Earnings IBM, GE, Water, Africa
As expected, an 11th hour can-kick is all we got and the debt ceiling debate. Nothing resolved, just buying some more time. The story will quickly move to the back burner, as it always does. Even many politicians will forget and focus on something else, most likely their extra-long holiday. Then again, at the last minute, they will all panic in January, it will make the headlines, and then the blame game starts again. Well, at least we have Thanksgiving and the holidays without political tom-foolery. Perhaps we can now focus on earnings.
Earnings IBM, GE, Water, and Africa
Courtesy of wikipedia
IBM was one of the first and few companies that made the successful move out of the cost ridden business of technology hardware and focused on software and services. It was a logical and timely move several years ago, as IBM was focusing on software enterprise and services as their margins on hardware began to shrink. They sold off their hardware unit to a Chinese company, Lenovo. It then steered all focus onto technology services and enterprise solutions. This move added a huge amount of bottom-line profit, as the cost heavy side of R&D technology was shed. The company has done very well over the years and has been running larger profit margins. For the quarter, revenue fell 4% to $23.72 billion, but net income rose 6% to $4 billion or $3.68 a share. While both the top and bottom lines did fall short of Wall Street’s expectation, it is interesting to note that a company like IBM has a lot more profit margin in their “service” business as we see how top line revenue fell, but they were still able to raise bottom line profits. A big chunk of those top-line revenue declines came from China and some are blaming a slowdown in China for the top-line declines. However, I am not buying that story. Ever since IBM changed their business model to a “services” company they have put a target on their back. Companies like Oracle, Dell, CSCO and HP have all been trying to emulate that model. Certainly not to the same extent as IBM, which is the world’s leading technology service company, but they are taking chunks of the pie. Our ethnocentrism has blinded us to only those big U.S. company names; there are other companies in China that have been moving into IBM’s space. Companies like CDC Corporation and Digital China are not household names in the U.S., but they are growing. The stock is unchanged in the pre-market. The company has the ability to manage costs well, but the long-term top-line revenue based on competition is something to take under consideration.
GE and WATER
Courtesy of wikipedia
Water is the next big fluid commodity, like oil. I wrote a small article about it in the Market Preview, but I am sure if you pick up any environmental or global business rag you will find something about water. The global population continues to grow and in many regions are not near fresh water supplies. Some of the most radical water projects the world has ever seen are in places you would never think of, like Libya, which built a huge water pipeline and a multi-billion dollar project to tap some of the world’s largest under water lakes: Libya’s Water. It’s an environmental concern, a human concern, and a business concern. Over the last few years GE has begun to make some really big water technology investments, getting the jump early and understanding that the need and cost of water is only going to increase. GE has also continued to expand in their energy unit as well. The one drag on the company has been their GE Capital division, which took TARP money and continues to shed non-performing assets and liabilities. While GE has been a dominant world leader in several areas,they are facing real competition from the East, just like IBM. The company saw both top-line and bottom line declines. Revenue fell to $37.7 billion from $36.3 billion this time a year ago. Earnings per share were weaker than expected at 31 cents versus 33 cents last year.
I keep hearing analysts talk in general terms about global growth slowdowns or blaming our domestic governmental circus. There is certainly truth to both of those issues; however, what they are not touching on is REAL competition coming out of the emerging markets. The BRIC nations are bringing forth REAL and STRONG competition to the big U.S. companies and no one is talking about it, mainly because these companies are NOT publicly listed on the U.S. exchanges. Two Russian companies have garnered massive energy contracts in the Middle East and the nation also negotiated a HUGE military contract with Brazil and Peru to supply them missile, air defense, tanks, and weapons. Chinese companies have even been contracted right here on our soil, like the Bay Bridge project in San Francisco. Brazilian energy companies are expanding beyond the shores of South America.
The last significantly untapped content is Africa, but the race is on. GE has been making huge inroads, but the Chinese counterparts are already a couple of years ahead. Everything from farming, water, drilling, mining, construction, and even IT technology is growing quickly in the African region. Their nations are filled with natural resources, under-employment, and low cost manufacturing. It only makes sense that China and the other BRICs move there, but what about the U.S.? The U.S. has been tripped up in tying tariffs, protectionism, human rights, and a host of issues with any trade deals. U.S. businesses are having a hard time navigating through African / U.S. trade negotiations and regulations. The BRICs are there and expanding fast. China has built actual cities in Africa, with schools and infrastructures, in trade for manufacturing, mining, and other businesses to be built. It reminds me of the stories of the industrial revolutions in the U.S., as companies would build entire towns around their business to support them.
The U.S. takes the moral high ground; any trade deal is tied to human rights, democracy, and a host of other issues. I appreciate and understand our moral obligations and how we feel the need to police the world and spread democracy, but handcuffing trade relationships with a political agenda is quickly putting us at a strategic and economic disadvantage.
Global competition is heating up; it isn’t just U.S. companies anymore and it is not just trade with China that fuels our economic machine. The BRICs are on the move and fast.
Support & Resistance
INDU 14,800 – 15,700
I think we could be in choppy waters for the 4th quarter. I don’t see any reason to panic, but also see no real reason to be hugely optimistic. The equity markets still are better returns than the treasuries, but the current earnings are not showing too much strength to be overly excited about at this point.
The tech sector continues to push higher and ignores the government silliness. Netflix, Google, Amazon, and others continue to push higher. The overweight’s drive this index and so far they could care less about a government shutdown or debt ceiling.
The VIX is down sharply, below 13, and is perhaps going lower. This index is pushing higher, even on lighter revenue and lackluster earnings. The Fed remains the core driver into the equity market as they have continued on with their QE and now with Yellen at the helm, expect the money to continue to flow.
The RUT again priced it right – no Taper, no long lasting government shutdown, no default, more Fed money printed and bond prices high with low yields – all forcing investors into equities. To get long, we must embrace the cheap, free money and ignore the fundamentals, for it is the money machine pushing this higher.
Are we in a wide range for the 4th quarter? It seems that could be the case. The government shutdown and debt ceiling battles were not resolved, but just kicked down the road. While that should give the market some reprieve, we are also suffering from some weaker top-line revenue in the 3rd quarter and competition is heating up globally. That could create a slow growth or stagnant 4th quarter. Businesses are also shedding jobs to reduce costs to boost bottom line margins. Add in that all the government did was kick the can down the road for a couple of months, businesses are not going to be eager to start investing and hiring when the same questions we had about Obama care, national debt, deficit spending, taxes, etc. still have not been answered.
Yet, none of this matters as we are experiencing stock market inflation. As long as the jack-boot remains firmly on the throat of bond yields, the printed devalued money will continue to flow to equities. Those that can borrow are borrowing. Those that can leverage up positions are leveraging up positions. The monetary policies of this nation are encouraging leverage investments, discouraging treasury investments, and we are creating unrealized wealth. The Fed hopes we can inflate our way out of debt. Well, it is working for the market, but I am afraid that rather than paying down debt and saving, we are seeing more leveraged consumption and starting the next super cycle, but in a faster manner.