, which is still near a 50-year low.
  • Continuing Jobless Claims fell from 1.705 million last week to 1.631 million, which is also near a 50-year low.


2018 Christmas Shopping Spending stronger than expected:

  • Black Friday sales grew 23.6% year over year to $6.2 billion.
  • Thanksgiving Day was also a big up-day for retailers, bringing in $3.7 billion, up 28% from a year ago.
  • Small-Business Saturday, also part of the holiday shopping pantheon, rose 24% this year to $3 billion overall.
  • Other big retail winners over the weekend: Walmart (WMT) grew sales 23% year over year between Thanksgiving and Black Friday, boosted notably by its Click & Collect feature, which cranked up 73% from the year-ago quarter.  Target (TGT) sales over the weekend grew at 47% from a year ago.
  • Cyber Monday sales were over $8 Billion which was the largest shopping day in U.S. history.  Total sales on Cyber Monday grew at over 20% from 2017.
  • Christmas spending from Thanksgiving through Cyber Monday was reported at over $60 Billion, which is an increase of over 20% from 2017.


The Conference Board’s Leading Economic Indicators Index for October rose 0.1 percent in October to 112.1 (2016 = 100), following a 0.6 percent increase in September, and a 0.5 percent increase in August.  The index still points to robust economic growth and should continue in 2019.

The chart below shows that the Leading Economic Indicator Index has historically dropped below its six-month moving average before a recession. The latest index reading shows no near-term recession risk.


President Trump and Chinese leader Xi agree to suspend Tariffs:

Over the weekend President Donald Trump and President Xi Jinping agreed to a “truce” during their meeting at the G20 summit.  President Trump agreed to leave tariffs on $200 billion worth of Chinese goods at 10%, rather than increase them to 25% on January 1, 2019, as originally planned. In turn, President Xi pledged to immediately resume purchases of U.S. agricultural goods, including corn and soybeans, which were hit particularly hard by China’s retaliatory tariffs. China also agreed to buy an unspecified amount of energy, industrial and other products from the U.S.

The two sides agreed to continue talks to resolve contentious policies at the heart of the trade conflict. Such policies include intellectual property protection, state-sanctioned cyber intrusion and forced technology transfer.  President Trump said he is confident that they can reach an agreement within 90 days.  Trump also cautioned that if China does not follow through on their promises made at their meeting then he will increase tariffs on China to 25%.

While considerable uncertainty remains around resolution of these trade conflicts, the fact that the U.S. and China reached a tentative agreement could benefit recently troubled emerging markets stocks (EM). We believe EM stocks offer a very good opportunity for investors because many EM companies are selling at deep discounts.  Many Chinese stocks have sold off by 30% to 40% this year due to concerns over a trade war with the U.S.   The sell-off in China presents an historic opportunity for investors because many Chinese companies have strong cash flow and are forecast to grow earnings by over 20% in 2019.  If a final agreement is reached between the U.S. and China in the next 90 days it will provide a much needed catalyst that could spark a strong rally in Chinese and EM stocks in 2019.


President Trump’s goals:

President Trump and his team of negotiators are going to try to convince the Chinese leaders to agree to a new trade agreement that will achieve the following goals:

  1. Prevent the Chinese from stealing technology, intellectual property and trade secrets from U.S. companies.
  2. Stop the Chinese government from forcing U.S. companies to turn over their trade secrets and technology as a prerequisite for doing business in China.
  3. Get China to agree to designate Fentanyl (an addictive opioid) as a controlled substance which would subject any Chinese sellers of the drug to criminal penalties.
  4. Get China to take affirmative action to help the U.S. in its efforts to convince North Korea to end nuclear weapons development.
  5. President Trump also wants to make sure that China’s new long-term development plan, “Made in China 2025,” does not create an unlevel playing field to help China gain a lead in artificial intelligence, automation, robotics and electric vehicles by unfairly subsidizing Chinese companies while discriminating against U.S. businesses operating in China.  Currently, China has two sets of rules for conducting business in China – one that favors Chinese companies and another set of laws that make it incredibly difficult for U.S. companies to succeed in China.


President Xi’s Goals:

Negotiating with the Chinese leaders will be the most difficult “deal” that President Trump has ever tried to make.  China has a Communist Ruling Party but it also has a quasi-free market system and their views and goals are very different than other countries the U.S. has negotiated trade deals with.

When Xi became President in 2010, he started creating a new vision for China – he announced a new national plan to create what he called a “great modern socialist country that is going to be prosperous” and “a global leader in terms of composite national power”.  Xi’s goal is to double China’s GDP per capita to $10,000  by 2021, which is the year that China will celebrate the 100th anniversary of the founding of the Chinese Communist Party.

