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Federal Reserve says just enough today to keep June interest rate increase on the table; watch tomorrow’s GDP numbers

posted on April 27, 2016 at 7:01 pm
The Fed Building

No surprise that the U.S. stock market didn’t move much in response to today’s (April 27) Open Market Committee meeting. The Fed left interest rates alone and then released a statement that contained the minimum possible tweak needed to keep a potential increase at the June 14-15 meeting on the table. The Dow Jones Industrial Average closed ump 0.28%; the Standard & Poor’s 500 stock index gained 0.16%, and the NASDAQ Composite fell 0.51% under the influence of disappointing earnings after the close on Tuesday from Apple (AAPL) and Twitter (TWTR).

Here’s the Fed’s big change in language. In March the Fed said that “global economic and financial developments continue to pose risks.” Today the U.S. central bank said instead it will “closely monitor” such developments.

The Fed continued to feel positive about the job market even as it recognized that economy activity is likely to have slowed in the first quarter. A big question facing the Fed is whether any first quarter slowdown is simply a continuation of a recent pattern of weak first quarter results (followed by a pickup in growth) or a sign that the economy is actually headed for a slower year in 2016. The Bureau for Economic Analysis will release the initial read on first quarter GDP growth tomorrow, April 28. The Fed had already seen this data when it wrote today’s statement. The Atlanta Fed’s model of economic growth projects first quarter GDP will increase by just 0.6% year over year. (Growth in the fourth quarter was just 1.4%.)

Look to see if, over the next week or so, Fed members give speeches amplifying the Fed’s rather minimal change in language. Today’s meeting didn’t include a scheduled press conference by Fed chief Janet Yellen and I expect coming statements from Fed governors to pick up the communications slack. Not only what these speeches say but who delivers them is important. If doves,who have been reluctant to raise interest rates talk about the need for the Fed to move, as has been the case in one or two speeches lately, then the odds of a Fed interest rate increase go up faster than if it was just the same old interest rate hawks pushing for a move.

Also look to tomorrow’s GDP numbers to see if the first quarter upsets the Goldilocks story that the financial markets have been reading lately. That story has included just enough economic growth to keep stocks moving higher but not enough growth to prompt the Fed to move quickly on another interest rate increase for 2016.

I would expect the Fed futures market to start pricing in a higher chance of an interest rate increase in any case as we get closer to the June 14-15 meeting. But if that increase in odds is gradual, I don’t think it would be enough to change the market’s belief that conditions are “Just right.”

Today on my paid site: The oil price rally and the fracklog, and finding a stock pick to capture the fast growth of cloud computing

posted on April 26, 2016 at 7:45 pm
NY Stock Exchange floor

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy called tactical stock picking.

So today I’ve taken a look at yesterday’s earnings report and guidance from Pioneer Natural Resources (PXD) to see what that shale oil producer had to tell investors about when oil prices will be high enough to open the gates for production from the fracklog., The fracklog is the inventory of drilled but not completed wells in U.S. shale geologies that could be quickly put into production once oil companies think the price of oil is high enough. Estimates are that tapping the fracklog would quickly put 500,000 barrels of oil a day onto the markets–enough to send oil prices tumbling if oil companies get the timing wrong as they did in mid-2015.

And then in my Sector Monday (yes, I know it’s Tuesday but that’s how some weeks go) I’ve surveyed the astounding growth in revenue from cloud computing–almost 20% annually for the next five to 10 years is the forecast–looking for a stock that can capture that growth. The big leaders of the moment, Amazon, Microsoft,IBM, and Alphabet, aren’t the best bets to do that, as the post explains. This is important background for tomorrow’s pick in cloud computing that I’ll add to my Jubak Picks portfolio.

Tomorrow on the paid and this free site, I’ll take a look at today’s earnings from Apple (AAPL) and Twitter (TWTR) to see how those results have rearranged the technology space. (Including the timing for a buy on Nvidia (NVDA).)

That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

 

My Apple earnings preview: Disappointment on the iPhone; good news on services?

posted on April 26, 2016 at 4:02 pm
iPhone_470x225

The markets are expecting a major disappointment on revenue and earnings from Apple (AAPL) after the close of the markets. Will it be worse than expected? Is there a good news story buried in the bad? Here’s my  preview post on Apple’s earnings

For the last year or so, the Apple (AAPL) growth story has been soaring iPhone sales in China. That story now seems to be either over (probably not) or much weaker (good chance.)

But I can see a new growth story emerging. Check the company’s Tuesday, April 26, earnings report to see if services might be able to pick up the slack and listen to CEO Tim Cook’s guidance to see if the company is looking to drive service revenue in the quarters ahead.

