The FDA “Self-Diagnosis” Plan
There were a few stories with potentially major implications that broke this week. France and Greece had their elections over this past weekend which saw citizens of those countries send a clear message – they are tired of the austerity measures being placed on them. In France, the election of Francois Hollande ushers in the return of the Socialist party to power for the first time in two decades. The ousting of the current leader, Nicolas Sarkozy, marks the 11th European Union leader to be tossed aside since the debt crisis began. In Greece, the two pro-bailout parties did not receive enough votes to form a majority government and late on Friday we learned that another round of elections is almost a certainty as no coalition has been able to be formed.
These election results have potentially big implications on the future direction of European austerity and bailout “strategies”. For instance, Hollande of France has been campaigning on the idea of spending more and bringing more people back to work and bucking the austerity direction. This prompted an ally of German Chancellor Merkel to say, “Germany is not here to finance French election promises”. The bigger issue may be Greece as their government is now up in the air. Investment firms continue to raise their odds that Greece will eventually exit the Eurozone, with this election moving Greece one more mile down that road.
To finish out the week, JP Morgan announced it has a “mark-to-market” loss of about $2 billion from supposed hedging activities that appear to have gone wrong. The SEC has opened an investigation into these activities to see if there was something more behind this announcement. With all of these announcements, the market had some volatile days but ended the week only modestly lower.
In company news, McDonalds reported same store sales results that were a little on the light side. It appears that higher commodity costs were impacting their bottom line. Intel announced that it is expecting another record year in 2012 and boosted its quarterly dividend by 7%, and P&G is planning to move its global beauty, skin, cosmetics and personal-care unit to Singapore from Cincinnati, according to a Wall Street Journal report.
For the story of the week we turn to the Food and Drug Administration (FDA) and their potential plan to allow Americans to obtain some prescription drugs over the counter that treat conditions such as high blood pressure and diabetes. The FDA says this would allow patients to get drugs for many common conditions without all of the time and expense of visiting a doctor. While the debate will rage over whether this is a sound medical practice, this change would remove financial pressures from the Medicare system because Medicare would no longer have to pay for doctor’s visits and prescription drugs included in the plan. Now you know.
May 11, 2012
Supermoon Saturday
The stock market has been drifting higher on earnings announcements and hopes of further quantitative easing for several weeks now. However, with earnings reports winding down, it could no longer ignore the elephant in the room. The economic data, which had been overshadowed by earnings, is slowing and has investors uncertain about the coming quarter.
The good news is that earnings and revenue growth in the first quarter were good. Many companies are finding ways to remain profitable, either shifting production, increasing productivity, focusing on emerging markets, reducing prices or in some cases passing along the costs where possible. The best companies have management teams that are looking ahead and finding solutions to challenges that are still on the horizon.
As for the challenges, the most significant one is the high rate of unemployment we have today. While we learned this week that the unemployment rate dropped from 8.2% to 8.1%, it was the drop in the participation rate that caused some raised eyebrows. And while the economic data released this week was less robust than expected, it’s not a phenomenon unique to the United States. Europe is already experiencing a mild recession and China’s growth has slowed too. It would be unreasonable to expect that the United States could somehow escape the current global slowdown.
The silver lining is that global economies are self-correcting. There is a natural equilibrium or perhaps chain of events that allow for a self-correcting mechanism to take hold. For example, the price of oil dropped considerably which we might expect to translate into cheaper gasoline at the pump. While not necessarily good for the oil producers, it could mean more disposable income for consumers this summer. We should also remember that the economy is cyclical and while we’ve experienced two years of nominal GDP growth between 3-5%, it is not unusual to see a brief pullback before once again resuming course.
This weekend we have presidential elections in both Greece and France. We will be eagerly awaiting the outcomes of each election because they each have the potential to destabilize the current austerity mindset in Europe. Either way, the markets will likely decide next week if they think the outcome is advantageous or not. We will be watching closely.
In closing, for those of you thus inclined, this weekend we will experience a perigee full moon, sometimes called a “supermoon.” From our perspective on Earth, the moon will appear 30% brighter and 14% bigger than other full moons in 2012. This is due to the moon flying closer to the Earth than usual. At 11:35 p.m. Eastern time on Saturday, the moon officially becomes full and will also arrive at its perigee–its closest point to Earth – a distance of 221,802 miles (356,955 kilometers) away. Take this opportunity to stay up late and see a truly amazing sight (assuming the skies are clear!).
May 04, 2012
Earnings Announcements Take Center Stage
After starting off the week on the wrong foot, the markets managed to finish each of the subsequent four days higher. Clearly, earnings announcements were the main driver this week as they made headlines morning, noon and night. Yet there was also an undercurrent of tension due to recently released economic data that suggests we may already be in the midst of an economic slowdown. Regardless, the market chooses to focus on what it wants and this week it chose the seemingly good earnings announcements.
