Trade, Defense Spending Boost Third-Quarter Growth

Alamy WASHINGTON -- A smaller trade deficit and a surge in defense spending buoyed U.S. economic growth in the third quarter, but other details of Thursday's report hinted at some loss of momentum in activity. Gross domestic product grew at a 3.5 percent annual rate, the Commerce Department said Thursday, beating economists' expectations for a 3 percent pace. While the pace of growth in business investment, housing and consumer spending slowed from the second quarter, all those categories contributed to growth. "The report was broadly constructive, with the gains broadly based and pointing to positive underlying momentum in the U.S. economy," said Millan Mulraine, deputy chief economist at TD Securities in New York. "However, with some indications of weakness emerging in housing and consumption spending, we expect the pace of growth to slip further in the fourth quarter." Despite decelerating from the second quarter's brisk 4.6 percent pace, it was the fourth quarter out of five that the economy has expanded at or above a 3.5 percent clip. A separate report from the Labor Department showed first-time applications for unemployment benefits rose modestly last week, but remained at levels consistent with firming labor market conditions. The data came one day after the Federal Reserve ended its asset purchasing program. Fed officials said there was sufficient underlying strength in the broader economy. The dollar extended gains against the euro and the yen, while prices for U.S. Treasury debt trimmed gains. The narrower trade deficit reflected a plunge in imports, which fell at their fastest pace since the fourth quarter of 2012. That was largely attributed to a drop in oil imports. Trade added 1.32 percentage points to growth. Although there are concerns a strengthening dollar and slowing euro zone and Chinese economies will crimp U.S. export growth, economists believe the impact will be marginal. Government spending was also a boost, with defense spending rising at a 16 percent rate, its fastest pace since the second quarter of 2009. One of the few areas that was a drag on growth was inventories, which subtracted 0.57 percentage point from GDP after adding 1.42 percentage points in the second quarter. Business Spending Slows Growth in business investment slowed in the third quarter, with spending on equipment rising at only a 7.2 percent rate. Economists had expected a second straight quarter of double-digit growth. Business spending on structures and intellectual property products also slowed. Data on Tuesday suggested further moderation in the pace of equipment investment in the fourth quarter, but it is still expected to remain strong enough to keep the economy on a higher growth pace. While growth in consumer spending decelerated to a 1.8 percent pace from the second-quarter's 2.5 percent pace, it still contributed 1.22 percentage points to GDP growth. Consumer spending accounts for more than two-thirds of U.S. economic activity. The moderate pace of consumer spending helped keep inflation pressures under wraps during the quarter. A price index in the GDP report rose at a 1.2 percent rate in the third quarter after advancing at a 2.3 percent pace in the prior period. A core price measure that strips out food and energy costs increased at only a 1.4 percent pace, slowing sharply from the second quarter's 2 percent rate. Declining gasoline prices and accelerating job growth, which is expected to lift wages, will provide tailwinds for consumer spending in the fourth quarter. If you thought this classic horror movie was about a haunted house, see if this scenario sounds familiar: An idealistic young couple buys a home that sounds too good to be true. Once they're mortgaged to the hilt, problems start to crop up. They can't leave, they can't stay, and an unseen evil force starts to tear their family apart.

Are you too old to buy stocks?

One of the worst things about getting older is that it seems like nobody wants you to have any fun. You have to be more careful about your health. When you exercise, you're supposed to keep your heart rate in a safe zone. Some retirees even face having their driver's licenses taken away once they reach a certain age.

It's much the same with investing. After spending a lifetime making investing decisions and gaining valuable experience in the stock market, you'll hear most financial planners tell you that you should take a more conservative approach with less stock exposure. They'll cite the risk of owning stocks and say it's too high once you get older.

Consider your own situation

For many people, that logic makes sense. When you're young, you have time on your side, with decades before you'll need whatever money you save for retirement. With all of that time ahead of you, you can afford to take some big risks -- and even if your investments don't do well at first, it won't be fatal to your long-term financial prospects. That makes high-growth stocks a viable option, even when their prices can fluctuate much more wildly than the overall stock market.

On the other hand, as you approach or enter retirement, you no longer have the luxury of a long time horizon to weather stock market downturns. You need that money now, and if the next market crash happens to hit you at just the wrong moment, you may have to sell at very low prices just to pay your bills.

