Weekly Comment

September 15, 2014

Overview

While military hostilities seemed to lessen in Ukraine, the economic war appeared to heat up. The United Stated and European Union imposed more sanctions, notably including the energy sector, while Poland reported a sharp drop in natural gas supplies from Russia. In U.S. economic news, the market returned to a "good news is bad news" mode as better-than-expected August retail sales and an upbeat September consumer-sentiment survey raised concerns that the Federal Reserve will start raising interest rates earlier than previously forecast.  For the week, the Dow Jones Industrial Average was down 149.85 points (0.87 percent), the S&P 500 Index dropped 22.17 points (1.10 percent), and Nasdaq Composite declined 15.30 points (0.33 percent). The energy sector was weak as Brent crude fell to about $98 a barrel, its lowest level since April 2013, on concerns that sluggish global economic activity will be translated into weak demand for oil. 

In the News

Lululemon Athletica (LULU-45.19) Stretching Good News

            Lululemon Athletica reported second-quarter (ended August 3) EPs of $0.33, down from $0.39 in the year-earlier period but better than the consensus estimate of $0.29. Revenue rose from $344.5 million to $390.7 million, beating the average estimate of $377.4 million. Total comparable sales, which includes sales at stores open at least a year (down 5 percent)  and direct-to-consumer revenue (up 30 percent), were flat on a constant dollar basis. Lululemon has worked to improve operations since last spring when it pulled one of its popular yoga pants from stores because they were too sheer, which it blamed on a style change and production issues. The Company said that its strategic efforts are on track and that it is starting to see the results in its products, its brand and also in its international expansion. Lululemon now anticipates full-year adjusted EPS between $1.72 and $1.77 on revenue in a range of $1.78 billion to $1.8 billion. Its prior guidance was for adjusted EPS of $1.71 to $1.76 on revenue of $1.77 billion to $1.8 billion. The stock rallied 15 percent on the news despite the fact that the new guidance is largely only in line with prior average analyst forecasts of full-year EPS of $1.74 on revenue of $1.78 billion.

General Electric (GE-61.18) Not Your Father's GE

            General Electric announced the sale of its appliance division to Electrolux for $3.3 billion. Electrolux will still sell appliances under the GE brand in attempt to leverage the company's long history. GE's appliances and lighting division accounted for just 8 percent of the company's industrial revenues and 2 percent of its profit. GE has made it clear that it wants move out of consumer goods and services and focus on industrial machines such as aircraft engines, locomotives, gas-fired turbines and medical imaging equipment and thereby become less of a conglomerate and more of a global infrastructure company.  In July, the Company spun off its consumer credit card business into a new company, Synchrony Financial. In recent years it has sold NBC Universal and its insurance operations and it is gradually shrinking its sprawling financial company, called GE Capital. On the other hand, in June GE agreed to buy the energy and power generation operations of the French engineering company Alstom for $17 billion, and, over the last several years it has spent $14 billion acquiring oil and gas-related companies. The stock was down o.9 percent for the week.


The Week Ahead

The economic news this week will paint a picture of moderate growth and low inflation. The Organization for Economic Co-operation and Development will release its global economic outlook on Monday; expectations are for a forecast of continued modest economic growth in most of the world's large economies over the coming months. Fed Chair Janet Yellen will hold a news conference on Wednesday afternoon after the conclusion of the Federal Reserve Open Market Committee's regularly scheduled meeting.  Alibaba Group was expected to sell 320 million shares in an initial public offering on Thursday, and expectations were for a price of around $63 per share. Given those figures, and if the overallotment is exercised, the deal could set a record for an IPO of $24.3 billion. However, responding to strong demand, it now appears the selling price could be as high as $70.  The earnings calendar is light and, as has been the recent trend, characterized by mixed results. with mixed results. The Treasury auctions scheduled for this week are on Monday: $24 billion of three-month bills and $23 billion six month bills; Tuesday: $25 billion of one-year notes; and Thursday: $13 billion of nine-year, 10-month TIPS.

 

Economic Indicators       

  Expected

 Last Period

Mon., Sept. 15

Aug. Industrial Production

+0.4 percent

+0.4 percent

Aug. Capacity Utilization

79.3 percent

79.2 percent

Tues., Sept. 16

Aug. Producer Price Index

+0.1 percent

+0.1 percent

Wed., Sept. 17

Aug. Consumer Price Index

0.0 percent

+0.1 percent

Thurs., Sept 18

Aug. Housing Starts

1.04 million

1.09 million

Sept. Philadelphia Fed Survey

22.8

28.0

Fri., Sept. 19

Aug. Leading Indicators

+0.4 percent

+0.9 percent

Source: Bloomberg/FactSet


Selected Corporate Earnings

Period

Estimate

Year Earlier

Mon., Sept. 15

Analogic

4Q

$1.24

$1.30

Fabrinet

4Q

$0.35

$0.35

Tues., Sept. 16

Adobe Systems

3Q

$0.26

$0.32

Apogee Enterprises

2Q

$0.34

$0.21

Wed., Sept. 17

CBRL Group

4Q

$1.56

$1.43

Cintas 

1Q

$0.75

$0.63

FedEx

1Q

$1.95

$1.53

General Mills

1Q

$0.69

$0.70

Lennar

3Q

$0.67

$0.54

Miller (Herman)

1Q

$0.46

$0.43

Scholastic

1Q

($0.84)

($0.90)

United Natural Foods

4Q

$0.65

$0.65

Thurs., Sept. 18

ConAgra Foods

1Q

$0.35

$0.37

Oracle

1Q

$0.64

$0.59

Red Hat

2Q

$0.38

$0.35

Source: Thomson First Call










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