This commentary was excerpted from the weekly roundup sent to subscribers of Action Alerts PLUS, a charitable trust co-managed by Jim Cramer and Jack Mohr. Click here to learn about this actively traded stock portfolio.
Investors watched another volatile week in the equity markets fly past as major pushes in crude oil in the middle of the week and some strong earnings proved too little to provide any significant gains. The Nasdaq, in particular, experienced a rough week as investors rotated out of high-growth names and we saw a contraction of multiples and a short-term re-rating in the tech space.
While all eyes remained fixated on oil for most of the week, investors shifted their focus to the domestic economy on Friday following the comprehensive jobs report, which, although slightly disappointing on the headline number, showed stronger underlying trends. Ultimately, investors weren't gifted with any much-needed clarity in terms of the timing of future rate hikes, as the report seemed to leave the decision in limbo for the time being.
Treasury yields were lower for the week, the dollar was weaker against the euro, gold was higher and West Texas Intermediate (WTI) and Brent were both extremely volatile, with huge pushes higher during the week, but ultimately ended on a down note on Friday.
Fourth-quarter equivalent earnings have been relatively positive compared with expectations, with 76.7% of companies surprising to the upside. In the Action Alerts PLUS portfolio portfolio, Alphabet (GOOGL), Dow Chemical (DOW), Mondelez (MDLZ) and Occidental Petroleum (OXY) reported earnings.
Alphabet delivered a monstrous top- and bottom-line fourth-quarter beat, with revenue of $21.33 billion (up 18% year over year, including FX impact) topping consensus of $20.77 billion, while EPS of $8.67 blew away consensus of $8.10. The strong top-line growth -- which at 18% year over year represents a sequential acceleration from 15% y/y growth in the third quarter -- reflects the resilience of the company's business model amid biting FX headwinds. If FX costs were stripped out, revenue would have been up 24%, yet another acceleration from 21% year-over-year constant currency growth posted in the prior quarter. CFO Ruth Porat attributed the breathtaking top-line momentum to the vibrancy of the company's business, driven in particular by mobile search as well as YouTube and programmatic advertising. Aggregate paid clicks at Google grew 31% y/y (above consensus for 22%), with paid clicks on Google websites up 40% (smashing consensus of 28%).
Amid a nasty macro backdrop, Dow Chemical delivered a convincing top- and bottom-line beat, with fourth-quarter operating EPS of $0.93 (+9.5% year over year) coming in $0.23 above consensus ($0.70) and sales of around $11.5 billion (down 20% year over year) topping the Street's $11.17 billion forecast by nearly $300 million. The 20% decline in sales (or 15%, excluding the impact of divestitures and acquisitions) in the quarter -- albeit jarring from a headline perspective -- was better than feared and below the expected 25%+ decline. The company has been facing an onslaught of macro headwinds -- most potently commodity deflation (which pressures pricing related to hydrocarbons and energy) and biting currency, all of which weighed heavily on sales. Volume gains were broad-based, however, with all geographies posting positive growth, led by Asia Pacific (up 8%) and North America (up 6%). Volume grew 5% in emerging markets, led by Greater China (up 10%).
Mondelez International reported mixed fourth-quarter 2015 results, marked by a top-line beat (revenues of $7.36 billion vs. $7.26 billion consensus) and a bottom-line miss (EPS of $0.46 falling slightly short of $0.48 consensus). Management also provided mixed 2016 guidance, with a lower-than-expected organic revenue growth forecast balanced by relatively strong EPS growth and in-line margins. Overall, fourth-quarter EPS was messy as it included a $0.48 negative impact related to Venezuela operations (essentially, Mondelez had to take an accounting charge as a result of the country's collapsing currency and ongoing deconsolidation) and an incremental $0.19 drag from other FX headwinds. Fourth-quarter organic sales growth of 4.7% year over year, which came in well above consensus of 3.5%, was strong, however, as the company raised prices to recover currency-driven inflation in emerging markets. In fact, emerging markets grew 12.4% year over year, offsetting flat growth across developed markets.
Occidental Petroleum reported fourth-quarter results this morning with revenues of $2.8 billion and EPS of -$0.17 both coming in slightly below consensus of $2.95 billion and -$0.12 for the top and bottom lines, respectively. Revenues from operations were down roughly 35% year over year, but this was expected due to deteriorating conditions in the oil and gas markets. Specifically in that segment, the company's decline in after-tax results was solely a result of the persistent drop in commodity prices throughout the quarter, although partially offset by higher volumes and lower operating expenses (positive indications of both demand for OXY's products and the nimble nature of its management team). Although the company produced 11,000 additional barrels of oil equivalent (BOEs) per day domestically (to 312,000, which was in line with consensus) in the fourth quarter compared to last year, the increase was mostly attributable to its Permian operations, which remain the company's premium growth asset and differentiator from its peers. Sequentially (i.e., compared to the third quarter), production actually declined by roughly 3,000 BOE in the U.S. as management adapted to the worsening oil and gas price environments. Internationally, the slight increase in production year over year was due to the ramp-up of OXY's Al Hosn position in the Middle East, which opened in the third quarter.