The China story has two problems. First, overall smartphone sales in China have leveled off. According to market researcher Gartner smartphone sales in China (and in North America) will be flat in 2016. Second, China looks like it has finally decided that it won’t let Apple keep or expand its current market share in China. Last week regulators shut down Apple’s iBooks and iMovie stores. This comes just six months after Apple opened these electronic stores in China with regulatory approval. Now it looks like the Chinese government has decided to give an extra edge to domestic content providers such as Tencent (TCEHY) and Alibaba (BABA)–and as a result to domestic smartphone makers. I’ve heard speculation that ApplePay, which also competes with domestic Chinese payment services, will be next to suddenly face regulatory problems. For Apple, this is a big deal since the company has so closely integrated its software and hardware and since such Apple services as ApplePay and its content stores are key selling points for the iPhone itself. Add in the continued demands from the Chinese government for access to the iPhone source code and encryption keys as part of an antiterrorism law passed two years ago, and it’s clear Apple faces major challenges to its growth story in China. (Apple has so far refused to turn over encryption keys or source code, but I don’t think the demands from the Chinese government are going away.)

So where’s the growth to come from? Certainly not the iPad. The iWatch is still too small a market to make much of a difference to Apple’s top or bottom lines. Apple TV or other new hardware? Well if any new hardware were introduced next quarter, it would take quarters for sales to build momentum in all probability.

No, if you’re looking for growth now, it’s going to have to come from services–despite the problems with the Chinese market. Service revenue has climbed at Apple from $3.2 billion in 2010 to $14.5 billion now. That’s 15% of revenue–or enough for growth in this business to make a difference. Credit Suisse, a decided Apple bull having set a target price of $150, projects service revenue will climb to $37.3 billion (30% of Apple revenue then) by 2020. Service revenue carries a higher profit margin than Apple’s hardware so this kind of growth in service revenue would up Apple’s operating margins and earnings. Customers that have signed up with one or more of Apple’s services tend to stick around, Credit Suisse notes, so this service revenue would have some of the qualities of an annuity with very predictable cash flows.

The big question for Apple, as well as for Netflix (NFLX), Amazon.com (AMZN), and Alphabet (GOOG), is how do you grow this service base? So far the answer seems to be “Add original content,” but with everybody pursuing the same strategy, the price of acquiring content is climbing. Which means costs are climbing. Which means growing service revenue requires sizable investment.

If Apple is going after services as a source of growth, I expect investors will be able to hear it in the post-earnings-announcement conference call on April 26.

Right now Wall Street is projecting earnings per share for the quarter of $1.88 to $2.17. The median estimate of $2.00 a share would be a 14.3% drop from earnings in the year earlier quarter.

On my paid site: Playing the rally in natural gas, and looks ahead at the Fed meeting this week and possible tech earnings disappointments

posted on April 25, 2016 at 7:40 pm
stocks up

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy called tactical stock picking.

Today I’ve been looking at last week’s 13% rally in natural gas and picking through the shares of producers and pipelines to see which offer the best upside and when. A lot depends on the weather, I conclude, since the rally seems to be pricing in a hot summer.

And over the weekend I took a look ahead at the Fed’s meeting on Wednesday–an interest rate increase is unlikely I believe but the markets will be looking for any hints about what the Fed will do at its June meeting. And those hints will be enough to move the financial markets.

I also took a look ahead at technology earnings for this week. After easily surviving not as bad as expected bank stock earnings last week, the U.S. stock market showed that it’s vulnerable to disappointments in technology earnings as the NASDAQ index sold off on news from Alphabet, Netflix, and Microsoft. The big tech stories this week are Facebook, Amazon, and Apple (tomorrow, April 26.)

That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Please don’t overlook today’s post on this free site on why I want to buy Nvidia soon and how I’m trying to get the timing right.

Looking to buy Nvidia but trying to get the timing right

posted on April 25, 2016 at 7:25 pm
technology_hi-tech

I’m going to add shares of Nvidia (NVDA) to my Jubak’s Picks portfolio later this week–as soon as the dust has settled from what is likely to be a disappointing earnings announcement by Apple. (Apple (AAPL) postponed earnings report from today April 25 to tomorrow April 26 so Apple executives could attend the funeral of Bill Campbell, a long-time member of Apple’s board of directors.) Nvidia reports quarterly earnings itself on Thursday, May 5. More thoughts about the timing of this purchase later in this post.

You know Nvidia (NVDA), if you know it at all, as the dominant maker of graphics processors for computer gaming.

That’s one of the few areas of growth in traditional chip markets. It is most recent survey of the markets for chips, Intel (INTC) didn’t find a whole lot of good news to report. PC sales continued to fall in the first quarter and were likely to stay negative for all of 2016. Smartphones, a market that Intel had targeted were showing stagnating sales with 2016 growth looking to be in the single digits. The market for server chips continued to grow but with Intel already owning almost all the market for servers running on PC-style chips, there wasn’t any opportunity to grab market share in that direction.