The concept that you should reduce your allocation to stocks is so universally accepted that certain types of mutual funds do it automatically. Target retirement funds change their investment strategy gradually over time to accommodate your changing risk tolerance. Yet even though these funds make investing automatic, they aren't able to handle all of the specific needs that you may have.

Why one-size-fits-all might not fit you

Reducing stock exposure as you get older only addresses one risk that investors face: the! potential for falling stock prices. But that's not the only risk people have to deal with as they move toward retirement. Inflation is a huge threat to your long-term prospects, even if your portfolio is big enough to cover your costs at the beginning of your retirement years.

Low interest rates have been a big thorn in retirees' sides lately. Even if you lock up a $1 million portfolio in 10-year Treasury bonds, you'll only earn about $27,500 at current rates in order to cover expenses each year. Even if that's enough right now, your portfolio value will remain locked at that $1 million mark, and it won't be long before rising costs eat away the purchasing power of your fixed income.

Stocks, on the other hand, offer not only prices that rise over time but also rising dividends. Many well-known companies have histories of raising their dividend payouts annually for decades. When they push their dividends higher, it provides extra income that retirees can use to keep up with the impact of inflation. Moreover, that income can prevent you from having to sell shares at inopportune moments.

That said, some fortunate people have enough wealth that they can tolerate the risk of market downturns. For them, a typical retirement plan might involve selling some stocks every year to supplement other sources of retirement income.

You can protect against the risk of a market drop by keeping enough money in safer investments to give your stocks a chance to recover. Even though this strategy involves keeping several years' worth of expenses in bonds, CDs, or cash, it still gives you the ability to keep a substantial fraction of your portfolio in assets that will provide you a better return.

As an example, if you had retired in 2007 following this strategy, you might have chosen to forgo selling stocks in 2008 and 2009, waiting until the market recovered to sell and replenish your cash reserves.

Getting more conservative as you grow older is a basic rule of thumb, and it can be helpfu! l for beg! inning investors to follow. The better choice, though, is to weigh the risks of different investment strategies and pick the one that will work best for you. That means you won't have to give up the fun of stock investing no matter how old you get.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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Mawer New Canada Fund Investment Newsletter Q3 2014

The U.S. economy continued to show signs of progress this quarter. The labour market improved, inflation was subdued, and manufacturing and capital expenditures indicated that an expansion is likely underway. In response, the U.S. Federal Reserve continued to taper its asset purchase program and communicated its plans to cease this program as of October.

Fear that a withdrawal of economic stimulus will cause higher bond yields has not materialized thus far, as yields have actually decreased during this period. The next phase in the Fed's efforts to normalize monetary policy will be to raise interest rates; a process that most investors anticipate will begin sometime in 2015. Unfortunately, economic conditions outside of the U.S. were not as rosy. In Europe, the latest economic data indicates that growth stagnated while unemployment and industrial overcapacity remained stubbornly high. Geo-political tension between Russia and Ukraine, as well as the Scottish referendum on independence, created additional uncertainty that weighed on European sentiment. To encourage growth and combat a deflationary scenario, the European Central Bank (ECB) announced their version of an asset purchase program, or quantitative easing. By acquiring non-performing loans from European bank balance sheets, the ECB hopes that the banks will renew credit to corporations, thereby promoting growth. However, while European banks certainly need to clean up their books, it is unknown whether the demand for the additional credit truly exists. This "pushing on a string" argument is top of mind among many investors.

In Japan, GDP contracted sharply this quarter as both consumer spending and capital expenditure declined. In part, this was in response to the sales tax increase from 5% to 8%. This suggests that there is much uncertainty whether Prime Minister Abe's economic reforms will reinvigorate growth in Japan and pull the nation out of its long-standing deflationary quagmire. Meanwhile, in China, the banking system remains under pressure given the abundance of bad loans linked to an overheated real estate market. It is unclear how authorities will tackle this program, but the result of their actions could have a far-reaching global economic impact. Overall, the global economic picture is mixed, with evidence suggesting that the growth outlook is deteriorating. But this is balanced by an absence of inflationary pressure in the developed world and monetary policies that remain extremely accommodative. Consequently, global equity markets were relatively flat in local currency terms. Chart A outlines the quarterly performance, expressed in Canadian dollars, of some of the notable equity indices around the world.

