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  1. Home
  2. / Investing
  3. / Energy

Action Alerts PLUS: A Dizzying Market Mix

Earnings, Trump and the Fed keep investors on their toes.
By JIM CRAMER AND THE AAP TEAM Feb 05, 2017 | 02:00 PM EST
Stocks quotes in this article: DHR, AAPL, ARNC, FB, NXPI, MMP

This commentary was excerpted from the Weekly Roundup sent to subscribers of Action Alerts PLUS, a charitable trust co-managed by Jim Cramer and the AAP staff. Click here to learn about this actively traded stock portfolio. 

Markets traded roughly flat this week as a flurry of earnings, macro-economic data and political developments required investors to balance near-term expectations. While earnings have been mostly positive thus far, increased uncertainty regarding the timing and scale of the new administration's policies has caused the market to stall somewhat as investors await definitive action. A strong, but not too strong, jobs report on Friday helped boost stocks, which had already been piling on momentum on expectations for the implementation of an executive order aimed at rolling back Dodd-Frank and other financial regulations. As we continue to move through the coming weeks, investors will have one eye fixed on the administration's policy decisions and the other eye weighing earnings and macro data. 

For this week, Treasury yields were volatile as investors reacted to the Fed statement on Wednesday (more below) and the jobs report on Friday (more below). In similar fashion, the dollar was largely weaker versus the euro due to the lowered expectations for a rate hike in the foreseeable future. Gold, on the other hand, trended higher as increased uncertainty caused investors to shore up their portfolios with some safe-haven assets. Oil prices moved higher, but failed to definitively break out of the $50-$55 range. 

Fourth-quarter equivalent earnings have been relatively positive versus expectations thus far, with 68% of companies in the small sample reporting a positive EPS surprise. Within the Action Alerts PLUS portfolio, Danaher, Apple, Arconic, Facebook, NXP Semi and Magellan Midstream reported earnings this week. 

Danaher (DHR) reported a top- and bottom-line beat with its fourth-quarter results. For the quarter, revenues of $4.58 billion (up 6% year over year or 7.5% on constant currency) came in above consensus of $4.53 billion and EPS of $1.05 (up 15.5% year over year) beat consensus of $1.03. Digging deeper into the quarter, revenue growth was strong at +6% year over year in total, with +4% from acquisitions, +3.5% from core growth and -1.5% from FX headwinds. The performance still beat expectations, despite incrementally higher currency impacts. The core strength was led by life sciences (+4%) and environmental and applied solutions (+4%), but was somewhat offset by softness in dental (+0.5%), which had been anticipated given management's commentary at the recent analyst day. Diagnostics came in roughly in line for the quarter at 3% revenue growth.

Apple (AAPL) reported blowout results for its fiscal first quarter after Tuesday's close, with revenues of $78.35 billion (up 3.3% year over year) beating consensus of $77.26 billion and EPS of $3.36 walloping consensus expectations of $3.22. The all-important iPhone unit sales number of 78.29 million units beat consensus of roughly 77 million. Importantly, the average selling price of $695 was a record for the iPhone maker, demonstrating the company's continued ability to leverage its premiere worldwide brand despite stiff competition in domestic and emerging markets. Total iPhone revenues came in better than consensus expectations. On the back of these solid iPhone results, Apple finally returned to revenue growth in the quarter following three consecutive quarters of revenue declines.

Arconic's (ARNC) fourth-quarter results missed just slightly on the top and bottom lines. Revenues for the fourth quarter came in at $3 billion, narrowly missing consensus of $3.003 billion, and EPS of $0.12 came in one cent below consensus. The transportation and construction solutions performed best on a comparisons basis, with revenues of $456 million up 3% year over year and adjusted EBITDA of $75 million up 75% year over year. Engineered products and solutions' revenues came in roughly flat with the prior year, while adjusted EBITDA of $265 million was up 9% year over year. Global rolled products struggled, with revenues down 9% year over year and adjusted EBITDA flat year over year.

