Category Archives: oud

No Bull. Economic Weakness Continues To Pressure Corporate Profitability

Is the U.S. economy really in great shape? The U.S. Federal Reserve does not seem to think so. They started the year with an intention of raising the overnight lending rate four times – from 0.25% to 1.25%. In March, they announced that it would more likely be a mere two. And today, the Atlanta Fed downgraded its Q1 estimate for gross domestic product (GDP) to a new low for the year (0.4%). Granted, GDP for the fourth quarter of 2015 came in at a better-than-expected 1.4% after its third revision. However, that is significantly lower than the average economic performance since 2009 of 2.1%. And then there’s Gross Domestic Income (NYSE: GDI ). This measure looks at the income earned while producing goods and services (as opposed to measuring them on expenditures). GDI finished Q4 2015 at a sub-standard 0.9%, confirming widespread weakness. (Note: Theoretically, GDP and GDI should match one another, but they deviate due to different methods of calculation.) If one ignores the average rate of U.S. expansion in history, disregards the current 6-month slowdown in GDP/GDI, and overlooks the Federal Reserve’s emergency measures for monetary policy accommodation, one might applaud the economic “progress” made between 2009 and 2016. Conversely, realistic observers know that things are not that rosy. For example, U.S. government debt has swelled from roughly $11 trillion to $19 trillion. That’s a great deal of stimulus to keep the economy afloat. The Fed’s balance sheet has bloated from $800 billion to nearly $5 trillion. That’s an incredible amount of stimulus designed to bolster borrowing activity. Yet the big bang from the $12 trillion-plus injection is an economy that can barely hold its head above water. Apologists point to other data points that suggest the U.S. economy is dandy. “Robust job growth,” they say. Of course, they neglect to mention that low-quality positions in leisure, hospitality, retail and customer service account for most of the gains, whereas high-paying positions, particularly in manufacturing, continue to evaporate. That data shows up in average hourly earnings, where stagnation in wages are indicative of a shift toward lower-paying jobs with fewer hours. There’s more. Approximately 14 million jobs have been created since the end of the financial crisis in 2009. Sounds impressive, right? Unfortunately, the size of the labor force grew by roughly 16 million potential participants in the same seven-year period. Now we have 94 million working-aged Americans (16-64) who are not even counted in the labor force – those who have no job and who are not currently looking for a job. Granted, many younger folks are going to school and many older folks have retired. Nevertheless, the bulk of these 94 million individuals (16-64) simply believe that they do not have viable employment options. “But Gary,” you argue. “The economy here would be doing okay if it weren’t for the problems with overseas economies.” That may very well be true. On the other hand, this possibility only clarifies the fact that we live in a world that is more interconnected than ever before. Most of the world’s economies still depend on their product exports. It follows that when the world’s manufacturing is free-falling, the U.S. economy is going to feel it. “We are a consumption-based society with resilient consumers,” you respond. Unfortunately, the idea that resilient U.S. consumers can overcome global manufacturer woes is as erroneous as the notion that U.S. companies can escape the negative impact that weak currencies have had on corporate profits . They can’t and they aren’t. Global manufacturing woes have been adversely affecting the quality of the jobs that people have stateside. In fact, American consumer resilience is little more than “code” for acknowledging that we increase our debts at a much faster clip than we increase our take-home pay. Specifically, at the turn of the century, household consumer credit as a percent of average income had risen to 26%. Today? This percentage has jumped to 34%. Over-leveraged households imply that there will be some constraints on consumption, contributing to the overall weakness in the current economic backdrop. Think that the economic weakness is not going to have an impact on risk taking? Think again. Even the U.S. central bank’s about-face on rate hikes in 2016 – even the 14% surge in the S&P 500 SPDR Trust (NYSEARCA: SPY ) off of its mid-February lows – may not encourage as much “risk on” activity as many investors hope for. Consider the year-to-date performance of the FTSE Custom Multi-Asset Stock Hedge Index (MASH) as it relates to the S&P 500. MASH, with “risk-off” assets such as SPDR Trust (NYSEARCA: GLD ), Currency Shares Yen Trust (NYSEARCA: FXY ) as well as PIMCO 25+Year Zero Coupon (NYSEARCA: ZROZ ) and iShares National Muni Bond (NYSEARCA: MUB ) are collectively outperforming the stock benchmark with significantly less volatility. Click here for Gary’s latest podcast. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Apple Should Be Valued Like Internet, Not Hardware, Company

