Today's Headlines: No Clear Message

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Today's Headlines: No Clear Message
May 13, 2014

      Editor’s Note:

      In this weekly series, we look for practical value in current financial headlines so you can make better decisions in the management of your money. Check back each week for new columns, and let us know what you think!

No Clear Message in Q1 Corporate Earnings

First quarter earnings reports are winding down with mixed results, producing odd stock market reactions. S&P expects the cumulative Q1 results for the S&P 500 to show a 3.4% increase in earnings – not bad, but down from the near 8% gain in Q4 2013.

Indicative of the week's oddities, Google (NASDAQ: GOOG) reported 19% growth and was subsequently pummeled with a 6% drop in its stock. Expectations for Google are still crushingly high.

Last Friday became a bit of a Freaky Friday, as stocks fluttered around near-record territory while stocks showed odd reversals. LinkedIn (NYSE: LKND) and Tesla (NASDAQ: TSLA), who have both suffered recent losses of over 10%, both rose (2.5% for LinkedIn; 2% for Tesla). Typically stable utility stocks dropped by 1.4%.

As of this writing, there were a few important companies to weigh in with Q1 earnings, such as Wal-Mart (NYSE: WMT) and Cisco Systems (NASDAQ: CSCO). It is doubtful that these will change the overall conclusion – which is that there is no clear, across-the-board message to the market and investors. It is all case-by-case.

Pharma Consolidation

The past few weeks have shown a lot of activity in the pharmaceutical sector, including a complex $16 billion transaction between Novartis (NYSE: NVS) and GlaxoSmithKline (NYSE: GSK), Merck's (NYSE:MRK) $14.2 billion sale of consumer care products to Bayer (NASDAQ: BAYRY), and the topper of them all, an attempted takeover of AstraZeneca (NYSE: AZN) by Pfizer (NYSE: PFE), recently rejected at $106 billion.

Is there a common thread? If so, it seems to be a collective shortage of promising new drugs overall, and the encroachment of generics on some of the existing cash cows. Profit appears to be targeted toward acquisitions to gain new research-level drugs and cost-cutting opportunities.

In the case of Pfizer and AstraZeneca, there is another factor aside from promising cancer treatment drugs – the potential tax shift through a reincorporation of the combined company in the UK. Taxes there are 21%, compared to Pfizer's current 27% tax rate.

Pfizer will be back with yet another offer, no doubt with more goodies to persuade skeptical government officials on both sides of the pond. The fact that AstraZeneca stock is rising suggests that investors expect the deal to get done with a reasonably high offer per share.

Meanwhile, if you are on the Pfizer side, beware of capital gains taxes if the UK reincorporation goes through. The tax-savings switch triggers capital gains on the share appreciation – if your holdings are not in tax-deferred accounts. Contact a tax professional to verify your situation.

Fed Says: Trust Us, We Know What We're Doing

That was the implied message from Fed Chairwoman Janet Yellen last week in her testimony to Congress' Joint Economic Committee. Her comments on everything from the bond buyback program to inflation and the labor market sent the message that the Fed intends to stay on its current course until they decide the economy is strong enough – and there will be no numerical benchmark given to Wall Street.

So in the short term, expect little to change in Fed policy – but with no guidelines, Wall Street will probably be a little jumpy for any economic indicator or report that shows a large swing in either direction. Another jobs report like the last one, without the added losses in the labor force, might cause a quicker than usual shift in Fed Policy and Wall Street's subsequent reaction.

3 Key Takeaways:

It will be our custom to end this column with our “3 Key Takeaway’s” from the prior week’s headlines. Here are this week’s Takeaways:

  1. Q1 earnings provide no clear messages to investors about general economy or specific sectors. Therefore, you must find value based on research into the performance and direction of individual companies. That’s probably good advice at any time.
  2. Pharmaceutical consolidation is outstripping product innovation currently. Short-term outlook isn’t bullish.
  3. Slow unwinding of Fed stimulus continues, but no radical moves expected soon.

We hope these commentaries on the financial headlines prove interesting and helpful, and that we will see you here again next week!

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