Markets ended relatively flat this week as we balanced a slew of economic data with the Fed's two-day FOMC meeting, the appointment of Jerome Powell as new Fed Chairman (beginning in February), the all-important nonfarm payrolls report on Friday for the month of October and an overload of earnings releases. In case you missed it, TheStreet.com also hosted a trading strategies round table with Jim and senior portfolio analyst, Jeff Marks which members can watch here.
Treasury yields trended lower this week with investors moving into bonds as the market pushes up against all-time highs. In line with the move into bonds (remember as bond prices decline, yields rise), gold moved higher this week. The euro bounced slightly following last week's decline resulting from statements that the European Central Bank (ECB) would halve the pace of its bond buying program (to €30 billion) and would consider extending its current stimulus plan if necessary. Lastly, oil ground higher this week, reaching its highest level in roughly two years.
Third-quarter earnings are underway and have so far been largely positive vs. expectations. In the portfolio, we heard from First Data Corp (FDC) , Allergan (AGN) , Facebook (FB) , Apache (APA) , Magellan Midstream Partners (MMP) , DowDuPont (DWDP) , Apple (AAPL) , Starbucks (SBUX) and Activision Blizzard (ATVI) .
First Data
First Data Corporation (FDC) reported an in-line third quarter result, with revenue of $1.9 billion and adjusted earnings per share of $0.40 matching the consensus.
Global Business Solutions revenue increased 2% on an organic constant currency basis, but in North America, organic constant currency declined 3% year over year due to weakness in the company's joint venture business. Although management reiterated their confidence in improving this business, lead flow indicators suggest that it still may be months before this happens. Free cash flow was strong during the quarter and brought the year-to-date total to $1.079 billion, however, total debt increased during the quarter due to recent acquisitions.
Allergan
Allergan (AGN) reported an in line top line and a bottom line beat with its third-quarter results. Revenue of $4.03 billion was in line with the consensus, but non-GAAP adjusted earnings per share of $4.15 topped expectations of $4.06. Additionally, while Allergan narrowed its full year 2017 revenue guidance from $15.85 billion - $16.05 billion to $15.875 billion - $16.025 billion, the mid-point remained the same at $15.95 billion.
U.S. specialized therapeutics grew 18.7% year over year to $1.7 billion, but was below expectations of $1.829 billion. U.S. general medicine revenue was about $1.5 billion during the quarter, representing little change year over year. Lastly, international revenue increased 13.7% year over year to $807.8 million, driven by robust growth in facial aesthetics, eye care, and CoolSculpting.
While expectations were high for Facebook (FB) heading into earnings, the company didn't disappoint. Revenue of $10.328 billion (up 47% year over year) exceeded consensus of $9.84 billion, while earnings per share of $1.59 (up 77% year over year) topped consensus of $1.28.
Driving results, advertising revenue grew 49% year over year to $10.142 billion, ahead of estimates of $9.845 billion. Additionally, mobile ads accounted for approximately 88% of advertising revenue, up from 84% during the third quarter 2016 and the 87% during the second quarter of this year. Helping the bottom line beat, Facebook's operating margin improved to 50%, higher than the second quarter's 47% margin. Expenses as a percentage of revenue held steady year over year at 14%, encouraging as the company is managing costs despite the more expensive mobile shift. Capital investments for the quarter were $1.76 billion, up 60% year over year.
Apache
Apache (APA) reported in-line-to-positive fiscal third-quarter results. While the company met expectations on the top line with production revenues of $1.39 billion, based on 448,235 barrels of oil equivalent (Boe) per day, it exceeded expectations on the bottom line, with earnings of $0.04 a share surpassing expectations of a $0.01 a share loss.
As for production, in North America, Apache produced 230,991 Boe/d (207,000 Boe/d when excluding discontinued operations in Canada) with 160,823 Boe/d coming from the Permian basin (13,300 BOE/d from Alpine High), 59,507 Boe/d coming from the North Sea and 157,737 Boe/d coming out of Egypt (87,000 Boe/d when excluding minority interest and tax barrels).
Magellan Midstream
Magellan Midstream Partners (MMP) reported disappointing results when it reported on Thursday before the bell as revenue of $573 million (up 3.8% year over year) missed expectations of $605 million while adjusted EPS of $0.97 (when including an 8-cent positive impact from mark-to-market commodity related pricing adjustments) matched expectations.
Within transportation and terminals, sales of $446.9 million edged out consensus of $445.6 million. In product sales, revenue of $121 million came up short of expectations of $156.3 million.
