Weekly Comment

November 17, 2014

Overview

Investors have increasingly come to view falling energy prices as more of a positive for the economy than a sign or potential cause of economic weakness. Last week, against the backdrop of another decline in crude oil prices (from $78.65 to $75.82/barrel), the Dow Jones Industrial Average rose 60.81 points (0.35 percent), the S&P500 Index advanced 7.90 points (0.39 percent to finish at a new closing high on Friday), and the Nasdaq Composite gained 56.01 points (1.21 percent). It was a week when President Obama made it clear that he is ready to go it alone on major policies as he: announced an agreement with China that involves doubling the current speed of pollution reduction in the United States in return for a promise of less pollution in China starting in 2030;  called on the Federal Communications Commission to adopt the "strongest possible rules" to create "net neutrality" (reversing decades of bipartisan policies that treated the Internet as an information service rather than a utility overseen with 1930s-era regulation); and previewed his plan to take executive actions on immigration that may offer work permits and protection from deportation for several million illegal immigrants.  Overseas, Russia sent military convoys into the Ukraine as expectations grew for a step up in the "rebel" offensive including a renewed effort to achieve a land bridge to the newly-annexed Crimean Peninsula.  ISIS attacks have been stepped up, but the Kurds are holding on to Kobani in Syria and Iraqi security forces appear close to retaking the country' largest refinery, located in Baiji.


In the News

Baker Hughes (BHI-59.89) "Big Oil" Service

            It was announced this morning that Halliburton (HAL) will buy Baker Hughes for about $35 billion in cash and stock, creating an oilfield services behemoth to take on market leader Schlumberger (SLB) as falling oil prices threaten to erode demand. The merger is widely expected to raise anti-trust concerns and Baker Hughes shares, at about $69 in today's pre-market, while up from the pre-merger rumor level of about $51 on Wednesday, are trading well short of the offer of $80.69 per share, based on Friday's close. The combined company would have close to 40 percent market share in North America which could give it more power to charge energy companies higher prices.  Halliburton said on Monday that, if required, it was ready to divest businesses that generate up to $7.5 billion in revenue. Baker Hughes shareholders would get 1.12 Halliburton shares plus $19 in cash for every Baker Hughes shares held. The combined company is expected to save nearly $2 billion a year in costs.

DreamWorks Animation SKG (DWA-26.02) Just Toying Around

          Dreamworks Animation shares rallied 16 percent on Thursday and Friday in response to news that toy maker Hasbro (HAS) and DreamWorks were  in "advanced talks" with the studio known for the "Shrek" and "Kung Fu Panda" movies. The deal would involve cash and stock. In September, Japanese conglomerate SoftBank was reportedly in talks to buy Dreamworks for $32 per share the talks cooled and no deal was done.  Hasbro has been working to become more of a media company as toy sales decline amid demand for electronics like smartphones, tablets and video game consoles. Hasbro has a joint venture with Discovery Communications (DISCA) called Discovery Family Channel. The station's shows feature products like My Little Pony, Transformers and other Hasbro toys.  However, by late Friday the merger talks were said to have cooled. 


The Week Ahead

The economic releases this week are expected to show continued moderate growth with inflation nowhere to be found.  The earnings schedule will be dominated by retailers and investors will be looking for early signs of a strong holiday season in the wake of lower gasoline prices. In other news this week, on Wednesday the Federal Reserve will issue its minutes from its October policy meeting and the "final" round of nuclear talks with Iran will begin.  Treasury auctions scheduled for this week are on: Monday: $24 billion three-month bills and $28 billion six-month bills; and Thursday: $13 billion nine-year, eight month TIPS. 

Economic Indicators       

  Expected

 Last Period

Mon., Nov. 17

Oct. Industrial Production

+0.2 percent

+1.0 percent

Oct. Capacity Utilization

79.3 percent

79.3 percent

Tues., Nov. 18

Oct. Producer Price Index

-0.1 percent

-0.1 percent

Wed., Nov. 19

Oct. Housing Starts

1.03 million

1.02 million

Thurs., Nov. 20

Oct. Consumer Price Index

-0.1 percent

-0.2 percent

Oct. Existing Home Sales

5.15 million

5.05 million

Oct. Leading Indicators

+0.5 percent

+0.2 percent

Nov. Philadelphia Fed Survey

18.3

20.7

Source: Bloomberg/FactSet

Selected Corporate Earnings

Period

Estimate

Year Earlier

Mon., Nov. 17

Agilent Technologies

4Q

$1.56

$1.57

Jacobs Engineering

3Q

$0.51

$0.38

Tyson Foods

3Q

($0.13)

$0.12

Urban Outfitters

3Q

$0.16

$0.11

Tues., Nov. 18

Dicks Sporting Goods

3Q

$0.41

$0.40

Home Depot

3Q

$1.13

$0.95

Medtronic

2Q

$0.96

$0.91

PETsMART

3Q

$0.94

$0.98

TJX Co.

3Q

$0.85

$0.75

Wed., Nov. 19

Keurig Green Mountain

4Q

$0.77

$0.89

L Brands

3Q

$0.40

$0.31

Lowe's Co.

3Q

$0.58

$0.47

salesforce.com

3Q

$0.13

$0.09

Smucker (J.M.)

2Q

$1.57

$1.52

Staples

3Q

$0.36

$0.42

Target

3Q

$0.48

$0.56

Williams-Sonoma

3Q

$0.63

$0.58

Thur., Nov. 20

Best Buy

3Q

$0.24

$0.18

Buckle

3Q

$0.86

$0.85

Dollar Tree

3Q

$0.64

$0.58

Donaldson

1Q

$0.42

$0.41

GameStop

3Q

$0.61

$0.58

Gap

3Q

$0.79

$0.72

Intuit

1Q

($0.20)

($0.06)

Mentor Graphics

3Q

$0.21

$0.32

Ross Stores

3Q

$0.87

$0.80

Fri., Nov. 21

Footlocker

3Q

$0.79

$0.68

Hibbett Sports

3Q

$0.62

$0.66

Source: Thomson First Call










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