Xi recently announced an expanded long-term national plan for China called “Made in China 2025”.  This new plan creates a vision for China to become the global leader in key technologies including computing, robotics, artificial intelligence and self-driving cars.   Xi’s vision for China is not just about economic growth and increasing the wealth of the Chinese people, Xi’s vision is to make China powerful and make the Chinese people proud again.  China’s goal is to become the global leader in finance, automation, defense, science, technology and the arts & culture.

President Xi’s wants the U.S. to allow China to pursue its “One-China policy” which they have used to assert that Taiwan is a part of China.  The negotiations will be complicated by the fact that the Chinese leaders believe that the U.S. wants to prevent China from achieving their goal of becoming one of the world’s economic and military super powers.  The Chinese think that America’s strategy is to isolate and contain China.  The Chinese also believe that the U.S. does not want to recognize and accept the political legitimacy of the Chinese Communist Party because it is not a democratic based party.

President Trump and his team have their work cut out for them to convince their Chinese counterparts that the U.S. is not going to try to sabotage the Chinese government or try to derail China’s economic growth plans.  The U.S. negotiators will have to remind their Chinese counterparts that the U.S. led the world back to stability after the second World War.  The U.S. has also played a major role in helping China and other Asian countries prosper.  The Chinese recognize the role the U.S. has played but China does not want to be dependent on the U.S. in the future. President Xi made this clear in a speech he gave in 2014 when he said, “In the final analysis, it is for the people of Asia to run the affairs of Asia, solve the problems of Asia and uphold the security of Asia.”


Investors remain concerned about uncertainty of a trade deal with China:

The initial excitement wore off quickly after Monday’s announcement of the truce agreed to by  President Trump and President Xi due to the fact that there does not appear to be any formal written agreement between the U.S. and China and many skeptics have expressed doubts over the trustworthiness of China.  However, we believe that Trump and Xi will be able to reach a formal agreement because both countries have too much at risk if they allow this to turn into a full-blown trade war.  The final deal may end up being criticized by media pundits but it would still be a monumental success if China agrees to make a genuine commitment to stop stealing U.S. technology and other intellectual property, to buy more U.S. agricultural and other products and agree to label Fentanyl as a controlled substance and to prosecute Chinese illegal sellers.  President Xi has an historic opportunity to improve China’s tarnished reputation in the World Trade Organization.


Huawei CFO Arrest threatens to derail U.S. and China trade negotiations:

After being closed on Wednesday for President Bush’s funeral, the market opened down over 400 points today after news broke that the CFO of Chinese technology giant Hauwei, Wanzhau Meng, was arrested in Canada and she is going to be extradited to the U.S. to face charges by the U.S. Department of Justice. It is unclear at this time if President Trump and President Xi knew about the arrest at the time of their meeting on Saturday.

It is being reported that the Justice Department is investigating Hauwei based on the following potential charges:

1) they violated U.S. sanctions on Iran by selling them telecommunications-equipment

2) they violated U.S. sanctions by selling U.S. technology to Syria and North Korea

3) they violated a variety of laws by installing secret chips that provided them with a “back door” into the equipment sold in the U.S. that allows them to monitor user activity and helped them steal technology from U.S. companies and possibly top-secret information from the U.S. government.

Chinese officials immediately condemned the arrest of Meng saying it is a violation of its citizens’ rights and demanding that the U.S. and Canada release her immediately.  Meng’s arrest will certainly increase tensions between President Trump and China’s President Xi.  The arrest was made on the same day Trump and Xi had dinner and agreed on a truce on tariffs.  Neither Trump or Xi has made any comments yet to address concerns that China may suspend negotiations on a new trade agreement.  The arrest is an unprecedented move by the U.S. Department of Justice and it remains to be seen if Trump knew about the impending arrest or if the Justice Department kept him in the dark as they arrested Meng.

Meng is the daughter of Ren Zhengfei, the founder of Hauwei.  Zhenfei is well connected with Xi and China’s ruling party.  He is a former army engineer and he has led Hauwei to become one of the world’s largest sellers of smartphones and networking gear. He’s regularly named among China’s top executives and he has a similar status in China as Bill Gates has in the U.S.

Huawei has been trying to acquire U.S. technology on artificial intelligence, chipmaking and 5G wireless technology and U.S. companies have complained to the Department of Justice that they have tried to hack their networks, etc. to try to steal U.S. technology.   By arresting the CFO of Huawei, the U.S. is threatening one of China’s most successful companies.