Let’s start with the good news. For the most part, companies reporting this week continue to show resilience in the face of challenges both domestically and abroad. For many, increasing margins and earnings are the norm. Yet a keen eye will notice that revenue growth has slowed for many companies across both industries and sectors. We suspect this slowdown will be temporary and that earnings will continue to improve as companies find new and innovative ways to cut costs. For example, Apple once again blew past even the most optimistic analysts’ estimates. It seems China is a big market for them after all. There’s talk of a deal with China Mobile which brings with it some six hundred million potential new subscribers. Now that’s something to think about.
What the media has chosen not to focus on this week is the news coming out of Europe. The recent developments there point to a quickly changing environment with potentially large consequences. Standard & Poor’s (S&P) downgraded Spain two notches, to BBB+ from A, with a negative outlook. It expects, “Spain’s budget trajectory will likely deteriorate against a background of economic contraction.” Spain’s unemployment rate hit 24% which marks the highest reading in over 18 years. In other news, France looks to be on the cusp of giving Sarkozy the boot in favor of Hollande, a socialist candidate who is opposed to the austerity measures that France and Germany have crafted. We could be setting up for a repeat of the last couple of years where the markets sell off mildly during the summer months only to recover later in the year. The main difference, and big unknown this year, will be our presidential election this fall. The election will assuredly move markets one way or the other depending on the outcome.
As for domestic issues, The Federal Open Market Committee released their latest statement on the state of the economy. Investors listened intently for any suggestion that further quantitative easing is necessary. Unfortunately they were disappointed but continue to hold out hope. However, he may not have been completely transparent regarding the health of the economy. March Durable Goods Orders came in lower than expected. The Weekly Initial Unemployment Claims this week confirmed the recent trend of increasing unemployment. And just today we learned that the first estimate for Q1 GDP came in below the already reduced forecasts. It’s not inconceivable that part of the move higher this week is in anticipation of further quantitative easing in the coming months.
It was an unusually busy week parsing earnings announcements and company reports. Due to this, I don’t have a story of the week but you can look forward to one next week.
April 27, 2012
The Benefits of Being Large
If the markets felt choppier to you than usual this week, it’s because they were. We look to close the week higher, breaking a four week modest decline. The news was mostly about earnings, as one company after another reported. To a lesser extent economic news out of Europe and the United States had an impact. In the end, it was a tug of war between earnings announcements and Europe, with earnings announcements ultimately pushing stocks higher for the week.
Domestically the economic news continues to trend slightly negative. March Housing Starts were well below already reduced expectations and Industrial Production is slowing. The April Empire State Survey, a manufacturing survey, came in well below expectations and the March Philly Fed Business Outlook shows business activity, new orders and shipments are all down.
Internationally, the situation in Spain continues to simmer as investors are becoming less likely to buy Spanish debt. Spain’s 10-year bond yield rose to 6.07% and talks have re-started regarding another round of cheap money for Europe (LTRO #2). Goldman Sachs rightly points out that Spain may not be able to right itself through austerity alone. The issue is competitiveness, and Goldman figures Spain needs a depreciation of nearly 20% without a currency with which to do it. Thus, Spain finds itself in a “Catch22”, where austerity only worsens its debt issues.
For better news we turn to the earnings announcements this week. There were plenty of them and, for the most part, they were good. Companies appear to continue the trend of running lean and saving cash. They are wringing out every last bit of productivity whether through technological advantage or simple head count. While Europe remains weak, many companies are finding sales domestically are picking up. Examples of those would be Coca Cola and McDonalds. Both benefited from increased consumer demand in the United States. Another observation is that companies with diversified products are doing well since they can shift focus to whichever segment is in demand. Among companies like these are DuPont, whose main business is generally thought of as industrial. However, it has benefited significantly this quarter from its agricultural and food ingredients divisions. Schlumberger is another example of a company that has shifted focus from natural gas to deep-water drilling as natural gas prices have fallen and crude oil prices climb. While it may seem obvious in hindsight, in some environments, large-cap multinationals do have advantages that smaller companies simply can’t replicate.
The story of the week is actually a follow up from a previous story. As it turns out Starbucks was listening. You’ll remember that we mentioned the fact that Starbucks had decided to move away from artificial dyes in favor of commonly-used cochineal beetles to color its Strawberry Frappuccinos. Given the backlash and general feelings of unease, the company has decided to use a tomato-based extract instead. We can all rest easy now that the beetles are safe and the vegans satisfied. By the end of June these drinks will be reformulated. Thank you Starbucks. Now we’re waiting for other food and beverage companies to follow suit.
April 20, 2012
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