by Shawn Narancich, CFA Vice President of Research
Easy Money As Far As the Eye Can See The Fed concluded its policymaking meeting this week with Chairman Bernanke accomplishing two long-held goals: providing additional transparency to markets (short rates telegraphed to remain near zero until late 2014) and targeting an explicit inflation rate of 2 percent. As well, Friday brought investors their first view of fourth quarter GDP growth which, at 2.8 percent, modestly undershot expectations—but represented the strongest rate of expansion since the first quarter of 2010. Excluding the boost from inventory restocking, real final sales grew at an anemic rate of just 0.8 percent. QE3 anyone?
Apple Headlines Heavy Week of Earnings A plethora of companies delivered fourth quarter results this week that, for the most part, supported stock prices, which finished the week unchanged on the S&P 500. Apple delivered what was arguably the best quarter ever reported by a public company, delivering record sales and earnings that blew past expectations—not by millions, but by billions of dollars. As our technology analyst Jason Norris noted, “ ‘twas an Apple Christmas.”
At least for now, Apple’s riches come at the expense of its telecom partners that distribute the iPhone. Both Verizon and AT&T reported profit declines because of losses they incur when selling the device. The idea is that they will recoup the subsidy with pricier smartphone plans over time. How successful has this been? Over the past three years, Ma Bell’s operating income has declined and operating cash flow is flat.
In general, more companies are calling out pension, currency and European headwinds for 2012, but industry leaders like Apple, EMC, Caterpillar, and McDonalds are managing through the challenges, prospering in a slow-growth environment by continuing to capitalize on their substantial competitive advantages. Commodity cost inflation is evident in poor refining results being reported by big oil and consumer companies like Colgate and Procter & Gamble, but for consumer staples companies at least, gross margin headwinds should abate in 2012 as grain prices moderate.
Whistling Past the Graveyard? The World Economic Forum in Switzerland commenced this week and Europe remains the center of attention. While the IMF presses for more aid to the beleaguered southern periphery, Germany remains reluctant to boost the size of Europe’s bailout fund and the Greek debt restructuring festers. A key question is whether the ECB will ultimately accept losses on the Greek debt it owns. Despite England’s report that is has joined so many other European nations in announcing economic contraction in Q4, Spanish and Italian bond yields continued to fall. How deep the downturn becomes hinges on policy actions that unify the continent fiscally without prescribing an overbearing level of austerity that crushes aggregate demand.
Low Natural Gas Prices Elicit Supply Response Investors took notice this week when Chesapeake Energy announced that it would be curtailing natural gas production because of low prices. Conoco-Phillips announced similar moves. Producing an existing well is relatively inexpensive once it is drilled and completed, so prices have to be very low to incent producers to shutter production when it typically generates at least a contribution margin. Whether production shut-ins gather momentum below $3.00 gas remains to be seen—but for now, it looks like Chesapeake may have helped call the bottom in the “clean” hydrocarbon, with prices rebounding 15 percent this week. Notwithstanding the bounce, domestic natural gas is almost seven times cheaper than oil on an energy equivalent basis.