In August, Trump signed a bill banning the government’s use of Huawei technology based on the security concerns and many U.S. allies are either imposing or considering similar moves. That same month, Australia barred the use of Huawei’s equipment for 5G networks in the country and New Zealand last week did the same, citing national security concerns. The U.K. and European Union are also considering banning Hauwei products. In November, Huawei said that banning Hauwei products will hinder the development of 5G and raise prices for consumers.


Impact of the arrest on trade negotiations with China:

There is no question that the arrest of Hauwei’s CFO makes it clear that the U.S. is prepared to play “hard ball” with China on the trade negotiations.  The arrest does increase the risk of a break-down in negotiations leading to a trade war with China and more punitive tariffs from both sides.  It appears that China wants to get a deal done because they have more to lose because their economy is still dependent on exporting goods to the U.S.  A protracted trade war with the U.S. will lead to rising unemployment in China which could lead to Xi’s worst fear – civil unrest that could jeopardize the future of China’s communist ruling party.  The arrest of the CFO of Hauwei should make it clear to China that the U.S. is not going to allow them to continue to steal our technology and that China is going to have to abide by international law in the future.

We will update clients on any new developments on the tensions between China and the U.S. as we get new information.


PFA Investment Committee

Jim Reding      Ryan Powers


Brad Combs    Matt Schaller


Bob Spindel     Matt Kellermann

Market Commentary: October 30, 2018

Paradigm Financial Advisors

Market Commentary

October 30, 2018


Stock Market Volatility:  Market volatility continued today with the Dow Jones Industrial Average closing up 431 points (1.77%) and the S&P 500 ended the trading session up 41.38 points (1.57%).  Last week U.S. equities declined 3.9% and global stock markets also struggled as European stocks fell 4% and Emerging Market stocks were down 3.3%.  Yesterday, stocks initially opened higher but the gains were lost after Bloomberg reported that the U.S. is planning more tariffs on Chinese imports if the meeting at next month’s G20 meeting between President Trump and Chinese President Xi fails. The October sell-off has erased all of the year to date gains in the S&P 500 despite strong economic reports and corporate earnings growth for Q3 coming in at 22%.

As we discussed in our market update last week, investors are concerned about a number of potential risks that could undermine the U.S economy such as the Federal Reserve raising rates too quickly, lower earnings growth in the future, negative consequences of the trade dispute with China, uncertainty in Europe surrounding  BREXIT & the EU’s rejection of Italy’s budget, and potential sanctions against Saudi Arabia after the murder of Jamal Khashoggi.


Over the weekend we dug deeper into the market data and it became clear that there are a number of trading related factors that also contributed to the magnitude of the sell-off:

1)  Stop-Loss Orders:  A large volume of trades were triggered by investors having entered Stop-Loss orders on stocks in order to protect their gains.  Stop prices are not guaranteed execution prices. A “stop order” becomes a “market order” when the “stop price” is reached – unless

the investor places a limit on the stop order.  Stop orders can add to selling pressure during volatile market conditions and many investors who enter stop orders end up selling at a price significantly below their expectations.

2) Profit-Taking:  Some active mutual fund managers do not want to risk trailing the indexes so they started taking profits as soon as the market went down two days in a row.

3) VIX Volatility Trading:  Data from the Commodity Futures Trading Commission indicates that during the 30 days prior to the sell-off a large volume of trades were made shorting VIX futures. When stocks started selling off, volatility rose very quickly and institutional investors

who had shorted VIX options had to unwind their trades very quickly which exacerbated the drop in the stock market.

4)  High-Frequency Trading Algorithms: Many of the big Wall Street firms have proprietary trading departments that use “high-frequency trading algorithms” that are designed to increase volatility by adding enormous selling pressure in down markets.   Wall Street’s

proprietary trading departments will likely end up making millions of dollars in October while their clients may end up losing more money than they would have otherwise!  Note:  this is one of the reasons Wall Street firms have spent a large amount of money lobbying against the

proposed Fiduciary Standard because they would have to shut down their proprietary trading departments since it is not in the best interest of their clients.


These trading factors contributed to the sell-off over the past few weeks.  The good news is that these factors only impact short term prices.  Long-term stock prices are primarily determined by valuations, future earnings and economic growth forecasts.