Unquestionably, the rise in the MSCI World Index (C$) and the S&P 500 Index (C$) were primarily driven by strong U.S. dollar returns, which masked an otherwise lackluster quarter for most of the world's equity markets. Though Japan and some other Asian markets joined the U.S. on the positive side of the ledger, equity markets throughout much of Europe were decidedly negative. German and French markets now rest in negative territory on a year-to-date basis, with several other European countries flirting with a similar fate.

A sharp correction in oil, natural gas, and several other commodity prices proved to be a difficult headwind for Canadian equity markets to overcome. With the Energy and Materials sectors accounting for approximately 38% of the S&P/TSX Composite Index, and over 49% of the BMO Small Cap Index, the losses endured by companies operating in these sectors dragged down the overall market. We should not overlook how regional divergences in equity returns were significantly influenced by currency movements this quarter. Due to the relative strength of the U.S. economy, the Federal Reserve is further along the path of interest rate normalization than many of its developed peers. Thus, the expectation for higher rates in the U.S., and potentially more easing in other regions of the world, propelled the U.S. dollar higher this quarter. Its status as a safe haven currency in times of crisis — and there have been no shortages of geo-political tensions of late — lent further support to its ascent. Its appreciation versus the Canadian dollar was approximately 4.9% this quarter, whereas gains versus the Euro, British Pound, Swiss Franc, Japanese Yen, and Australian dollar were even more pronounced.

The implications for Canadian investors were twofold. First, investments held in U.S. dollars were bolstered by nearly 5% when converted to Canadian dollars. This turned a mere 1.1% gain in the S&P 500 in U.S. dollar terms into a much more impressive 6.1% gain in Canadian dollars. Second, investments denominated in the other aforementioned currencies lost value due to the translation effect.

Chart B notes the magnitude of this effect from a Canadian perspective.

Market Overview

Chart A

Q3 2014 Equity Index Performance (C$)

Meanwhile, with a mediocre and unbalanced growth outlook, central banks continued to provide accommodative monetary policy. In general, developed market bond yields moved modestly lower this quarter. While this was most apparent in Europe, yields in Canada also retreated, with the 10-year Government of Canada bond yield declining from 2.24% to 2.15%. This was one of the factors leading the FTSE TMX Canada Universe Bond Index to a 1.1% gain. Performance was positive across the Federal, Provincial, and Corporate sectors, with Provincials leading the way, like they did last quarter. As expected in a declining yield environment, with other factors held constant, longer-term bonds outperformed short and mid-term securities. Chart C summarizes the performance of the various components of the Canadian bond market.

How Did We Do?

In absolute terms, Mawer's performance was rather uneventful this quarter. The Balanced strategy (gross of fees) gained 1.0% with most of the underlying asset classes performing within a narrow range of this figure. Results were mixed on a relative basis with most asset classes closely tracking their underlying benchmark. The exceptions were the U.S. Equity strategy that lagged the S&P 500 Index (C$) by 2.3% and the New Canada strategy that outpaced its benchmark by over 10%. Chart D highlights the quarterly performance (gross of fees) of various Mawer strategies relative to their benchmarks.

The 1.6% decline in the International Equity strategy slightly trailed the 1.3% loss in the MSCI EAFE Index (C$). Our security selection in Europe resulted in a decline of 4.8% among our European companies compared to a 2.4% decline among European companies in the MSCI EAFE Index. Our German selections were especially disappointing as they shed over 12% this quarter, led by a 17% loss in BASF, a diversified chemicals company, and an 11% decline in BMW. Fortunately this was offset by strong security selection within Asia ex-Japan, where we have allocated over 17% of the portfolio, and enjoyed average returns that exceeded 10%. China Mobile (CHL), one of our recent additions to the portfolio, gained over 26% this quarter as it continued to benefit from a dominant position in China's telecom market. Our addition of China Mobile to the portfolio in April is a good example of Mawer's bottom-up process at work. In the months leading up to our initial purchase of the company, its share price had been in a steady decline as investors seemed to be overly worried with short-term issues. Our discounted cash flow approach, however, focuses on the long-term cash flow generating ability of the business rather than placing heavy emphasis on the near-term. This analysis identified China Mobile as trading at a significant discount to what we believe is its true value, thereby offering the potential for above average future returns. As we've expressed in previous quarters, we've been actively re-allocating capital from businesses that appear to be fully valued towards businesses that we believe are more reasonably priced. Not every new addition instantly yields a 26% return as China Mobile did this quarter, but it's a good example of the potential benefit of following a disciplined approach.