DowDuPont
DowDuPont (DWDP) reported a top and bottom line beat with their third quarter earnings report. Adjusted revenue of $18.285 billion beat the consensus of $18.01 billion, and adjusted earnings per share of $0.55 topped the consensus by $0.13
Strong sales across most of the company's divisions helped produce results in the top line, and the company's cost cutting and synergy realizing strategy increased EBITDA and the bottom line. Looking ahead, management expects to achieve $1 billion in synergies for Agriculture, $1.2 billion for Materials Science, and $0.8 billion for Specialty Products. These three businesses are expected to be spun off within the next 18 months, which should further unlock shareholder value.
Apple
Apple (AAPL) reported a top- and bottom-line beat for its fiscal fourth quarter, with revenue reported at $52.6 billion (up 12% year over year), beating the consensus of $50.79 billion. EPS for the quarter came in at $2.07 (up 24% year over year), exceeding the consensus of $1.87.
As for product sales, the company sold 46.68 million iPhones, 10.33 million iPads and 5.39 million Macs. The company also reported $3.23 billion from sales of other products (Apple TV, Apple Watch, Beats, etc.) and Services revenue of $8.5 billion (including a one-time adjustment of $640 million).
Starbucks
Starbucks (SBUX) reported in-line results after Thursday's close for its fiscal fourth quarter. Revenue of $5.7 billion came in slightly under the consensus of $5.8 billion, and earnings per share of $0.55 matched expectations.
Global same-store sales during the quarter were 2%, below management's historical guidance of 3% to 4%. When factoring in the effects of the hurricanes which temporarily closed 1,000 stores, global comps would have increased 3%. Driving the figure this quarter was an 8% same-store sale increase in China, a region that the company is heavily investing in. Importantly, management reset earnings expectations, lowering previous long-term guidance of 15%-20% to 12%. Offsetting this anticipated revision was the company's increase in capital return strategy as management raised the dividend by 20% and $15 billion is expected to be returned to shareholders over the next three years though buybacks.
Activision Blizzard
Activision Blizzard (ATVI) reported better-than-expected results (including deferred revenues) for its fiscal third quarter after the closing bell. On the top line, revenue of $1.9 billion (up 11.9% year over year) exceeded consensus of $1.74 billion. On the bottom line, adjusted earnings per share of $0.60 (up 15.4% year over year) surpassed expectations of $0.49.
The company also raised full-year 2017 estimates for both the top and bottom lines. Management now expects full-year top-line results (including deferred revenue) of $6.85 billion (up from $6.575 billion) and bottom-line EPS results of $2.16 (up from $2).
Economy
On the economic front, on Monday, the Bureau of Economic Analysis (BEA) reported that month-over-month personal income rose 0.4% (or $66.9 billion) in September, in line with expectations. Personal consumption expenditures (PCE) -- i.e., personal spending (over two-thirds of U.S. economic activity) -- increased 1.0% (or $136.0 billion) month-over-month, exceeding expectations of 0.8% and notching the largest monthly increase since August 2009.
The rise in personal income resulted primarily from an increase in wages and salaries, and nonfarm proprietors' income. The faster pace of growth in personal consumption (compared to August's 0.1% reading) can be attributed to higher utilities spending within services and higher motor vehicle sales within goods. The increased spending on motor vehicles should come as little surprise as greater purchase activity was likely driven by consumers in Texas and Florida replacing automobiles damaged in hurricanes Harvey and Irma.
Regarding the recent hurricanes, the BEA noted that while September and August readings reflect the effects of Harvey and Irma, it was not able to measure the total impact. As a result, the BEA adjusted estimates when data was unavailable or did not fully reflect the impacts.
Importantly, the PCE price index rose 0.4% in September, following a 0.2% increase in August.
The Core PCE price index (which takes out food and energy to reduce month-to-month volatility) rose 0.1% in September (the fifth 0.1% gain in as many months), in line with expectations. More importantly, on a year-over-year basis, the index is up 1.3%, in line with expectations and unchanged from August's annual increase. Despite the flat annual reading from August to September, yearly readings have slowly declined from 1.9% in February of this year. We mention this because the core PCE price index is a key economic metric as it represents the Fed's preferred measure of inflation. Recall, controlling the rate of inflation is one of the Fed's dual mandates when determining the outlook for rates (the other being maximizing employment).