U.S. Economic Growth Outlook remains Positive: The much anticipated first release of the third quarter 2018 GDP estimate was released on Friday and it showed that GDP grew at an annualized rate of 3.5%.  This was 30 basis points (0.30%) higher than consensus estimates.  This follows second quarter GDP growth of 4.2% and first quarter growth of 2.2%.  This has been the best three-quarter average GDP growth since 2014.  The tax cuts and deregulation have produced higher U.S. economic growth than what economists have been forecasting.  In the third quarter, consumer spending (which accounts for approximately 70% of our economy) rose 4%, government spending on Defense rose by 0.50% and imports rose by 9.1%.


Q3 2018 Corporate Earnings RecapAccording to FactSet, as of October 26, 2018, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter.

  • 77% of Companies in the S&P 500 have beat analyst’s expectations for EPS Growth.
  • 59% of Companies in the S&P 500 have beat analyst’s estimates on revenue growth.
  • Average earnings per share growth for the S&P 500 is 22.5%.
  • Average revenue growth for the S&P 500 is 7.6%.
  • The companies in the S&P 500 Index are on pace to increase EPS by 22% with 7.2% higher revenues.
  • The bottom up target price among analysts for the S&P 500 over the next 12-months is 3,205.55. This is approximately 20% higher than today’s closing price.

October has been a very frustrating month for investors as the market seems to be reacting irrationally by ignoring strong economic reports and not rewarding companies that have posted strong earnings growth.  Typically, when a company beats earnings estimates their stock moves up immediately but that has not been the case in Q3 for most companies.


The Chart below shows the average one-day stock price change for the companies that have reported results thus far in Q3 (solid column) compared to the change in stock price after Q2 earnings reports (shaded column).


Chart Comparing Stock Price Changes after Q2 vs Q3 Earnings Reports


Recap of Earnings Results from Last Week:


Amazon reported another quarter of record profit Thursday, fueled by the growth of online shopping and its cloud-computing service, but revenue grew less than Wall Street analysts expected.  For years, Amazon has  posted razor thin quarterly profits because it has been spending most of its earnings on building warehouses and making other investments to continue growing sales.   However, Amazon’s earnings are improving dramatically due to Amazon’s Cloud Computing business.  Just one year ago, Amazon reported profit of just $256 million but then last week Amazon posted third-quarter profit of $2.88 billion, its fourth straight quarter profit above $1 billion.  Amazon’s Revenue rose 29 percent to $56.58 billion in Q3 – which was slightly below analyst’s expectations of $57.05 billion.  Amazon reported earnings per share of $5.75, beating the $3.29 per share analyst expected.  Amazon gave guidance for the fourth quarter, which includes Christmas shopping season, in the range of $66.5 billion to $72.5 billion, which is slightly lower than the $73.8 billion Analysts had been expecting.


Google (Alphabet) posted earnings that were 25% higher than analyst’s estimates.  Google reported a net profit of $9.19 billion in Q3 and earnings per share of $13.06 – significantly above the $10.42 EPS that analysts expected.  Alphabet Q3 revenue was $33.7 billion, up 21% year-over-year but slightly lower than Wall Street’s consensus estimates of $34.04 billion.  Google’s hardware sales were down somewhat in Q3 but they anticipate significant growth going forward with the launch the new Google Pixel 3 smartphones and other products in Q4.  Google ad revenue climbed 20%, to $28.95 billion for the third quarter, and operating income rose 10.6%, to $9.49 billion.  Google ended the quarter with $106.4 billion in cash and equivalents and marketable securities, and $3.99 billion in long-term debt.


Netflix’s third-quarter revenue rose 34% year-over-year, to almost $4 billion, and net income was up 130% to $481 million. Revenue growth was fueled by a 25% increase in average paid streaming memberships, along with an 8% increase in average pricing. Netflix began raising its monthly prices in November 2017, and the increase helped Netflix post an impressive increase in revenue in the third quarter.  Netflix’s profit margins rose by 6% from the prior year to 28.8%.  Quarterly EPS rose to $0.89 from $0.29 in the same period last year, which was $0.21 or 31% higher than analyst’s consensus estimates.  Netflix grew subscribers by 22% in the third quarter.  They added 1.09 million new subscribers in the U.S. and 5.87 million international net streaming members in the quarter and now has 137 million total streaming subscribers. Management currently expects 1.8 million net additional U.S. streaming subscribers in Q4 2018. The company is also forecasting a continued ramp in international streaming net adds to 7.6 million.   The market has still sold Netflix stock off over overblown fears that the costs will continue to rise as the company plans to continue to spend heavily on creating new content.