About the only place that Intel could see room to run was in the market for graphics processors. While the market for PCs was showing negative growth, the market for graphics chips running on platforms that included but weren’t limited to PCs continued to show solid growth. In 2015, Intel noted, the market for high-end Core i7 and unlocked PC enthusiast “K” processors set all all time records for volumes.

Nvidia’s dominance of that market, though, is a kind of two-edged sword. Nvidia has roughly an 80% share of the market for discrete graphics cards for PCs. Which means that not about to grab big share from other players. For growth in this segment Nvidia is pretty much dependent on growth in the market as a whole and on convincing gamers to move up to faster and faster graphics processors. (That’s a GPU as opposed to the CPUs that Intel sells to run PCs and servers and the like.) That’s a challenge but such trends as the increasing complexity and richness of computer games and the introduction of virtual reality technology are flowing in Nvidia’s direction.The company’s GTX 970 graphics card, which sells for $350, is the most popular graphics card on the Steam digital distribution platform for PC gaming. (Steam is the largest digital distribution platform for PC gaming with 125 million active users, according to Valve, Steam’s developer and Gamespot.) Steam has had as many as 12.5 million concurrent users.) And Nvidia’s new Pascal GPU is a beast–65% faster but consuming 70% less power. Gaming isn’t a shabby business for Nvida. Gaming revenue has climbed at a compounded average annual growth rate of 21% over the last five years on 9% CAGR in units.

Okay, that’s the Nvidia you may know. But importantly it’s not the company that emerges from Nvidia’s most recent company presentations.

Here’s the company in fiscal 2013: 42% of revenue came from chips for PCs and mobile devices (the Tegra family of mobile processors): 52% of revenue came from chips for gaming (X-Box, etc.), datacenters, and autos, and 6% from licensing of intellectual property (to Intel, mostly.)

And here’s the company in fiscal 2016 (that’s basically through the end of 2015): PC and mobile revenue are down to 9% of the total, intellectual property is 6%, and the rest, 86%, is all gaming, data centers, and autos.

Consider these compounded annual growth rates over the last 3 years.

Gaming 30%. Datacenter 40%. Auto 80%.

It turns out that the kind of massively parallel architectures that you need to built to handle graphics processing for massively complex multiplayer games where a chip has to handle input from multiple sources and keep an entire visual world updated in real time is well suited to the world of cloud computing and massive real time datacenter processing, and to the real time needs of the driver of an automobile for navigation, automatic braking, lane guidance and all the rest of the new world of automated driving.

Yep, this maker of graphics processing units for gaming finds itself with chips and systems on a chip ideally suited for two of the fastest growing parts of the technology market–cloud computing and automobiles.

And did I mention that these fastest growing parts of Nvidia carry a higher margin that the old bread-and-butter PC graphics processing business. Gross margins at Nvidia have climbed to 56.8% in fiscal 2016 from 52.3% in fiscal 2013. Operating margins in the same period have gone to 22% from 20%.

These two fastest growing parts of Nvidia aren’t yet the biggest parts of Nvidia. In fiscal 2016 the datacenter business produced $339 million in revenue or 6.8% of the total for the company. Automotive revenue was 6.4% of total revenue or 6.4%.

But one of the nice things about Nvidia as a growth stock is that it’s big enough to generate a lot of cash to use in research & development–$1.2 billion in cash flow in fiscal 2016–but the company is small enough so that a fast growing but still small business like datacenter or automotive can make a difference to the bottom and top lines fairly quickly. This isn’t Intel with its $55 billion in 2015 revenue. Nvidia had revenue of $5 billion in fiscal 2016.

Now on to the tough stuff valuation and timing.

Nvidia isn’t cheap.

If you subtract cash,the stock trades at a PE ratio of 27 times trailing 12-month earnings. Nvidia’s multiple on forecast earnings is 19.2 but, of course, that depends on earnings growth coming in as forecast.

Officially Wall Street is looking for the company to report earnings of 31 cents a share for the next quarter. The unofficial whisper number is 34 cents. That’s not a huge enthusiasm indicator but I do worry that if Nvidia merely beats expectations by a few cents a share, traders looking for momentum will be disappointed and sell the shares off.

And that’s the danger. Do you buy now and risk that sell off? Or hold off until after earnings and avoid the risk is a disappointment but take the risk that Nvidia will jump on a surprise?

I’m going to wait a few days to answer that–until I see what Apple reports tomorrow and whether or not those results create some selling in the entire technology sector that might take a little risk out of Nvidia.

But I definitely am looking to buy. There’s not a lot of growth in the market right now and I’m willing to pay up a bit for it.



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