As a reminder, the Fed ideally targets a 2.0% rate of inflation -- the core PCE has generally run below this target in recent years, and despite some strength in prior months, including the 3.0% advance 3Q17 reading reported last week, investors must balance additional rate hike expectations this year against the declines in core PCE in recent months.
Jumping to Wednesday, we saw a better-than-expected private-sector payrolls report from ADP, showing an increase of 235,000 jobs, surpassing estimates for an increase of 200,000.
The headline number can be further broken down into a "goods-producing" sector and a "service-providing" sector. The goods-producing sector accounted for 85,000 jobs while the service-providing sector accounted for 150,000. All subsectors within the goods-producing sector showed an increase in employment, with construction leading the way (62,000 jobs created), followed by manufacturing (22,000) and natural resources/mining (1,000). In the service-providing sector, job creation was led by professional/business job creation (109,000), followed by leisure/hospitality (45,000), education/health (39,000), other services (24,000) and financial activity (9,000). Offsetting these gains were declines in trade/transportation/utilities (-50,000) and information (-27,000).
By business size, we saw gains across the board with small business (1-49 employees) adding 79,000 employees, midsize businesses (50-499 employees) adding 66,000 employees and large businesses (500+ employees) adding 90,000 employees.
Commenting on the results, Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, stated, "the job market remains healthy and hiring bounced back with one of the best performances we've seen all year."
Mark Zandi, chief economist of Moody's Analytics, added that, "the job market rebounded strongly from the hit it took from Hurricanes Harvey and Irma. Resurgence in construction jobs shows the rebuilding is already in full swing. Looking through the hurricane-created volatility, job growth is robust."
The reading came ahead of Friday's nonfarm payroll numbers, and while the two reports are based on slightly different sources (ADP does not include government jobs, for example), the two readings do have a general tendency to illustrate the same trend.
Also on Wednesday, the Institute of Supply Management (ISM) reported that the purchasing managers index (PMI), also called the manufacturing index as it is an indicator of activity in the manufacturing sector, declined 2.1% in October to 58.7%, coming up just short of expectations for a decline to 59%. We remind members that this is a key economic metric as manufacturing is responsible for roughly 12% of the U.S. economy. Also recall that anything above 50 represents expansion while anything below 50 indicates a contraction. The rise comes on the heels of September's 60.8% reading. October marked the 101st consecutive month of expansion in the overall economy and the 14th in the manufacturing sector.
Digging deeper, of the 18 manufacturing industries tracked by ISM, 16 showed growth in October while two indicated no change in month-over-month activity. Leading the way were paper products; nonmetallic mineral products; machinery; and transportation equipment.
In addition to the headline reading, the new-orders index pulled back 1.2% month over month to 63.4% (indicating a slower rate of growth). Production also retraced 1.2% to 61.0%. The employment index declined marginally, falling 0.5% to 59.8%, while prices for raw materials (an input for manufacturers) decreased 3% to 68.5% after surging 9.5% in September.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending October 28 were 229,000, a decrease of 5,000 claims from the prior week's revised level (revised up from 233,000 to 234,000) but 6,000 claims below expectations of 235,000 initial claims. While the impact of recent hurricanes is mostly behind us regarding US mainland data (with some impact still being seen in Florida), the effects of Irma and Maria continue to be seen in Puerto Rico and the Virgin Islands, with claims for the Virgin Islands needing to be estimated. However, we note that conditions are improving in Puerto Rico and backlogged claims are now being processed. Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 232,500, a decrease of 7,250 from last week's revised level (revised up from 239,500 to 239,750). This marks the lowest four-week moving average since April 7, 1973 (roughly 44 years), when claims were 232,250. The low rate of layoffs reflects a strengthening labor market as claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an incredible 139 consecutive weeks, the longest streak since 1970.
Finally, on Friday, the Labor Department reported that the economy added 261,000 jobs in October, bouncing back from a poor September reading due to Hurricanes Harvey and Irma but missing expectations for an addition of 315,000 jobs. Slightly offsetting the miss, September's numbers were revised up from a loss of 33,000 jobs to a gain of 18,000 jobs while August's reading was revised up from a gain of 169,000 jobs to a gain of 208,000 jobs. Job gains have averaged 162,000 a month for the last three months.
Despite the miss, the unemployment rate ticked down slightly to 4.1%, slightly exceeding expectations for a flat monthly reading at 4.2% and marking the lowest reading since December 2000. Unfortunately, labor-force participation moved down slightly to 62.7% in October, following September's 63.1% reading. The low participation rate, which is also 0.1% lower compared to October of last year, continues to suggest that many able-bodied Americans are remaining on the sidelines despite what appears to be growing optimism within the economy.