Although the 3.9% gain in the U.S. Equity strategy represented the highest absolute return this quarter, it also underperformed its benchmark by the widest margin as it trailed the S&P 500 Index (C$) by 2.3%. This can be attributed to poor security selection, where we modestly underperformed across several sectors. Generally, our underperformance wasn't from selecting companies that underperformed, but from omitting companies in the S&P 500 Index that performed exceptionally well over the last three months. For example, the eight companies we own in the Information Technology sector represent approximately 20% of our portfolio, and collectively they rose by approximately 6.1% this quarter. But the overall sector increased by 9.9%. Looking closer, we see this sector was driven higher by companies we don't own, such as Facebook (FB) (+23%), Yahoo (YHOO) (+22%), and Apple (AAPL) (+14%). These are businesses that we have considered for our portfolios but concluded that they did not meet our criteria of having sustainable competitive advantages that can create wealth in the long-run, while also being attractively valued. Lagging the benchmark in the short-term is disappointing, but we believe that we can outperform over the long-term by following our disciplined, bottom-up approach.

We believe that straying from our approach in order to invest in companies like Facebook, which currently trades at about 80 times earnings, is not prudent for long-term investors.

The Global Equity strategy lagged its benchmark by approximately 1.0% this quarter. Our underweight position in U.S. equities relative to the benchmark proved detrimental. Security selection in the Information technology sector was also weak, led by a decline of almost 15% in Samsung. The Global Small Cap Equity strategy lost 0.2% this quarter, but outperformed the Russell Global Small Cap Index (C$) that shed 2.0%. An overweight position in Europe did not prove favourable, but our minimal exposure to the weak Energy sector, and strong security selection across numerous sectors, more than compensated for this decision.

Our Canadian Equity strategy gained 0.7% while the S&P/TSX Composite Index lost 0.6%. The Energy and Materials sectors account for approximately 38% of the S&P/TSX Composite Index, but less than 18% of our portfolio. Given that these were the two weakest sectors this quarter, our outperformance was primarily attributed to this positioning. This was partially offset by weaker security selection, particularly in the Financials and Industrials sectors.

In absolute terms, the 1.4% gain in our New Canada strategy was modest, but this was significantly greater than the 8.8% loss in the BMO Small Cap Index. Emphasizing the Financials sector and being underweight the Materials sector proved to be favourable, but most of our outperformance was attributed to excellent security selection throughout the portfolio. For example, Materials companies within the BMO Small Cap Index lost 14% this quarter, whereas our selections gained over 10%, led by Intertape Polymer (TSX:ITP), a Quebec-based packaging company that rose approximately 38%. The Industrials sector shed over 7%, but our selections gained over 5%, led by an 18% gain in Logistec (TSX:LGT.A), another Quebec-based business that provides cargo handling and other services to North American ports.

Finally, our Canadian Bond strategy gained 0.9% this quarter, modestly trailing the 1.1% return of the FTSE TMX Canada Universe Bond Index. Security selection was strong among our Federal securities, but weaker in the Provincial and Corporate sectors. Tim Hortons bonds reacted negatively to the proposed merger with Burger King as this is expected to increase the degree of leverage in the business. Although we had been cautious regarding this investment and held just 1.5% of the portfolio in Tim Hortons securities at the time of the announcement, the losses that arose from the proposed merger were significant enough to detract from the overall performance of the strategy.

Portfolio Positioning

Although the U.S. economy appears to be on solid footing, growth in Europe has stagnated, and China, like many other developing economies, is experiencing a slowdown in economic growth. It's plausible that this deterioration can be remedied with additional monetary stimulus and structural reforms, and global growth can re-accelerate. But it's also possible that this is a harbinger of things to come; that is, we may be entering a phase of slower global growth, which may be a precursor for deflation. How and when central banks transition from accommodative monetary policy to more normalized conditions will be a delicate task, and likely a predominant theme in the years to come.