Facebook (FB) reported a top- and bottom-line beat with its fourth-quarter results after Wednesday's close. Revenues of $8.81 billion (up 51% year over year) topped consensus expectations by roughly $300 million and EPS of $1.41 beat consensus of $1.31. Advertising revenues of $8.63 billion were up 53% year over year, beating consensus expectations of $8.3 billion despite what was considered a tough comparable from the strong performance in the fourth quarter of 2015. Mobile ad revenue, representing approximately 84% of the total, up from 80% in the fourth quarter of 2015, demonstrated the continued execution by management on this key growth strategy. Importantly, advertising revenue increased sequentially and year over year in all of FB's main geographies of operation, indicating that growth is widespread as global advertisers look to tap into consumers in all markets across the globe. Digging deeper into user engagement metrics, FB again beat consensus across the board. Daily active users (DAUs) were 1.23 billion, an increase of 18% year over year, compared with consensus of 1.2 billion. Monthly active users (MAUs) were 1.86 billion, a surge of 17% year over year, edging out consensus of 1.84 billion. Importantly, DAUs as a percentage of MAUs -- a metric that provides a peek into consistent engagement -- were 66% in the quarter, consistent with prior quarters this year despite the consistent growth in MAUs and overblown concerns of increased competition.

NXP Semiconductor (NXPI) reported a bottom-line beat with its fourth-quarter results. Revenue of $2.44 billion (down 1.2% sequentially) was in line with Street expectations and company guidance, while adjusted earnings of $1.76 a share topped consensus of $1.65. The beat on the bottom line was driven by better-than-expected gross margins of 51.1% and lower operational expenditures, which helped the company earn operating margins of 29.3%, roughly 100 basis points above guidance. Importantly, management continued to execute on synergies from the Freescale acquisition, which should help drive solid results moving forward. By segment, the company delivered roughly in-line results on the top line, with automotive and secured infrastructure showing strength while secured connected devices and secured identification solutions declined in the quarter.

Magellan Midstream Partners (MMP) reported a top- and bottom-line beat in its fourth-quarter 2016 results, as revenue of $614.9 million came in above consensus of $602.8 million, and earnings of $1.04 a share came in above consensus of $0.96. The company's strong bottom-line performance was better than prior guidance of $0.91 due to better-than-expected results in its core fee-based business. Importantly, MMP generated $277 million of distributable cash flow (DCF) in the quarter, above consensus expectations of $256 million. DCF is one of the key determinants of sentiment for a master limited partnership (MLP), as it reflects the ability of the partnership to cover its payouts. MMP continues to expect 8% distribution growth in 2017 and also initiated an 8% growth target for 2018. The increases in distributions will be covered by 2017 DCF of $1 billion (in line with consensus), resulting in a 1.2x coverage ratio (i.e., the ability of the partnership to cover its payouts with its DCF -- the higher, the "safer"). This guidance assumes average oil prices of $55 per barrel in 2017.

On the economic front, the week kicked off strongly with a bullish housing indicator. The National Association of Realtors reported that pending home sales rose 1.6% in December, besting expectations for a 1.1% gain and improving from a 2.5% drop in November. Over the past 12 months, pending home sales were up a lighter 0.3%. The stronger-than-expected report comes after last week's housing data (see our Weekly Roundup from last week) had come in with declines in various pockets but also followed a very strong housing-starts report from earlier in the month. As we have noted, housing data tend to be volatile month to month. Either way, the housing market appears to have some support moving forward, although the major concerns hinge on continued price increases and tight inventory.

On Wednesday, the Institute for Supply Management (ISM) reported that its manufacturing index hit 56 in January, up 1.5% from December and above expectations for a reading of 55. The survey showed that the overall economy grew for the 92nd straight month. As a reminder, any reading above 50 indicates an expansion while any reading below 50 points toward a contraction. January's reading is a great start to the year and adds to the cautious optimism underlying the outlook for the economy under the new administration. Of the 18 manufacturing industries tracked in the survey, 12 reported growth in the month. The previously defeated sector had shown weakness in prior years as companies were damaged by the energy sector's demise and the strong dollar, but performance has improved in recent months as oil prices have stabilized. Manufacturing looks to continue its expansion through 2017 after finishing off 2016 with the strongest growth in two years.