On the economic front, the Commerce Department reported on Monday that personal income rose 0.3% in December while personal spending remained flat. Personal income was expected to rise 0.2% and spending was expected to increase 0.1%. Consumer spending for all of 2015 was up 3.4% after a 4.2% advance in 2014. The slowdown in the consumer's willingness to purchase contributed to the restricted economic growth we witnessed toward the end of last year (recall that fourth-quarter GDP was estimated at 0.7% last week). Despite continued lower oil and gas prices, consumers have seemed to hoard their extra earnings and savings as opposed to spending on discretionary items.
That being said, the big story coming out of this report is that the personal savings rate jumped to 5.5%, the highest since 2012. Inherently, when consumers are saving more, spending tends to decline as well, which is a concern as consumer spending makes up more than two-thirds of our economic activity. The savings rate is expected to drift lower, however, as consumers recognize the continued, depressed energy prices and ultimately feel more comfortable in spending. It is unclear how long it will take for consumers to shift their habits, but it will be an important theme to continue to monitor.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending Jan. 30 were 285,000, which was 8,000 claims higher than the prior week's revised figure and 5,000 higher than expectations. The four-week moving average for claims (which is used as a gauge to offset volatility in the weekly numbers) rose 2,000 claims to 284,750. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for 48 straight weeks, which is still the longest streak since the early 1970s. Importantly, this figure had no bearing on the more comprehensive jobs report released on Friday, as it fell outside the survey period.
On Friday, the Department of Labor reported that the U.S. economy added 151,000 jobs in January, lower than expectations for a 185,000 gain. Revisions were also made to the prior two months, with December's payroll gain adjusted downward by 30,000 jobs (to 262,000 from 292,000) and November's gain recast upward by 28,000 jobs (to 280,000 from 252,000). Overall, the revisions showed employers added 2,000 fewer jobs in the last two months of the year than previously stated.
As for the unemployment rate, we saw a slight dip to 4.9% (from 5% previously and vs. expectations of 5%), which marks the first sub-5% rate since November 2007. Importantly, hourly wage gains also accelerated in January, growing by 0.5% month over month and 2.5% year over year to an average of $25.39. However, much of this wage gain can be attributed to the rise in minimum wages across the country, which could prove misleading.
Overall, the report seems to pit the market against two competing trends: On one hand, we have a disappointing headline payroll number along with slight downward revisions for November/December; on the other, we have a lower-than-expected unemployment rate and accelerating wage growth. As for the weaker-than-expected job growth, we would note that the numbers fluctuate month by month and there are often heavy revisions to previous estimates once more data is collected (as seen in December and November in this report). In aggregate, the three-month trend remains stronger than the January report -- if viewed in isolation -- would imply.
With respect to the strong unemployment rate and wage growth, we believe these numbers could prove to be a bit misleading as well. Unemployment can be affected by many factors that can artificially inflate the number, and wages were likely boosted by minimum-wage increases, which do not spread evenly across the entire job market.
In the end, we come away a bit concerned that the Fed may view this report as proof that further tightening is needed. By crossing under the 5% unemployment rate (key threshold for Chair Janet Yellen in particular), it reinforces the main theme driving the Fed's December hike decision -- that is, slack in the job market is diminishing and will ultimately lead to higher wages and inflation.
This would be a troubling interpretation in and of itself, in our opinion. Although our own economy is showing pretty resilient data (and this can be debated given weakness in manufacturing), the Fed has acknowledged that it cares about global market factors as well. With every other central bank accommodating (ECB, Bank of Japan) and considering the continued prevalence of global market volatility and deteriorating global economic data, there remain serious doubts about our own future economic productivity. For what it's worth, the rates markets are pricing in basically 0% probability of a March rate hike (as of this publication).
As for now, it is not worth speculating what the Fed will do in March, as the decision is a month and a half away. We know how much can change in a matter of days, not to mention weeks and months, and we expect the Fed to evaluate all the various data points we will receive in the coming weeks before making a decision. If anything, our view is that this report provided more confusion than certainty.
On the commodity front, it was another volatile week for oil as investors continued to speculate over a meeting between major oil producers to discuss potential output cuts. While there continue to be doubts that any such meeting will actually occur, other bullish factors, such as a weakening dollar, helped add to major upward pushes in the trade throughout the week. These factors, at least at the beginning, outweighed another inventory report that showed a build in crude stockpiles (to the highest level on record for weekly data since 1982), although the underlying numbers did show a cut in production, which is bullish given the global oversupply. An improvement in Chinese services activity also helped support oil prices on the upward climb, given that China is the world's second-largest consumer of crude (at about 12%). However, crude regressed toward the end of the week as the focus turned to global supply that has time and again pressured the trade.
