Earnings: PG, MSFT, AMZN
The earnings story continues with solid technology reports coupled with weakness from the retail and consumer sides. These mixed earnings stories are driving core concerns about fundamentals heading into the holiday season and, it being one of the shortest holiday season (between Thanksgiving and Christmas), there is a shorter sales cycle. We are also seeing the trend continue as shoppers continue to expand towards online sales as brick-and-mortar stores continue to struggle with traditional costs that online retails are not encumbered by. The Millennial generation of entrepreneurs has embraced online retailing and technology, so I only see this trend continuing.
Earnings: PG, MSFT, AMZN
Courtesy of Wikipedia
Procter & Gamble (PG) – If there was ever an articulate CFO that has a command of the facts, numbers, and data of their company, it is the CFO Jon Moeller. He could give CFO lessons. PG is an excellent company to monitor for global quality of life and consumer disposable income. They has a wide range of consumer household products, which are staple,s and the company has penetrated practically every market on earth. What I am always interested in monitoring is their emerging market growth. Data shows that, depending on emerging market regions, income growth is rising between 7 and 18% per year. That means we are seeing an annual lift in the quality of life and those people will be able to afford higher quality household products to improve their standard of living. Moeller reported that the company is on track for full-year guidance and continues to see strong, high single digit growth in China and the emerging markets. The earnings came in line with expectations and global growth continues in the 3-4% range. The company has a solid understanding of their products, market share, growth rates, currency risk, and inflation. While it is not a big growth company in which we would expect huge upside revenue growth and sales, it IS a company that is a understands the global market and continues to pay dividends and sees steady growth. It’s always a great company to monitor global consumption and quality of life measures. The report clearly shows that emerging markets are still growing and expanding.
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Microsoft (MSFT) is undergoing some big changes. Windows 8 has come with some bumps in the road, but their Surface product, along with the touch-screen capabilities of Windows 8, has put a dent in the competition and is bringing real PC capabilities to the tablet market. Windows phones are facing an uphill battle and while they have only a small sliver of the market share compared to Android and iOS, it no doubt is growing as well. This is also the year of the game console battle, with the next generation of XBOX coming out after a long wait. Close out the story with a change in the CEO as Ballmer has announced leaving the company and we could be in for the next generation of Microsoft that could really bring some fight to Apple, Android, Sony, and even Google. The company posted far better earnings than expected, on $18.53 billion in revenue generating 62 cents a share, well ahead of the $17.79 billion, 54 cents expected on the street. The stock is up in the pre-market. The question one must ask – is this the mark of the next generation of Microsoft?
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Amazon (AMZN) reported a loss of 9 cents a share as expected, but what surprised the market was the beat on revenue. There had been concerns with the slowdown in the third quarter, the TAPER issue, government shutdown, and a weaker consumer. Some thought that top-line revenue may contract some and were watching Amazon as the bellwether for online retailing. The better than expected sales has certainly boosted optimism that the consumer may not be as bad off as initially thought. The stock jumped in after hours trading and there is some hope that the holiday sales maybe better than expected. However, I don’t think one can look to Amazon as a strict guide to consumer strength, because competition in this space is vastly different. Amazon is an online retailer competing with traditional retailers, by offering steep discounts, free shipping, and better service. Could the story be that the consumer is not strengthening, but rather Amazon is just stealing market share from a more cost conscious consumer? If we look at sales across competing retailers that is the story I think we are really seeing. Companies like JC Pennies, Sears, even Target are continuing to lose market share in similar market categories. There is another story here, Amazon is just not an online retailer, and they are in the technology space and added everything from hosting services to even their own tablet. We must think of Amazon like another Google, whose product offerings are just continuing to expand. They are even adding distribution centers INSIDE of Procter & Gamble. The company is up in the pre-market and the company continues to fire on all cylinders.
Clash of the Titans!