Apple ( AAPL ) is grossly undervalued because investors wrongly treat it like a computer hardware company, Needham analyst Laura Martin said in a research report Tuesday. Martin initiated coverage of Apple with a strong buy rating and a 12-month price target of 150. Apple stock fell 1.2% to 109.81 on the stock market today . Based on four different valuation methodologies, Apple’s long-term value is 180, or 64% above current levels, she said. “For each of the past five years, Apple’s profit margins have been higher than Disney ’s ( DIS ) and its asset productivity (i.e., earnings per asset employed) have been higher than Facebook ’s ( FB ),” Martin said. Apple “should not be valued like a hardware company if its fundamentals are better than world-class content and Internet companies.” If Apple were valued as a top content or Internet company, its shares likely would trade at 200, she said. Apple’s business also is similar to a cable company’s recurring subscription model, she said, and Apple’s iPhone customers are predictably loyal and upgrade to the latest smartphones roughly every two years. If Apple was valued at an average cable company multiple today (even though Apple has a far less capital-intensive business model), Apple would trade at 180, she said. Under Needham’s worst-case scenario, where Apple has 1 billion active devices and zero unit growth for the next 20 years, the stock still should be valued at 168, she said. RELATED: Apple Stock Rises On Upbeat Analyst Reports, Video Services Upside

Palo Alto Networks Falls After Analyst Day As Price Targets Change

Palo Alto Networks ( PANW ) hosted an upbeat Analysts Day at its Ignite 2016 cybersecurity conference in Las Vegas Monday, but the stock erased weeks of gain Tuesday. It’s still up 39% from a low point on Feb. 8. The biggest pure-play computer network security company fell 6% to 151.92 in the stock market today . The drop reflected its worst day since a 7.2% slide on Feb. 18 in the throes of the January-February software sag of 2016. Palo Alto Networks stock is now trading 24% off its record high, set July 24 at 200.55. It went public priced at 42 in July 2012. The market was down Tuesday, but none of the major U.S. indexes was off more than 1% at midday, while Palo Alto Networks became the topic of a slew of analyst reports issued after Monday’s big show. Let’s go to the tape: Needham’s analyst raised a price target on Palo Alto to 187 from 171, affirming its buy rating. Goldman Sachs trimmed a price target to 188 from 191. Pacific Crest’s analyst assured, “The party is still getting started.” Credit Suisse’s analyst noted: “The company anticipates being able to sustain this level of revenue growth (over 30% in 2017 and beyond) and operating profile (35%-45% free cash flow and 100-200 basis points of operating margin expansion by 2017) for several years.” William Blair’s Jonathan Ho “came away with a stronger appreciation for the company’s … opportunity to ultimately become the largest player in the cybersecurity space,” he said in a research note issued Tuesday. Let’s do the math: If computer networking behemoth Cisco Systems ( CSCO ), which is growing its cloud-related services much faster than its traditional on-premise products, were able to sustain its fiscal 2015 growth rate for security services — up 12% to $1.747 billion, or 88% more than Palo Alto’s entire $928 million in 2015 sales — Palo Alto’s estimated 30%-plus growth rate by 2017 suggests that it would overtake Cisco’s security sales sometime in fiscal 2019, something like $3.05 billion vs. $2.74 billion in projected Cisco security revenue. But who’s counting? The analysts are. “We continue to believe investors are underestimating how large Palo Alto will ultimately be, particularly given that most of its revenue is still derived from competitive displacements, as opposed to a refresh of its captive installed base (which has only recently modestly begun),” said William Blair’s Ho. “Our industry discussions suggest Palo Alto continues to dominate next-generation firewall win rates and is still in the relatively early phases of a market undergoing significant transition. Furthermore, increasing traction in (Palo Alto products) WildFire, Traps, Aperture and AutoFocus could create opportunities in new markets for the company to broaden its platform reach. As a result, we would continue to be buyers of the stock, particularly given its recent pullback.” Given Tuesday’s slide in Palo Alto stock, Pacific Crest analyst Rob Owens’ take on Palo Alto seems even more the case: “Palo Alto Networks is our top pick in security,” he said in a late Monday research note. “It is rapidly gaining share against competitors, trades at a discount to comparable-growth companies and has potential upside drivers from new subscription services.” He affirmed Pac Crest’s 190 price target with an outperform rating. Palo Alto gets an IBD Composite Rating of 82 out of a possible 99, factoring in its earnings track record, stock performance and other measures.