by Shawn Narancich, CFA Vice President of Research
U.S. Economy Surprisingly Strong Economic data stole the show from earnings reports this week, validating stocks’ strong start to 2012. The U.S. economy created 243,000 net new jobs in January, exceeding the top-end of estimates and confirming the consistent downtrend in weekly jobless claims. Detail in the January jobs report showed that over 20 percent of the gain came from manufacturing—demonstrating a renaissance of sorts for “Smokestack Americana.” Japanese automakers are relocating auto production stateside to lessen the negative impact of a strong yen and chemical companies are building new factories here to take advantage of low-cost natural gas feedstock—compliments of the shale drilling boom. Job gains were confirmed by another encouraging report on monthly manufacturing domestically, with similar January data from Europe improving as well. U.S. auto production rose and retail chain-store sales were stronger than expected. Our takeaway is that first-quarter GDP appears to be growing faster than expected.
Earnings Season Moves to Late Innings With well over half of the companies in the S&P 500 having reported at this point—company commentary, encouraging economic data and recent weakening of the dollar support expectations for mid single-digit earnings growth in 2012. Amazon reported quarterly revenue that surged by 35 percent, confirming the increasing popularity of online shopping and the company’s as-yet-undemonstrated ability to make much money from it. Investors are left to ponder why the stock trades for 137x earnings expected to be flat in 2012. All the while, UPS is happy to ship the goods that Amazon sells at a 1 percent profit margin; it reported strong quarterly profits and credited increased U.S. shipments for the upside to estimates. Elsewhere, Broadcom and Qualcomm testified to the boom in wireless device sales, with both reporting earnings upside driven by surging smart phone and tablet volumes. Refining results were predictably lousy in the fourth quarter, but industry plans to shutter unprofitable capacity are having the intended effect, pushing gasoline refining margins back over $20 a barrel, measured against West Texas Intermediate oil prices.
Facebook Gives “Thumbs-Up” to IPO Rising stock prices have put the capital markets back on offense—and this week investors received confirmation that the social networking giant will offer shares to the public for the first time ever. Private market trading of Facebook indicates a valuation of the company approaching $100 billion … or a cool 100x earnings. Why such a high valuation? Facebook has revolutionized the business of display advertising, offering companies the opportunity to leverage targeted advertising to audiences based on users’ public profiles. What’s that noise? It’s the sucking sound of Facebook ad dollars being pulled away from Yahoo, which continues to lose market share. It is anticipated that the “Facebook Effect” will also impact Google’s giant advertising presence in due time.