Given this murky outlook, we continue to believe that diversification is the primary tool in building resilient portfolios. We have a modest bias towards equities given our belief that cash and bonds offer limited upside in the current environment. But we are cognizant that should slower growth occur, and a deflationary scenario follow, cash and bonds will likely provide more downside protection than equities. Rather than speculate on how the world will unfold and aggressively position our portfolios for one particular outcome, we feel investors are better served striving for resilience to multiple outcomes, even if that means foregoing higher returns in the near-term.

Within equities, we continue to emphasize global equities relative to Canadian companies and currently have a bias to U.S. equities relative to European or Asian companies. This reflects not only our positive outlook on the U.S. economy, but also our belief that American companies benefit from longer-term structural advantages relative to their global peers. For example, a reliable source of low cost energy offers a cost advantage to American companies that few peers can replicate. And, as we are reminded with the recent escalation in geo-political tensions around the world, the U.S. dollar tends to be viewed as a safe haven currency. For Canadian investors, this introduces the possibility for a positive translation effect, as we experienced this quarter, lending additional resilience should geo-political tensions escalate. Although we continue to believe equities remain the most attractive asset class, discipline is needed to manage the risk of excessive valuations. This risk is mitigated by our continual effort to re-allocate capital from businesses that appear fully valued towards those that are more reasonably priced. Finally, the positioning of our bond portfolio continues to emphasize highly rated Corporate and Provincial securities. Within the Federal sector, we have enhanced yields by including Federalagency bonds. To provide additional resilience, we have positioned the portfolio to be less sensitive to changes in interest rates. This includes having a lower duration than that of our benchmark, as well as allocating approximately 10% of the portfolio to Floating Rate Note securities which offer capital protection in a rising yield environment.

Also check out: Mawer New Canada Fund Undervalued Stocks Mawer New Canada Fund Top Growth Companies Mawer New Canada Fund High Yield stocks, and Stocks that Mawer New Canada Fund keeps buying