Intel posted third quarter earnings of $1.40 per share on an 18.7% year-over-year jump in revenue to $19.16 billion, both of which also beat analyst’s estimates.  Intel also posted higher than expected guidance for the fourth quarter of 2018. Intel said that they expect fourth quarter earnings of $1.22 per share and fourth quarter revenue to be roughly $19.00 billion. Intel now expects full year 2018 earnings of $4.53 per share, which is significantly higher than previous guidance for earnings between $3.94 per share and $4.36 per share.  Intel said it expects revenue to reach $71.20 billion for full fiscal year 2018, which is also higher than their previous forecast for sales between $68.50 billion and $70.50 billion.  Intel generated record revenue in all of their business segments and their operating margin rose by 5% to 39.7%, the strongest level in more than a decade.  Business Computing sales grew 16.0% year-over-year to $10.20 billion while operating income jumped 26.0% to $4.50 billion.  Personal/Desktop computer sales increased 9.0% and notebook/laptop computer sales rose 13.0%. The average selling price of desktop processors increased 10.0% while the average selling price of notebook CPUs grew 4.0%.  Data Center revenue jumped 26.0% to $6.10 billion while operating income spiked 37.0% to $3.10 billion.  Cloud revenue grew 50.0% while unit volumes grew 15.0%. Intel’s average selling prices increased 10.0%.  INTC is currently trading at a P/E of 9.7, based on 2019 forecasted earnings per share, which is a 35% DISCOUNT to 5-year median for semiconductor companies.


Peak Earnings Fears are Overblown:  Despite the fact that 77% of companies have reported better than expected earnings, investors seem to believe that the combination of additional tariffs, a stronger dollar, and rising material costs may signal that corporate earnings have reached a peak.  We think worries over peak earnings are overblown because it  assumes that every company and sector are all the same and it fails to recognize that companies in various sectors of the market are at very different stages in their growth cycles.   There are a number of industries that have experienced very little growth over the past decade, such as energy, machinery, infrastructure, health care, biotechnology, transportation, robotics & artificial intelligence, etc. that are in the early stages of a long-term growth trend.  Companies are forecasting double digit earnings growth in 2019 and they do not expect any significant deterioration in profit margins.  As additional earnings reports come in this week, hopefully investors will stop reacting to the noise and focus on the data that shows corporate earnings are not going to fall off of a cliff anytime soon!


The Federal Reserve May Change its Plans for Raising Interest Rates:  In September the Federal Reserve raised rates by another .25% to 2.25% and they raised some concerns by removing the word “accommodative” from their comments describing their stance on monetary policy.   After the meeting, Chairman Powell tried to relieve these concerns by saying “the change does not signal any change in the likely path of policy” and he also said, “it is a sign that policy is proceeding in line with our expectations.”   In our opinion the Fed needs to reconsider their plans and postpone the December rate hike because inflation is well contained and higher interest rates will have a negative impact on home and auto sales.  The Federal Reserve has said repeatedly that they do not want to jeopardize the economic recovery by raising rates too aggressively.  A number of Federal Reserve officials will be giving speeches over the next few weeks and we expect to hear them start walking back their comments about the timing of raising interest rates prior to the next meeting of the Federal Reserve Board on December 18th & 19th.

Important announcements this week


  • Earnings: Apple, Facebook, Berkshire Hathaway, Coca-Cola (KO), General Electric (GE), Starbucks (SBUX) and Pfizer (PFE). Chevron (CVX) and Exxon Mobil (XOM) all release earnings this week.


  • The October jobs report will be released on Friday and it is expected to improve over September’s hurricane-dampened figure of 134,000 to 193,000. The unemployment rate is expected to remain at 3.7% and wage inflation as measured by average hourly earnings is expected to stabilize at 2.8% year-over-year.


Conclusion:  The market seems to be ignoring the fact that U.S. companies are posting fantastic earnings and their balance sheets are the strongest they have been in decades.  The investors that have sold equities during this recent volatility are making irrational investment decisions based on short term noise.  Disciplined investors focus on the data – not the noise and they take advantage of the buying opportunities that have been created by the short term selling.   We believe that the selling has been overdone and the market should get some support from the earnings reports and economic data over the next few weeks.


PFA’s Investment Committee:

Jim Reding                          Bob Spindel

Ryan Powers                     Brad Combs

Matt Schaller                    Matt Kellerman




Market Commentary: October 24, 2018

Paradigm Financial Advisors

Market Update

October 24, 2018


Global stock markets have experienced increased volatility over the past few weeks as a number of issues have combined to rattle investors.  Investors are concerned about corporate earnings and profit margins, a potential full-blown trade war with China, interest rate hikes by the Federal Reserve, European tensions regarding Brexit and the Italian budget negotiations, the implication of Saudi Arabia in the brutal murder of Jamal Khashoggi, and uncertainty surrounding the upcoming Mid-term elections.