On Wednesday, the Federal Reserve, coming out of its two-day policy meeting, decided to keep benchmark interest rates unchanged at 0.5% to 0.75%. Recall that the committee had increased rates for the first time in a year back in December.

While investors largely expected the Fed to leave interest rates unchanged, the commentary regarding the progress of the macro economy was most important. Prior to this most recent press release, investors placed roughly a 25% probability that rates would be hiked at the Fed's next meeting, in mid-March. The committee has been consistent in its plan to "gradually" raise interest rates throughout the balance of the coming years, and reiterated that view in its commentary released on Wednesday.

As for changes in this statement compared to recent months, the Fed did remove a concern aimed toward declining energy prices and the subsequent effect on inflation. Oil prices have been steadily rising since November, trickling down to gasoline prices and helping inflation tick higher in recent months. Although prices have stabilized in recent weeks, we are way off the lows seen in February 2016. The Fed expects its preferred inflation gauge to rise toward 2% over the "medium term."

Importantly, the committee also specifically noted that "measures of consumer and business sentiment have improved" recently, as reflected in the stock market rally following the election. Increasing confidence has been coupled with continued strength in the labor market, supported by the ADP payrolls report also announced on Wednesday.

All in, the Fed's statement was virtually in line with expectations, although investors still question when the next hike will come, given that the committee failed to provide any specific guidance. In previous commentary, Fed Chair Janet Yellen has noted that changes to the plan will not anticipate the new administration's policies as the Fed prefers to see tangible evidence of the impacts of how President Trump's moves will trickle down in the economy. The Fed cannot predict when and on what scale these policies will come, so it has remained appropriately vague in terms of detailing its exact strategy moving forward. The statement reiterated that monetary policy remains "accommodative" as the risks to the economic outlook remain "roughly balanced."

Similar to investors, the Fed appear to be in a wait-and-see mode as the new administration begins to move forward with its first 100 days in office. In the meantime, investors will look ahead to Yellen's speech before Congress in two weeks and we will continue to follow the economic data points. In general, the outlook has not changed: While we can keep track of the data (jobs, housing, inflation, etc.), the market remains on its toes, waiting to see how new policies (or the lack thereof) will affect the macro economy in the short, medium and longer terms.

Prior to the nonfarm payrolls report on Friday, the Department of Labor reported on Thursday that initial jobless claims for the week ending Jan. 28 were 246,000, a decrease of 11,000 claims from the prior week's revised numbers and 5,000 claims lower than expectations. The overall trend remains strong with claims having remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an astounding 100 straight weeks, the longest streak since 1970. Claims have remained under 275,000 since the middle of November. The four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) rose 2,250 claims to 248,000 last week. The consistently low claims data support continued strength in the labor market, although these figures were not included in the survey period for the jobs report released on Friday.

On Friday morning, the Labor Department reported that the U.S. economy added 227,000 jobs in January, better than expectations for around a 175,000 job increase. The unemployment rate was reported to have grown to 4.8%, slightly higher than both expectations and December's figure of 4.7%, as new Americans entered the workforce looking for employment. The labor participation rate rose to 62.9%, up from 62.7% in December, perhaps indicating additional slack in the labor market moving forward.

While the jobs numbers in January were strong and above expectations, the prior two months' data were revised down by a total of 39,000 jobs. The change in total nonfarm payroll employment for November was revised down from 204,000 to 164,000 jobs, whereas the change for December was revised up slightly from 156,000 jobs to 157,000 jobs. Over the past three months, the economy has still averaged a strong 183,000 jobs created per month, roughly in line with the 187,000 average per month in 2016. The labor market continues to move through a historically long stretch of job creation following the recession, which ended in 2009.