Tuesday, October 21, 2014 Intel and Rockchip Release an ARM Chip: What You Need to Know Liliputing reported Rockchip is "showing off one of the first chipsets" based on the partnership that Intel (NASDAQ: INTC  ) and Rockchip announced back in May. In particular, it looks as though this is a dual core ARM (NASDAQ: ARMH  ) Cortex A5 processor which has an integrated 2G/3G modem as well as separate RF chip that integrates 2G/3G RF, Wi-Fi/Bluetooth, and GPS functionality. What seems to have people freaked out is that this is based on an ARM processor rather than an Intel processor, leading some to believe that there has been an abrupt change in plan. This couldn't be farther from the truth. This is SoFIA's predecessor Remember when Intel first announced its SoFIA system-on-chip platform for low-cost smartphones and tablets? Intel's management team explicitly noted that they were taking a design that had already been under development from its "feature phone" (i.e., dumbphone) product offerings and goosing it to include Intel-designed processor cores. What we are seeing here with the recently announced platform from Rockchip and Intel is a modem platform known as the XMM 6321 (consisting of the XG632 baseband/SoC and AG620 RF chip). According to an Intel road map that leaked quite some time ago, this part was under development well before Intel inked its deal with Rockchip. Why release this chip? In this day and age, smartphones are ubiquitous, and with each passing day "smartphones" displace traditional "feature phones" as prices on the latter come down. It's interesting, then, to see Intel (along with Rockchip) release what is essentially a feature-phone-targeted part. According to the aforementioned leaked roadmap, Intel had listed Samsung, Huawei, LG, and ZTE as (potential) customers for this product. The fact that the product is still being launched leads me to believe that there is nontrivial demand for the platform, and given how low Intel's Mobile and Communications Group revenue is (it raked in a mere $1 million last quarter), my guess is that Intel is happy to grab any business that it can. What does the future hold? Intel's CEO Brian Krzanich talked about the company's strategy with SoFIA and the low-cost smartphone market on the company's most recent earnings call. He alleged that Intel has "SoFIA in the labs running" and that the LTE version of SoFIA is "on schedule" for the "first half of [2015]." These chips, by their very name ("Smart or Feature Phone on Intel Architecture") will feature Intel-designed processor cores, and should actually offer much better performance than the dual core ARM Cortex A5 found inside of this XMM 6321 modem platform. That said, SoFIA will probably be more expensive to build, so it probably won't go into the same types of phones as the XMM 6321 will. Foolish bottom line When all is said and done, this new chip likely doesn't mean too much for Intel from a revenue perspective; the revenue per chip that Intel will be able to get from it is probably not high, and it's not clear how many Intel will actually be able to sell. However, given that XMM 6321 apparently served as the springboard for Intel's upcoming SoFIA product, I'd say that whether it generates a material amount revenue or not, it was still a worthwhile for Intel to develop it. Apple Watch revealed: The real winner is inside Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here! Sunday, October 19, 2014 Is It Finally Time to Buy a House? According to the most recent data, foreclosure activity in the U.S. is at its lowest level since July 2006. All foreclosure-related metrics dropped in September, including the number of homes repossessed, the number of properties set for foreclosure auctions, and the number of default notices issued. Source: flickr user Nick Bastian. While this is definitely a good sign, it doesn't necessarily mean that home prices are going to continue on their upward trajectory. Rather, it does mean that the housing market is returning to a "healthy" state. But what does that mean to you? The data looks great Foreclosure activity in the U.S. is now at an eight-year low. According to RealtyTrac, there were 106,866 foreclosure filings across the country, which is 8.6% less than in August, and represents a year-over-year drop of 18.6%. In fact, overall foreclosure activity, which includes foreclosure notices, auctions, and repossessions, is now back down to pre-bubble levels, according to the report. The number of lender-repossessed homes in September dropped by 13% from the month before, default notices given to homeowners dropped by nearly 10%, and the number of homes set for foreclosure auctions dropped by 5.5%. Why home prices may actually cool off now Despite this good news, home prices aren't necessarily going to continue on their upward trajectory. Since bottoming in early 2012, U.S. home prices have gained nearly 25% in value, and have actually pulled back a little bit recently. The foreclosure market was one of the big reasons for these gains. Generally, foreclosed homes sell for lower prices than traditionally sold homes. In fact, RealtyTrac also reports that the median sales price for a foreclosed home was 36% less than that of non-distressed sales. As foreclosures have been gradually working their way out of the market, home prices have naturally risen faster than they normally would, simply because there are fewer foreclosures holding the average price down. There are other factors that could drive home prices a little lower in the short term. A big one is the seasonality of the housing market. Generally, summer is the peak selling time for homes, as kids are out of school, and it's simply more convenient to move. With summer ending, selling activity is probably going to cool off considerably. Thanks to higher prices, activity may cool off even more this year than in most years. The recent mortgage application data shows purchase applications are actually 4% lower than they were at this time last year. The inventory of existing homes on the market has actually risen by about 24% in 2014 as sellers try