What does all this tell us? Bottom line: The oil trade is poised to remain volatile in coming weeks as the underlying fundamentals (which continue to be bearish for the trade) jab back and forth with the short-term speculation of potential production cuts, short-covering and movements in the dollar. In our view, we can't count on output cuts from major oil producers as each continues to fight for market share, and this means the oversupply is likely to continue for the time being. While there may continue to be some short-covering in the trade as prices drop to trigger levels, the underlying fundamentals remain weak and this will continue to be the main driver of the longer-term outlook. Overall, it seems that any recovery in the oil market, regardless of how long it takes, surely will not occur in a straight line upward.
Fourth-quarter earnings continued this week and have been relatively mixed compared to estimates. Total fourth-quarter earnings growth is down 4.6%; of the 234 non-financials that have reported, earnings growth is down 5.2% vs. expectations thus far for a 4.6% decrease. Revenues are decreasing 4.8% vs. expectations throughout the season for a 3.31% decline; 73.1% have beaten expectations, 16.8% have missed the mark and 10.1% were in line with consensus. On a year-over-year comparison basis, 53.5% have beaten the prior year's results, 43.1% have come up short, and 3.4% have been virtually in line. Materials, health care and info tech have led the strong performance vs. estimates whereas energy, telecom and utilities have posted the worst results thus far in the S&P 500.
Next week, 62 companies in the S&P 500 report earnings. Within the AAP portfolio, Panera Bread (PNRA), Cisco Systems (CSCO), Twitter (TWTR), and WhiteWave (WWAV) all report earnings.
Other key reports include: Hasbro (HAS), CNA Financial (CAN), Cognizant (CTSH), Diamond Offshore (DO), Lennox (LII), 21st Century Fox (FOXA), Molina Healthcare (MOH), Owens & Minor (OMI), Plains All American (PAA), Plains GP Holdings (PAGP), Yelp (YELP), Aecom Tech (ACM), Agrium (AGU), Coca-Cola (KO), CVS Health (CVS), Centene (CNC), Fidelity National Info (FIS), Goodyear Tire (GT), Masco (MAS), Omnicom (OMC), Regeneron (REGN), Spirit Airlines (SAVE), Sabre (SABR), Tenneco (TEN), Viacom (VIAB), WellCare (WCG), Wendy's (WEN), Wyndham Worldwide (WYN), Akamai Tech (AKAM), Assurant (AIZ), Horace Mann (HMN), Regal Entertainment (RGC), SolarCity (SCTY), Walt Disney (DIS), Western Union (WU), Amtrust Financial (AFSI), Aramark Holdings (ARMK), Berry Plastics (BERY), Carlyle (CG), DTE Energy (DTE), GW Pharma (GWPH), Henry Schein (HSIC), Humana (HUM), Owens Corning (OC), Sealed Air (SEE), Time Warner (TWX), Voya Financial (VOYA), Wix.com (WIX), Andersons (ANDE), CenturyLink (CTL), CNO Financial (CNO), Cognex (CGNX), Expedia (EXPE), FMC Corp. (FMC), Green Plains (GPRE), Mylan Labs (MYL), O'Reilly Auto (ORLY), Omega Health (OHI), Primerica (PRI), Pioneer Natural Resources (PXD), Prudential (PRU), Tesla Motors (TSLA), Whole Foods (WFM), Advance Auto Parts (AAP), AllianceBernstein (AB), Avon Products (AVP), Blue Nile (NILE), Bunge (BG), Cenovus Energy (CVE), First American Financial (FAF), GNC Holdings (GNC), Huntsman (HUN), Kellogg (K), KKR (KKR), Lending Club (LC), Incyte (INCY), Manulife (MFC), Molson Coors (TAP), Monster Worldwide (MWW), Nielsen (NLSN), Nokia (NOK), PBF Energy (PBF), Peabody Energy (BTU), Penske Auto (PAG), PepsiCo (PEP), Reynolds American (RAI), Sonoco Products (SON), Teva Pharma (TEVA), Thomson Reuters (TRI), Time (TIME), TripAdvisor (TRIP), World Fuel Services (INT), Activision Blizzard (ATVI), American International (AIG), CBS (CBS), FireEye (FEYE), Groupon (GRPN), King Digital (KING), LPL Financial (LPLA), Pandora Media (P), Web.com (WEB), Zillow (ZG), American Axle (AXL), ArcelorMittal (MT), Brookfield Asset Management (BAM), Interpublic (IPG) and Red Robin Gourmet Burgers (RRGB).