• Volume I, Issue 3

LGR Financial Newsletter

Volume I, Issue 3 (Released On January 28, 2014)

This week’s big topics (among many): key earnings reports and news from China and emerging markets.

Next up: current trends in the stock market.
If you have any specific topics of interest, please let me know.


Earnings Reports and Company News:
This earnings season was big, as was its impact on the market. Last week approximately 60 stocks from the S&P 500 reported their quarterly earnings, with mostly mixed results for blue chips. Many companies received less-than-enthusiastic responses. The Wall Street Journal accurately predicted last week that investors were looking more at margins and forward guidance during this earnings season. The article continued by saying that investors would react positively if a company beat analyst earnings expectations but fell short on revenue expectations (indicating that the company has good margins), and react badly to an earnings miss and revenue beat (indicating bad margins). But this is not always so…

Apple: forward guidance trumping current performance.

Today, January 28, 2014, Apple (AAPL) sank 8% after releasing its earnings report after yesterday’s close. Apple reported that it “earned $13.1 Billion, or $14.50 a share, on $57.6 billion in revenue” and Oppenheimer (Apple’s Senior Vice President and CFO) said “iPhone sales were strong, reaching 51 million units in the quarter,” and that “the company is pleased with performance” (Marketwatch.com). Despite the fact that Apple outperformed both earnings and revenue expectations, and had record iPhone sales, Apple’s share price went down 6% after hours due to missing iPhone sales expectations, and investors are expecting next quarter’s report to post “the company’s first year-over-year revenue decline in 11 years” (CNN Money). Expectations about Apple’s future continued to spiral this morning as many companies decided to downgrade their rating for Apple shares, which further caused the stock price to decline. If anyone would like to learn more about Apple’s earnings report, and what major investors are saying about it, you can follow this link: http://tech.fortune.cnn.com/2014/01/28/apple-analysts-q1-2014/?source=yahoo_quote


News from China and Emerging Markets:

Indications that China’s economy might not be as stable as many believed led to more general concerns with global economic conditions, especially in emerging markets. Last Wednesday, for example, the Hong Kong and Shanghai Banking Corporation (HSBC) released its “Flash Manufacturing PMI,” which came in below forecasts at 49.6 vs. expectations of 50.6. The Purchasing Managers’ Index (PMI) is released monthly and a reading “above 50.0 indicates industry expansion, below indicates contraction” (Forexfactory). Investors around the world care about a country’s PMI reading because “It’s a leading indicator of economic health - businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company’s view of the economy” (Forexfactory). China’s PMI reading came as a severe blow to investors who were used to China’s recent record of sustained level of growth and economic stability, particularly on top the first month of contraction in China’s manufacturing industry since July 2013.

China’s PMI reading might have been the tipping point, but concern over the future of emerging markets has been growing. Interest rates in developed countries have been at all-time lows (sometimes considered “artificially low”) for some time, and the question on many investors’ minds has been: When will interest rates finally rise? Well, that time is approaching sooner than some would like. This topic isn’t new, as investors have been expecting rates to rise. Unfortunately for emerging markets, low interest rates drew more investment, as investors sought out higher growth returns. As interest rates rise in the U.S. and Europe, however, many of these investors will seek out safer returns at home.

When will interest rates rise? Well, the Fed Open Market Committee (FOMC ) has “established a 6.5% unemployment rate as a threshold for when the Fed will consider raising the fed funds rate, the rate at which banks charge each other for overnight loans” (FoxBusiness). Additionally, after yesterday, investors can’t hope for another reduction in rates by the European Central Bank (ECB), as the Head of the ECB, Mario Draghi, declared that there will not be another rate reduction.

In short, emerging markets have been struggling as a whole, with countries such as Argentina and Turkey experiencing having a tougher time than others. Currencies in both countries have had major slides over the past year, and it will be extremely difficult for them to turn it around.

Even Foreign Chickens Roost at Home:
Concerns with China’s manufacturing data and emerging markets heavily affected American stocks as the S&P 500, DJIA, and the Nasdaq were all down between 3.5 and 4% last week (with most of the major losses taking place on Thursday and Friday when emerging market concerns were at their peak).

If you have any questions about this Issue of my Financial Newsletter please fill out the form below. I also appreciate receiving any comments you might have about what you just read, and I encourage you to send me ideas for topics that you would like to see me write about in the future. Thank you for reading!

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