Digging deeper into the report, wage growth only came in at a paltry 0.12% from December, below expectations for a 0.3% gain. Over the year, average hourly earnings rose by 2.5% in January, compared with 2.9% year over year last month. Ultimately, a strong headline number of new jobs added failed to lift wages as much as expected. The result? Treasury yields traded lower following the release of the report as expectations for a March Fed rate hike further diminished. There's now only an 8.9% chance of a move by March, versus 18% on Thursday, according to CME Group data. The market suggests a 63% chance of a Fed rate increase by June, down from 69% on Thursday. While the labor market clearly continues to flex its muscles, the uptick in labor participation and lackluster wage growth indicate that there could still be room for improvement.

As such, this report seemed to fit into the sweet spot of what the market likes -- better-than-expected job gains to demonstrate strength in the labor market, but enough signals indicating additional slack, meaning that the overall numbers are likely just not good enough for the Fed to accelerate the pace of tightening dramatically. This is consistent with the Fed's commentary that it would increase interest rates gradually over the coming years. The FOMC will remain data dependent, evaluating another jobs report along with other key economic indicators from January and February before holding their March policy meeting. A March hike is not off the table -- and three hikes in 2016 are still a possibility as economic growth accelerates -- but this report is not being viewed as the definitive firepower needed to make that decision.

On the commodity front, crude oil was volatile for the majority of the week, trending upward but failing to break out of its trading range of $50-$55. As we have been referring to in recent weeks, investors are waiting for the next catalyst to move prices higher and to provide the next leg to push energy stocks to new levels. The sector has weakened in recent weeks as oil has remained stagnant.

The week started on a lower note as investors focused on the higher rig count reported last Friday. As domestic rigs continue to increase, domestic producers are bringing more production back on line to take advantage of the rally in oil prices over the past several months. This increase in production is at odds with the OPEC agreements to cut global output in an attempt to balance the supply-and-demand dynamic.

On that note, prices found their footing on Tuesday after OPEC reported that cooperating nations had cut output by more than 1 million barrels per day, or roughly 88% of the agreements reported in November. While the market would like to see 100% compliance, the figure is still encouraging given OPEC's lack of commitment to its agreements in the past. This, added to a fading dollar (as investors weigh President Trump's rhetoric), allowed prices to edge higher.

The struggling dollar helped prop prices higher into Wednesday as well, especially following the Federal Reserve's commentary, which provided no specific guidance on the next rate hike, thereby lowering expectations for a March increase. Oil, which is a dollar-denominated asset, becomes more expensive for foreign buyers when the dollar rises and becomes more attractive as the dollar falls. Given that the dollar was the main focus of the day on Wednesday, traders appeared to ignore a bearish inventory report, which showed that crude oil and gasoline stockpiles grew more than anticipated. Slightly declining U.S. production figures also added support for the commodity.

While the momentum somewhat continued into Thursday on speculation that rising tensions between the U.S. and Iran could result in a tightening of global crude supply, investors shifted focus toward the rising inventory numbers after downplaying the impacts of any such "war of words." Overall, the market appears to be looking for any reason to push oil prices higher, indicating a generally bullish sentiment, but investors are waiting for something concrete for support as the swift rally in the commodity since November had largely priced in the benefits from OPEC production cuts. There is certainly reason for optimism moving forward, but the competing forces have kept oil in a wait-and-see mode for now, similar to the action across the broader market.

Moving on to the broader market, as we mentioned, fourth-quarter earnings are more than halfway complete and have been better than expected, proving to be positive compared to estimates. Total fourth-quarter earnings growth is up 6.3% year over year; of the 206 non-financials that reported, earnings growth is 5% versus expectations for an overall 4.9% increase throughout the season. Revenues are up 3.8% versus expectations throughout the season for a 4.01% increase; 67.5% of companies beat EPS expectations, 20% missed the mark and 12.5% were in line with consensus. On a year-over-year comparison basis, 75.8% have beaten the prior year's EPS results, 22.2% have come up short and 2% have been virtually in line. Information tech and materials have had the strongest performance versus estimates thus far, whereas real estate, telecom and consumer staples have posted the worst results in the S&P 500.

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Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long DHR, AAPL ARNC, FB, NXPI and MMP.

TAGS: Investing | U.S. Equity | Energy | Technology | Economic Data | Earnings | Consumer | Economy | Jim Cramer | Markets | Stocks

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