A few market commentators have been stirring up fear by predicting that corporate earnings have peaked and that we could fall back into a recession in the U.S. as early as 2019.   Ratings go up when fear rises but the doom and gloom commentators are likely to be wrong again because the economic and earnings data do not indicate any risk of a recession any time soon.  The third quarter earnings reports are forecast to show double digit earnings growth and the most recent economic data indicate that the U.S. economy is the strongest it has been in many decades.  The tax cuts and decreased business regulations will help U.S. companies continue to produce strong earnings going forward.   We believe the recent sell-off has produced an excellent opportunity for investors to rebalance their portfolios to take advantage of very attractive prices.


While It is impossible to figure out the exact cause of these short-term market pullbacks, the following “fear factors” likely have contributed to the recent increase in volatility:


1) Will the Federal Reserve Raise Rates Too Quickly?

The Federal Reserve, under the new leadership of Jerome Powell, has been very hawkish in their recent outlook for future rate hikes.   They have implied that they will raise rates one more time this December, followed by 3 more rate hikes in 2019.   The problem with this guidance is how they have framed the statements as “tightening” monetary policy and they should change the terminology to “normalizing” monetary policy.  They need to explain that interest rates are still very low compared to historical standards and that if the robust economic conditions continue, they will continue to move rates higher to a more “normalized” level.

Home & Auto Sales:  Home and Auto sales have fallen over the past few months due to higher interest rates.  The Federal Reserve may have to walk back their most recent statements indicating more aggressive tightening after seeing the most recent Housing and Automobile sales data.  Rising interest rates may be hurting home and auto sales more than anyone expected.  If the threat of increased rate hikes continues to hurt the housing and automotive markets, we may see the Federal Reserve move to a more dovish stance on future rate hikes.

Inflation Concerns:   The Federal Reserve is also causing some fears in the market due to their 2% inflation target.  As the U.S. economy strengthens the Fed may face pressure to change its inflation target to a range of 2% to 3%, rather than boxing itself in with the 2% target.  Inflation is not currently an issue in the U.S. or across the globe and we have seen over the past two decades that the globalized economy and technological advances has helped keep inflation in check and we expect this trend to continue going forward.


2) Trade War with China:

We believe that the fears of a full-scale trade war with China are overblown and that these fears have created a fantastic opportunity for long term investors.  Most of the Chinese stock market is now trading in bear territory (down over 20%) and is very attractive from a valuation perspective.  We do not believe that our administration or their administration wants this to turn into a full-scale trade war, in that scenario, neither country wins.   We think a breakthrough could happen in the next few weeks which will hopefully set the stage for a meeting between President Trump and Chinese leader Xi Jinping at the multilateral summits which will be held in November.


3) Peak Earnings Fears

Many pundits continue to predict that U.S. companies’ profits and margins have peaked and its all downhill from here.  They have been saying this for several years and they continue to be wrong.   This is the second full week of this earnings season and approximately 20% of S&P 500 companies have reported earnings thus far, and we are still expecting total earnings growth of 20% for the quarter (year over year), which will mark the 3rd consecutive quarter of over 20% earnings growth.   The economic data has clearly indicated that the U.S. economy is still growing at a very solid pace at approximately 3%.  The third quarter GDP report will be released this Friday and we believe it may show higher growth than economists have forecasted.


4) Will the Tax Cuts Benefit Companies in 2019 and Beyond:

The benefits of the tax cuts have already surpassed what nearly all of the economic forecasters predicted.  However, there is still fear that the Tax Cuts will only benefit the earnings of U.S. companies in 2018.  We believe the tax cuts will continue to help U.S. companies be much more competitive globally and will save U.S. companies millions of dollars EVERY year.  The big surprise that commentators should be talking about is that the tax cuts and reduced business regulations could lead to stronger than expected economic growth in the years to come.


5)  European and other Geopolitical Fears:

European political uncertainty continues to weigh on European stocks.  The never-ending Brexit debate continues and the European Union is demanding that Italy change their budget to reduce entitlement spending further and a decision is supposed to be reached in Italy today.  If Italy refuses to change their budget the European Union may take the unprecedented step of demanding Italy take back, revise and resubmit its fiscal plan.