We are in a world of competing technology conglomerates that are carving out their technology networks, it is the Clash of the Titans. The big four are: Microsoft, Apple, Google, and Amazon. These companies continue to expand and compete in each other’s sandbox. Three of them offer their own operating systems, they all have their own retail products, they are all moving into the mobile space, and they each continue to expand in a variety of areas. However they all can’t be number one, but right now the pie is still big and they will continue to expand. There are some smaller companies that could be targets for the big four. If Amazon wants to expand their online search and services, perhaps they buy Yahoo. That is just one example of what could be future takeover targets to compete in an ever growing battle of the technology conglomerates.
Microsoft and Apple are the older school companies with their own culture that is a legacy from their founders. These two are going through some management changes, but have a strong core client base. Google and Amazon are still in their youth, relatively speaking, their young visionary founders are still managing their companies and they seem to be more nimble and willing to take risk.
It is certainly an interesting group of companies and the battle will certainly be interesting to watch. Personally I think Apple and Google have been on the overvalue side in recently, while Microsoft and Amazon have been undervalued. However, this is just a cursory observation and opinion. I can think of any reason why all four should not be in everyone’s portfolio. The stocks are getting pricey, yet they have room to go higher and they are here to stay.
Support & Resistance
The market continues to struggle at this level, wanting to go higher and making small knee jerking moves on earnings. There are certainly some good stories, but they are in isolation. The Western consumer is still not firing on all 4 cylinders and many companies continue to look to the emerging markets to drive in the revenue.
Amazon, Google, Microsoft, Apple – these companies continue to be the core drivers in the tech world. Sure there is Netflix and Tesla, but the big tech conglomerates in this new technology revolution are going after a piece of the pie.
Much like the Dow Jones, this seems to be a consolidation area. One would think that the tech sector could lift all boats, but it seems that the index is in a holding pattern. The VIX is holding in the 13 area and that is not very telling and reflects consolidation as well.
Regardless of my general enthusiasm for the tech sector, the RUT has continued to be the best indicator of broad market order flow. While I certainly think that tech sector can help prop up the general market, it may not be enough to keep the general market pushing higher.
The Keynesian Mind
A big driver in the broad market has been the Fed QE policy and with Yellen at the helm I don’t think we will see a TAPER anytime in the near future. There are those that think we could taper in December, January or at the latest March. For me is not a factor on whether they could; of course they can. The question is WILL they TAPER and that answer is clearly NO. You must put yourself into a Keynesian / Socialist mindset. That means you must remove any thoughts about Supply/Demand theory, Revenue – Costs = Margins, and certainly any Darwin economic theories. For a pure Keynesian / Socialist, capitalism and the free markets do NOT work, it never did, it never will. The government must not just regulate, it must INTERVENE in the market, economy, and business. The government must be responsible for the people and services they require, for the people cannot take care of themselves or be responsible for themselves. For if we leave the people to their own devices, they will be fooled and tricked by evil corporations and companies who are out to steal from them and thus makes them poor. For that Keynesian/Socialist mind, moral obligations will ALWAYS trump math. Yellen embodies the Keynesian mind more than any other Federal Reserve Chairman, ever. She has already stated that she is willing to take on MORE inflation if it would help create jobs. She doesn’t see a problem with a $3 trillion dollar Federal Reserve debt, soon to be $4 trillion, and by the end of next year $5 trillion. She will not give an answer about what number is TOO MUCH DEBT, because for her it is not a problem that the Fed can’t deal with – how can you put a price on human suffering?
That being said and understanding the Keynesian mind, we could see this market continue to drive higher, but NOT because of great earnings or a strong consumer, but rather the Fed’s money printing scheme to continue to drive investments into equities since there is no other place to store savings. You can’t make money in a savings account, CD, money market, or treasury bonds – so what choice do you have?
I still believe that emerging markets are a great story, commodities and water, the future of Africa looks bright, and the new technology revolution. What could ruin those great stories? The failure of Western governments (Japan, US, and Europe) to manage their debt, deficit spending, and balance sheets. They continue to run up trillions in debt, expand socialistic policies, and further put their nations and currencies at risk.