to take advantage of higher prices, while the rate of sales has increased by just about 4%. The laws of supply and demand tell us that high inventory plus lower demand means prices are likely to drop a little bit. What a healthy market looks like, and what it means to homebuyers In a healthy market, real estate gradually appreciates by a low single-digit percentage. Gains like we saw before the market collapsed and the declines that resulted from the bubble bursting are not healthy. Take a look at the chart below, which tracks U.S. home prices since 1991. The market of the 1990s was pretty healthy. The market of the past decade or so has not been healthy. We may see a small drop in price as the market becomes healthy again as prices adjust to normal supply and demand dynamics again. However, without a massive amount of foreclosure activity, there should be much less volatility in the housing market going forward. In other words, if you have been putting off buying a home, you can now buy with a little more confidence. Smart homebuyers take advantage of all of the tax "loopholes"  Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report, "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more. Saturday, October 18, 2014 General Electric Poised For Better Growth When General Electric (GE) released its third quarter results on October 17, it left investors delighted, as the company is on a fascinating growth track with respect to its earnings from the diverse segments it operates into – which proves that GE knows how to grow. However, the top line numbers missed the analysts' estimates, though they were well above what was reported in the last quarter or even a year ago. Let's take a sneak peek into the financial playbook of GE for better insight on the quarterly results, and try to determine whether GE's growth could be expected to grow rapidly in the near future. A quick quarter glance Revenue for the quarter stood at $36.2 billion, compared to $35.73 billion reported last year in the same quarter. Also, earnings saw a clear boost with net income rising to $3.54 billion, or $0.35 per share from $3.19 billion, or $0.31 per share, a year earlier. Analysts had expected GE to report earnings of about $0.37 per share on $36.79 billion in revenue, according to a consensus estimate from Thomson Reuters. But, GE clearly missed to meet consensus both in the top and bottom lines. Although the quarterly growth missed the analysts' expectations, GE said that the revenue was on track for the higher end of the projected range of 4-7% growth for the fiscal year. GE's strength in the industrial segment remains evident in the third quarter results which saw industrial margins up 0.9 percentage points to 16.3% and industrial profit went up 9% from that reported last year. Now, let's assess the key drivers driving the success story of GE which just reported a fantastic quarter. Industrial segment performance on track The industrial segment drivers were mainly in the aviation and oil and gas sectors which saw rapid growth during the quarter. The industrial segment organic revenue rose by 4% this quarter, and the growth market orders were up by 34%. U.S. orders were also up 25%. During the third quarter, equipment orders were also up 22%. Even the order backlog stood at $250 billion, up $21 billion from that reported last year. The oil and gas segment's revenue improved 7% year-over-year, while Energy management revenue went down 1% to $1.8 billion. Revenue from Aviation and Transportation rose 6% and 10% to $5.7 billion and $1.5 billion when compared year-over-year, respectively. Meanwhile, the Power & Water segment's revenue plunged 2% year-over-year to $6.4 billion. Both Healthcare and Appliances section were up 5% and 1% respectively, to $4.5 billion and $2.1 billion. Investors need to take note of GE's expectations from the industrial segment. The company hopes that industrial segment would comprise 75% of its earnings by 2017. GE is also working on the approval process to acquire Alstom (AOMFF) Power and Grid businesses for about $16 billion. The deal would possibly add close to $0.06 to $0.09 per share in 2016, since it's expected to close by end of next year. The GE aviation wing is looking forward to acquire helicopter lessor Milestone Aviation Group for $1.78 billion; this acquisition is a perfect fit to its strategic plan of "growing the core areas aligned with GE's industrial business." Cost cutting measures keep margins safe The company is currently on track to achieve its goal of $1 billion cost-cuts in the fiscal year. By restructuring efforts, the company has been able to reduce the structural costs by $674 million during the first nine months of the year. Since six of the seven business lines showed positive margin growth, margins rose substantially this quarter. Operating profit in the industrial segment improved 9% to $4.3 billion with cost productivity, while GE Capital profit decrease Furious Week Fades as Dow Finishes Down Just 1% War is hell, and the Brad Pitt-led Fury aims to demonstrate that as graphically as possible. A World War II U.S. tank team heads into Germany on a mission to rescue American soldiers trapped behind enemy lines. But really, the story is about blood, guts and horror. A new soldier peels a face off the tank; legs get shorn off by machine-gun fire; Brad Pitt stabbing a Nazi in the eye. NPR’s Chris Klimek writes that “Fury reminds us like no film since Saving Private Ryan 16 years ago that there was nothing good about [the Good War], and it does so with considerably less flag-waving,” while the Philadelphia Inquirer’s Steven Rea notes that “Fury presents an unrelentingly violent, visceral depiction of war, which is perhaps as it should be.” It should also top the box office this week with a $33 million haul, according to Box Office Mojo. Columbia Pictures The stock market had its own fury this week–if nothing compared to the horrors of war–furies that don’t show up in final weekly numbers. Sure, the S&P 500 fell just 1% to 1,886.76, while the Dow Jones Industrial Average dropped 163.69 points, or 1%, to 