6) Midterm Elections: 

President Donald Trump is intensifying his campaign ahead of the midterm elections and is making promises in a bid to ward off Democratic control of Congress. He doubled down on his promise for further tax cuts, saying there would be an additional 10 percent reduction for middle-income families.   President Trump is also promising that the U.S. would outspend any other nation in building up its military defense to answer any challenge presented by Russia and China.  President Trump is also taking a hard line on immigration, saying the U.S. may close the border temporarily and the U.S. may cut off foreign aid to Guatemala, Honduras and El Salvador as thousands of people march north from the region in search of a better life in America.


7) Saudi Arabia’s Involvement with the Murder of Jamal Khashoggi:

The Saudi Government has denied involvement but Investors are concerned because their explanation does not seem credible.  The timing of this incident is terrible for Saudi Arabia because they are hosting the Saudi Arabia Future Investment Initiative conference which begins today.  Many countries have pulled out of the conference due to the murder of Khashoggi.  Turkey’s President Recep Tayyip Erdogan is laying the blame for the death squarely at the door of Saudi authorities, dubbing it a planned operation. The markets are concerned that the U.S. and other allies of Saudi Arabia may impose sanctions or take more serious action against them which could have a destabilizing impact on the middle east.  There is very little risk of a major conflict between the U.S. and Saudi Arabia over this but it is still weighing on the global markets because it creates uncertainty.



This is a bump in the road and it has created some excellent buying opportunities.

The media has, and will likely, continue to question whether this is the end of the bull market.  It’s an easy story to push, as we are now in the longest economic recovery in history and the market is near all-time highs.  The odds of a recession are still very low over the next few years, so it is hard to buy into this thinking that we are due for a recession simply because we have not had one in a long time.  A recession is defined as two consecutive quarters of negative GDP growth.  U.S. GDP growth is accelerating not declining and it is forecast to be over 3% during the remainder of 2018.  We believe that many economists are underestimating the impact of the tax cuts and decreased business regulations and that we could see GDP growth in the U.S reach 4% in 2019.

Keep in mind that no bull market has ever died simply of old age. We believe that the recent sell-off has been irrational and it provides us with an opportunity to rebalance our portfolios to take advantage of mispricing in many asset classes.


PFA’s Investment Committee:

Jim Reding                        Bob Spindel

Ryan Powers                     Brad Combs

Matt Schaller                    Matt Kellerman




Market Commentary: July 10, 2017

The Markets (as of market close July 7, 2017)

Stocks ended last week higher, despite falling energy shares. The Dow and S&P 500 rose last Friday on the heels of June’s strong labor report. Of the indexes listed here, the Dow led the way followed by the Nasdaq and the Global Dow. The yield on 10-year Treasuries climbed closer to its 2016 closing value as long-term bond prices fell, sending yields higher.

The price of crude oil (WTI) closed at $44.30 per barrel, down from the prior week’s closing price of $46.33 per barrel. The price of gold (COMEX) decreased last week, closing at $1,212.00 by late Friday afternoon, down from the prior week’s price of $1,241.40. The national average retail regular gasoline price decreased for the fourth week in a row to $2.260 per gallon on July 3, 2017, $0.028 lower than the previous week’s price and $0.031 less than a year ago.

Market/Index 2016 Close Prior Week As of 7/7 Weekly Change YTD Change
DJIA 19762.60 21349.63 21414.34 0.30% 8.36%
Nasdaq 5383.12 6140.42 6153.08 0.21% 14.30%
S&P 500 2238.83 2423.41 2425.18 0.07% 8.32%
Russell 2000 1357.13 1415.36 1415.84 0.03% 4.33%
Global Dow 2528.21 2769.39 2772.66 0.12% 9.67%
Fed. Funds target rate 0.50%-0.75% 1.00%-1.25% 1.00%-1.25% 0 bps 50 bps
10-year Treasuries 2.44% 2.30% 2.38% 8 bps -6 bps
10-year Treasuries 2.44% 2.30% 2.38% 8 bps -6 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

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Market Commentary: The Markets: (As of Close June 23, 2017)

Market Week: June 26, 2017

A drop in energy shares is keeping the large cap indexes of the S&P 500 and Dow in check, although both benchmarks posted moderate weekly gains. Last week’s big mover was the Nasdaq, which advanced close to 2.0% and is up over 16.0% year-to-date. The yield on 10-year Treasuries slipped 2 basis points last week and is down 30 basis points since the end of last year. Energy stocks declined again last week as the price of oil continues to fall into bear market territory.

