John Dessauer Investments, Inc.

Transcription

1 John Dessauer Investments, Inc. John Dessauer s market review and update as of Wednesday February 4, 2015 The long Bull stock market run is far from over, but the pace has slowed considerably. Last week stocks were down more than they were up. The media blamed Greece and the political victory of the far left. At home the blame fell on the mixed earnings reports that were released last week. Finally, the media pundits beat the same old interest rate horse, saying the Federal Reserve was likely to raise interest rates sooner rather than later. Greece Prime Minister Alexis Tsipras won a sweeping election by promising to end the austerity measures imposed on Greece as part of the financial bailout. He wants to raise the minimum wage, negotiate a reduction in mandatory debt repayment provisions and talks openly about walking away from the debts if he doesn t get his way. The responses from Germany and a high ranking ECB (European Central Bank) board member have been harsh. Germany s Angela Merkel says Greece must abide by the terms of the bailout. Officials from Greece will be wandering all around Europe this week trying to gather some political sympathy for their beleaguered economy. Notably, neither Berlin nor Frankfurt appear on the Greek travel schedule. Greece has a very real problem: government cash will run out by the end of this month unless Greece can find a source of new funding. Greek government debt has been downgraded to less than investment grade. This means the ECB cannot buy Greek

2 government bonds. There is little appetite for Greek government debt among bond speculators. There are reports of interest rates as high as 19%, but still more sellers than buyers. In terms of the global economy, Greece is tiny - perhaps the size of the economy of Philadelphia. A Greek economic crisis will not drag down the rate of growth of the global economy or have an impact on U.S. corporate profits. Investors are alarmed about Greece because of the uncertainty it raises about the euro. In the long run a Greek exit from the euro would most likely be good for the euro. But the exit process could be messy. Greek voters and therefore Greek politicians want it both ways. They want to stay in the euro but on their newly revised terms. That, of course, is impossible. Leaving the euro would be catastrophic for the Greek economy. The Greek government would be at the mercy of both the currency and the bond market. Interest rates on Greek government debt would soar. Eventually, a devalued Greek currency might help revive economic growth, but in the short run economic conditions would most likely get a whole lot worse. I expect the newly elected Greek politicians to put on a good show so they can say they did their best to fulfill their pre-election promises. But Greece will bend, continue to live up to the bailout provisions, and stay in the euro. There most likely will be some window dressing - modest changes to make Tsipras look good and fool some voters. I don t expect riots in the street. The newly elected left-wingers will keep making promises they know they can t keep. In coming weeks Greece will fade from the headlines, until the next Greek economic drama a year or two from now. Greece is still a long way from

3 being able to sustain real economic growth fast enough to bring down the unemployment rate. Economic cycles and the stock market Stock markets do not suddenly reverse course without some underlying economic reason. Sentiment can swing from enthusiasm to panic, pushing stock prices around day to day or even week to week. But unless the underlying economy confirms the change in sentiment, stocks revive and continue on their long term trend. Economic cycles come to their end in one of two ways: recession, or overheating that drives inflation to threatening levels. Neither is likely this year - or for that matter - next. The latest government data show the economy grew at an annual rate of 2.6% in the final quarter. For 2014 as a whole, the economy grew 2.4% - better than zero and far better than a recession, but still far below what has been the case in prior economic recoveries. With oil prices down, the rate of job growth in Texas and the other U.S. oil patches is going to slow. There will be a rise in unemployment in some regions. Excluding the oil sector, the U.S. economy continues to create too many low paying jobs and not enough jobs with true living wage compensation. Obamacare is beginning to take a bite out of consumer wallets and making tax forms more complicated. Growth rates in the first half of this year will likely be held back by the combination of low oil and more complex tax forms. In the longer run, the lower oil price will be a boost for consumers. Recent measures of U.S. consumer sentiment are very encouraging. Lynn Franco, Director of Economic Indicators at The Conference Board said: Consumer confidence rose sharply

4 in January, and is now at its highest level since August The second half of this year should show an increase in the rate of economic growth. Interest rates Economists and stock market professionals are convinced the Federal Reserve would like to raise U.S. interest rates in a one and done move that would lift short term interest rates to 1%-2%. That would bring interest rates closer to historically normal levels. The problem is the strong dollar, which is the other side of the weak euro coin. Raising interest rates would likely make the dollar more attractive and hurt both the euro and the U.S. economy. Odds are the Federal Reserve will wait until the Greek economic drama plays out and the euro stabilizes before making any changes in U.S. interest rates. The bottom line is that the U.S. economy is not about to surge ahead in a burst of inflation-producing growth, nor is it going to slow and tip back toward recession. The U.S. is likely to grow at a 2.5%-3.5% rate this year, providing fundamental support for growth in corporate profits, and modestly higher stock prices. SEI Investments, NASDAQ, SEIC, $40.17, reported a strong quarter and full year Earnings, excluding special items, were $0.51 a share in the final quarter. For all of 2014 SEI earned $1.85 a share, up 12.8% from For this year the consensus expectation is for earnings of $2.09 a share, up almost 13%. SEI is clearly benefiting from the financial market recovery but also is attracting new business by offering new services and expanding geographically. SEI remains an attractive long term investment. Buy more on any dip to $35 or lower.

5 Microsoft, NASDAQ, MSFT, $40.40, reported second fiscal quarter results that were in line with analysts expectations. Earnings were $0.71 a share. Sales grew 4.8%. One article captured the story with this headline: Microsoft sales are growing for just about every product it makes.except for Windows. Windows used to be the company s cash machine. Now Microsoft would almost give Windows away for free to grow the customer base and support its other products. Microsoft is a remarkable story of a major technology company successfully transitioning as technology leapfrogs. Wall Street analysts are still skeptical. Argus Research, for example rates the stock a hold with a full fiscal year earnings target of $2.68 a share. I am more confident and see Microsoft - at 15 times that estimate and down from a 52 week high of $ as attractive. Microsoft is a buy. I will have the next market review and update for you one week from today on Wednesday February 11, All the best, John Dessauer February 2015