16,380.41 and the Nasdaq Composite dipped 0.4% to 4,258.44. Heck, the small-company Russell 2000 even gained 2.8% to 1,082.33. But that kind of misses the point. On Wednesday however, the S&P 500 has fallen as low as 1820.66–or down 4.5% from the previous week, while the Dow Jones Industrials had moved a total of 1,268 points as it fell, bounced, fell and bounced again. Look at the final numbers and it’s as if “nothing happened,” says JJ Kinahan, chief strategist at TD Ameritrade. A lot did happen, though Kinahan doesn’t necessarily think that’s a bad thing. He notes that every few years you get these moves, where volatility increases, and you get a “reorganization in the market where people try to reevaluate where valuations are.” Ultimately, though, Kinahan expects the market to head higher. He’s not the only one. Nuveen Asset Management’s Robert Doll thinks the correction is nearing its end: The past few days have been wild for the markets. Equities had been trending lower before volatility spiked and prices dropped sharply earlier this week. Investors are now asking whether the near-term downturn is finished and if this bull market is ending. Our answer: We think there is a two-out-of-three chance that we have already seen the lows for this current correction (1,820 for the S&P 500 Index), although volatility is likely to remain elevated and we may see another test of those lows. In any case, we also expect the bull market to continue. That may be the case for the overall market, but Deutsche Bank’s Stephen Richardson and team acknowledge that the worst might not be over for energy stocks, which have dropped 8.2% in October, despite rallying 0.9% on Friday: A commodity price assumption underlies any investment in E&P equities. The tacit assumption of the market has been that with global prices in the $90-110/bbl band, domestic oil producers would remain in a halo of profitability where the excess rents associated with resource expansion, drilling efficiencies, and technology advances would all accrue to the producers. The humbling reality is that without support for global prices, these excess returns (and the growth fueled by re-investment rates) evaporate and so follows equity valuation… The recent decline in the equities has been a reminder of the cyclical nature of the industry and that despite growing resource and technology advances, pullbacks of this scale have previously occurred. Putting the recent ~30-35% EPX pullback into context with declines seen over the past decade shows we have been in this environment before with the most recent ~30% decline occurring in 1H12. Although unlikely to be as severe as the decline following the financial crisis that saw oil prices decline from ~$145/bbl to ~$30/bbl, the continuation of US supply growth (on pace for ~900-1,000mbpd annual additions in 2014/15) and now lower global demand keep us mindful of these trends. Like the Boy Scouts say: Be prepared. Thursday, October 9, 2014 JC Penney: That Wasn’t Good For the past week or so, analysts have been warning that JC Penney (JCP) would have a hard time living up to expectations at its Analyst Day today. It appears they were right. Getty Images JC Penney said same-store sales would grow at a low-single-digit clip duringthe third quarter of 2014 fiscal year, down from its previous prediction of mid-single digits after a September sales slowdown. JC Penney also said its 2015 gross margins would increase significantly over 2014 and that it would be free cash flow would be positive. Investors weren’t happy with the news, as shares of JC Penney dropped 11% to $8.17 today. S&P Capital IQ’s Efraim Levy explains why: JC Penney shares are lower as it cut Q3 sales outlook after disappointing September sales. Even though management reiterated that other metrics for the quarter and full year were still on plan, and provided some outlook for future growth and improved profitability, some investors may be concerned about demand and what JC Penney also admitted (albeit no surprise) is a promotional environment. Near-term “conservative” margin outlooks were below historical levels. A bright spot was in-store Sephora retailing operations that are exceeding expectations and could provide additional growth. What did everyone expect–that JC Penney would reach its former heights in record time? Sunday, October 5, 2014 LPL Exec Resigns Over 'Employee Interactions' LPL Financial (LPLA) says Derek Bruton, managing director and head of independent advisor services, retired Friday, after the company expressed “concerns over his interactions with other employees.” In a statement, the independent broker-dealer added that his resignation “was not related to company performance.” It plans to fill the post “from a slate of internal leaders” and anticipates “announcing this new leader by the end of next week.” Bruton's exit from LPL’s San Diego operations comes just two days after it opened its new headquarters in the La Jolla district of the city. The news of his resignation was made public in an SEC document. A year ago, Bruton became LPL Financial’s representative on the Financial Services Institute’s board of directors. LPL Financial tapped him as a managing director in 2010. Before joining the IBD in 2007, he served as a senior manager at TD Ameritrade (AMTD), Merrill Lynch (BAC) and Charles Schwab (SCHW). He played a key role in the expansion of LPL's platform for RIAs. LPL Financial serves more than 13,600 independent financial advisors, 4,500 licensed insurance agents and some 700 financial institutions. It has a total of roughly 3,000 employees in San Diego, Boston and Charlotte. During a call with equity analysts in February, Chairman and CEO Mark Casady explained that the independent broker-dealer is no longer pursuing any plans to form a bank holding company. It is, however, still considering the possibility of acquiring an industrial loan company. Its stock, which fell 4% on Friday before the announcement of Bruton's exit, is up about 12% so far this year, way ahead of the major equity market indexes. 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