The price of crude oil (WTI) closed at $43.15 per barrel, down from the prior week’s closing price of $44.67 per barrel. The price of gold (COMEX) increased last week, closing at $1,257.40 by late Friday afternoon, up from the prior week’s price of $1,255.20. The national average retail regular gasoline price decreased to $2.318 per gallon on June 19, 2017, $0.048 lower than the prior week’s price and $0.035 less than a year ago.

Market/Index 2016 Close Prior Week As of 6/23 Weekly Change YTD Change
DJIA 19762.60 21384.28 21394.76 0.05% 8.26%
Nasdaq 5383.12 6151.76 6265.25 1.84% 16.39%
S&P 500 2238.83 2433.15 2438.30 0.21% 8.91%
Russell 2000 1357.13 1406.73 1414.78 0.57% 4.25%
Global Dow 2528.21 2764.97 2769.05 0.15% 9.53%
Fed. Funds target rate 0.50%-






0 bps 50 bps
10-year Treasuries 2.44% 2.16% 2.14% -2 bps -30 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


Last Week’s Headlines

·         The housing sector may have shown signs of improvement in May, as existing home sales climbed 1.1% for the month — 2.7% above a year ago. Total housing inventory rose 2.1%, which helped increase the number of sales. However, inventories remain low, which is driving up prices. The median existing-home price in May was $252,800, which is the highest median price on record and is up 5.8% from a year ago. Unsold inventory is at a 4.2-month supply at the current sales pace, which is down from 4.7 months this time last year.

·         At an annual rate of 610,000, sales of new single-family homes in May were 2.9% above their revised April rate, and 8.9% above the May 2016 estimate. The median sales price of new houses sold in May 2017 was $345,800. The average sales price was $406,400. The seasonally adjusted estimate of new houses for sale at the end of May was 268,000. This represents a supply of 5.3 months at the current sales rate — unchanged from April.

·         In the week ended June 17, the advance figure for seasonally adjusted initial claims was 241,000, an increase of 3,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 237,000 to 238,000. The advance seasonally adjusted insured unemployment rate was 1.4% for the week ended June 10, unchanged from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ended June 10 was 1,944,000, an increase of 8,000 from the previous week’s revised level. The previous week’s level was revised up 1,000 from 1,935,000 to 1,936,000.

Eye on the Week Ahead

The final week of the month and second quarter offers a last look at the rate of economic growth with the release of the final report for the first-quarter GDP. Inflation is slowing, a trend that is expected to carry over to consumer income and spending as detailed in this week’s May report on personal income and outlays.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/ Market Data (oil spot price, WTI Cushing, OK); (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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Market Commentary: The Markets as of Close June 16, 2017

The benchmark indexes listed here seemed to follow last week’s mixed economic news. While the Fed raised interest rates based on what it perceived as favorable labor and economic reports, inflation is definitely receding and the housing market has stalled. Equities were mixed as the small caps of the Russell 2000 and the tech stocks of the Nasdaq fell back, while the large caps of the S&P 500 and Dow posted marginal gains. Rising interest rates were offset by lower inflationary trends, which may account for the lack of movement in the 10-year Treasuries. Continue reading

Market Commentary: The Markets: (As of Close June 9, 2017)

The benchmark indexes listed here produced mixed results last week. The large-cap Dow gained a little more than 0.25%, while the small-cap Russell 2000 jumped over 1.0% by last week’s end. On the other hand, tech stocks took a hit as the Nasdaq fell over 1.5%. Long-term bond prices fell last week as evidenced by the 4-basis-point jump in the yield of 10-year Treasuries. It’s hard to tell what impact, if any, the domestic (Comey testimony) and foreign (UK election) political developments may have had on the market.

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Market Commentary: The Markets: (As of Close June 2, 2017)

New highs were reached by the S&P 500, the Dow, and Nasdaq as stocks rose for the second week in a row. The small-cap Russell 2000, which had been lagging, scored the highest weekly gains, closing up 1.67%. While the lackluster jobs report apparently didn’t have much of an impact on equities, it may be the reason long-term bond prices climbed as the yield on 10-year Treasuries fell to their lowest level since November of last year.

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Market Commentary: The Markets (as of close May 26, 2017)

Following two weeks of losses, equities rebounded last week, with each of the benchmark indexes listed here posting week-over-week gains, led by the Nasdaq, which climbed over 2.0% for the week and is up 15% since the beginning of the year. The S&P reached another record high last Friday, posting its largest weekly gain since the end of April. The Global Dow advanced less than 1.0%, but is firmly in the black for the year, up almost 10.0% since December 31, 2016. Continue reading