Average hourly wages fell $0.01 in October to $26.53 but are up roughly 2.4% on a yearly basis. The average workweek was unchanged at 34.4 hours on both a monthly and annual basis.
For those skeptical of the headline measure of unemployment (for reasons such as the decline in the labor-force participation rate), a different, broad measure of unemployment and underemployment known as the U-6 -- which accounts for those working part time due to the inability to find full-time work -- was 7.9% in October, down from 8.3% in September and down from 9.5% at the same time last year. The U-6 had averaged around 8.3% in the years before the recession. For more on the jobs report, members can see our analysis here.
Oil
On the commodity front, oil pushed higher this week, bumping up against its highest level in nearly two years. Most notably, on Wednesday, the US Energy Information Administration (EIA) reported the U.S. exports reached an all-time high of 2.13 million barrels per day in the week ending Oct. 27. Driving the record-high exports, the spread between Brent and WTI continues to hover at around $6/barrel. Aided by the rising exports, domestic inventories declined by 2.4 million barrels. However, offsetting the inventory drawdown, production increased to 9.55 million barrels per day from 9.51 million the week prior.
Given, the slow news week, we want to take a moment to recap the key factors we believe are driving the oil market and what we are watching for clues as to where prices may be headed. We have mentioned all of these trends in our recent roundups (and encourage members to look back for more detail) but feel it is important to review them from time to time as oil in particular can be a very difficult commodity to gauge given the political dynamic that heavily influences prices.
First and foremost is OPEC, while the organization has been trying to reduce global supplies, their efforts have been offset by the relentless production in the US. However, with the production cut agreement coming to an end in March of next year, the organization is considering an extension, something investors have pointed to as one reason for the rise in prices. There is also geopolitical tension to account for. The latest news on this front has been fighting in Iraq between the central government and the Iraqi Kurds (following the Kurdish vote for independence). This has caused disruptions in the supply chain (good for prices) out the region. Finally, there is the spread between WTI and Brent mentioned above. With WTI selling at roughly a $6 discount to Brent, U.S. crude has become increasingly more attractive to international buyers. As a result, U.S. producers are inclined to keep pumping as they are beginning to see increased demand from new buyers emerging overseas, namely China and India.
These are the major stories we are monitoring (along with weekly reports from the various reporting agencies) and believe that should international buyers continue to buy WTI, and should OPEC decide to extend its current deadline to the end of 2018 prices will continue to grind higher into the end of the year. On that note, OPEC will host a press conference next week Tuesday (November 7th) from Vienna, Austria to discuss its World Oil Outlook report. The organization will then meet again at the end of the month, on November 30th for its 173rd OPEC meeting, also in Vienna, Austria.
Stocks
Magellan Midstream on Friday following the release of the company's earnings report. While the report was somewhat disappointing, with the company reporting a top-line miss, we continue to like shares of MMP for its safe, 5.42% yield and lessened exposure to the underlying price of oil as the company generates revenue mostly though transportation and terminal fees that the company collects when oil and gas move through its pipelines.
Moving on to the broader market, third-quarter earnings are underway and have so far been largely positive vs. expectations, with 74.3% of companies reporting a positive EPS surprise. Total third-quarter earnings growth has increased roughly 8.2% year over year vs. expectations for an overall 6.73% increase throughout the season; of the 320 non-financials that reported, earnings growth is up 11.0%. Revenues are up 5.7% vs. expectations throughout the season for a 5.06% increase; 74.3% of companies beat EPS expectations, 17.0% missed the mark and 8.6% were in line with consensus. On a year-over-year comparison basis, 75.92% beat the prior year's EPS results, 21.2% came up short and 2.36% were virtually in line. Information Tech, Financials and Healthcare have had the strongest performance vs. estimates, whereas Utilities and Telecom have posted the worst results in the S&P 500 for the third quarter thus far.
Next week, 86 companies in the S&P 500 will report earnings. In the portfolio, we will hear from DXC Technology (DXC) and Cimarex (XEC) after the close on Tuesday. We will also here form Nvidia (NVDA) after the close on Thursday.
This commentary was excerpted from the Weekly Roundup sent on Friday to subscribers ofAction Alerts PLUS, a charitable trust co-managed by Jim Cramer and the AAP staff. Click here to learn about this actively traded stock portfolio.
