March 22, 2010Last week was indeed quiet as the concern over the vote on Obamacare caused investors to head to the sidelines. The economic news remains mixed, but profits are doing fine. As a result the market held up overall.
As the charts above illustrate the Dow Jones Industrial Average gained over one percent last week while the NASDAQ Composite was up fractionally. The Markets & Economy Unfortunately, the markets, economy and daily news are dominated by events and proposals emanating from Washington DC. Yesterday’s approval of the federal government’s takeover of health care will present investors with longer-term issues.
Caterpillar estimated that it would cost over 100 million dollars annually to deal with this. The only way to lower this cost going forward is simply to hire fewer people and this will be what happens. This program is exactly what this Country did not need as it struggles to recover from the recession of 2008/09. It will serve to introduce uncertainty into business decisions and plans and will be just one more reason for all business and other financial decisions to remain subdued. Thus the unemployment rate, which remains around 10 percent, will have one more factor slowing down any improvement. Speaking of the economy, the data continues to show that profit growth is strong, but fundamentally the domestic economy is still struggling to ramp into a self-sustaining growth mode. One can see this in the continued lack of progress on the job creation front. In this regard the question is simply - are we getting better or just not getting worse? To help answer that question, look at the numbers from the Economic Cycle Research Institute in the chart below. While they improved last week the longer-term downturn in the growth rate implies the economy will slow down over the summer months. Their view today is that no double dip is in the cards, but of course that does not consider what the impact of Obamacare will have on this lackluster recovery we are experiencing.
From an employment perspective we are just not getting worse. From a profit point of view, the news is far better and the lack of a strong economy will keep the inflation numbers looking wonderful and keep the Federal Reserve from raising interest rates in any meaningful way. Thus investors may continue to do well in this climate. Longer-term, how this nation can add another entitlement program to its list of bankrupt programs such as social security, Medicare/Medicaid and welfare, which will add trillions of dollars to the national debt, is unclear. The problems of Greece and Ireland should be teaching us that you cannot borrow your way to prosperity and you cannot, in a free society, tax a few people to pay for the benefits of everyone, especially when it is done with a political purpose of obtaining votes.
What to Expect This Week The action on the healthcare bill will continue to advance as the Senate considers the basket of new taxes. So headline risk remains. On the other hand it will be a relief to stop looking at the business news being dominated by Washington politics. Let’s get back to earnings, mergers and economic outlook for a change. The week is light on economic releases and so with the approaching end of the quarter the trading should go from light today to lighter as the week moves on. Sector rotation will be the emphasis in the light of the new healthcare legislation having been passed into law.
SYMBOL: BA Boeing announced last week that the Company is increasing production of its 777 and 747 airplanes as the Company is experiencing stronger than expected demand for its commercial aircrafts. It has become clear that management has seen a pick-up in orders during January and February and is now expecting the recovery to pick up steam in the second half of this year. These increases in production comes six months ahead of their previous forecasts and are causing analysts across Wall Street to take up their earnings estimates for the Company. We believe this is the beginning of a multi-year uptrend in orders for Boeing and the backlog of business remains robust at the Company. Strength in the Asian and Latin American markets have fueled the production increases, although we expect the rest of the world will follow suit in the next six months. We believe the Company will announce increases in production of its other aircraft within the next several quarters, which would also act as a further positive catalyst to the share price. Boeing has been a strong leader in the recent uptrend in the market and we believe that will continue as earnings estimates are headed higher. If the Company can achieve its shipment targets for the 787 Dreamliner later this year, we believe that will offer further upside to the share price. We are raising our 12-month price target to $90 per share and expect the news flow to continue to improve over the remainder of this year.
SYMBOL: PDC Recently Pioneer Drilling announced that the Company has completed its $250 million unsecured notes offering. The debt has a coupon rate of 9.875 and comes due in 2018. The Company will use the proceeds to pay down its previous debt and will strengthen the balance sheet. In a more interesting development the CEO and CFO of the Company each made large purchases of the common stock in the open marketplace. CEO William Stacy Locke purchased 56,300 shares between $7.29 and $7.35 per share, bringing his holdings to 253,507 shares. CFO, Phillip Lorne, purchased 42,275 shares at similar prices. There were also some smaller purchases by lower level executives in the last two weeks. Once these purchases were announced the shares rallied sharply on very heavy volume for Pioneer. This is normally an excellent technical indicator of where the shares are headed, although the natural gas stocks have been underperforming the market lately. We believe this is a sign that better news is ahead for shareholders of Pioneer, and still expect the shares to reach $11 in the next 12 months.
(c) McIntyre, Freedman & Flynn
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